20 Basic Accounting Terms Every Class 11 Commerce Student Must Know – CBSE Accountancy

An **entity** is a business enterprise with a definite, identifiable existence — such as a sole proprietorship, partnership, or company. Every accounting system is designed for a specific **accounting entity**. Importantly, the business and its owner are treated as separate entities.

A **transaction** is any event involving an exchange of value between two or more parties. It can be a **cash transaction** (immediate payment) or a **credit transaction** (payment deferred). Examples: purchasing goods, paying salary, receiving money from customers.

**Goods** refer to the products the business buys and sells. The same item can be "goods" for one business and an "asset" for another. For example, chairs are **goods** for a furniture dealer but a **fixed asset** for a law office.

**Assets** are economic resources owned by a business, expressed in monetary terms. They provide future economic benefits. - **Current Assets** — converted to cash within 12 months: inventory, trade receivables, cash - **Non-Current Assets** — held long-term: land, machinery, goodwill, patents

**Liabilities** are obligations or debts the business must pay in the future. They represent creditors' claims on assets. - **Current Liabilities** — payable within 12 months: trade payables, short-term loans - **Non-Current Liabilities** — payable beyond 12 months: long-term bank loans, debentures

**Capital** is the amount invested by the owner in the business — in cash or other assets. It appears on the **liabilities side** of the Balance Sheet because the business owes this amount back to the owner. > Capital = Assets − Liabilities

**Drawings** are withdrawals of money or goods by the owner for personal use. Drawings **reduce capital**.

**Revenue** (also called income) is the total amount earned by the business through its main operations — selling products or providing services. It also includes commission received, interest, dividends, royalties, and rent received.

**Sales** are the total revenues earned from selling goods or services. Sales may be **cash sales** (immediate) or **credit sales** (collected later).

**Expenses** are costs incurred while earning revenue — what the business spends to stay operational. Common examples include salaries, rent, depreciation, and interest payments.

**Expenditure** is spending money or incurring a liability to obtain a benefit. - If the benefit lasts **less than one year** → **Revenue Expenditure** (treated as expense, e.g., repairs) - If the benefit lasts **more than one year** → **Capital Expenditure** (treated as asset, e.g., buying machinery)

**Profit** is the excess of revenues over expenses in an accounting period. > Profit = Total Revenue − Total Expenses Profit increases the owner's capital. **Example:** Revenue ₹6,00,000 − Expenses ₹5,40,000 = Profit ₹60,000.

A **gain** is a profit from transactions **incidental to the main business** — not from regular operations. Examples: profit on sale of a fixed asset, winning a court case, appreciation in asset value.

**Loss** is the excess of expenses over revenues. It decreases the owner's equity. It also includes money lost without any return — such as goods destroyed by fire or cash stolen.

**Stock** refers to goods held in hand by a business. - **Opening Stock** — goods at the start of the accounting period - **Closing Stock** — unsold goods at the end of the period In manufacturing, closing stock includes raw materials, work-in-progress, and finished goods.

**Purchases** are the total goods procured by a business for resale or use — on cash or credit. In trading firms, purchases are merchandise for resale; in manufacturing firms, purchases are raw materials.

**Discount** is a deduction from the price of goods. Two types: - **Trade Discount** — deducted at the time of sale from the list price; offered by manufacturers to wholesalers; **NOT recorded** in books. - **Cash Discount** — given to debtors who pay early; **IS recorded** in books; encourages prompt payment.

A **voucher** is the documentary evidence supporting a transaction. It is the original source document for every accounting entry. Examples: cash memo (cash purchase), invoice (credit purchase), receipt (payment made).

**Debtors** are persons or entities who **owe money to the business** for goods or services received on credit. They appear on the **asset side** of the Balance Sheet as *Sundry Debtors* or *Trade Receivables*.

**Creditors** are persons or entities **to whom the business owes money** for goods or services provided on credit. They appear on the **liabilities side** of the Balance Sheet as *Sundry Creditors* or *Trade Payables*.

Profit results from the main business operations (e.g., selling traded goods), while gain arises from incidental transactions such as selling a fixed asset above its book value.

Debtors owe money to the business and are recorded as an asset. Creditors are owed money by the business and are recorded as a liability.

Revenue expenditure benefits only the current accounting period and is treated as an expense. Capital expenditure provides benefits for more than one year and is treated as an asset.

Drawings represent the owner using business funds for personal purposes, which reduces the net amount the owner has invested in the business.

Goods are items that the business buys and sells in the normal course of trade. Assets are items purchased for use in the business, not for resale.