Introduction
Chapter 2 of DK Goel Class 11 Accountancy introduces the fundamental terminology of accounting. These terms form the language of business and are essential for understanding financial transactions. Every business activity can be expressed using these standardized terms, making communication in the business world precise and universally understood.
Core Business Terms
Definition: An economic event that changes the financial position of a business and can be measured in monetary terms.
- Must have: Monetary value, dual aspect (debit and credit), and documentary evidence
- Types:
- External Transactions: With parties outside the business (customers, suppliers)
- Internal Transactions: Within the organization (depreciation, provisions)
- Example: Purchase of goods for ₹10,000, Sale of goods for ₹15,000
Definition: The result or consequence of a transaction.
- It is the outcome of one or more transactions
- Not directly recorded but calculated from recorded transactions
- Example: Calculating net profit or loss after considering all revenues and expenses
Definition: A summarized record of all transactions relating to a particular person, asset, liability, expense, or income at one place.
- Shows both debit and credit effects
- Maintains complete record under specific heads
- Helps in determining the net position of any item
- Format: T-shaped with debit on left and credit on right
- Example: Cash Account, Salary Account, Ram's Account
Definition: The amount of money or money's worth invested by the owner(s) in the business.
- Represents owner's equity in the business
- It's an internal liability (business owes to owner)
- Formula: Capital = Assets - External Liabilities
- Increases with additional investment and profits
- Decreases with drawings and losses
- Example: Owner invests ₹5,00,000 to start business
Definition: Cash or value of goods withdrawn by the owner from the business for personal use.
- Reduces owner's capital in the business
- Not a business expense (personal withdrawal)
- Recorded separately to track owner's withdrawals
- Example: Owner takes ₹10,000 cash for personal expenses
Complete Assets Classification
ASSETS
Resources owned by business providing future economic benefits
Non-Current Assets
Held for long-term use (>1 year)
Current Assets
Convertible to cash within 1 year
Fictitious Assets
Deferred expenses (not real assets)
Fixed Assets - Tangible
Physical assets that can be seen and touched:
- Land & Building
- Plant & Machinery
- Furniture & Fixtures
- Vehicles
Fixed Assets - Intangible
Non-physical assets with value:
- Goodwill
- Patents & Copyrights
- Trademarks
- Computer Software
Current Assets Examples
Assets easily convertible to cash:
- Cash in hand/bank
- Inventory/Stock
- Trade Receivables (Debtors)
- Bills Receivable
- Prepaid Expenses
- Accrued Income
Complete Liabilities Classification
LIABILITIES
Obligations to pay in future
Internal Liabilities
Amount owed to owners
External Liabilities
Amount owed to outsiders
Non-Current Liabilities
Payable after more than one year:
- Long-term Loans
- Debentures
- Mortgage Loans
- Long-term Provisions
Current Liabilities
Payable within one year:
- Trade Payables (Creditors)
- Bills Payable
- Bank Overdraft
- Outstanding Expenses
- Unearned Income
- Short-term Loans
Revenue, Expenses & Financial Results
Definition: Income of recurring nature from business activities.
- Operating Revenue: From main business (Sales)
- Non-Operating Revenue: From other sources (Rent, Interest, Commission)
- Revenue Receipts: Regular/recurring nature
- Capital Receipts: Non-recurring (Sale of fixed asset, Loan taken)
Definition: Cost incurred for generating revenue in an accounting period.
- Related to current period's operations
- Examples: Rent, Salary, Depreciation, Insurance, Utilities
- Matched against revenue to determine profit
Definition: Spending of money or incurring liability for acquiring assets, goods, or services.
- Revenue Expenditure: Benefit within one year (Rent, Wages)
- Capital Expenditure: Benefit beyond one year (Machinery, Building)
- Deferred Revenue Expenditure: Heavy expense, benefit over multiple years (Large Advertisement Campaign)
Income: The excess of Revenue over Expenses
Profit: Excess of total revenues over total expenses from regular business
Gain: Profit from irregular/non-recurring activities (Sale of fixed asset)
Loss: When Expenses exceed Revenue
Key Formula
Trading Terms
Goods/Merchandise
Items purchased for resale or production. The primary items a business deals in.
Note: Term 'Goods' is specific to items for trade, not assets.
Purchases
Buying of goods (only) for resale or production.
- Cash Purchases: Immediate payment
- Credit Purchases: Payment later
Sales
Selling of goods or services - main revenue source.
- Cash Sales: Immediate receipt
- Credit Sales: Payment received later
Stock/Inventory
Unsold goods at the end of accounting period.
- Opening Stock: Beginning of period
- Closing Stock: End of period
Debtors vs Creditors
| Aspect | Debtors (Trade Receivables) | Creditors (Trade Payables) |
|---|---|---|
| Definition | Persons who owe money to the business | Persons to whom business owes money |
| Arises from | Credit sales of goods/services | Credit purchases of goods/services |
| Classification | Current Asset | Current Liability |
| Also called | Sundry Debtors, Trade Receivables | Sundry Creditors, Trade Payables |
| Bills related | Bills Receivable (formal promise to receive) | Bills Payable (formal promise to pay) |
Discounts & Vouchers
Trade Discount
Deduction from list price
- NOT recorded in books
- Given to all customers
- Deducted before recording
Cash Discount
For prompt payment
- IS recorded in books
- Motivates quick payment
- Shown as expense/income
Voucher
Source document
- Invoice, Receipt
- Cash Memo
- Debit/Credit Note
Key Formulas Summary
Fundamental Accounting Equation
Capital Formula
Capital = Assets - Liabilities
Income Formula
Income = Revenue - Expenses
Gross Profit
GP = Sales - COGS
Net Profit
NP = GP - Indirect Expenses
Cost of Goods Sold
COGS = Op.Stock + Purchases - Cl.Stock
Working Capital
WC = Current Assets - Current Liabilities
Operating Cycle
The Operating Cycle is the time period between the acquisition of assets for processing and their final conversion into cash. This cycle helps determine whether an asset or liability is classified as "current" (within operating cycle or one year, whichever is longer) or "non-current".