basic accounting terms

1. Definition of accounting?
The art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least of a financial character and interpreting the result there of.
2. Definition of Book keeping?
It is mainly concerned with recording of financial data relating to the operations in a significant and orderly manner.
3. What are the important concepts of accounting?
· Separate entity concept
· Going concern concept
· Moneymeasument concept
· Cost concept
· Dual concept
· Accounting period concept
· Matching concept
4. What are systems of accounting?
· Cash system of accounting
· Mercantile system of accounting.
5. What are the types of in accounting?
There are three types of accounts
a. Personal account
b. Real accounts
c. Nominal accounts
6. What are the principles of Accounting?
a) For personal accounts:-
Debit the receiver and credit the giver
b) For real accounts
Debit what comes in Credit what goes out
c) For nominal accounts
Debit all expenses, losses and credit all incomes, gains
7.What is the accounting cycle?
The accounting cycle is often described as a process that includes the following steps: identifying, collecting and analyzing documents and transactions, recording the transactions in journals, posting the journalized amounts to accounts in the general and subsidiary ledgers, preparing an unadjusted trial balance, perhaps preparing a worksheet, determining and recording adjusting entries, preparing an adjusted trial balance, preparing the financial statements, recording and posting closing entries, preparing a post-closing trial balance, and perhaps recording reversing entries
8. What is the meaning of Journal?

Journal means chronological record of transactions.
9. What is the meaning of Ledger?

Ledger is a set of accounts. It contains all accounts of the business enterprise whether real, nominal, personal.
10. What is posting?
It means transferring the debit and credit items from the journal to their respective accounts in the ledger.
11. What is Contra Entry?
Which accounting entry is recorded on both the debit and credit side of the cash book is known as the Contra entry.
12.. What is trial balance?
It is a statement containing the various balances of all accounts on a particular date.
13. What is Debit note?
When the goods are returned to the supplier; a debit note is sent to the supplier indicating that his a/c has been debited with an amount mentioned in the debit note.
14. What is Credit note?
The customer when returns the goods get credit for the value of the goods returned. A credit note is sent to him intimating that his account has been credited with the value of the goods returned.
15. What is capital income?
It represents an income which does not grow out of or pertain to the running of the business
16. What is Revenue Expenditure?
It is an expenditure which is incurred in course of regular business i.e for doing of the ordinary activities carried by the business.

17. What is an Accrued income?
Income that has been earned by the business entity during the accounting year but which has not yet been due and there fore has not been received.
18. What is outstanding income?
It means an income which has been become due during the accounting year but which has not yet been received by the business entity.
19. What is Capital employed?
It means sum of total long term funds employed in the business i.e. Share capital+ Reserves & Surpluses+ Long term loans-Fictitious assets.
20. What is Capital reserve?
The reserve which has transferred from the capital incomes is called capital reserves.
E.g. Profit on sale of fixed assets, profit on revaluation of assets and liabilities etc. these reserves are not available for distribute as by way of dividends.
21. What is general reserve?
This has been transferred form the normal profits of the business. These reserves may available for distribute as by way of dividends.
22. What is capital Expenditure?
It means the expenditure which has been incurred for the purpose obtaining a long term advantage for the business.
23. What are fictitious assets?
. These are assets not represented by tangible possessions or property. Example of preliminary expenses, discount on issue of shares, debit balance in the profit and loss account when shown on the assets side in the balance sheet.
24.What is the accounting equation?
The accounting equation is Assets = Liabilities + Owner’s Equity. This is the same format used in a sole proprietorship’s balance sheet. (A corporation’s balance sheet will use Stockholders’ Equity instead of Owner’s Equity.). The accounting equation will always remain in balance if double-entry accounting is followed accurately.
25. What is the distinction between debtor and creditor?
A debtor is a person or enterprise that owes money to another party. (The party to whom the money is owed is often a supplier or bank that will be referred to as the creditor.)
A creditor is a person, bank, or other enterprise that has lent money or extended credit to another party. (The party to whom the credit has been granted is often a customer that will now be referred to as a debtor.)
26.What are accrued revenues and when are they recorded?
Accrued expenses are expenses that have occurred but are not yet recorded through the normal processing of transactions. Since these expenses are not yet in the accountant’s general ledger, they will not appear on the financial statements unless an adjusting entry is entered prior to the preparation of the financial statements.
27.What is the meaning of equity?
Equity is used in accounting in several ways. Often the word equity is used when referring to an ownership interest in a business. Examples include stockholders’ equity or owner’s equity.
Occasionally, equity is used to mean the combination of liabilities and owner’s equity. For example, some restate the basic accounting equation from Assets = Liabilities + Owner’s Equity to Assets = Equities.
28.What is the deferred revenue?
Deferred revenue is not yet revenue. It is an amount that was received by a company in advance of earning it. The amount unearned (and therefore deferred) as of the date of the financial statements should be reported as a liability. The title of the liability account might be Unearned Revenues or Deferred Revenues.
29. Is the cost of goods sold an expense?
While we often think of expenses as salaries, advertising, rent, interest, and so on, the cost of goods sold is also an expense. The cost of goods that were sold needs to be matched with the pertinent sales on the income statement, just as commission expense must be matched with sales or other revenues.
30. What is the difference between revenue, income, and gain?
Revenue is the amount earned from a company’s main activities such as selling merchandise or providing services.
A gain results from a peripheral activity, such as selling the old delivery truck. A gain is the amount received that is in excess of the asset’s carrying amount (book value).
Income is sometimes used instead of the word revenue: some people refer to the rent they receive as rent income. Generally, accountants use the word income to mean “net of revenues and expenses.” For example, a retailer’s income from operations is sales minus the cost of goods sold minus operating expenses.
31.What is a nominal account in accounting?
Nominal accounts in accounting are the temporary accounts, such as the income statement accounts. In other words, nominal accounts are the accounts that report revenues, expenses, gains, and losses.
Nominal or temporary accounts are closed at the end of each accounting year and transferred to either P&L account or trading account.
The balances from the income statement accounts will end up in the owner’s equity account, if the enterprise is a sole proprietorship. If the business is a corporation, the balances will end up in the retained earnings account.
32.Is the sale of a plant asset recorded in the sales account?
The sale of a plant asset should not be recorded in the sales account. The sales account is used to report a retailer’s sale of merchandise or a manufacturer’s sale of products. In other words, sales result from a company’s main revenue producing activities.
The gain or loss on a sale of a plant asset is reported on the income statement as a separate item.
33. What is the difference between accounts payable and accounts receivable?
Accounts payable are amounts a company owes because it purchased goods or services on credit from a supplier or vendor. Accounts receivable are amounts a company has a right to collect because it sold goods or services on credit to a customer. Accounts payable are liabilities. Accounts receivable are assets.
34.What is the accounting entry to close the sole proprietorship drawing account?
The journal entry to close the drawing or withdrawal account of a sole proprietorship includes a debit to the owner’s capital account and a credit to the drawing account.
35. Should inventories be reported at their cost or at their selling prices?
Inventories should be valued at cost price or net realisable value which ever is less.
36. What is depreciation?
It denotes gradually or the permanent decrease in the value of an asset due to the wear and tear, technology changes or due to the passage of time.

37. What is an Intangible asset?
It means an asset which is not having the physical appearance. And its have the real value, it shown on the assets side of the balance sheet.

38. What is the object of bank reconciliation statement?
The main objective of BRS is to know the causes of difference between the balance as per cash book and pass book and pass the necessary correcting or adjusting entries in the bo0oks of business entity.

39. What is the share premium?
It consists of the excess price collected by business entity on the issue of shares over the face value of the shares .it will adjusted under the liabilities side of the balance sheet.

40. Redeemable Preference shares:-
The preference shares which are to be repayable at the end of the fixed period of time or at the end of an agreed period of time.

41. What is meant by reserves?
Reserve is nothing but money kepting a side for future expenses/payments i.e. unknown expenses.

42. Why do we prepare Trail Balance?
Trial balance will show Net balances of all accounts irrespective of nature of account such as Assets, Liabilities, Income and Expenses. Once the Credit and Debit balances of a Trial Balance will tally then only we can proceed for Profit & Loss A/c and Balance Sheet

43. What is prepaid expense and what are its effects?
Prepaid expenses are those expenses which are paid in advance, and whose benefit will be available in future. So that these will reduce from the respective expenses and show it under current assets side in balance sheet.
44. What is meant by the authorized share capital of the company?
It means the face value of shares which a company is authorized to issue by its memorandum.
45. What is meant by Reserve capital?
It is the portion of the Uncalled capital of the company, which has to be called up by the company only at the time of winding-up of the company and also which should be used only for the winding up proceedings.
46. What is an error of posting?
Error of posting means if the transaction has been entered in journal but has been posted wrongly in the ledger accounts.
47. What is an error of principle?
These are the errors arises due to the incorrect application of the principles of an accounting and treating the wrong application of Capital and revenue expenditure.
48. What is an error of omission?
Error of omission arises due to the complete failure to enter a transaction in the books of accounts maintained by the business entity.
49. Define the journal proper/
Journal proper used for making the original record of those transactions which are not recorded in the remaining books maintained by the business entity and which are occurred rarely in nature.
50. What are the Rectification entries?
A mistake which has been in passing an entry should be corrected by passing another entry in the books of accounts maintained by the business entity.


51. What are the characteristics of a transaction?
For every transaction there must be at least two parties and it involves an exchange of money or money’s worth for the equal value.
52. What is a business entity concept?
According to this concept the business is treated as a separate entity distinct from its owners and others.

53. What is going concern concept?

According to this concept it is assumed that a business has a reasonable expectation of continuing business at a profit for an indefinite period of time.

54. What is money measurement Concept?
This concept says that the accounting records only those transactions which can be expressed in terms of money only.
55. What is cost concept?
According to this concept, an asset is recorded in the books at the price paid to acquire it and that this cost is the basis for all subsequent accounting for the asset.
56. What is Dual aspect concept?
In every transaction, there will be two aspects the receiving aspect and the giving aspect; both are recorded by debiting one accounts and crediting another account. This is called double entry.
57. What is Accounting period concept?
It means the final accounts must be prepared on a periodic basis. Normally accounting period adopted is one year, more than this period reduces the utility of accounting data.
58. What is Realization concept?
According to these concepts, revenue is considered as being earned on the data which it is realized, i.e., the date when the property in goods passes the buyer and he become legally liable to pay.

59. What is Materiality concepts?
It is a one of the accounting principle, as per only important information will be taken, and unimportant information will be ignored in the preparation of the financial statement.

60. What is Matching concepts?
The cost or expenses of a business of a particular period are compared with the revenue of the period in order to ascertain the net profit and loss.

61. What is Accrual concept?

The profit arises only when there is an increase in owners capital, which is a result of excess of revenue over expenses and loss.

62. What is Gross Profit ratio?
A. Formula: Gross profit *100
Net Sales

63.What is Net profit ratio?
A. Formula: Net profit *100
Net Sales

64.What is Return on share holder’s funds?
It indicates measures earning power of equity capital.

Formula: profits available for Equity Shareholders *100
Average Equity shareholders Funds

65.What is earning per Equity Share (EPS)?
It shows the amount of earnings attributable of each equity share.

Formula: profits available for Equity shareholders
Number of Equity Shares

66.What is Dividend yield ratio?
It shows the rate of return to shareholders in the form of dividends based in the market price of the share.

Formula: Dividend per share *100
Market price per share

67.What is price earning ratio?
A. It a measure for determining the value of a share. May also be used to measure the rate of return expected by investors.

Formula: Market price of share (MPS) *100
Earning per share (EPS)

68.What is current ratio?
It measures short-term debt paying ability.

Formula: Current Assets­­____
Current Liabilities

69.What is Debt-Equity Ratio?
It indicates the percentage of funds being financed through borrowings: a measures of the extent of trading on equity.

Formula: Total Long – term Debt
Shareholders funds

70.What is Fixed Assets ratio?
This ratio explains whether the firm has raised adepuate long-term funds to meet its fixed assets requirements.

Formula : Fixed Assets
Long – term Funds

71.What is Quick Ratio/
The ratio termed as liquidity ratio. The ratio is ascertained comparing the liquid assets to current liabilities.

Formula: Liquid Assets
Current Liabilities

72.What is Stock turnover Ratio?
The ratio indicates whether investment in inventory in efficiently used or not. It, therefore explains whether investment in inventory within proper limits or not.


Formula: Credit Sales
Average Accounts Receivable


73.What is Debtors turn over Ratio?
The ratio the better it is, since it would indicate that debts are being collected more promptly. The ration helps in cash budgeting since the flow of cash from customers can be worked out on the basis of sales.

Formula : Credit Sales
Average Accounts Receivable


74.What is Creditors Turnover Ratio?
It indicates the speed with which the payments for credit purchases are made to the creditors.

Formula : Net Sales
Working Capital

75.What is working capital turnover ratio?
It is also known as working capital leverage Ratio. This ratio indicates whether or not working capital has been effectively utilized in making sales.


Formula : Net Sales
Working Capital


76.What is Fixed Assets Turnover Ratio?
This ratio indicates the extent to which the investment in fixed assets contributes towards sales.


Formula: Net Sales
Fixed Assets


77.What is pay-out Ratio?
This ratio indicates what proportion. Of earning per share has been used for paying dividend.

Formula: Dividend Equity Share *100
Earning per Equity Share


78.What is Overall Profitability Ratio?

It is also called as “Return on Investment” (ROI) or return on Capital Employed (ROCE). It indicates the percentage of return on the total employed in the business.


Formula : Operating profit *100
Capital employed
Operating profit means ‘profit before interest and tax’.