Important Terms of Bookkeeping

Important bookkeeping terms

Before attempting to learn the art or science of bookkeeping it will be better to clarify some of the terms that will have to be used again and again.

Transaction:

Any dealing between two persons or things in a transaction. It may relate to purchase and sale of goods, receipt and payment of cash and rendering of services by one party to another. Transaction is of two kinds - cash transaction and credit transaction. When cash is paid or received as a result of an exchange, the transaction is said to be a cash transaction. When the payment or receipt of cash is postponed for future date, this transaction is said to be credit transaction.

Business:

It includes any activity undertaken for the purpose of earning profit e.g., banking business, and insurance business, a merchant business etc., etc.

Proprietor:

He is the owner of a business. He invests capital in it, gives his time and attention to it. He is entitled to receive the profit or bear loss arising out of it.

Drawings:

The cash or goods taken away by the proprietor from the business for his personal use are called drawings.

Purchases:

Goods purchased are called purchases. When the goods purchased for cash they are called cash purchases but if they are purchased for which payment will have to be made at some future date it is known as credit purchases.

Purchases returns:

If goods purchased are found defective or unsatisfactory, they are sometimes returned to the persons from whom they were purchased or to suppliers are called purchases returns or returns outwards.

Sales:

Goods sold are called sales. When goods are sold for cash they are called cash sales, but when they are sold without having received payment, they are credit sales.

Sales returns:

If a person to whom goods have been sold finds that they are defective or unsatisfactory and returns them, are called sales returns or returns inwards.

Trade discount:

It is rebate or allowance from the scheduled price granted by the seller to the buyer. Trade discount is usually granted in the following circumstances:
(a) When selling to a fellow trader.
(b) When the buyer is an old customer.
(c) When sales are made in bulk.
(d) As a custom of trade.

Cash discount:

It is deduction or allowance allowed by creditor to a debtor. If a person pays his debit before the due date of payment the recipient may grant him an allowance for doing so. This allowance is known as cash discount

Commission:

It is a form of remuneration for services rendered by one person to another.

Expenditure:

Expenditure takes place when assets or service is acquired.

Expense:

It means an expenditure whose benefit is finished or enjoyed immediately such as salaries, rent etc. Difference between expense and expenditure is that the benefit of the former is consumed by the business in present whereas in latter case benefit will be available for future activities of the business.

Account:

A summarized record of transactions relating to person or thing is called an account.

Debtor (account receivable):

A person who owes money to another is a debtor. It is also termed as accounts receivable.

Creditor (accounts payable):

A person who pays out something or to whom money is owing is a creditor. It is also termed as accounts payable.

Assets:

These are the things of value possessed by a trader such as building, land, machinery, furniture, etc.

Liabilities:

They are the debt due by a business to its proprietor and others.

Voucher:

Any written evidence in support of a business transaction is called a voucher. When a ream of paper is bought from a stationer, he gives a cash memo. The cash memo is a voucher for the payment. When we buy groceries from the supermarket and we pay to the sales person, receipt is taken from him. The receipt serves as a voucher for the payment.

Goods (merchandise):

It includes all merchandise commodities which are purchased by the business for selling.

Stock (inventory):

Goods or merchandise on hand, that is goods remaining unsold, is called stock, stock in trade, or inventory.

Equity:

A claim which can be enforced against the assets of the firm is called equity. In other words, the rights to properties are called equities. Equities are of two types: the right of creditors and the right of owners. The equities of creditors represent debts of the business and are called liabilities. The equity of the owner is called capital, proprietorship or owner's equity.

Bookkeeping versus accounting

There is some confusion over the difference between bookkeeping and accounting. This is due to the fact that two are related and there is no universal accepted line of demarcation between them.

In general bookkeeping is the recording of business data in the prescribed manner, this is the first phase. Much of the work of bookkeeper is of the clerical in nature. The sphere of accounting starts where the sphere of bookkeeping ends. Accounting is primarily concerned with the design of the system of records, the preparation of reports and the interpretation of reports. Accountants often direct and review the work of bookkeepers.

Accounting cycle

Accounting cycle refers to a complete sequence of accounting procedures which are required to be repeated in same order during each accounting period. Accounting cycle includes:

Recording:

First, all transactions should be recorded in the journal or books of original entry known as subsidiary books as and when they take place.

Classifying:

All entries in the journal of books of original entry should be posted to the appropriate ledger accounts to find out at a glance the total effect of all such transactions in a particular account.

Summarising:

Last stage is to prepare the trial balance and final accounts with a view to ascertaining the profit or loss made during a trading period and the financial position of the business of a particular date.