Basic Concepts & Terminologies of
Accounting
For BBA- Introduction to Accounting
Prepared By. Ms. Tooba Ameen
Lecturer- MUISTD-MUET
Assets
Tangible
Intangible
Short term
Long Term
Short Term
Long Term
(Current Assets)
(Non-current/Fixed Assets)
(Current Assets)
(Non-current/Fixed)
Cash
Inventory
Office Supplies
(prepaid assets)
Land
Building
Equipment
Machinery
Furniture & Fixture
Accounts Receivable (A/R)
interest Receivable
Marketable Securities
Prepaid Assets(some)
Patents
Copyrights
Goodwill
Bonds Receivable
Note:- The segregation is done for the concept development. In reality, only some assets are considered as intangible.
(Goodwill, copyright, patents trademarks etc.).
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Liabilities
Short Term (Current liabilities)
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Accounts Payable
Salaries & Wages payable
Interest payable
Lease rental payable
Income tax payable
Dividends payable
Unearned revenue
Long term (Non-current Liabilities)
Notes payable
Bonds payable
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Accounting Equation
Assets = Liability + Owner’s Equity
Owner’s Equity (Owner’s Capital)
Common stock
Preferred Stock
Treasury Stock
Retained Earnings
Reserves
Income Statement
Revenues
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Sales Revenue
Other Revenue/Other Income
Rental revenue/income
Interest revenue/income
Royalty income/income
Commission income
Franchise fee
Dividend
Expenses
General & Administrative Expenses/ Marketing & Selling Expenses/ Distribution Expenses
• Rent expense
• Utilities Expense
• Insurance expense
• Salaries and wages expense
• Legal expenses
• Advertisement expenses
• Commission expense
• Repair & maintenance expenses
• Interest expenses
• Depreciation Expenses
• Audit Fee
• Transportation(Freight outward)
• Warehouse charges
Income Statement: Revenue- Expenses = Net Income/Net loss
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Double Entry Accounting system
This system says that for every Debit entry there should be a credit Entry and vice versa
Rule for Debit & Credit
Asset Increase
Debit
Asset Decrease
Credit
Liability increase
Credit
Liability Decrease
Debit
Owner’s Equity Increase
Credit
Owner’s Equity Decrease
Debit
Revenue Increase
Credit
Revenue Decrease
Debit
Expense increase
Debit
Retained Earnings
increase
Retained Earnings
decrease
Credit
Debit
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Asset & Expense whenever would increase it would debit
Asset & Expense whenever would decrease it would Credit
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Liability, Owner’s Equity, and Revenue whenever got increase it would be “credit”
Liability, Owner’s Equity and Revenue whenever got decrease it would be “Debit”
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Logically Liability and owner’s equity shows up at the same side of balance sheet which is right side. So
the treatment of their debit/credit would be same.
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On the other hand, Revenue in last after deducting all expenses comes under owner’s equity so that’s
why its treatment of debit/credit is same as owner’s equity.
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Retained earnings are the part of Owner’s Equity
Fiscal Year- This is simply a tax year or accounting year follow by a company.
For example if company starts its year from 1st January to 31st December so its tax and accounting year would
be the different.
Another example: if any company starts its year from 1st July to 30th June so its tax and accounting year would
be same from previous company
Fiscal/Tax year: this is year comprised on 12 months on which tax is imposed on company.
Accounting year: this is time period of 12 months which company use for prepare its annual financial
statement(Balance sheet, Income Statement, Cash flow Statement & others)
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sometimes Tax and accounting years are same, sometimes not.
Assets
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Cash – An amount in form of “money” kept by Company’s Bank account
Inventory – Raw material required for manufacturing the products
Prepaid Assets- the assets which is purchases but not utilized for e.g. Advance rent, prepaid insurance, prepaid
shop supplies
Supplies- little items required for daily use for e.g. Stationery, cleaning items, fluids, A4 printer papers
Land - self explanatory
Building- self explanatory
Tools & Equipment- nuts, bolts, hammer, screw driver, wrench etc.
Machinery- Self explanatory
Furniture & Fixtures- Table, chair, sofas, Fixtures-bulb/lighting, fan
Accounts Receivable- Products & Services has been provided by seller but amount has not been received yet.
Interest Receivable- interest income which is yet to receive on any debt security purchase by company
Marketable Securities- it include those bonds/stocks which are easily and conveniently available to buy/sell in
market
Patents- A patent is a form of intellectual property that gives its owner the legal right to exclude others from
making, using, selling and importing an invention for a limited period of year- it is on tangible assets
Copy rights- Copyright is the exclusive right given to the creator of a creative work to reproduce the work,
usually for a limited time. The creative work may be in a literary, artistic, educational, or musical form. Copyright
is intended to protect the original expression of an idea in the form of a creative work
Goodwill- the established reputation of a business regarded as a quantifiable asset and calculated as part of its
value when it is sold.
Bonds Receivable- Principal plus interest on “Debt Security” will be received at the time of maturity
Loans Receivable- any loan (given to any other person/company) would be received in any future date. It can be
with or without interest.
Liabilities
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Accounts Payable- A short term accrued liability is left to pay by company
Salaries and Wages payable- accrued employee salaries are left to be paid by company
Interest Payable- accrued interest has to pay by company on “Debt”. Debt can be bond/loan
Lease rental payable- lease payment is required to pay by company
Income tax payable- accrued income tax amount is left to pay.
Dividends payable- accrued dividends which are left to pay
Unearned Revenue- here Cash has been taken in advance but products/services has not been provided.
Notes Payable- A short term/long term accrued liability is left to pay by company. It can/can’t be interest
bearing
Bonds payable- - Principal plus interest on “Debt Security” will be paid by company at the time of maturity
Owner’s Equity(Owner’s Capital)
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Common Stock- Also known as ordinary shares. Capital stock (shares) issued by company.
Preferred Stock- A kind of stock issued by company in which preference for payment of dividend is given to
preferred shareholders.
Treasury Stock- Outstanding (sold) stocks are call back by company.
Reserves- part of retained earnings. Reserve amount is specified for any purpose.
Supplementary information
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Capital includes liability plus Owner’s equity collectively. Only Owner’s Equity is known as Owner’s Capital.
Revenues
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Sales Revenue - An income generated from normal business activities
Other Revenue/Other Income
Rental revenue- income generated through rent
Interest revenue- income received as interest
Royalty income- income received as royalty
Commission income- income as a fee/commission
Franchise fee- income received by providing franchise rights
Dividend- income received as dividend
Expenses- The cost incurred to generate revenue
➢ Basically expenses are those costs which accumulates as business operation starts. Often assets are
converted into expense as the utilization occurs.
General & Administrative Expenses/ Marketing & Selling Expenses/ Distribution Expenses
o Rent expense- rent has to pay for running the business operation
o Utilities Expense- electricity/fuel/water/internet bills have to be paid.
o Insurance expense- insurance has to be purchased for ensuring minimizing the risk of any
unforeseen event.
o Salaries and wages expense- salaries & wages have to be pay
o Legal expenses – legal fee/cost for business
o Advertisement expenses- marketing expense
o Commission expense- marketing expense
o Repair & maintenance expenses- repair and maintenance of an asset
o Interest expenses- interest has to pay
o Depreciation Expenses- depreciation needs to be allocated.
o Audit Fee- audit report fees needs to acquire by chartered accountant firm approved by SECP.
o Transportation(Freight outward)- transportation charges to retailers and wholesalers
o Warehouse charges- Godown cost/charges
➢ Some very Useful links to learn about basics of accounting.
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https://www.myaccountingcourse.com
https://www.investopedia.com
https://www.accountingformanagement.org
https://www.accountingtools.com
https://www.financialaccountancy.org