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Financial
Accounting-1
Basic Terminologies For The Students
Of Accounts
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Effective participation in these activities requires
some command of this language
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These Terminologies of Financial Accounting are
basically written for the Non-Accounting Students who don’t
know about the basic concepts of Accounting
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I am thankful to all my teachers for all their efforts,
motivation, and support during my studies
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Regards:
Hamza Saleem(Gold Medalist)
BBA(Hons
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0315-3130448
Email: hamzasaleem4u1@gmail
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Introduction to Accounting
2
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Double Entry System
4
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Special Journal
6
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Bill of Exchange
8
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Bank Reconciliation Statement
10
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Adjustments
12
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Capital and Revenue Expenditure
14
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Business:
Any legal economic activity
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E
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Law Firms, Real Estates, Restaurants, Manufacturing etc
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Types of Business:
1
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Merchandising/Trading Concerns (Medical Store, General Store, Cloth House)
3
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Accounting /Financial Accounting:
Accounting is an art of collecting, classifying, processing, analyzing, summarizing and
interpreting the financial information of an enterprise
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Cost Accounting:
The objective of cost Accounting is to find the cost of a product
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5
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6
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It covers entire body of theory and practice
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Accountancy includes: Financial Accounting, Cost Accounting, and Management
Accounting
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Book Keeping:
Book keeping is an art of recording financial transactions(i
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sales, purchases,
receipts etc
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Purchases:
The Term ‘Purchases’ has specified meaning in accounting
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It is said that Purchases has been
made
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10
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Cash Purchases
2
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Purchase Return & Allowances/Return Outward/Supplier
Return:
Sometimes purchased goods are sent back to supplier due to defective or
unsatisfactory condition etc
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It is named as Purchase
Return & Allowances
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Sales:
When the merchandise/goods are sold at specific price to customers
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They are recorded as Sales Account
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Types of Sales:
1
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Credit Sales

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It is named as Sales return & allowances
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Owner/Proprietor:
Owner means a person, who invests money into business and give his time to
business and also responsible for profit and loss of business
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Drawings/Withdrawals:
Any money or goods taken out/withdrew from business by its owner for his personal
use is called Drawings
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g
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e
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Sales, Commission Earned, Service Revenue etc
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Expenses:
Any amount, spent for the purpose of running the business operations(activities) is
called Expenses
e
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Electricity, Taxes ,Carriage Expenses etc
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Capital/Owner’s Equity/Owner’s Fund/Owner’s
Investment/Contributed Capital:
Capital is the source of funds provided by business’s owner to business
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E
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Cash, Land, Motor Vehicles, Good Will, Prize Bonds etc
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Narration:
Short explanation written under each transaction in the journal
is called Narration
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Current Assets/Liquid Assets/Quick Assets:
Current assets are cash or easily convertible into cash within a year or purchase
with a view to convert or sell them for cash
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g
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E
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E
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Good Will, Patent, Design, Copy Right, Trade Mark etc
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Liabilities:
Liabilities are the debts and obligations of the business payable to another entity
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g
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g
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E
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Bonds payable, Long-term notes payable, Mortgages payable, Lease obligations
etc
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Contingent Liability:
It is not liability at present, rather it is a potential liability depended upon the
happening or not happening of any future event
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g
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Discounted notes receivable etc
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Voucher:
The documentary evidence of any business transaction is called
Voucher
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32: Transaction:
A business event which can be measured in terms of money and must be recorded in
books of accounts is called Transaction
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g
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500
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External Transaction:
A transaction taking place with an outside person or organization is called external
transaction
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g
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34
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It is an economic activity within a company
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g
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Then it
is called Credit Transaction
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Assets = Liabilities + Owner's Capital
Assets = Equities
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Accounting Equation:
Accounting Equation expresses the relationship between what is owned and what is
owed by an entity
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39
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If all the accounts are kept in a book, the
book is called Ledger
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g
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41: Types of Accounts:
Personal Accounts
Impersonal Accounts(Nominal Account+Real Account)

42
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Nominal or temporary accounts are closed at the end of
each accounting year
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g: Salary Account, Sales Account, Interest Expense Account etc
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Real Accounts/Property Accounts/Permanent Accounts:
The accounts relating to all assets and properties(cash, building, plant etc
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Real accounts are not closed at the end of
accounting year
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g
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Fixture & Fitting Account, Furniture Account etc
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Personal Accounts:
The accounts relating to individuals, natural persons, firms, associations,
institutions or companies are known as personal accounts
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g
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i
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i
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49
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One
account is debited while the other account is credited with an equal amount
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e
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Ali Purchased Stationary For Rs
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The Entry would be, 1
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Cash Credit

50
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51:Journalising:
The process of recording business transaction into journal is called Journalising
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Entry:
Recording a financial transaction by both aspects ,debit and credit in proper books
of accounts is called Entry
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Simple Entry:
An entry in which only one account is debited and only one account is credited is
called Simple Entry
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Compound Entry:
An entry in which more than one account is debited or more than one account is
credited, or more than one of both debits and credits is called Compound Entry
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Posting/Posting Of Entry:
The process of transferring information from journal to ledger is called Posting
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Ledger Entry/Ledger:
The recording of transaction from journal to the concerned account in the ledger is
called Ledger Entry
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Balance:
The difference between both sides of an account is called Balance
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Balancing:
The process of equalizing two sides of an account is known as Balancing
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Debit Balance:
If the debit side of an account is more than its credit side, then the balance of
account is called debit balance
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Credit Balance:
If the Credit side of an account is more than its debit side, then the balance of
account is called Credit balance
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Zero Balance/Nil Balance
If both sides of account are equal then the account will show zero balance
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If a company spreading air pollution around the area then the people will sue on
Company Name, not on its owner
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Going Concern Concept:
Going Concern Concept means the business will continue to operate the business
operations for indefinite time period, there will be no intention to liquidate the
business in the foreseeable future
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Money Measurement Concept:
According to this concept, accounting records only transactions or events which can
be measure in terms of money
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Cost Concept:
According to this concept, An asset is recorded in the books of accounts at the
cost at which It is purchased
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Cash Accounting System:
It is a system in which, Accounting Entries are recorded on the basis when amount
is actually received or paid
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Accrual Accounting System/Mercantile Accounting
System:
It is a system in which, Accounting Entries are recorded when transaction is
occurred regardless of actual payment or receipt
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Bill Of Exchange:
According to Negotiable Instruments Act, 1881,
“A bill of exchange is an unconditional order in writing, addressed by one person to
another, signed by the person giving it, requiring the person to whom it is addressed
to pay on demand, or at a fixed or determinable future time, a sum certain in money
to or to the order of a specified person, or to bearer
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Inland Bill:
When the bill is drawn and payable within the boundary of same country
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The bill is drawn
in one country but payable in another country
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1
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2
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3
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It may be drawer himself or any other party
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Dishonoring of Bill Of Exchange:
If the drawee refuse to make the payment of bill on due date(maturity), then the
bill is said to be dishonored
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Discounting Of Bill:
If the holder of a bill is need of money before the due date of the bill he may sell it
to the bank
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This is
called discounting of bill
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Retiring Of Bill:
If the drawee pay the amount of bill of exchange before its due date
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In this case, The Drawer may allow some discount (rebate) to
drawee
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Renewal Of Bill:
When the drawee unable to pay the bill on due date; he may request the drawer to
draw a new bill along with interest for an extended period
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He will declared insolvent
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Days Of Grace:
Three additional days given by drawer to drawee to make the payment of bill of
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exchange is called Days of Grace
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Cash Book:
The Book in which all cash receipts and payments are recorded in chronological
order is called Cash Book
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Single Column Cash Book/Simple Column Cash Book:
The Cash book in which there is only one column of Cash(Amount) is called Single
Column Cash Book
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) to its customers
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Current Account:
It is basic type of account opened by business persons, firms, companies
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Generally transaction is limited and simple interest is given on this type of account
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Fixed Account:
It is an investment account in which money is deposited for a stated period of time
and compound interest is paid at the end of that period
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There may be 10,20,50,100 pages in cheque book
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Petty Cash Book:
A Petty Cash Book is a book used for recording small and little value expenses
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E
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Carriage inward, Packing charges, Fuel, Wages, octroi duty etc
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Indirect Expenses:
The expenses incurred after the production of goods are called indirect Expenses
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g
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These expenses incurred to achieve the goals
of organizations
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g
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It summarizes the assets, liabilities and capital of
business
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Interest On Capital:
Any interest given on invested capital by partners/owners of the business is called
Interest On Capital
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100
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E
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outstanding salary, outstanding rent, etc
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Prepaid Expenses/Un-Expired Expenses:
Expenses paid in advance but its benefit is to be availed in future are called Prepaid
Expenses
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g Prepaid Insurance, Prepaid Rent etc
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Accrued Income/ Outstanding Income:
Income earned but not actually received at the end of accounting period is called
Accrued Income
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g
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104
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E
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A rent payment made in advance etc
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Depreciation:
The systematic decrease in the value of fixed assets due to wear and tear, physical
deterioration etc
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Or
Depreciation is the gradual and permanent decrease in the value of an asset from
any cause
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Opening Inventory/Opening Stock:
The value of goods at the opening of accounting year is called Opening Inventory
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Ending Inventory/ Closing Stock:
The value of goods at the end of accounting year is called Closing Inventory
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Bad Debts/Un-Collectible Expenses:
Any amount or debt which is not recoverable is called Bad Debt
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Accounting Cycle:
The sequence of accounting procedure used to Record, Classify, and summarize the
accounting information is called Accounting Cycle
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Record the transaction into journal
2
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3
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Adjusting entries
5
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Financial Statements
7
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Closing trial balance
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Capital Expenditure/CapEx:
Expenditure incurred for the purchases of fixed assets/permanent assets or to
improvement or extension of fixed assets/permanent assets are called Capital
Expenditure
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g
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Their benefit would be only for current period
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g
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E
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Preliminary Expenses,Discount On Shares,Cost Of New Product Launch
etc
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Error Of Omission:
When any transaction is omitted to record in the books of accounts due to
oversight
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That is called
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Error Of Commission
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Error of Principle:
Error occur due to wrong application of fundamental accounting principles(GAAP) at
the time of recording journal entries is called Error of Principle
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Compensating Errors:
When the error in one account is automatically being corrected with the similar
error in other account by chance then it is called compensating error
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Error Of Posting:
When a transaction is recorded in journal correctly but an error committed during
posting the transaction into ledger
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Suspense accounts are used when trial balance is out of
balance or when there is an unidentified transaction
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Worksheets illustrate relationship between the unadjusted trial balance,
proposed adjusting entries and financial statements
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Profit & Loss Account:
Profit and Loss Account shows the net profit or net loss of a business over a given
period of time
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125
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Basically the bank allows people to borrow a set amount
of money
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Debit Note:

If goods bought on account are returned back to seller due to some solid reason,
the buyer debited the seller account and informs the seller through a note
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This note is called Credit Note
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Capital Receipt:

Receipts which are non-recurring and have the benefits of long period are called
Capital Receipts
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g
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129
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It is
also called Stock Turnover
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Revenue Receipt:
Receipts which are recurring in nature and meets day-to-day expenses of a business
is called Revenue Receipt
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g: Sales of Merchandise, Discount Received, commission earned etc
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Capital Profit:
The profit made on the sale of fixed asset is called Capital Profit
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5,000 sold for Rs
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The excess Amount will be treated as
Capital Profit
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Capital Loss:

If any fixed asset is sell less than it cost
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10,000 sold for Rs
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The loss of Rs
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135
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136
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It is called Crossing of
Chque
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138
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139
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We can either show assets and liabilities in liquidity order or
permanence order
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Adjustments:
The entries made in general journal at the end of an accounting period to bring
account balances up-to-date are called adjusting entries or Account adjustments
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Endorsement/Endorsement of Bill of Exchange:

The process by which legal rights to receive the amount of bill is transferred from
one person to another is called Endorsement
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Endorser:

The person who transfer the bill to another person is called Endorser
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Endorsee:
A person to whom bill of exchange is transferred is called Endorsee
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Accounting Period Concept:
Accounting Period Concepts means the life of business is divided into a series of
relatively short accounting periods of equal length
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The Matching Concept:
The concept of offsetting expenses against income on the basis of “Cause and
Effect” is called The Matching Concept
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147
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We can
say that, “for every debit, there is an equivalent credit”
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148
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E
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Goods worth Rs
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149
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E
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Manager Delivered A Lecture To Employees
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Depletion:
The wear and tear in the value of natural resurces(i
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151
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)

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E
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Machinery worth Rs
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This reduces the total value of
assets
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Qualitative Change:
The change in the different elements of assets and liabilities, not in the value of
them is called Qualitative Change
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g
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10,000
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Machinery-Debit 2
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Trading Account:
Trading Account shows the gross profit or gross loss of a business over a given
period of time
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155: Real Assets:

Assets which have some market value are called Real Assets
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g
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156
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E
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Preliminary Expenses,Loss on issue on shares etc
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………………………………………………………………………

Signature:

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Why are you roving in the whirl of life?
See the beauty of nature
and say:
OH ALMIGHTY ALLAH!
“What a beautiful things You created for us,
Thanks a lot”
(Hamza Saleem)

23



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