CBSE Class 11 Chapter 2 Basic Accounting Terms - Part 1
Basic Accounting Terms
Introduction:
In this article, you will find simple and easy-to-understand explanations of the important basic accounting terms prescribed in the CBSE Class 11 Accountancy syllabus. Understanding these terms will help you grasp accounting concepts more effectively and prepare for your examinations with confidence.
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What You Will Learn:
Business Transaction:
A Business Transaction
is a financial transaction or economic event between two parties that
affects the financial position of a business and is recorded in the books of
accounts.
Characteristics of Business Transactions:
- It has a monetary value.
- It is supported by a source document (such as an invoice or receipt).
- It changes the assets, liabilities, or capital of the business.
- It affects the accounting equation.
- Every transaction has two aspects: Receiving (Debit) and Giving (Credit).
- It may be an internal transaction (e.g., Depreciation on machinery) or an external transaction (e.g., Purchase of goods from a supplier)
- It can be a cash transaction & Credit Transaction
Example 1 (Cash Transaction)
A
business purchases furniture for ₹20,000 and pays cash
immediately.
This
is a cash
business transaction because payment is made instantly.
Example 2 (Credit Transaction)
ABC Traders sells goods worth ₹15,000 to Rahul on
credit.
This is a credit business transaction
because payment will be received later.
Account:
An account is a
record of all transactions relating to a particular person, asset, liability,
income, or expense.
It shows:
- The amount of each transaction.
- Whether the account is debited or credited.
- The balance available in that account.
- Cash Account
- Sales Account
- Purchases Account
- Salary Account
- Machinery Account
Example:
A business pays ₹8,000 as office rent.
This transaction is recorded in the Rent Account.
Capital:
- Capital is the amount invested in an enterprise by the proprietor (in the case of a proprietorship) or by partners (in a partnership business).
- It may be invested in the form of cash or other assets.
- Under the Business Entity Concept, capital is treated as a liability because the business and the owner are considered separate entities.
- Capital is also known as owner's equity or net worth.
Example:
Mr. Arun starts a business by investing ₹ 5,00,000 in cash.
Capital = ₹ 5,00,000.
Drawings:
- Drawings refer to the cash or goods withdrawn by the proprietor or partner for personal use.
- Drawings reduce the investment (or capital) of the owners.
- Drawings by the proprietor or partner are debited to the Drawings Account.
- At the time of preparing the balance sheet, it is deducted from the capital of the proprietor or partner.
- The owner withdraws ₹10,000 from the business for personal expenses. These are treated as drawings.
- The owner takes goods worth ₹5,000 from the shop for personal use. Goods worth ₹5,000 are recorded as drawings.
Liabilities:
- Liabilities are the amounts
owed by a business to outsiders or the owner.
- Liabilities are classified into: Internal Liability & External Liability
- They are also classified as: Non-current Liabilities & Current Liabilities
(a) Internal Liability
Internal liability is the amount payable to the owner of the business. This amount is treated as the business's liability to the owner.
The proprietor invests ₹6,00,000 in the business.
(b) External Liability
External liability is the amount payable to persons or organizations outside the business.
Liability is further classified into Non-current liability & Current Liability.
Examples:
- Creditors
- Bank Loan
- Bills Payable
Example:
A business purchases goods worth ₹40,000
on credit from XYZ Ltd.
₹40,000 becomes
an External Liability.
(i) Non-current Liability
A Non-current liability is payable after more than 12 months
from the end of the accounting period.
Examples:
- Long-term Bank Loan
- Debentures
- Long-term Borrowings
Example: A business takes a 5-year
bank loan of ₹10,00,000.
This is
a Non-current Liability.
(ii) Current Liability
A current liability is payable within 12 months from the end
of the accounting period.
Examples:
- Creditors
- Bills Payable
- Bank Overdraft
- Outstanding Expenses
- Short-term Loan
Example:
A business purchases goods worth ₹30,000
on credit, payable within 30 days.
This amount is a Current Liability.
Conclusion:
Carefully rewrite all the important MCQs to clarify your concepts of basic accounting terms.
Print the below MS Word practice sheet and revise and practice offline anytime.
Repeat watching the video explanation to get more clarity and to revise fast before exams.
The PDF notes download link is available for you to download for free.
👉 Download Questions & Answers Notes
👉 Click Here to Watch YouTube Video (MCQs & Short Answer Questions)
👉 Click Here to Watch YouTube Video - CBSE Chapter 2 Basic Accounting Terms
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