Financial Accounting



  • Accounting is often called the language of business.
  • The basic function of any language is to serve as a means of communication
  • Accounting is a discipline which records, classifies, summarizes and interprets financial information about the activities of a concern so that intelligent decisions can be made about the concern


  • Assets: It is the properties belonging to the company. Any physical thing or right owned that has a money value is an asset. Ex. Machinery. Furniture, Building etc.
  • Goods: It is articles which are bought for resale for profit are known as Goods.
  • Proprietor: The person who makes the investment and bears all the risks connected with the business is known as proprietor.
  • Share Capital: Total amount of cash which the shareholders or proprietors have contributed to the company.     

                Capital = Assets - Liabilities.

  • Drawings: It is the amount of money or the value of goods which the proprietor takes for his domestic or personal use. It is usually subtracted from capital.
  • Accounting Period: Time period for which financial statements are prepared (e.g. month, quarter, year).
  • Accounting Standards: Definitive statements of best practice issued by a body having suitable authority.
  • Debit: A debit is the left hand side of an account. It represents increase in assets and decrease in liabilities
  • Debtor: A person or organisation that owes money to the entity. Suppose goods sold to Mohan, Mohan is a debtor
  • Credit: Entries in the credit column of a ledger account represent increases in liabilities, increases in ownership interest, revenue, or decreases in assets
  • Creditor: A person or organisation to whom money is owed by the entity. When company purchases goods from the Raja. Raja is a creditors
  • Credit purchase: A business entity takes delivery of goods or services and is allowed to make payment at a later date
  • Credit Sale: A business entity sells goods or services and allows the customer to make payment at a later date.
  • Bad debt: It is known that a credit customer (debtor) is unable to pay the amount due.
  • Balance Sheet: A statement of the financial position of an entity showing assets, liabilities and ownership interest.
  • Current Asset: An asset that is expected to be converted into cash within the trading cycle.
  • Current Liability: It is due to be settled within 12 months after the   balance sheet date.
  • Depreciation: It is reduction in the value of the asset. The systematic allocation of the depreciable amount of an asset over its useful life. The depreciable amount is cost less residual value.
  • Fixed Assets: Assets which are used for long term use and are not likely to convert into cash, such as land, buildings and equipment.
  • Fixed Capital: Finance provided to support the acquisition of fixed assets.
  • Working Capital: Finance provided to support the short-term assets of the business (stocks and debtors) to the extent that these are not financed by short-term creditors.

         Working Capital= Current Assets - Current Liabilities.

  • Fixed Cost: One which is not affected by changes in the level of output over a defined period of time.
  • Historical Cost Method: It is methods of valuing assets and liabilities based on their original cost without adjustment for changing prices.
  • Intangible Asset: Without shape or form, cannot be touched.
  • Interest (on loans): The percentage return on capital required by the lender (usually expressed as a percentage per annum).
  • Inventory: Stocks of goods held for manufacture or for resale.
  • Liquidity: The extent to which a business has access to cash or items which can readily be exchanged for cash
  • Revenue: It includes all incomes like sales receipts, interest, commission, brokerage etc.,
  • Expense: The terms ‘expense’ refers to the amount incurred in the process of earning revenue. If the benefit of an expenditure is limited to one year, it is treated as an expense (also know is as revenue expenditure) such as payment of salaries and rent.
  • Gross Profit: Represents total revenue from sales of inventory or services, less Cost of Goods Sold, before overhead expenses. 
  • Net Profit /Loss: Total Income minus Total Expenses.
  • Profit and Loss Statement (or Income Statement): The primary financial statement that shows detailed revenues and expenses for a period of time.
  • Prepaid Expenses: Represents expenses that are paid in advance of incurring them.
  • Outstanding Expenses: It is an expenses that are unpaid
  • Income Received in Advance: Income not earned but received
  • Invoice: While making a sale, the seller prepares a statement giving the particulars such as the quantity, price per unit, the total amount payable, any deductions made and shows the net amount payable by the buyer. Such a statement is called an invoice.
  • Cost of Goods Sold (COGS): Represents the cost incurred in producing products that are sold to customers.

      COGS= Opening stock +Purchases - Closing Stock

  • Voucher: A voucher 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.
  • Discount: When customers are allowed any type of deduction in the prices of goods by the businessman that is called discount.
  • Trade Discount: Some discount is allowed in prices of goods on the basis of sales of the items, that is termed as trade discount. It may be allowed by producer to wholesaler and by wholesaler to retailer for purchase of goods in large quantity.
  • Cash Discount: Cash discount is a concession allowed by seller to buyer to encourage him to make early cash payment. When debtors are allowed some discount in prices of the goods for quick payment that is termed as cash discount.
  • Solvent: A person who has assets with realizable values which exceeds his liabilities is insolvent.
  • Insolvent : A person whose liabilities are more than the realizable values of his assets is called an insolvent
  • Contingent Liability: The liabilities may or may not arises