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Basics of Accounting

Basic accounting terms - Cont'd

Sales refers to the amount of goods sold that are already bought or manufactured by the business. When goods are sold for cash, they are cash sales but if goods are sold and payment is not received at the time of sale, it is credit sales. Total sales include both cash and credit sales.

Sales Return or Returns Inward
When goods are returned from the customers due to defective quality or not as per the terms of sale, it is called sales return or returns inward. To find out net sales, sales return is deducted from total sales.

Stock includes goods unsold on a particular date. Stock may be opening and closing stock. The term opening stock means goods unsold in the beginning of the accounting period. Whereas the term closing stock includes goods unsold at the end of the accounting period. For example, if 4,000 units purchased @ Rs. 20 per unit remain unsold, the closing stock is Rs.80,000. This will be opening stock of the subsequent year.

Revenue means the amount receivable or realised from sale of goods and earnings from interest, dividend, commission, etc. It is the total amount of proceeds generated for providing goods and services to your customers. This is typically the total amount of the invoices that you generated for your customers.

Expenses are the costs you incur to run your business, whether they are fixed costs (independent of how much business activity you have, like rent) or variable costs (directly related to how much business activity you have, like shipping). It is the amount spent in order to produce and sell the goods and services. For example, purchase of raw materials, payment of salaries, wages, etc.

Income is the difference between revenue and expense.

The excess of Revenue Income over expense is called profit. It could be calculated for each transaction or for business as a whole.

Loss: The excess of expense over income is called loss. It could be calculated for each transaction or for business as a whole.

Capital Expenditure
This represents expenditure incurred for the purpose of acquiring a fixed asset which is intended to be used over long term for earning profits there from. e. g. amount paid to buy a computer for office use is a capital expenditure. At times expenditure may be incurred for enhancing the production capacity of the machine. This also will be a capital expenditure. Capital expenditure forms part of the Balance Sheet.

Revenue expenditure
This represents expenditure incurred to earn revenue of the current period. The benefits of revenue expenses get exhausted in the year of the incurrence. e.g. repairs, insurance, salary & wages to employees, travel etc. The revenue expenditure results in reduction in profit or surplus. It forms part of the Income Statement.

It is a written document in support of a transaction. It is a proof that a particular transaction has taken place for the value stated in the voucher. It may be in the form of cash receipt, invoice, cash memo, bank pay-in-slip etc. Voucher is necessary to audit the accounts.

Invoice is a business document which is prepared when one sell goods to another. The statement is prepared by the seller of goods. It contains the information relating to name and address of the seller and the buyer, the date of sale and the clear description of goods with quantity and price.

Receipt is an acknowledgement for cash received. It is issued to the party paying cash. Receipts form the basis for entries in cash book.

Account is a summary of relevant business transactions at one place relating to a person, asset, expense or revenue named in the heading. An account is a brief history of financial transactions of a particular person or item. An account has two sides called debit side and credit side.

Cost of Sales
Cost of Sales (or COGS) refers to the total value of the goods and services that were sold to your customers. Typically, this refers to items-based businesses that buy inventory for resale, or a manufacturer who builds items for resale. Total revenue less cost of goods sold equals your gross profit.

In broader sense, the term equity refers to total claims against the enterprise. It is further divided into two categories.

i. Owner Claim - Capital
ii. Outsider’s Claim – Liability

Capital: The excess of assets over liabilities of the enterprise. It is the difference between the total assets & the total liabilities of the enterprise. e.g.,: if on a particular date the assets of the business amount to Rs. 1.00 lakhs & liabilities to Rs. 30,000 then the capital on that date would be Rs.70,000/-.

Liability: Amount owed by the enterprise to the outsiders i.e. to all others except the owner. e.g.,: trade creditor, bank overdraft, loan etc.


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