Accounting Equation
The glossary of common terms to define some of the elementary terms
used again and again in accounting such as :
Account:
It is a date wise
summarized record of business transactions relation either to a person or thing
or any item of income or expenditure.
For Example,
accountants of Ahmad and Co., of machines, of wages, or of sales income
Accounting Equation
The equation of
financial position is:
Assets=Liabilities+ Owner’s Equity
Accounting actually measures the performance of a company
in meeting with its goals of making a profit.
Assets
These are thing having value, which are possession of a trade
or business, e.g., cash, stock, machines, vehicles, buildings, etc. These items
are owned by the business
Assets lead towards:
Debit (Dr) for increase and Credit (Cr) for Decrease
Assets are increased by debits on the left side of the
account and decrease by credits on the right side of the account.
Business
It is an activity, which is undertaken for earning
profit. Examples are export business, banking, insurance, cloth merchandise,
etc.
Capital/ Equity
It is an amount of cash or other property which a man or
group of person invests in business in the form of cash and other assets like
buildings, machinery, vehicles, etc.
It is also called Equity.
Debit (Dr) for Decrease and Credit (Cr) for increase
Owners’ Equity is decreased by debits on the left side of
the account and increased by credits on the right side of the account
Credit
It denotes a transaction where cash or another payment is
not made immediately in a business transaction. The amount in such a case is
payable at some future date. It is the opposite of the debtor.
Briefly, the creditor is written as “Cr”.
Drawings
If cash or goods are taken away by the businessman or the owner for his personal use, the amount or value of goods is called drawings.
Expenditure
It means spending money or incurring
expenditure\expense to secure some benefits.
Debit and Credit Rules for expense and revenue are:
A. A decrease in revenue or profit accounts are debit; increases are credits;
B.
Increase in expense accounts are debit;
decreases are credits
Income
The Earning of a business resulting in a gross increase in
capital or equity.
Journalizing
It is an act of debiting one account and crediting the
other accounts simultaneously.
Following are the steps involved in the process of
journalizing a transaction:
A. Determine
the title of accounts involved
B. Understand nature
of accounts
C. Apply the
rule of debit and credit
D. Make the
necessary journal entry
Example:
Bilal Invest Rs.5000/- cash in the business. Let us analyze the transaction
a.
Title of relevant account: Cash and Capital
b.
Nature of account: Assets and Equity
c.
Apply the rule: Cash Dr. and Capital Cr.
d.
Journal entry: Cash Dr. and capital
Cr. 5000
Ledger
The ledger is a register in which classified record of all
the transactions of the business are posted from the journal.
Liabilities
These are
balance, which a business has to pay either to various parties for loans or
supply of goods and services on credit. For Example, Bank Loan, Bank Overdraft,
Salaries, wages payable, and other creditors.
Liabilities are decreased by debits on the left side of
the account and increased by credits on the right side of the account
Debit (Dr) for Decrease and Credit (Cr) for increase
Trial balance
It is a list of all credit and debit balances of the
ledger accounts and cashbook at a particular date.
Voucher
It is a document serving as written evidence in support
of business, transaction to be recorded in the Journal, cashbook, or
the Ledger.
No comments:
Post a Comment