LECTURE ONE

Learn accounting series

FOUNDATION STAGE:
BUSINESS:
"Any legal activity undertaken for the sake of earning profit is called business."

(i)
(ii)
(iii)

Manufacturing Business.
Trading Business.
Business of Providing Services.

TRANSACTION:
Any business deal between two or more persons (including owner,
employee, supplier, etc.) which is measureable in term of money and
involved an exchange is called transaction.
Exchange means give and take
it may be exchange of goods
Example:
goods sold, purchased, etc.
Or services.
Example:
Doctors, lawyers, professors, carpenters etc. sells their services. To
identify whether a deal is a transaction or not one must see that both
the conditions are being fulfilled.
1
2

Is the deal involving exchange?

Is this exchange is measureable in money.
(Have monetary value) Examples:
Purchased goods for cash Rs. 3000/=
Yes Paid salaries to an employee Rs.
2000/= Yes Appointment of a clerk at
Rs. 1000/= No Publishing a tender
notice for purchase of furniture.

Cash Transaction
When cash is immediately paid or receipt of cash on spot for executing a deal.
Credit Transaction
If the payment or receipt of cash is postponed for some future period is
known as credit transaction.
Examples:
Purchased goods from X Rs. 100/=
Sold goods on account to A
amounting Rs. 800/= Bought
furniture on credit Rs.
3000/=
PURCHASES:

In accounting those goods which are purchased for resale purpose

are called purchases.
Example:
a. Stationery is purchased by a stationer is called "Purchases"
b. Cloth purchased by a cloth merchant is called "Purchases"
c. Cement purchased by a cement dealer is called "Purchases"
If you purchase a few books and brought in to your class for studying
these books are not purchases but if you sell these books to your class
fellows it will be a purchase. Similarly cloth purchased by a cloth
merchant is a purchase but if computer or furniture is purchased for
his / her shop is not a purchase.
SALES:
The amount received against by sale of good or b sale of services is called sales, sales
revenue or sales income.
ASSETS:
Properties or financial resources of the business are called assets
of business.
ROPRIETOR:
Owner of the business. He invests his money.
Gives his time and attention to the business.
He enjoys profit and bear loss of the business.
EQUITY
Right or a claim against the assets business is called equity It is of
two kinds:
i. Internal equity:
Claim of owner (capital)
ii. External equity:
Claim of outsiders. (Loans)
Example
A starts a business by investing Rs.100,000 & takes a loan of Rs.200,000 from a
bank, then owners equity will be Rs.100,000 which is invested by the owner and Rs.
200000 is outsiders equity.

Assets=equities
GOODS OR MERCHANDISE
The things which are manufactured for selling purpose or bought for reselling
purpose are known as goods or merchandise.
Example:
a. Cloth is goods or merchandise for a cloth dealer.
b. Cement is goods or merchandise for a cement dealer.

c. Furniture is goods or merchandise for a furniture vender.

If these items are manufactured or bought to retain in business or for personal
use then these will not be termed as goods e.g. If Mr. A deals in cars then cars are
goods for him. When he purchases Air conditioner for his office then it will not be
termed as goods.
CAPITAL
Amount with which a business is started.
Or the value of goods with which the owner starts his business.
Example:
Ali started business with cash Rs. 100,000; Furniture Rs. 20,000 and Building
Rs. 300000. r on he invests further Rs. 1,00,000 in business. So the total
capital of All is Rs. 520,000.
DRAWINGS
Cash or goods taken away by the proprietor from the business for
his personal use are called his drawings.
Example:
Mr. Ali withdrew from business cash Rs. 2000.
And goods worth of Rs. 500 for his personal use.
His total drawings are amounted to Rs. 2,500.

DEBTORS/ACCOUNTS RECEIVALBES
The persons to whom the goods have been sold on credit and from
whom the amount is receivable are called "Debtors". Debtors are
also termed as Accounts Receivable. (grouped under assets)
Example:
Ali Sold goods to Imran on credit for Rs. 500, Imran are a Debtor of Ali.
When name is not mentioned use word debtors or accounts
receivable in place of imran to pass journal entry.
CREDITORS
The persons from whom the goods are purchased on credit
And to whom the amount is payable are called creditors. Creditors
are also termed as Accounts Payable. (grouped under liabilities)
Example:
All Sold goods to Imran on credit for Rs. 500, Ali is a Creditor of Imran
When name is not mentioned use word creditor or accounts payable in place of
imran to pass journal entry.
Example:
a. Stationery is purchased by a stationer is called "Purchases"
b. Cloth purchased by a cloth merchant is called "Purchases"
c. Cement purchased by a cement dealer is called "Purchases"

COMMISSION
It is reward of service given by one to another person/business.
When paid becomes expense when received becomes income
Example:
Amount paid to a commission agent.
EXPENSE
Amount spent to get short term benefit.
Example:
Salaries, Rent, Stationery etc.
Or expired portion of cost (depreciation)
ACCOUNT / LEDGER
A summarized record of all transactions relating to a particular
person or thing is called an account. Or separate record of each
asset, liability, income, expense, or owner equity.
Example:
Building Account, Plant Account, Salaries Account, Rent Account
Capital Account etc.
STOCK OR INVENTORY
The goods which remain unsold at the end of a day, month or year
are called stock. It may also be termed as stock-in trade or
inventory.
Group (assets)

Additional

BUSINESS:
"Any legal activity undertaken for the sake of earning profit is called business."

(i)
(ii)
(iii)

Manufacturing Business.
Trading Business.
Business of Providing Services.

Explanation: Where the activity is not legal it is not a business

secondly where the objective is not to earn profit or the objective is
other than profit like welfare or service to the society etc then that
activity will not a business both the conditions should be fulfilled.
INCOME OR REVENUE
The price received by a business against goods sold or services rendered to
customers is known as income or revenue. OR
"Revenue is the price of goods sold and services rendered during given accounting
period."
Example:
Sales, Commission earned, etc.
EXPENDITURE
Expenditure takes place when amount is spent to acquire an asset, the benefit of

which will remain for many years.

Example:
Amount spent to purchase Building, Furniture, Plant etc.
ACCOUNTING PERIOD
The length time for which separate business records (financial
statements) are prepared is called accounting period. Accounting
period vary according to the nature of business. It may consist of
3 months or 6 months but, normally accounting period consists of 1
year. Example:
If accounting records of a business concern are maintained from
January to December, it is an "Accounting Period" of that business.
VOUCHER
Written evidence in support of a business transaction is called
voucher. CASH MEMO
It is a document issued by a seller to the buyer when goods are sold
for cash.
INVOICE
It is a document issued by a seller to the buyer when the goods are
sold on credit
VOUCHER
Written evidence in support of a business transaction is called
voucher. CASH MEMO
It is a document issued by a seller to the buyer when goods are sold
for cash.
INVOICE
It is a document issued by a seller to the buyer when the goods are
sold on credit
DEBIT NOTE
If goods bought on credit are returned to the seller, the buyer
debit the seller's account and informs the seller through a note.
This note is called "Debit Note".
CREDIT NOTE
If goods sold on credit are returned by the buyer, the seller
credit the buyer's account and informs the buyer through a
note. This note is called "Credit Note".
NOTES RECEIVABLE
All the documents in the shape of receivable promissory notes
and bill receivables are called notes receivable.

BANKING TRANSACTIONS: