Basic terms of accounting: the words you will use every day
- Explain entity, transaction, assets, liabilities and capital with examples
- Tell apart revenue, expense, expenditure, profit, gain and loss
- Understand discount, voucher, goods, drawings, purchases, sales and stock
- Identify debtors and creditors and classify items correctly
Every language has a basic vocabulary. Before you can speak English you need words like "book", "run", "happy". Accounting is the language of business, and today we learn its twenty basic words. These words will appear in every single chapter after this one: in the journal, the ledger, the trial balance, everywhere. So we will not rush. For each term you will get a plain meaning, a real shop example and, where students usually get confused, a warning. By the end you should be able to read a small business story and pick out the capital, the assets, the creditors, the gain and the loss on your own.
1. Entity and transaction
Entity means a reality that has a definite individual existence. A business entity is a specifically identifiable business enterprise, such as Sharma Kirana Store, Mehta Mobile Store or Reliance Industries Ltd. An accounting system is always designed for a specific business entity (also called the accounting entity).
Why does this matter? Because the books of Sharma Kirana Store record only the shop's dealings, not Ramesh uncle's family expenses. The shop and its owner are treated as two separate "persons" in accounting.
Transaction: an event involving some value between two or more entities, for example purchase of goods, receipt of money, payment to a creditor or incurring an expense.
- Cash transaction: payment is made or received at once (cash, UPI, card). Example: sold a charger for ₹499 and received it by UPI.
- Credit transaction: payment will be made or received later. Example: bought 50 phone covers from Kapoor Accessories for ₹7,500, to be paid in 30 days.
For accounting, a payment by UPI, debit card or cheque that settles the deal immediately is also a "cash" transaction in nature, because there is no credit period. Only when payment is postponed is it a credit transaction.
2. Assets
Assets are economic resources of an enterprise that can be usefully expressed in money. They are items of value used by the business in its operations and give it future economic benefit.
A delivery van owned by a grocery store is an asset: it helps the store deliver goods and earn money. Assets are classified into two types:
| Non-current assets | Current assets |
|---|---|
| Held for long-term use, not meant for sale; benefit lasts more than a year | Cash or items expected to be converted into cash, sold or used up within 12 months (or the operating cycle) |
| Property, plant and equipment (tangible): land and building, machinery, furniture, motor vehicles, computers, air-conditioners | Inventories: stock of goods, raw materials, loose tools |
| Intangible assets: goodwill, patents, trademarks, computer software | Trade receivables: debtors, bills receivable |
| Non-current investments, long-term loans and advances, other non-current assets | Cash and cash equivalents: cash in hand, cash at bank; current investments; short-term loans and advances; other current assets |
Tangible = you can touch it (a van, a table). Intangible = you cannot touch it but it still has value (a famous brand name, a patent, software).
3. Liabilities and capital
Liabilities are obligations or debts that an enterprise has to pay at some time in the future. They represent creditors' claims on the firm's assets.
Almost every business borrows money or buys goods on credit at some time. If Sharma Kirana Store buys goods for ₹25,000 on 25 March 2027 on one month's credit, then in the Balance Sheet on 31 March 2027 the supplier appears as a creditor on the liabilities side. A three-year loan from a bank is also a liability.
| Non-current liabilities | Current liabilities |
|---|---|
| Long-term borrowings (e.g. 5-year bank loan, debentures), deferred tax liabilities (net), other long-term liabilities, long-term provisions | Short-term borrowings (e.g. bank overdraft), trade payables (creditors, bills payable), other current liabilities, short-term provisions |
Current or non-current? Four clues. An item is current if it (1) is involved in the operating cycle, (2) will be realised or settled within 12 months, (3) is held mainly for trading, or (4) is cash or a cash equivalent.
Capital is the amount invested by the owner in the firm. It may be brought in as cash or as assets. For the business entity, capital is an obligation and a claim on its assets, so it is shown on the liabilities side of the Balance Sheet.
Students ask: "The owner gave the money, so why is capital a liability?" Remember the entity idea: the business and the owner are separate. The business has received money from the owner and in a sense owes it back to him. Hence capital is shown with liabilities.
4. Sales, revenues and expenses
Sales are total revenues from goods or services sold or provided to customers. Sales may be cash sales or credit sales.
Revenues are amounts earned by the business by selling its products or providing services (sales revenue), plus other earnings such as commission, interest, dividends, royalties and rent received. Revenue is also called income.
Expenses are costs incurred by a business in the process of earning revenue. They are generally measured by the cost of assets consumed or services used during an accounting period, e.g. rent, wages, salaries, interest, depreciation, electricity, water, telephone.
5. Expenditure: revenue or capital?
Expenditure means spending money or incurring a liability for some benefit, service or property received, e.g. purchase of goods, machinery or furniture.
- If the benefit is used up within a year, the expenditure is treated as an expense (called revenue expenditure): e.g. ₹12,000 paid for this month's shop rent.
- If the benefit lasts more than a year, it is treated as an asset (called capital expenditure): e.g. ₹45,000 paid for a new display counter.
Expenditure is the big umbrella. Under it: short-life spending → expense; long-life spending → asset. "Every expense is an expenditure, but not every expenditure is an expense."
6. Profit, gain and loss
Profit: the excess of revenues of a period over its related expenses. Profit increases the owner's investment (capital).
Gain: a profit that arises from events or transactions which are incidental to the business (not its main activity), e.g. sale of a fixed asset above its book value, winning a court case, rise in the value of an asset.
Loss: the excess of expenses of a period over its related revenues. It decreases the owner's equity. It also means money or money's worth lost without any benefit in return, e.g. cash or goods lost by theft or fire, and loss on sale of fixed assets.
| Basis | Profit | Gain |
|---|---|---|
| Source | Main, regular business activity (buying and selling goods) | Incidental or occasional events |
| Nature | Recurring, expected every period | Non-recurring, occasional |
| Example | Mobile store sells phones and earns ₹80,000 over expenses in a year | Mobile store sells its old delivery scooter for ₹5,000 more than its book value |
Mehta Mobile Store bought a display machine for ₹40,000 for use in the shop (not for sale). A year later, when its book value was still ₹40,000, it sold the machine for ₹46,500. Find the amount of gain.
7. Discount
Discount is a deduction in the price of goods sold. It is of two kinds:
Trade discount: an agreed percentage deducted from the list price at the time of sale, generally given by manufacturers to wholesalers and by wholesalers to retailers.
Cash discount: a deduction allowed to a debtor at the time of payment if he pays within the stipulated period or earlier. It is an incentive for prompt payment.
- Trade discount = 10% of 20,000 = 2,000. Invoice amount = 20,000 − 2,000 = ₹18,000.
- Cash discount is calculated on the amount due (₹18,000), not on the list price: 2% of 18,000 = ₹360.
- Amount paid = 18,000 − 360 = ₹17,640.
Trade discount is not recorded separately in the books; the sale or purchase is simply recorded at the net amount (₹18,000 above). Cash discount is recorded (as discount allowed by the seller and discount received by the buyer). Also, cash discount is worked out on the amount after trade discount, never on the list price.
8. Voucher, goods, purchases and drawings
Voucher: the documentary evidence in support of a transaction. For example, a cash memo when we buy goods for cash, an invoice when we buy on credit, a receipt when we make a payment.
Goods: the products in which the business deals, i.e. which it buys and sells, or produces and sells. Items bought for use in the business are not goods.
- (a) A furniture dealer buys chairs to sell them. They are its stock-in-trade → goods (recorded as purchases).
- (b) The kirana store buys chairs to use them for years → furniture, an asset.
- Same item, different business, different treatment. Similarly, stationery is goods for a stationery merchant, but for others it is an expense (not purchases).
Purchases: the total amount of goods bought by a business, on cash and on credit, for use or sale. A trading concern buys merchandise for resale (with or without processing); a manufacturing concern buys raw materials, converts them into finished goods and sells them. Purchases may be cash or credit purchases.
Drawings: withdrawal of money and/or goods by the owner from the business for personal use. Drawings reduce the owner's investment (capital).
If Ramesh uncle takes ₹5,000 from the shop's cash for his daughter's fees, or takes home rice worth ₹800 from the shop for family use, both are drawings.
9. Stock
Stock (inventory) is a measure of goods, spares and other items on hand in a business at a given time (stock in hand).
- Closing stock: in a trading concern, goods lying unsold at the end of the accounting period. In a manufacturing company it includes raw materials, semi-finished goods and finished goods on hand on the closing date.
- Opening stock: stock at the beginning of the accounting period. This year's closing stock becomes next year's opening stock.
On 1 April 2026 Sharma Kirana Store had opening stock of ₹25,000. During the year it purchased goods costing ₹1,40,000. Goods costing ₹1,20,000 were sold during the year. What is the closing stock (at cost) on 31 March 2027?
10. Debtors and creditors
Debtors are persons or entities who owe an amount to the enterprise for buying goods or services on credit. The total due from them on the closing date is shown in the Balance Sheet as sundry debtors (trade receivables) on the asset side.
Creditors are persons or entities to whom the enterprise has to pay for goods or services supplied on credit. The total due to them is shown as sundry creditors (trade payables) on the liabilities side.
| Basis | Debtors | Creditors |
|---|---|---|
| Meaning | Owe money to the business | The business owes money to them |
| Arises from | Credit sale of goods/services | Credit purchase of goods/services |
| Balance Sheet | Asset side (sundry debtors) | Liabilities side (sundry creditors) |
| Kirana example | Verma family took groceries on udhaar | Wholesaler supplied rice on 30 days' credit |
Debtor = Dena hai (he has to give us). Creditor = we have to pay him (he gave us "Credit", i.e. trusted us).
11. Putting it all together
- Capital: amount invested by the owner = ₹3,00,000.
- Fixed assets bought: furniture ₹60,000 and printer ₹8,000 (bought for use, not for sale).
- Purchases (goods): 1,50,000 cash + 70,000 credit = ₹2,20,000.
- Sales: 1,00,000 cash + 40,000 credit = ₹1,40,000.
- Creditor: Kapoor Paper Mart, ₹70,000 (liability). Debtor: Neha Enterprises, ₹40,000 (asset).
- Expenses: salary 12,000 + rent 9,000 + electricity 2,500 = ₹23,500.
- Drawings: ₹5,000 (personal use of business cash).
- Gain: printer sold for 9,500 against cost 8,000 → ₹1,500 (incidental event).
- Loss: stationery lost in theft, ₹6,000 (no benefit received).
In the Arjun Stationers example above, what is the total amount of expenses and losses for April 2026?
Three classic exam mistakes: (1) writing drawings as an expense (it is a reduction of capital, not a business expense); (2) calling the purchase of furniture "purchases" (the word "purchases" is used only for goods); (3) writing discount allowed to debtors as revenue (for the seller it is an expense/loss).
- Furniture (a fixed asset)
- Purchases (goods)
- An expense
- Drawings
- increase capital
- increase expenses
- be treated as drawings and reduce capital
- be treated as a loss by theft
📌 Points to remember (Quick Revision)
- Entity: the business as a separate unit; transaction: a value exchange between entities, cash or credit.
- Assets (current and non-current) are resources owned; liabilities (current and non-current) are debts owed; capital is the owner's investment, shown on the liabilities side.
- Expenditure is spending; if its benefit ends within a year it is an expense (revenue expenditure), otherwise an asset (capital expenditure).
- Profit comes from main business (revenue − expenses); gain from incidental events; loss is excess of expenses or money lost without benefit.
- Trade discount is off the list price and not recorded; cash discount is for prompt payment and is recorded; drawings reduce capital.
- Goods are items the business deals in; debtors owe the business (asset), creditors are owed by the business (liability); closing stock = unsold goods at period end.
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