CBSE Class 11 Chapter 2 Basic Accounting Terms - Part 3
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:
1) Income:
Income is the profit or earnings generated by a business during an accounting period. It is the excess of revenue over expenses. Income is a broader term than profit because it includes earnings from both operating and non-operating activities.
Formula: Income = Revenue – Expenses
Example:
A business sells goods for ₹50,000. The total expenses incurred are ₹35,000.
Income = Revenue – Expenses
Income = ₹50,000 − ₹35,000 = ₹15,000
Income = ₹15,000
2) Profit:
Profit is the income earned by a business from its regular operating activities, such as selling goods or providing services.
Examples:
- Profit from the sale of goods.
- Profit from providing services.
Profit is classified into: Gross Profit & Net Profit.
a) Gross Profit
Gross profit is the excess of sales revenue over direct expenses (such as the cost of goods sold).
Formula: Gross Profit = Sales Revenue − Direct Expenses
Examples:
A business sells goods for ₹80,000; Cost of Goods Sold = ₹55,000
Gross Profit = Sales − Cost of Goods Sold
Gross Profit = ₹80,000 − ₹55,000 = ₹25,000
Gross Profit = ₹25,000
b) Net Profit
Net Profit is the profit remaining after deducting all expenses from total revenue and other income.
Formula: Net Profit = Total Revenue + Other Income − Total Expenses
If total expenses exceed total revenue and other income, the result is called Net Loss.
Example:
a) A business has: Sales Revenue = ₹1,20,000; Other Income (Interest Received) = ₹5,000; Total Expenses = ₹90,000
Net Profit = Total Revenue + Other Income − Total Expenses
Net Profit = ₹1,20,000 + ₹5,000 − ₹90,000
Net Profit = ₹35,000
Net Profit = ₹35,000
b) A business has: Sales Revenue = ₹1,20,000; Other Income (Interest Received) = ₹5,000; Total Expenses were ₹1,30,000
Net Profit = Total Revenue + Other Income − Total Expenses
Net Profit = ₹1,20,000 + ₹5,000 − ₹1,30,000 = –₹5,000
This means the business has a Net Loss of ₹5,000.
3) Gain:
A Gain is an increase in the owner's equity arising from irregular or non-recurring transactions, not from the normal business activities.
Examples:
- Profit on sale of Land
- Profit on sale of Machinery
- Profit on sale of Investments
Note: Gain is different from profit because it arises from activities that are not part of the regular business operations.
Example:
A machine purchased for ₹1,00,000 is sold for ₹1,20,000.
Gain = Cost of Purchase – Cost of sold
Gain = ₹1,20,000 − ₹1,00,000 = ₹20,000
Gain = ₹20,000
4) Loss:
A Loss occurs when total expenses exceed total revenue and other income. It reduces the owner's equity.
Losses may arise due to:
- Operating business activities.
- Theft of cash or goods.
- Sale of fixed assets at a loss.
- Other unexpected or non-recurring events.
Formula: Loss = Total Expenses − (Total Revenue + Other Income)
Examples: Business Loss
Total Revenue = ₹70,000 & Total Expenses = ₹85,000
Loss = Total Expenses – Total Revenue
Loss = ₹85,000 − ₹70,000 = ₹15,000
Loss = ₹15,000
Example: Loss on Sale of Asset
A computer purchased for ₹40,000 is sold for ₹32,000.
Loss = Cost of Purchase – Cost of Sold
Loss = ₹40,000 − ₹32,000
Loss = ₹8,000
5) Purchases:
Purchases refer to the buying of goods or raw materials for resale or for manufacturing products.
Purchases include: Cash Purchases & Credit Purchases
Example
A furniture shop purchases tables worth ₹75,000 from a supplier.
Purchases = ₹75,000
6) Purchases Return (Returns Outward):
Purchases Return means returning goods purchased to the supplier due to reasons such as defects, damage, or wrong supply.
Example:
A business purchases goods worth ₹30,000. Goods worth ₹5,000 are returned because they are damaged.
Purchases Return = ₹5,000
7) Sales:
Sales refer to the sale of goods by a business.
Sales include: Cash Sales & Credit Sales
Example
A mobile shop sells smartphones worth ₹1,50,000 to customers.
Sales = ₹1,50,000
8) Sales Return (Returns Inward):
Sales Return means goods sold that are later returned by customers due to defects, damage, or other reasons.
Example
A customer returns a defective mobile phone worth ₹12,000.
Sales Return = ₹12,000
9) Revenue from Operations:
Revenue from Operations is the income earned from the main business activities of an enterprise, such as selling goods or providing services.
It is calculated after deducting sales returns.
Formula: Revenue from Operations = Sales − Sales Return
Example:
Sales = ₹2,00,000 & Sales Return = ₹10,000
Revenue from Operations = Sales − Sales Return
Revenue from Operations = ₹2,00,000 − ₹10,000
Revenue from Operations = ₹1,90,000
10) Goods:
Goods are items that are purchased or manufactured for the purpose of sale. They form the stock-in-trade of a business.
Examples:
- Electronics Shop: Televisions, Refrigerators, Laptops
- Book Store: Books, Notebooks, Pens
- Garment Store: Shirts, Trousers, Sarees
- Furniture Shop: Chairs, Tables, Sofas
11) Stock (Inventory):
Stock (Inventory) refers to the goods that remain unsold or unused in production on a particular date. It is a current asset of the business.
Stock is classified into opening stock & closing stock.
a) Opening Stock is the stock available at the beginning of the accounting year. It is the closing stock of the previous year.
Examples: A grocery shop has goods worth ₹40,000 on 1st April.
Opening Stock = ₹40,000
b) Closing Stock is the stock remaining unsold at the end of the accounting period.
Examples: At the end of the financial year, unsold goods are worth ₹25,000.
Closing Stock = ₹25,000
Types of Inventory:
a) Inventory of Goods
This refers to finished goods held for sale.
Example: A shoe store has 150 pairs of shoes available for sale.
b) Inventory of Raw Materials
These are materials kept for manufacturing products.
Example: A bakery has flour, sugar, butter, and cocoa powder used to make cakes.
c) Work-in-Progress (WIP)
Work-in-Progress refers to partly completed goods that are still under production.
Its value includes the cost of Raw Materials, Labour Cost, Other Manufacturing Expenses (Power, Fuel, etc.)
Example: A furniture factory has partially completed tables that are still being polished and assembled. These are treated as Work-in-Progress (WIP).
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
Reference Book:
TS Grewal's Double Entry Bookkeeping Class 11 Accountancy (for educational purposes only for concept building).
Disclaimer:
The content is designed for educational purposes as per the CBSE class 11 syllabus in accountancy. It is not a copy of any textbook.
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