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Role of Accounting

  • Accounting is the art of recording business transactions.
  • It analyses the data of an enterprise through identification, Measurement, classification and summarisation. It presents the data in the form of report/statements to show the Net result and financial position of the business operation.
  • Accounting supplies appropriate information to different interested group both internal and external.
  • The major limitations in accounting information system is , it does not provide qualitative and non-financial information.

Basic terms in Accounting

  1. Entity: A business Entity is an association of persons to accomplish an economic goal. Such as clubs, sole proprietorship, partnership firm, joint stock companies, co-operative societies etc.,
  2. Transactions:
    It refers to business Activities. It may be cash or credit transaction
    Cash- when cash paid immediately. For eg., Goods Purchased on Cash
    Credit- When cash not paid immediately, but promise to pay later. 
    For eg., Good Purchased from Mr.X for Credit. Goods Purchased from Mr.X.
  3. Assets: It is anything of value owned by an enterprise
  4. Liability
    Liabilities are debts. It consists of financial obligation of an Enterprise other than owner's funds. Eg., Amount due to Creditors, Bank loan etc.,
    Long term Liability: Those debts which are payable after one year is long-term liability. For eg Debentures, etc. issued by the company.
    Short term liability: Those debts which are payable within one year is Short-term liability. For eg. Bills payable. Etc.,
  5. Capital
    It is the amount invested by the owner. It is also known as owners equity or net worth.
    Capital = Assets - liability
  6. Sales
    The goods sold out by the business. It may be Cash or Credit.
    Cash sales- Cash paid immediately (for eg., Goods sold to Mr. for cash)
    Credit Sales- Cash not paid immediately but promise to pay in future (For eg., Goods sold to Mr. ) 
  7. Purchases
    Goods purchased for the purpose of sale or for use is called purchasx`es. It may be cash or credit purchases. 
    Trading Concern - purchases for resale with or without process.
    Manufacturing - raw material are purchased processed into finished goods and sold
  8. Expenditure:
    It is the amount spent for getting something (benefit/services) in return.
    e.g., Salary paid, goods purchased, purchases of Machinery etc.,
    Expenditure can be Capital Expenditure and Revenue Expenditure
    Capital Expenditure: If the benefit of an expenditure is less than a year ( e.g., Rent Paid)
    Revenue Expenditure: If the benefit of an expenditure is more than a year (e.g., Machinery Purchased)
  9. Expenses:
    It is the cost of the use of things/services for the purpose of earning revenue.
    For e.g., Wages, Rent, Salary etc., 
  10. Profit:
    Profit is a measure of the performance of the enterprise. It increases in the owner's equity. Profit = Revenue- Expenses.
  11. Loss:
    Excess of expenses over Income is loss. It decreases in the owner's equity.
    Loss = Expenses - Revenue.
  12. Gains:
    A profit that arises from events (or) transactions which are incidental to business.
    For e.g., Profit on Sale of Fixed asset, Appreciation in the value of assets etc.
  13. Discount:
    It is the reduction in the price of the goods sold. There are two different types of discount
    1. Trade discount: It does not form part of account .Sale is made for the net value of goods sold after deducting Trade discount from the original price. E.g., good, the list price of which is Rs.20,000, are sold to Ramesh at 10% trade discount.
Date Particulars Debit Credit
Xxxx Ramesh a/c Dr

To Sales a/c

18,000 18,000
  1. Cash Discount: After goods sold, certain deduction are given to make the debtor to pay the amount within the stipulated period (or) earlier. Such discount /deduction is called Cash Discount. E.g., Cash received from Ramesh Rs.18,000.Discount allowed Rs.2,000.
Date Particulars Debit Credit
Xxxx Ramesh a/c Dr
Discount Allowed a/c Dr
To Sales a/c




  1. Voucher
    Every Entry recorded has to be supported by reliable documentary evidence. Such document evidences is known as Voucher.
    For eg., -Purchases of goods on Credit - Invoice
    Purchases of Goods on Cash - Cash memo/Cash receipt
  2. Goods
    Commodities Purchases for the purpose of Sale is called goods.
    For eg. Computer purchased for Sale is Goods. If Computer purchased for Administrative purpose it is a Fixed Assets.
  3. Revenue
    This is the income earned by providing Services/Selling of products. E.g. Sales receipt, commission, brokerage etc.,
  4. Drawings
    The amount of withdrawal by the owner form the business for personal use is Drawings.
  5. Purchases
    Goods purchased for the purpose of sale is called purchases.
    • Cash Purchases
    • Credit Purchases
  6. Stock
    It is the unsold goods in the business.
    • Opening Stock: Stock of goods at the beginning
    • Closing Stock: Stock of goods at the end.
  7. Debtors
    Debtors are the persons who buy goods on Credit from the business without paying the money immediately but promise to pay in future (I.e. Receives the benefit & promise to pay the money in future)
  8. Creditors
    Creditors are the persons who sold goods on Credit to the business without receiving the money immediately but in future. ( i.e. Gives the benefit the receives the money in future)

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