Business Transactions : All those activities which are related to exchange of goods, and services in monetary nature come under business transactions. Their special features are as follows :
(a) They are monetary in nature.
(b) They involve exchange of goods and services like packaging, storage, transportation etc.
(c) All business transactions are recorded in accounting books.
(d) Owners personal transactions are not recorded.
(e) Business transactions must be supported by documentary proof.
Capital : Amount used by the owners in the business is capital, which is used for further production. It can be in cash, goods and property. Capital is a liability to the business. It is also called ‘owners equity’ or ‘net worth’. Capital is the excess of assets over liabilities.
Capital = Assets–Liabilities
Capital is classified as :
(a) Fixed Capital, (b) Floating Capital, (c) Working Capital.
(a) Fixed Capital : The Money invested in purchasing fixed assets is called fixed capital, whereas fixed assets are land, machinery, furniture, buildings, vehicles etc.
(b) Floating Capital : It is the amount of money spent on the purchase of goods or selling goods on credit.
(c) Working Capital : Current Assets–Current Liabilities. Capital required for day-to-day working of the business is called working capital.
Liability : Liability is the obligation or debts payable by the enterprise to outsiders in the form of money. It is the owner’s and outsiders claim.
(a) Owner’s Claim : Owner’s claim is the capital invested by them in the business. It is against the assets of the enterprise.
Owner’s Equity or Internal Equity = Capital + Profits–Losses–Drawings + Interest on Capital–Interest on Drawing + Retained Earnings.
(b) Outsiders Claims : It contains goods purchased on loan, creditors and outstanding expenses.
Liabilities can also be grouped as under :
(i) Fixed Liability : Fixed liabilities are those liabilities which are paid after a long period, normally one year or more. They are long term loans, debentures, mortgages, etc.
(ii) Current Liability : Current liabilities are those liabilities which are to be paid off within one year. They change from time to time, such as creditors, (for goods), bills payable, short term loans, outstanding expenses, bank-overdraft, etc.
(iii) Contingent Liability : Contingent liabilities are not real liabilities. They are uncertain. It is decided in future whether they will be paid by the enterprise or not, such as guarantees taken, bills discounted, tax cases pending in courts.
Contingent liabilities are not included in the liabilities of the balance sheet. They are written as a footnote outside the balance sheet.
Assets : Assets are future economic benefits, the rights of which are owned or controlled by an organisation or individual.
—Finney and Miller
Assets are valuable resources owned by a business which are acquired at a measurable money cost.
—Prof. R. N. Anthony
In this way, the three characteristics of assets are:
(a) The resources must be valuable.
(b) The resources must be owned by business.
(c) The resources must be acquired at a measurable money cost.
Various types of assets
Fixed Assets : Fixed assets are held for continuous use in business for the purpose of producing goods and services. They are not meant for re-sale such as land, building, plant, machinery, furniture, long term investments, motor vehicles etc.
Current Assets : Current assets are for sale. Business wants to convert them into cash within one year, such as debtors, stock, prepaid expenses, bills receivable, cash at bank, cash in hand (also), etc.
Tangible and Intangible Assets: Tangible assets are those assets which can be seen and touched, such as land, machinery, furniture, goods, etc. Intangible assets cannot be seen or touched, such as patents, goodwill, trade marks, and prepaid expenses.
Wasting Assets : They are consumed through being worked or used such as mines. Wasting assets also include those assets which get exhausted with the lapse of time, such as patents, trade-marks, leasehold properties, etc.
Revenues : These are the amounts the business earns by selling its products or providing services to customers. Other titles and sources of revenues are fees, commission, interests, dividend, etc.
Expenditure : Expenditure is the amount of resources consumed usually, it’s of long term in nature. Therefore, its benefits are to be derived in future. For example, capital expenditure.
Expenses : They are costs incurred by a business in the process of earning revenues. Generally, expenses are measured by the cost of assets consumed of services used during an accounting period. The common heads of expenses are depreciation, rent, wags, salary, interest, costs of heat, light, water, telephone, etc.
Income : Income is the increase in the net worth of the organisation either from business activities or other activities. Income is a comprehensive term which includes profit also. In accounting income, it is the positive change in the wealth of the firm over a period of time.
Profit : Profit is the excess of revenues over expenses during an accounting year. It increases the owners equity.
Gain : Gain is the change in the equity (net worth) arising from change in the from and place of goods and holding of assets over a period of time realized or unrealized. It may be of capital nature or revenue nature or both.
Sales : Sales are total revenues from goods sold and/or services sold or provided to customers. Sales may be cash sales or credit sales or both.
Loss : Loss is the gross decrease in the assets or gross increase in the liabilities. It is the excess of expenses over revenues. It represents reduction in owner’s equity due to inability of the firm to recover the assets used in the business.
Financial Statements : There are basically two financial statements which are prepared by a business house—
(i) Profit and Loss Account, (ii) Balance Sheet.
Accounting Equation : The Accounting equation tells that assets are always equal to capital (owner’s equity) and liabilities (outside loan);
Assets = Capital + Liabilities
Drawings : It is the amount of cash or other assets withdrawn by the owner for his personal use.
Purchases : Purchases are total amounts of goods procured by a business on credit and for cash for sales.
Stock (Inventory) : Stock is a measure of something on hand—goods, spares and other items in business. It is called stock on hand. In a trading organization, the stock on hands is the amount of goods which have not been sold on the date on which the balance sheet is prepared. This is also called closing stock (ending inventory). In a manufacturing company it comprises of raw materials, semi-finished goods and finished goods on hand on the closing date.
Debtors/Accounts Receivable : Debtors (Accounts Receivable) are persons and/or other entities for receiving goods and services on credit. The total amount due from such persons and/or entities on the closing day is shown in the balance sheet as Sundry Debtors (accounts receivable) on the assets side.
Creditors/Accounts Payable : Creditors (accounts payable) are persons and/or other entities which have to be paid by an enterprise an amount for providing goods/and or services on credit. The total amount standing due to such persons and/or entities on the closing date, is shown in the balance sheet as Sundry Creditors (accounts payable) on liability side.
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