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30 Basic Accounting Terms, Acronyms and Abbreviations Students Should Know

By Callie Malvik on 07/20/2020

It seems every industry has its own secret language. And knowing the lingo is an entry-point into the inner circle—an indicator that you truly belong. So if you’re starting to think about pursuing a career in accounting , your first step is to familiarize yourself with some of the basic accounting terms, acronyms and abbreviations in the field.

Because of the confusing credentials , different accounting myths and these industry terms, it’s not uncommon for people to think working in accounting is inaccessible when really it just has its own unique language. Knowing how to “talk the talk” will allow you to focus less on accounting definitions and more on the important training you’ll need to launch a successful accounting career.

It's time to roll up those sleeves and start building your accounting vocabulary. To help you get started, we compiled an assortment of basic financial terms and acronyms and created this simple accounting glossary for beginners.

Basic accounting terms, acronyms, abbreviations and concepts to remember

Check out these basic accounting definitions and start to commit them to memory. That way, when you start your accounting education journey, you’ll already feel like you’re a step ahead and speaking the language.

1. Accounts receivable (AR)

Accounts receivable (AR) definition: The amount of money owed by customers or clients to a business after goods or services have been delivered and/or used.

2. Accounting (ACCG)

Accounting (ACCG) definition: A systematic way of recording and reporting financial transactions for a business or organization.

3. Accounts payable (AP)

Accounts payable (AP) definition: The amount of money a company owes creditors (suppliers, etc.) in return for goods and/or services they have delivered.

4. Assets (fixed and current) (FA, CA)

Assets (fixed and current) definition: Current assets (CA) are those that will be converted to cash within one year. Typically, this could be cash, inventory or accounts receivable. Fixed assets (FA) are long-term and will likely provide benefits to a company for more than one year, such as a real estate, land or major machinery.

5. Asset classes

Asset class definition: An asset class is a group of securities that behaves similarly in the marketplace. The three main asset classes are equities or stocks, fixed income or bonds, and cash equivalents or money market instruments.

6. Balance sheet (BS)

Balance sheet (BS) definition: A financial report that summarizes a company's assets (what it owns), liabilities (what it owes) and owner or shareholder equity, at a given time.

7. Capital (CAP)

Capital (CAP) definition: A financial asset or the value of a financial asset, such as cash or goods. Working capital is calculated by taking your current assets subtracted from current liabilities—basically the money or assets an organization can put to work.

8. Cash flow (CF)

Cash flow (CF) definition: The revenue or expense expected to be generated through business activities (sales, manufacturing, etc.) over a period of time.

9. Certified public accountant (CPA)

Certified public accountant (CPA) definition: A designation given to an accountant who has passed a standardized CPA exam and met government-mandated work experience and educational requirements to become a CPA .

10. Cost of goods sold (COGS)

Cost of goods sold (COGS) definition: The direct expenses related to producing the goods sold by a business. The formula for calculating this will depend on what is being produced, but as an example this may include the cost of the raw materials (parts) and the amount of employee labor used in production.

11. Credit (CR)

Credit (CR) definition: An accounting entry that may either decrease assets or increase liabilities and equity on the company's balance sheet, depending on the transaction. When using the double-entry accounting method there will be two recorded entries for every transaction: A credit and a debit.

12. Debit (DR)

Debit (DR) definition: An accounting entry where there is either an increase in assets or a decrease in liabilities on a company's balance sheet.

13. Diversification

Diversification definition: The process of allocating or spreading capital investments into varied assets to avoid over-exposure to risk.

14. Enrolled agent (EA)

Enrolled agent (EA) definition: A tax professional who represents taxpayers in matters where they are dealing with the Internal Revenue Service (IRS).

15. Expenses (fixed, variable, accrued, operation)

Expenses (FE, VE, AE, OE) definition: The fixed, variable, accrued or day-to-day costs that a business may incur through its operations.

• Fixed expenses (FE) : payments like rent that will happen in a regularly scheduled cadence.
• Variable expenses (VE): expenses, like labor costs, that may change in a given time period.
• Accrued expense (AE): an incurred expense that hasn’t been paid yet.
• Operation expenses (OE) : business expenditures not directly associated with the production of goods or services—for example, advertising costs, property taxes or insurance expenditures.

16. Equity and owner's equity (OE)

Equity and owner's equity (OE) definition: In the most general sense, equity is assets minus liabilities. An owner’s equity is typically explained in terms of the percentage of stock a person has ownership interest in the company. The owners of the stock are known as shareholders.

17. Insolvency

Insolvency definition: A state where an individual or organization can no longer meet financial obligations with lender(s) when their debts come due.

18. Generally accepted accounting principles (GAAP)

Generally accepted accounting principles (GAAP) definition: A set of rules and guidelines developed by the accounting industry for companies to follow when reporting financial data. Following these rules is especially critical for all publicly traded companies.

19. General ledger (GL)

General ledger (GL) definition: A complete record of the financial transactions over the life of a company.

20. Trial balance

Trial balance definition: A business document in which all ledgers are compiled into debit and credit columns in order to ensure a company’s bookkeeping system is mathematically correct.

21. Liabilities (current and long-term)

Liabilities (current and long-term) definition: A company's debts or financial obligations incurred during business operations. Current liabilities (CL) are those debts that are payable within a year, such as a debt to suppliers. Long-term liabilities (LTL) are typically payable over a period of time greater than one year. An example of a long-term liability would be a multi-year mortgage for office space.

22. Limited liability company (LLC)

Limited liability company (LLC) definition: An LLC is a corporate structure where members cannot be held accountable for the company’s debts or liabilities. This can shield business owners from losing their entire life savings if, for example, someone were to sue the company.

23. Net income (NI)

Net income (NI) definition: A company's total earnings, also called net profit. Net income is calculated by subtracting total expenses from total revenues.

24. Present value (PV)

Present value (PV) definition: The current value of a future sum of money based on a specific rate of return. Present value helps us understand how receiving $100 now is worth more than receiving $100 a year from now, as money in hand now has the ability to be invested at a higher rate of return. See an example of the time value of money here .

25. Profit and loss statement (P&L)

Profit and loss statement (P&L) definition: A financial statement that is used to summarize a company’s performance and financial position by reviewing revenues, costs and expenses during a specific period of time, such as quarterly or annually.

26. Return on investment (ROI)

Return on investment (ROI) definition : A measure used to evaluate the financial performance relative to the amount of money that was invested. The ROI is calculated by dividing the net profit by the cost of the investment. The result is often expressed as a percentage. See an example here .

27. Individual retirement account (IRA, Roth IRA)

Individual retirement account (IRA) definition: IRAs are savings vehicles for retirement. A traditional IRA allows individuals to direct pre-tax dollars toward investments that can grow tax-deferred, meaning no capital gains or dividend income is taxed until it is withdrawn, and, in most cases, it’s tax deductible. Roth IRAs are not tax-deductible; however, eligible distributions are tax-free, so as the money grows, it is not subject to taxes upon withdrawals.

28. 401K & Roth 401K

401k & Roth 401k definition: A 401K is a savings vehicle that allows an employee to defer some of their compensation into an investment-based retirement account. The deferred money is usually not subject to tax until it is withdrawn; however, an employee with a Roth 401K can make contributions after taxes. Additionally, some employers choose to match the contributions made by their employees up to a certain percentage.

29. Subchapter S corporation (S-CORP)

Subchapter S corporation (S-CORP) definition: A form of corporation (that meets specific IRS requirements) and has the benefit of being taxed as a partnership versus being subject to the “ double taxation ” of dividends with public companies.

30. Bonds and coupons (B&C)

Bonds and coupons (B&C) definition: A bond is a form of debt investment and is considered a fixed income security . An investor, whether an individual, company, municipality or government, loans money to an entity with the promise of receiving their money back plus interest. The “coupon” is the annual interest rate paid on a bond.

Start defining your accounting career

Now that you have a solid foundation of basic accounting terms, you’re ready to start on your path to entering the field. Learn more about the road ahead in our article, “ Your Step-by-Step Guide on How to Become an Accountant ”.

EDITOR’S NOTE: This article was originally published in February, 2013. It has since been updated.

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16 Basic Accounting Terms and Definitions for US-based Businesses

How often have you ended a call with your accounting team feeling befuddled about an accounting term? If your answer is a lot of times, then, you’re not alone. A lot of business owners in the US (and at other places too) aren’t familiar with common accounting terms and definitions. 

However, in order to manage your business and finances properly, it is really important to latch on to basic accounting concepts and terminologies. If you want to learn, then, keep reading! 

In this blog, Finsmart has compiled a handy list of 16 basic accounting terms and definitions for US-based businesses. These terminologies and definitions will define business accounting basics for you and give you insights on how to keep your business operations running smoothly. 

Accounting terms and definitions

Are you ready to explore our list of basic accounting terms and definitions? Let’s go! 

#1 Cash flow 

You must have heard this term while having a conversation with your accounting team. Cash flow depicts the net amount of cash and cash equivalents coming into and going out of the business at any given time. In simple words, it is the calculation of all cash collected and spent on business operations, investments, and financing.  

#2 Cash flow forecasting 

As the term itself suggests, cash flow forecasting involves predicting the future flow of cash that will move through (in and out) your business bank accounts. This basic accounting term will help you create scenarios based on new projects or investments; let you determine when to invest in a business, and also pay off debts or pay yourself correctly. 

#3 Allocation 

Most entrepreneurs allocate tasks to different team members to lighten the workload and make business functions run effectively. This basic accounting term is something like that. Allocation is the process of assigning funds to various accounts or periods. It can also be used to divide costs between different departments or activities within a company. 

#4 Credit/Debit 

Credit as a basic accounting term means an increase in a liability or equity account or a decrease in an asset or expense account. Debit, on the other hand, is an increase in an asset or expense account or a decrease in a liability or equity account. 

Learn about outsourced bookkeeping services in India

#5 Income sheet 

Another important accounting definition for businesses to keep in mind! The income sheet shows the company’s financial performance (net profit) over a certain period. It tells the financial story of the business over a period of time. The income sheet is an amazing benchmark tool for businesses to measure performance and understand profit. 

#6 Accounts Payable (AP) 

Accounts Payable (AP) represents money your business has incurred but has not yet paid. In other words, this basic accounting term represents the amount due to vendors or suppliers for goods or services received that have not yet been paid for. AP is recorded as a liability on your balance sheet. 

#7 Accounts Receivable (AR) 

Accounts Receivable (AR) represents the money due to your business for goods or services it has provided. It includes all of the revenue (sales) that your company has provided but has not yet collected payment on. AP is recorded as an asset on the balance sheet that is likely to convert to cash in the short term. 

Accounts payable and receivables services in India to streamline accounting 

#8 Accrued Expense 

As the accounting term itself suggests, an accrued expense is a type of expense that has been incurred but hasn’t been paid or for which there is no expenditure documentation yet. A journal entry is created to record an accrued expense in place of documentation. An accrued expense is generally expected to be paid for within quite a short period of time like next week or next month. 

#9 Asset (A) 

Another basic accounting term you might have heard from your accountant. An asset is defined as anything of value or a resource of value that is owned by your business and can be easily converted to cash. These are listed in descending order of liquidity. Cash, A/R balances, inventory, buildings, office furniture, land, and vehicles are all considered assets.  

#10 Equity (E) 

Equity (E) can be found on a business balance sheet and is one of the most common pieces of data employed by analysts to assess a company’s financial health. It denotes the value left over after liabilities have been removed. To be more precise, equity represents the money that would be returned to your business’ stakeholders if all of the assets were liquidated and all debts were paid off.

#11 Inventory 

Inventory is a basic accounting term used for raw materials, produced goods, and goods that are available for sale. There are 3 types of inventory – raw materials, work-in-progress, and finished goods. Inventory is classified as a current asset on a business’s balance sheet. As goods are sold to customers, the inventory account becomes lower. 

#12 Liability (L) 

All debts that a business has yet to pay are referred to as liabilities (L). These are settled over time through the transfer of economic benefits including goods, money, or services. Common liabilities in accounting include Accounts Payable (AP), payroll, and loans. 

#13 Interest 

Another basic accounting term every US-based business should have an idea about. Interest is the amount paid on a loan or line of credit that exceeds the repayment of the principal balance. It is often reflected as an annual percentage of the amount of a loan. Interest in accounting can either be simple or compound. 

#14 Journal Entry (JE) 

Journal entries (JE) are raw business transactions that are recorded in manual accounting or bookkeeping systems in chronological order by date and posted to the appropriate accounts in the general ledger. Each journal entry comprises a unique identifier, date, debit/credit, amount, and account code.  

  7 glorious tips to outsource accounting to India  

#15 Payroll 

Since you are a business owner, it is obvious you give wages, salaries, and bonuses to your employees. The total of all the compensation that a business must pay to its employees on a given date or for a set period is called payroll. It often appears as a liability on your balance sheet showing what your business owes in terms of unpaid wages, bonuses, and more. 

#16 Receipts 

We are certain most of our readers know about this accounting term. For those who don’t, receipts are documents produced by a business for its customers after they have paid for goods or services. Business owners should save received receipts because they can prove that their incurred expenses are accurate. 

Basic accounting terms and concepts 

Our list of basic accounting terms and definitions ends here. But your accounting journey has only begun. You are likely to come across more unfamiliar accounting terms, finance phrases, and acronyms. Whenever that happens, speak with your accounting partner to get the exact meaning and insights. 

Got any queries to ask? Send them to [email protected] and have them answered by our accounting experts.

Check out these services as well if you operate or want to scale in India:

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Common Accounting Terms Basic 101 Guide

Last updated by

Charles Hall

June 10, 2022

Accounting refers to recording, processing, analyzing, summarizing financial data, and reporting it. However, you must know the basic accounting terms.

Accounting refers to recording, processing, analyzing, summarizing financial data, and reporting it. However, you must know the basic accounting terms.

There are basic terminologies for writing a financial report, recording data such as assets, liability, accounts payable, accounts receivable, balance sheet, equity, inventory, etc. Other business domains use accounting terms such as revenue, net margin, net income, income statement, and cash flow.

All the above-mentioned terms are just the tip of the iceberg. There are a plethora of basic terms in accounting that every professional accountant must know by heart. For each process, the experts in the area use these technical jargons on a daily basis. While a layman only knows a couple of basic terms like cash, balance sheet, profit, and loss, there are actually over 40 basic accounting terms that you must familiarize yourself with. In this article, you are going to learn about the most commonly and frequently used terms with simple examples for your understanding.

According to NYS Society of Certified Public Accountants NYSSCPA , there are over 1000 basic accounting terms. After thorough research we have compiled some of the most common accounting terms you will come across on a daily basis as an accountant.  

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Table of contents

‍ Common Accounting Terms Basic 101 Guide

The glossary of accounting  contains over a thousand terminologies referring to in-depth procedures. However, here are the major common and essential terms that you must know as a student of the subject area.

While you will learn about some of the technical terms used in accounting  methods and processes, later, certain terms do not pertain to any specific financial report. These are the basic terminologies used as general accounting lingo.

Accounting Period

An accounting period for a company refers to a designated time frame mentioned in all financial statements, including balance sheets, income statements, and cash flow statements. This period refers to the time span for which the financial data refers to in the statements.

For example, the accounting period can be monthly, quarterly, half-yearly, or yearly. So, you can create financial reports or statements for a month with data referring to that month alone. Similarly, you can do that same for each quarter, every bi-yearly, or annual financial statements as well.

This generic accounting terminology refers to the procedure where your company assigns funds to various periods or accounts.

For example, your company can allocate a cost and spread it over several months. One such instance is mortgage payment or payment of insurances etc.

You can even allocate the cost over several departments within the company. Typically, this practice is very common with the administrative expenses for a company that operates with multiple divisions.

Business Entity

A business entity, also known as a legal entity, refers to the legal structure. In accounting, the common form of the business includes partnerships, proprietorship, C-Corp, S-Corp, Limited Liability Corp (LLC).

The accountants keep a close check on the ever-changing rules and regulations of each of these business entities. This is important because each of them has a unique structure of laws, requirements, and tax implications.

So, if your business has to stay out of trouble, it is highly critical that your accountants are well-versed in the laws pertaining to all legal entities.

In accounting, Cash Flow or (CF) refers to the influx and outgoing of cash from your company. You can calculate the net Cash Flow of your company for a specific period of time. First, you take the Cash Balance at the beginning of the time period and subtract the Cash Balance you have at the end of the time period.

If you get a remainder amount in a positive number, it means that more cash came into the business than what went out. On the other hand, the negative remainder implies that you have spent more than the amount that came into the company.

However, you must remember that these positive and negative remainder sums of the cash flow do not define the profit and loss of your company. There are more complex and integral components of the financial statements that will come into play when you wish to calculate the profit and loss during a specific time period.

Certified Public Accountant (CPA)

Certified Public Accountant  is a professional qualification that an accounting student can earn after passing a CPA examination. Plus, you will also have to fulfill the two pre-requisites for work experience and previous educational background. These requirements may vary by each state, so confirm with your local CPA body to determine their eligibility criteria.

The term credit refers to an increase in your company's equity or liability account. On the other hand, it can also refer to a decrease in your company's expense or asset account. When writing down the credit in the financial statement or balance sheet, you will always mention the credit to the right side.

In accounting, the term debit identifies an increase in your company's expense or asset account. Alternatively, it may also reflect a decrease in your company's equity or liability account. When recording debit in a financial statement or balance sheet, you will always mention the debit towards the left side in the account details.

Diversification

Diversification in accounting refers to a process of reducing risk. The ultimate purpose of this method is to allocate business capital across multiple assets. This way, the performance of the entire business does not depend on the performance of one asset.

Enroll Agent or EA

This terminology defines a professional designation in the field of accounting. This professional working on this designation has successfully passed the tests showcasing his/her expertise in personal and business taxes.

If your company wants to ensure that you are always in compliance with the rules and regulations by the IRS and file business taxes adequately, then an Enrolled Agent (EA) is who you need to hire.

Fixed Cost (FC)

As the name suggests, Fixed Cost in Accounting indicates the cost that does not change irrespective of your sales volume. For example, the employees' salaries, rent, monthly mortgage payment, and other fixed costs of the company will stay the same regardless of how many products you manufacture and sell.

On the other hand, there is a Variable Cost (VC), which means the cost has the tendency to fluctuate with time. For example, the utility bills of the company may fluctuate depending on how many hours you have been working or how much energy you are using on the production floor, etc.

Interests on business loans are also prone to variation; however, this does not happen overnight. You receive some sort of a prior warning or notification from the bank or lending institution.

General Ledger

A general ledger in accounting shows the complete record of all financial transactions. The GL is the main book that an accountant refers to when the time comes to prepare all financial statements.

GAAP is an abbreviation of "Generally Accepted Accounting Principles." These are the set of rules every accountant must abide by when performing their accounting duties.

These general rules have the primary purpose of keeping standard practices in all companies. This way, it is convenient to run an apple to apple comparison in a business's financial statements or reports.

Interest is the excess amount you pay on top of the principal balance as a repayment for a line of credit or a business.

This is a state in which a company or an individual can no longer meet their financial obligations with the lenders when the debts become due for payment.

Journal Entry

Journal Entry or JE is how you update or make changes in a company's financial books. Each JE must have a unique identifier, a debit/credit, an amount, an account code, and a date. All these factors help determine when you altered the account.

Liquidity is how quickly your company can convert its assets into cash. For example, your stock or cars are more liquid than your office. You can quickly sell stocks and cars to turn them into money, whereas selling the office will take a bit longer for you to gain access to cash.

The material in financial accounting refers to the impact of a misstatement or omission of information on your business's financial reports. Even if the material is half a cent, you will still have to report it. GAAP obligates companies to disclose all material considerations, no matter how big or small.

In accounting, overhead refers to business expenses pertaining to running your daily business operations. However, they do not include any costs related to making or delivering your products and services. The most common overheads include employees' wages, rent, and utility bills.

Payroll in accounts reflects the payments you make to your workforce as their wages, salaries, bonuses, benefits, and deductions. The payroll usually appears as a liability in your company's balance sheet. This is because it is the sum of money that your company owes to the employees.

Moreover, any accrued vacations and unpaid wages are also a part of your business's liabilities.

Present Value

Present Value or PV indicates the value of your company's assets today. Usually, you calculate it in comparison to a different time period. There is a fundamental principle behind this theory, i.e., due to the inflation rate, the cash your company has today is always more valuable than the cash your company will have tomorrow.

Any documentation that is proof of payment made is known as receipts. As a business, you must produce receipts when you make a sale. Similarly, you must ask for receipts when you buy inventory and supplies for your vendors.

You must keep these receipts saved for audits to prove the accurate record of incurred expenses.

Return on Investment

Return on Investment  or ROI refers to profits your company makes divided by the initial investment it made for manufacturing the product or creating the service.

For example, you spent 10,000 on creating a product and marketing it, and then you sold the product for $20,000. In this case, your company can say that your ROI on overall marketing spend is 50%.

Trial Balance

Your company's Trial Balance or TB comprises of the list of all the accounts present in the GL or General Ledger. All these accounts must have their balance amounts, i.e., debit or credit mentioned in the GL. The total amount of debits must always be equal to the total amount of credits. This is what you call a balanced General ledger.

So in simpler terms, monies that go out must always be equal to funds coming in. However, the incoming monies can be in other forms such as inventory, products, raw material, and assets.

Basic Terms in Balance Sheets and Accounting Records

The balance sheet, cash, profit, loss, credit, and debit are some of the most common financial terms you will find in any financial report produced by the accountant. However, this section will represent some of the most basic but confusing accounting terms that common people do not understand.

Accounts Payable

Accounts Payable or AP refers to all your business expenses that have been incurred by your company during a financial transaction, but you have not paid them as of yet. Your accountant or accounts department will record these business transactions as a liability.

Therefore, if you want to check out your accounts payable on the balance sheet, you can look for the section that will show the debt your company owes to any stakeholders.

For example, your company belongs to the textile industry, and you buy yarn from various suppliers on credit. This means you get the stock of yarn to continue smooth production of the fabric, but you make the payment later. Ideally, when you receive the payment after delivering the final product to the company that places the order.

So, when you purchase the yarn, the supplier will send you an invoice for this transaction. Your accounts department will receive the invoice and record the due amount along with other relevant details in the accounts payable (AP) ledger. This means you owe this money to the supplier of the yarn.

Accounts Payable plays a vital role for the company's financial analysts to know the most current and accurate financial condition of the company.

Accounts Receivable

Accounts receivable or (AR) refers to all of your business's revenue generated from sales. However, this is the number of sales your company made but did not receive the payment for them yet. In this case, your accountant or accounts department will enter this kind of business transactional amount as accounts receivable.

This is the amount you have not received yet; you will still mention it as an asset on your balance sheet. Why?  This is because you are certainly going to receive the amount at some point in the future. Yes, it is not in liquid or cash form, but you have the money in the pipeline.

For example, you are the supplier of yarn to a textile company. You have delivered an order worth $10,000 to the company, but they will make the payment upon completion of their order and/or receiving their payment.

In this case, your account department will generate an invoice and add an amount of $10,000 into the accounts receivable section of your company's financial balance sheet. So, in simpler terms, if you want to see the current figures of your company's Accounts Receivable (AR), you can check the balance sheet for how much other companies owe you.

Accrued Expenses

Accrued expenses refer to any or all expenses that your company incurs but has not made the payment against them yet.  Therefore, you can also say that accrued expenses are the amount that your company owes to others for whatever reason.

This can be pending invoices, utility bills, credit card bills, pending mortgage payments, insurance, taxes, and other liabilities.

For example, your company has to pay monthly or yearly insurance premiums. However, you do not make payments straight away, and they become a part of your accrued expense for a while. How? Because even if there is an interval of a single day in which you receive a bill and make the payment, the invoice still goes into your accrued statement section of the balance sheet.

So, once your accounts department receives an invoice or bill that your company has incurred, they will enter it into the accrued expense section of the balance sheet. This means you owe this money to a lending party or utility company etc.

Assets on the balance sheet and in general terms in the business refer to anything that your company owns. However, the owned asset must have a monetary value to be known as an asset. The accounting lists the assets in various categories according to their liquidity.

In this case, the cash held by your company is the most liquid form of assets, whereas land is the least liquid in the category.  If you wish to learn about what other things may count as an asset, here are some examples.

The asset may include cash or cash equivalent such as savings or checking accounts, certificates of deposits, physical money or cash in hand, money market accounts, stocks, treasury bills, etc. The land refers to any area of land or property or structure attached or associated with your company permanently.

Remember, you have to own the property for its classification as an asset. A rented property, no matter how long the duration of the lease, is still an expense. Other assets include the company's furniture, a fleet of vehicles or other transportation, equipment, stock or inventory, etc. However, remember that they are assets only if you own these items.

Balance Sheet (BS)

A balance sheet is a financial statement or report containing every piece of information of your company's monetary activities. No matter how big or small, every financial transaction must go on this balance sheet.

This financial report does not only contain information about the money your business owns but also maintains details of the company's equity, liabilities, and assets. As you can guess by the name "balance sheet," the report's primary purpose is to equalize or balance the financial equation i.e.

Your Company's assets = business liabilities + business equity

Another way to look at it in monetary terms is to see balancing that outgoing money from the company but be equal to incoming goods, services, assets, etc. means if you spend $1000 in a month, there should be an equal amount of services or goods received by your company to balance the sheet.

Think of it as running your home finances; if you go shopping, you balance your receipt. How? You come home and go through the shopping list to ensure that you have each item in the bag you paid for at the store.

Similarly, your accountant will look at all your outgoing money and check the company's record to ensure that the company received the relevant goods, service, or asset you paid the money for. However, a balance sheet also shows other aspects such as money you owe or the money owed to your business by vendors, business partners, and consumers.

Book Value (BV)

As an asset of your company depreciates, it starts to lose its monetary value. In this case, the book value is the term that refers to the original monetary value of the asset minus any monetary depreciation in the value over time.

This term derives from the practice in the field of accounting where the experts record the value of an asset at its historical original cost in the balance sheet. You can say it refers to the value of the item at the time of purchase.

For example, you purchased a vehicle or a truck to deliver your goods to the consumers and paid $ 20,000 for it. As years go by, the value of the truck's original cost will decrease over time, and the book value (BV) tells you the current value of the truck now if you sell it. The depreciation of the cost is another affair looked after by other aspects of accounting.

The term equity in accounting indicates the value of the item or asset leftover once you remove all the liabilities from the cost. Here you can remember the equation we used earlier i.e.

Business Assets = Business Equity + Business' liabilities

If you take all your company's assets and subtract all of your liabilities, the remainder of the amount is known as the equity of your company. This is also the financial portion of the company, which also refers to the stake owned by all the owners, stakeholders, or shareholders in the company.

In simpler terms, if you dissolve your company or sell it, equity refers to the amount available for division amongst all the stakeholders, partners, and owners. However, the division will happen according to their pre-agreed percentage.

For example, your company may be worth a million-dollar business on the book. That does not mean it has the equity of a million dollars. In order to calculate the equity, first, you will have to deduct all the liabilities, expenses, employee expenses, owned invoices, losses, etc.  

Once you have taken out all the liabilities, you will have the assets and cash known as the equity of your company.

In business accounting, the term inventory refers to the classification of all company's assets in stock for selling. This means the asset your company bought to sell them to the customers, but they remained unsold.

Now, as you start selling these items, your inventory system will show the volumes going down. In simpler terms, any products, raw material, or items waiting in your warehouse to sell will automatically become a part of your company's inventory.

So, whether you are a manufacturer of a product or a third-party supplier of raw material, any items in your stock available for selling will fall under the classification of inventory. There is no limitation on size, shape, or type of material. If it is up for sale, it is an inventory.

The term liability referred to as (L) on the balance sheet identifies all the debts that your company owes to other parties. This means any small or significant amounts that you have yet to pay are the liabilities of your company.

Some of the most common liabilities of a business include pending invoices, employees' payroll, monthly utility bills, daily operations expenses, insurances, business loans, credit card bills, fuel expenses, mortgages, tolls, and taxes, etc.

Not just that, if you have to pay back any dividends to the stakeholders, they will also fall in the category of liabilities.

Basic Accounting Terms in Your Company's Income Statement

Accounting is all about knowing exactly how your business is performing. Therefore, the income statement that is also known as the profit and loss statement, is one of the most basic but important financial statements in accounting.

However, there is a wide range of accounting terms used for reporting your company's income statement.

Costs of Goods Sold

The Costs of Goods Sold is a term also known as COGS. This term refers to the expenses of your company related directly to the manufacturing or creation of a service or a product. However, certain costs will not be a part of COGS. These include the costs or expenses your business requires to run your daily operations.

In order to understand the Costs of Goods Sold, let us consider this scenario. If you are a manufacturer of t-shirts, you will require different raw materials. In this case, the raw material will become part of the COGS. Other expenses that fall in the classification of COGS include Direct Labor cost that will be responsible for producing your t-shirts.

However, the cost of electricity, administration and other management operations will never be a part of COGS because those are the operations that you require anyway to run your business smoothly.

Depreciation

The term depreciation in financial accounting refers to a process that accounts for any loss of monetary value in your company's assets over a period of time. Typically, the assets of your company have to have substantial monetary value in order to fall under the category valid for depreciation.

Some of the most common assets that fall under the category of items valid for depreciation are your company's equipment, tools, and transportation vehicles. Another important aspect you must remember is that the depreciation in the value of any asset will appear as an expense in our company's financial income statement.

However, this particular expense will only appear as the 'non-cash expense.' Why? This is because the depreciation of any or all assets does not directly impact your company's cash position (good or bad).

Just like any other aspect of your daily life where an expense is something you pay or have to pay, the same principle applies in financial accounting. Here the term expense for a company refers to any cost your company incurs.

Whether it is the utility bills, you have to pay, purchase raw material, repaying a mortgage or business loans, clearing credit cards, or paying employees payroll or vendor's pending payments, all of these are your company's expenses.

Gross Margin

In financial accounting, Gross Margin (GM) refers to a percentage that an accountant calculates by taking your company's Gross Profit and dividing it by the revenue generated during the same period, i.e., of the profit.

The Gross Margin of your company will also represent how profitable your business has been in a specific period of time. However, your accountant will first deduct the Costs of Goods Sold from the money you made after selling the product. The remaining amount will fall under what you call the Gross Margin.

You can either find out the Gross Margin of an entire batch or each product. It depends on how you wish to analyze the productivity and/or profitability of your company.

Gross Profit

Gross profit or GP is an accounting term that identifies the total profitability of your business in the currency you deal in, i.e., Dollars. However, the accountants do not take out any of the overhead expenses in the calculation.

This means the Gross Profit is the outcome when the accountant subtracts the Costs of Goods Sold (COGS) sold from the total revenue your company made during the same period.

For example, your company sold 100 cars for 2 million dollars. On the other hand, the total cost of goods sold accounts for 1.4 million dollars. In this case, your accountant will first subtract the COGS amount of the revenue you generated, i.e., 2 million dollars i.e.

Gross Profit = Revenue – COGS = 2 million dollars – 1.4 million dollars = 0.6 million dollars.

The remainder sum, i.e., 0.6 million dollars, will be your company's gross profit for that period of time when you sold the 100 cars.

The Profit and Loss Statement

The profit and loss statement (P&L) is also known and commonly referred to as an income statement (IS). This is a report that contains your company's financial statement with full details of revenues generated, expenses paid, and profits gained over a specific time.

There is a certain standard format for a Profit and Loss or Income Statement. The revenue that your company earns over a given period of time appears at the very top of the financial report. Then various business expenses and costs appear, and you subtract from the total revenue generated.

For example, your business generated revenue of $500,000 from January to March this year. Your accountant will mention that on the top and then subtract any or all expenses incurred by your business during January to March. The final result will be the net income of your company during the first quarter of the year.

According to the basics of financial accounting, the net income or (NI) of your company refers to the monetary amount in dollars that you have earned as profits. The accounting department calculated your business's net income by taking all your revenues and subtracting them from the expenses incurred by the company during a specific period of time.

These expenses include the depreciation value of the assets, overhead costs, Costs of Goods Sold, taxes, and any other costs. You can calculate the overall net income of the company.

On the other hand, you can also narrow it down and find out the net income based on the profitability of a certain project. Moreover, you can also find out the net income of the company during a specific time frame.

The term net margin in accounting refers to the percentage amount of your company that illustrates all profit your company made in relation to the revenue generated. In order to calculate the net income, your accountant will take the net income of the company and divide it by the total revenue.

Now, this can be for the entire year or a specific project, or during a particular period of time.

This is a no-brainer; revenue is any money that your company earns upon selling products or services. The revenue is the incoming monies without any consideration of expenses, liabilities, etc.

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Accounting Terms: A to Z Glossary

Interested in accounting, but you keep seeing terms unfamiliar to you? This A-to-Z glossary defines key accounting terms you need to know.

Accountants possess a wide range of skills critical for financial management and reporting. They maintain financial records, analyze data, offer financial insights, ensure compliance, prepare reports, support audits, provide financial advice, and utilize technology to optimize financial processes. Their expertise contributes to effective financial management and informed decision-making for individuals or organizations.

This accounting glossary can be helpful if you want to get familiar with basic terms and advance your understanding of accounting.

Accounting Terms

Accounts Payable

Accounts Payable refers to the money a company owes to its creditors or suppliers for goods and services purchased on credit. It represents a liability on the company's balance sheet until payment.

Balance Sheet

The Balance Sheet is a financial statement that provides a snapshot of a company's financial position at a specific time. It presents the company's assets, liabilities, and shareholders' equity, enabling stakeholders to assess its financial health.

Cash Flow represents the movement of cash into and out of business over a specific period. It provides insights into a company's ability to generate cash and meet its financial obligations. Cash Flow is categorized into three main sections: operating, investing, and financing activities.

Depreciation

Depreciation is the systematic allocation of the cost of a tangible asset over its useful life. It reflects the asset's value decrease due to wear and tear, obsolescence, or other factors. Depreciation is recorded as an expense on the income statement.

Equity, also known as shareholder's equity or net assets, represents the residual interest in a company's assets after deducting liabilities. It reflects the owners' or shareholders' claim on the company's assets. Equity is a critical component of the balance sheet.

Financial Statement

Financial Statements are formal records that present a company's financial performance and position. The main financial statements include the following:

The income statement.

Balance sheet.

Statement of cash flows.

Statement of changes in equity.

They provide essential information for decision-making and financial analysis.

Generally Accepted Accounting Principles (GAAP)

GAAP refers to standard accounting principles, concepts, and guidelines for preparing and presenting financial statements. GAAP ensures consistency, comparability, and transparency in financial reporting, facilitating meaningful analysis and interpretation.

Inventory represents the goods a company holds for sale, in production, or anticipation of future use. It includes raw materials, work-in-progress, and finished goods. Proper inventory management is crucial for maintaining smooth operations and optimizing profitability.

Internal Control

Internal Control refers to a company's policies, procedures, and processes to safeguard assets, ensure accurate financial reporting, and promote operational efficiency. It helps prevent fraud, errors, and irregularities, enhancing the reliability of financial information.

Journal Entry

A Journal Entry is the initial step in the accounting cycle, recording the financial transactions of a business. It follows the double-entry bookkeeping system, where each transaction has an equal debit and credit entry in the company's accounts.

Key Performance Indicators (KPIs)

KPIs are quantifiable metrics used to evaluate the performance and progress of a business toward its goals. In accounting, KPIs can include financial ratios, such as profitability, liquidity, and efficiency. They provide insights into a company's financial health and performance.

Liabilities

Liabilities are obligations or debts that a company owes to external parties. They can include accounts payable, loans, accrued expenses, and other commitments. Liabilities are classified as current or long-term based on their maturity date.

Managerial Accounting

Managerial Accounting focuses on providing financial information for internal decision-making and management purposes. It involves analyzing costs, budgets, performance metrics, and other data to support business operations planning, Control, and evaluation. Managerial accountants provide insights to help managers make informed decisions and optimize organizational performance.

Net Income, also known as net profit or net earnings, represents the amount of Revenue left after deducting expenses, taxes, and other costs. It is a key indicator of a company's profitability and is reported on the income statement. Net Income is often used to calculate important financial ratios and assess overall financial performance.

Operating Expenses

Operating Expenses refer to the costs incurred in the regular operations of a business. These expenses include salaries, rent, utilities, marketing, and other operational costs. Operating expenses are deducted from Revenue to determine operating Income.

Payroll encompasses the total amount of wages, salaries, and benefits paid to employees by a company. It involves calculating and processing employee compensation, tax withholdings, and other payroll-related deductions. Accurate payroll management is crucial for legal compliance and maintaining employee satisfaction.

Quick Ratio

The Quick Ratio, or the Acid-Test Ratio, is a financial ratio that measures a company's ability to meet its short-term liabilities with its most liquid assets. It excludes inventory from current assets, focusing on cash, marketable securities, and accounts receivable. The quick ratio provides insights into a company's liquidity and short-term financial health.

Revenue Recognition

Revenue Recognition is the recording of Revenue on the financial statements when it is earned and realizable. It involves determining the timing and amount of revenue recognition based on generally accepted accounting principles (GAAP) or applicable accounting standards. Proper revenue recognition ensures accurate financial reporting and compliance.

Statement of Cash Flows 

The Statement of Cash Flows is a financial statement that provides information about a company's cash inflows and outflows during a specific period. It categorizes cash flows into operating, investing, and financing activities, offering insights into the sources and uses of cash. The statement of cash flows complements the income statement and balance sheet in assessing a company's financial performance.

Trial Balance

A Trial Balance lists all general ledger accounts and their respective balances. It is prepared to ensure that the total debits equal the full credits, validating the accuracy of the recorded transactions. The trial balance is an essential step in the accounting process before preparing financial statements.

Unearned Revenue

Unearned Revenue, or deferred revenue or advance payments, represents the money a company receives for goods or services not yet delivered. It is considered a liability until the company fulfills its obligations. Unearned Revenue is gradually recognized as Revenue as the goods or services are provided.

Variance Analysis

Variance Analysis involves comparing actual financial results to budgeted or expected figures. It examines the differences between planned and actual performance to identify the causes of deviations. Variance analysis provides insights into cost control, efficiency, and the overall financial performance of a company.

Working Capital

Working Capital represents the difference between a company's current assets and liabilities. It reflects the company's ability to meet short-term obligations and finance day-to-day operations. Positive working capital indicates a company's liquidity, while negative working capital may indicate potential financial difficulties.

XBRL (eXtensible Business Reporting Language)

XBRL is a standardized language for electronic business and financial data communication. It simplifies the preparation, analysis, and exchange of financial information. XBRL enables efficient and accurate reporting, facilitating data analysis and comparability across different organizations and jurisdictions.

Yield refers to the return on investment (ROI) or the rate of return earned. It is typically expressed as a percentage and represents the Income an investment generates relative to its cost. Yield is an important metric for investors in assessing the profitability and attractiveness of different investment opportunities.

Zero-Based Budgeting (ZBB)

Zero-Based Budgeting is a budgeting approach where all expenses must be justified and approved from scratch, regardless of previous budgets. Every budget line item must be evaluated and justified based on its merits and expected benefits. ZBB encourages cost control, prioritization, and efficiency in resource allocation.

Congratulations on exploring the A-Z glossary of accounting terms! This comprehensive guide has equipped you with a solid understanding of key concepts and terminologies in the accounting field. Whether you're a learner, professional, or simply interested in financial matters, this knowledge will enable you to navigate the accounting world confidently. Remember to continue expanding your knowledge and staying up-to-date with the evolving practices and standards in the accounting industry. 

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Basic Financial Accounting Case Study

Case study on basic financial accounting:.

Basic financial accounting is the branch of accounting which is aimed at the control and improvement of the firm’s finance system.

Every firm has its duty to earn money and receive profit, but without the constant assistance of accounting it is impossible to keep the situation under control.Basic financial accounting is supposed to help the executives of the company with decision making and solution of the relevant problems. This branch of accounting evaluates the financial situation of the company, analyzes the current functioning of the firm and makes sure the capital works in the appropriate way in the right sectors of the firm. It is of vital importance for the company to control the financial condition of the firm and react to its changes rapidly, otherwise it will be difficult to save it from bankrupting, crisis and other negative phenomena.So, basic financial accounting plays the informative role, informing the owners of the firm about the current condition of their business; regulating role, observing the condition of the company all the time and suggesting the appropriate solutions to the situation which has occurred there; the role of control over the finance, which means the complex of actions aimed at the all day round monitoring of the expenditures and profit what makes it impossible or completely difficult to steal the money or use it illegally. All in all, basic financial accounting keeps the finance of the firm under the constant control and monitoring, doing statistics, comparison and analysis of the financial processes carried out in the company.

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Basic financial accounting is the important sector of accounting which regulates the finance of the firm and the student should be aware about its issues and aspects if he wants to prepare a good case study on it. The main requirements to case study on basic financial accounting are the right analysis of the problem, the correct evaluation of the cause and effect, investigation of the case site, the effective supply with the arguments and facts about the basic financial accounting collected in the reliable sources. The student who is analyzing the case on financial accounting should be ready to compare the financial situation of the firm with another company and dwell on the pluses and minuses of the policy for the appropriate solution of the case.A good case study is fulfilled with the help of the Internet and it is obvious that one can read a free basic financial accounting case study example composed by the professional and borrow this experience for his own paper. A good free basic financial accounting case study sample is a valuable piece of help for everyone who requires answers to his questions about formatting and the right structure of the paper.

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Class 11 Accountancy Case Studies Questions

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CBSE introduced case-based questions in class 11 accountancy question papers last year to enhance and develop analytical and reasoning skills among students. Class 11 Accountancy Case Studies Questions are given in CBSE model question papers too. Last year sample case-based questions were released by the CBSE and immediately an air of confusion was created among all. This concept was uncharted territory for both students and teachers.

A hypothetical text was provided on the basis of which the student was required to solve the given case-based question asked by CBSE in the accountancy class 11 exam. Initially, the case-based questions appeared to be tedious for both the students and the teachers as they were unprepared to deal with the new pattern of questions but now a lot more clarity is there that has made the question paper quite student-friendly.

Case Study Questions in class 11 (Accountancy)

Case-based questions in Accountancy are considered to be quite challenging by the class 11 students. The questions need to be well prepared and adequately practiced before attempting the class 11 accountancy exam. The accountancy class 11 syllabus is a well-integrated program that facilitates the students to comprehend and learn the basic accounting theories/principles. The subject is the base of major accounting fundamentals that are studied in depth at an advanced level in class 12. For students appearing for grade 11 exams from the Commerce stream, Accountancy is a prime subject. Accountancy is considered to be the most difficult of all other core subjects in the class 11 commerce stream.

The subject is consuming and the case studies are termed to be troublesome for they do require conceptual clarity. To ace this CBSE exam, students need to put in the extra effort. Among all the core subjects of the Commerce stream i.e accountancy, economics and business studies, it’s accountancy that renders a tough time for the students because of its complex theories and principles. It is an arduous task to score well in the 11-grade accountancy examination without adequate practice and knowledge. Many students who opt for the commerce stream after their 10-grade exams target chartered accountancy as a career option, so the subject is of paramount importance for them.

Accountancy syllabus of class 11 CBSE

The entire Accountancy course is divided into 2 parts:

• Part A, Financial Accounting _ I
• Part B, Financial Accounting _ II

Most of the case study questions are centered around the exercises of NCERT textbooks. It is recommended to read the textbooks religiously. There are 2 prescribed textbooks for class 11 Accountancy that have been published by NCERT. But Accountancy has an extensive curriculum and students need to go through other reference books too. Adhering only to NCERT textbooks will not be adequate to achieve proficiency in this subject.

CBSE Class – 11

Accountancy (Code No. 055) Syllabus

Case Study Passage (Accountancy class 11)

In these questions, the students would go through a paragraph with a hypothetical situation, based on which critical reasoning type questions will have to be answered by them. It is important for the students to inspect the passage carefully before trying to attempt the questions. In the coming examination cycle (2022-23), case-based questions will carry a weightage of around 15 to 20%. These questions can be centered on any chapter from the NCERT textbook for accountancy, class 11. Students need to brace well for the case-based questions prior to appearing for their accountancy examination as these questions require a thorough understanding of the key concepts in their syllabus. CBSE aims to increase the weightage of such questions in the years to come.

Kind of case-based Questions in Accountancy

Accountancy is a subject that deals with trade and commerce. The subject records allocate and outline the transactions of a business. The subject is for sure demanding thus requiring a greater effort from the students in order to strive for a perfect score. It is believed to be demanding but at the same time, it is scoring.

The case-based questions asked in the CBSE accountancy question paper for class 11 are of two types:

• Objective- Such questions are asked in the MCQ format
• Subjective- The questions would be answered briefly only but these questions are the ones that would require detailed analysis and application of some fundamental accountancy theories.

How To Prepare For Case-based Questions in Accountancy Grade 11

Students need to prepare well for the case-based questions before appearing for their class 11 Accountancy exams. Here are some tips which will help the student to solve the case-based questions at ease:

• Go through the provided text carefully
• Analyze the situation provided as part of the question asked
• Focus on following correct formats in your responses, accountancy is one subject where apart from the concepts students need to be careful about the formats.
• Brush up well on the theory portion of accountancy, this is the key to scoring a perfect score.
• Practice rigorously
• Provide to-the-point responses

Students need to solidify their concepts in order to ace the accountancy class 11 exam. Case studies can be easily solved if your key fundamentals are crystal clear. These simple points if kept in mind will definitely help the students to fetch good marks in case study questions in class 11 Accountancy .

Case study question examples in accountancy

Here are some given case study questions for CBSE class 11 Accountancy. If you wish to get more case study questions and other study material, download the myCBSEguide app now. You can also access it through our student dashboard.

Accountancy Case Study 1

Read the hypothetical text given and answer the following questions:

Sachin and Dravid are partners in firm sharing profits and losses in the ratio of 3:2. Their balance sheet is given below:

Balance Sheet as on 31.03.2017

On 01.04.2017, they admit Ashwin as a new partner into partnership on the following terms a) He brings in 40,000 as capital and 18,000 towards goodwill for 1/4th share in future profits b) Depreciate furniture by 10% and buildings are revalued at 45,000

• c) PDD is increased to 3,500
• d) Prepaid insurance * 2,000.

Prepare: i) Revaluation Account

. ii) Partners’ Capital Accounts

iii) New Balance

Accountancy Case Study 2

Ram and Shyam are two friends who both have just attended their first class of accountancy. The friends were intrigued by the different branches of accounting and their widespread application. Ram personally liked the branch of accounting in which fund flow statement and budgetary control is used and that branch helps in planning and controlling of operations. As the concept of accounting was further explored, they began discussing the different users of accounting. Ram said that he finds it interesting that even the employees demand information relating to business. Shyam said he finds more interesting the fact that even competitors want information on the relative strengths and weaknesses of the enterprise and for making comparisons, Shyam further said that even accounting helps owners to compare one year’s costs, expenses, and sales with those of other years. However, they were quite shocked by the fact that the management-worker relations were not taken into consideration in the accounting. Meanwhile, Ram and Shyam had an argument at the end of the discussion. Ram was saying that accounting is an art whereas Shyam was saying that accounting is a science. Their teacher came in and said something to them which made them stop the argument.

Q1. What might their teacher have said to solve their argument?

• Ram, please understand, Shetty is correct in this situation

(b) Shyam, please understand, Ram is correct In this situation.

(c) Both are correct

(d) None is correct

Q2. Shyam talked about which type of users of accounting?

(a) Internal users

(b) External users

(c) Both (a) and (b)

(d) None of these.

Q3. Which limitation of accounting is being talked about by them?

(a) Influenced by personal judgment

(b) Omission of qualitative information.

(c) Incomplete information

(d) Based on historical costs

Q4. Which advantage of accounting is being talked about by Shyam in the last part of the first para?

(a) Provides information regarding profit and loss

(b) Provides completes and systematic record

(c) Enables comparative study

(d) Evidence in legal matters

Q5. Which branch of accounting is liked by Ram?

(a) Financial accounting

(b) Cost accounting

(c) Management accounting

(d) Tax accounting

Accountancy Case Study 3

Read the following case study and answer questions

Sam and Jay started with Cash 10,000 and Machinery 1,00,000. They decided to set up a production line for PPE kits for. the protection from Covid 19 virus. As their demand rose, they decided to buy one more piece of machinery. For the same, they took bank overdraft and purchased the machinery. The quality of the company’s product was extremely high and therefore, it could develop a reputation for itself in the market and business was flourishing. After 1.5 years, their old machinery turned obsolete so they decided to sell the same. They sold it and got some cash proceeds. To further increase the brand presence among the concerned stakeholders, they decided to run advertisements from the cash proceeds of machinery sold. As more and more customers demanded their product, they decided to launch a discount for bulk purchases. The discount was not to be recorded in the books of accounts. This campaign was successful and they earned a lot of profits from the same.

Q1. Which type of discount is being discussed in the last part of the passage?

(a) Trade discount

(b) Cash discount

(d) Can’t be determine

Q2. Which asset is discussed in the line, “The quality of the company’s product was very high and therefore, it could develop a reputation for itself in the market and business was flourishing”?

(a) Tangible

(b) Intangible

(c) Current.

(d) Both (a) and (c)

Q3. Which type of liability is discussed in the passage?

(a) Non-current

(b) Current

(d) Can’t be determined

Q4. What was the capital initially invested?

(b) 1,00,000

(c) 1,10,000

Q5. The passage involves capital receipts (apart from initial capital invested).

Advantages of case study questions in Accountancy

The entire class 11 Accountancy syllabus is divided into 2 textbooks that are prescribed by NCERT. The examiner can ask case study questions from any chapter or concept. Students are expected to prepare themselves thoroughly. They ought to practice class 11 Accountancy case-based questions from the various options available to them, so as to ace the subject.

• Uplift the analytical skills of students
• Provide a well-rounded understanding of the concepts
• Enhance intellectual capabilities in students
• Help students to retain knowledge in their long-term memory
• The questions would help to discard the concept of rote learning
• Case studies encourage practical learning.

“Procrastination is the thief of time”

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• DK Goel Solutions
• DK Goel Class 11 Accountancy
• Chapter 2 Basic Accounting Terms

DK Goel Solutions Chapter 2 Basic Accounting Terms

DK Goel Accountancy Class 11 Solutions Chapter 2 Basic Accounting Terms which is outlined by expert Accountancy teachers from the latest version of DK Goel Class 11 Accountancy books. We at BYJU’S provide DK Goel Solutions to assist students to comprehend all the theories in particular. There are numerous concepts in Accountancy, but the concept of Trial Balance, Depreciation and Bank Reconciliation Statement (BRS) is required.

DK Goel Accountancy Class 11 Solutions – Chapter 2

Short question for basic accounting terms.

Define basic accounting terms.

Answer: Basic accounting terms refers to the accounting terms that are used daily in the world of business. 

Give three examples of revenues. 

Answer: The three examples of revenues are

(i) Amount received from the sale of goods

(ii) Amount received from providing service to customers

(iii) Receipts of commission, interest, rent, etc. 

Distinguish between profit and gain

Answer: Profit is the excess of revenues over expenses during an accounting period. It is the result of business transactions which are of regular nature whereas gain arises from events or transactions which are incidental to business such as a sale of a fixed asset or winning a lottery prize. 

Distinguish between fixed assets and current assets

Answer: Fixed assets refer to those assets which are held for continued use in the business and are not meant for resale whereas current assets are either meant for sale or which are expected to be converted into cash within one year.

Distinguish between revenue expenditure and capital expenditure

Answer: If the benefit of an expenditure is exhausted within a year, it is treated as revenue expenditure (also called expense). On the other hand, if the benefit of expenditure lasts for more than a year it is treated as capita;l expenditure (also called an asset).

Distinguish between expense and expenditure

Answer: Expense is the cost incurred in producing and selling goods and services. Thus, it includes the cost of goods sold and the amount paid for salaries, rent, commission, etc. On the other hand, expenditure is a wider term which includes expense also. Expenditure is the amount spent on acquiring assets, goods, and services. 

Distinguish between expenses and losses.

Answer: If the benefit of expenditure is exhausted within a year it is called expense, whereas, excess of expenses of a period over its related revenues is termed as a loss. 

Give two characteristics of a business transaction.

Answer: The two characteristics of a business transaction are.

(i) It results in a change in the financial position of the firm,i.e. A change in the values of some of the assets, liabilities or capital.

(ii) The change must be capable of being expressed in terms of money.

Very Short Question for Basic Accounting Terms

What is Capital?

Answer: It refers to the amount invested by the proprietor in a business enterprise. It can be expressed as Capital = Assets – External Liabilities

What are Drawings?

Answer: Drawings refers to any cash or value of goods withdrawn by the owner for personal use. 

What are Liabilities?

Answer: It refers to the amount which the firm owes to outsiders (expecting the amount owed to the proprietor).

What are Assets?

Answer: Assets are valuable resources owned by a business enterprise which can be measured in terms of money.

What are the Current Assets?

Answer: Current assets include cash and other assets which are expected to be converted into cash within a short period(normally within one year).

Give two examples of current assets.

Answer: The two examples of current assets are cash and stock.

Give two examples of tangible assets.

Answer: The two examples of tangible assets are land and building and stock

Give two examples of intangible assets.

Answer: The two examples of intangible assets are goodwill and prepaid expense

What are fictitious assets?

Answer: These are the assets which cannot be realised in cash or no further benefit can be derived from those assets. Such assets include a debit balance of profit and loss A/c and the expenditure not yet written off such as advertising expenses etc. 

Question 10

What are the current liabilities?

Answer: Current liabilities refer to those liabilities which are to be paid in the near future(normally within one year) 

Question 11

Give two examples of current liabilities.

Answer: The two examples of current liabilities are creditors and bill payable.

Question 12

What are the internal liabilities?

Answer: All amounts which a business entity has to pay to the proprietor or owners are internal liabilities such as capital and accumulated profits. 

Question 13

What is the expense?

Answer: Expense is the cost incurred in producing and selling goods and services.

Question 14

What are the revenue?

Answer: Revenue is the income of a recurring (regular) nature such as receipts from the sale of goods, rent, commission, etc. 

Question 15

What is income?

Answer: Excess of revenue over expenses is called income. Income = Revenue – Expenses.

Question 16

What is a voucher?

Answer: A voucher is a document on the basis of which transactions are first recorded in the book. 

Question 17

What is a trade discount?

Answer: When a discount is allowed by a seller to its customers at a fixed percentage on the list or catalogue price of the goods it is called a trade discount. It is not recorded in the books of account. 

Question 18

What is a cash discount?

Answer: When a discount is allowed to the customers for making prompt payment it is called cash discount. It is always recorded in the books of account. 

Question 19

What is meant by purchases?

Answer: The term purchases are used for buying of goods for resale or for use in the manufacturing process. The term purchases included both cash and credit purchase of goods. 

Question 20

What is meant by sales?

Answer: The term sales is used for the amount of the sale of goods and services rendered. The term sales include both cash and credit sales. 

Question 21

Define merchandise.

Answer: Merchandise means goods for sale.

Question 22

Profit is earned on the sale of a fixed asset. What should be the accounting treatment of this profit?

Answer: It is a capital profit. Hence, it should be transferred to the capital reserve.

Question 23

Give two examples of revenue expenditure.

Answer: The two examples of revenue expenditure are the cost of goods sold and salary.

Higher Order Thinking Skills (HOTS) Questions

Godrej Ltd. imported from Germany one machinery for sale in India and other machinery for production purposes. Will you treat them goods or fixed assets?

Answer: The first machinery will be treated as goods, and secondary machinery will be treated as fixed asset.

Mr. Jaspal Singh dealing in electronic goods sold 10 TV sets costing ₹30,000 each at ₹40,000 each. Out of this ₹, 5,00,000 were received in cash and the balance is not yet received. State the amount of revenue.

Answer: Revenue will be ₹8,00,000(i.e 20TV sets X ₹40,000) Revenue is the amount either received or receivable from sale of goods and services. Both cash sales and credit sales are included in revenue. 

Mr. Dinanath who owed us ₹50,000 became insolvent and paid only 40% of this amount. What is the term used for the amount not received? 

Answer: Bad debts. 

Explain a few basic accounting terms.

Answer: Few basic accounting terms are.

• Business Transaction- Any economic activity that changes the financial position of a company is known as a business transaction. A few features of a business transaction are.
• It includes all the economic activities of a company. All goods or services that are purchased and sold for cash or credit, employee salaries, interest on borrowed money, etc, are few examples of a business transaction. 
• Transactions are divided into two parts, external and internal. The external transactions are those transactions that are made between two businesses. Such as the purchase of goods and services. Internal are those economic activities that have taken place within the organisation. 
• This transaction changes the financial status of a company.
• Events- An event is defined as the result or the outcomes of a transaction. Examples of events are. Rahul starts a business with a capital of ₹5,00,000. He purchases products for ₹4,00,000 for cash and sells 3/4th of these goods for 3,80,000. He also pays ₹20,000 as the rent of the godown. The following results can be outlined from the above transactions.
• ₹5,00,000 of investment for the business
• Goods purchased ₹4,00,000
• Cash sales ₹3,80,000
• Godown payment ₹20,000
• Account- An account is a place where all the transactions of a person or a business are recorded. For each asset, liabilities, expenses or income separate account is maintained. 
• Capital- It is the total amount invested by the owner or proprietor in a business. This amount can be in the form of goods, assets, and cash, which is used in the purchase of goods and assets. Capital can be derived by  Capital=Assets-Liabilities
• Drawing- All the cash or cost of goods withdrawn by the owner for his/her personal use in known as drawings
• Liability- This particular amount is the amount which the company owes to the external or another firm. Liabilities can be expressed as  Liabilities= Assets-Capital.
• Assets- Asset is something that is owned by the company including the due amount from other companies or debtors.

Value-Based Questions

What is the value involved in classifying the assets into current and non-current?

Answer: Classification of assets into current and non-asset helps in ascertaining the liquidity position of the business entity. Non-current assets are held for continued use in the business whereas current assets are expected to be converted into cash within one year. 

Discuss the value involved in classifying the receipts into capital and revenue?

Answer: Classification of receipts into capital receipts and revenue receipts is essential for the preparation of financial statements since revenue receipts are shown on the credit side of trading and profit and loss account whereas capital receipts are shown in the balance sheet. 

Identify the value involved in classifying the expenditure into capital and revenue.

Answer: Financial statements cannot be prepared without classifying the expenditure into capital and revenue. Capital expenditure is written in the balance sheet whereas revenue expenditure is written on the debit side of trading or profit and loss account. 

What is the reason that the capital expenditure is shown in the balance sheet?

Answer: Amount spent on acquiring or erection of fixed assets is termed as capital expenditure. Such expenditure is shown in the assets because it yields benefit over a long period of time. 

Also Check:  DK Goel Solution for Chapter 3 Accounting Principles

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Introduction to Accounting: Case Based Type Questions | SSC CGL Tier 2 - Study Material, Online Tests, Previous Year PDF Download

Read the following hypothetical Case Study and answer the given questions: Accounting is the most important part of any business entity. It gives the framework to record all the business transactions and events that happens during the working of the business entity. Accounting is the language of business with books of accounts being its script and debit-credit its style i.e. the way of expressing it. According to the American Accounting Association, “Accounting is the process of identifying, measuring and communicating information to permit judgement and decisions by the users of accounts.” According to American Institute of Certified Public Accountants – ‘‘Accounting is the art of recording, classifying and summarising in a significant manner and in terms of money, transactions and events which are, in part at least of a financial character and interpreting the result thereof.” Accounting is an Art as well as Science. It records Financial Transactions only which can be expressed in terms of money. First the transactions are recorded and then they are classified and summarised to interpret the financial position of the business. One needs to keep in mind that Accounting and Accountancy are two different concepts. Accounting is the recording, classifying and summarising business transactions to ascertain the financial position of the business firm. On the other hand, Accountancy is the body of knowledge based on principles for recording, classifying and summarising business transactions to help in the decision making function of management. Accounting is an art of recording, classifying and summarising all the business transactions. It is a science as well as it follows certain guiding accounting principles and standards. Question 1: Accounting gives the _________ to record all the business transaction. (a)  Framework (b)  Process (c) Money (d)  Classification

Correct Answer is Option (a) Business transactions are ordinarily summarized in books called journals and ledgers. You can buy them at your local stationery or office supply store. A journal is a book where you record each business transaction shown on your supporting documents.

Question 2:  Accounting is the art of recording, classifying and summarising in a significant manner and in terms of money, transactions and events which are, in part at least of a financial character and interpreting the result thereof. This definition of Accounting is given by: (a) Indian Institute of Chartered Accountants (b) American Accounting Association (c) American Institutes of Certified Public Accountants (d) International Financial Regulation System

Correct Answer is Option (c) In 1941, The american institute of Certified Public Accounts (AICPA) had defined accounting as the art of recording, classifying and summerising in a significant manner and in terms of ,money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof. With greater economic development resulting in changing role of accounting its scope become broader.

Question 3:   Accounting is called science because it follows certain guiding ___________.

Answer:  Accounting principles and standards

Question 4:   Accounting records only __________ transactions.

Answer:  Financial

Read the following hypothetical Case Study and answer the given questions: Business Transactions are only recorded in the Accounting Books of a firm and no other transaction that happens in the day to day functioning of the business. Now the question arises what exactly is the Business transactions? To answer this basic question we need to see that the transaction fulfils the basic criteria. First one being the transaction should be an economic activity, that is it should create an income for the firm or an expense for it. Like we can say that the payment of salary to the staff is a business transaction but persuading a customer to buy a product or hiring a staff for that matter is not a business transaction. Secondly, the transaction should change the financial position of the firm, that is it should either raise the income of the firm or create debt for the firm. For example, even if the goods are bought on credit, increasing creditors of the firm, it is a business transaction as it is creating a debt for the firm. But obviously, praising a staff for his work to sell the product at a better profit, is not termed as business transaction although it motivates the employee but does not result in changing the financial position of the firm. Lastly, the transaction should be able to be expressed in terms of money. Every business transaction lead to an event, that is a consequence of the transaction. Say for example, when the goods bought for ₹30,000 is sold for ₹32,000, the profit ₹2,000 is the event. In other words, we can say that event is what a transaction does for the business entity. Every transaction is supported by a document that provides the authorisation and allows the transaction to be recorded in the books of accounts. It varies from entity to entity and every transaction needs to have a separate uniquely numbered voucher. When we talk of business transactions, everything inclusive of acquiring of assets, whether current or non-current, and incurring of liability, whether internal, external, current or non-current, is present. The change in stock due to sale or purchase whether cash or credit, the expenses incurred, and other revenue generated are all business transactions, that are called events and have separate unique vouchers. Question 5: Business Transaction of _____________ nature. (a)  Economic (b)  Monetary (c)  Financial   (d)  All of the above

Correct Answer is Option (d) The purchase and sale of goods for cash or on credit, the receipts and payments of cash etc., are termed as business transactions since these activities involve exchange of values between parties. A business transaction therefore results in some property, goods or services changing hands.

Question 6: Business Transactions leads to an _________, that is nothing but its consequence.

Answer:  Event

Question 7:  Which of the following is not a business transaction? (a)  Buying of Furniture (b) Paying salaries of the accountant (c)  Giving a motivation speech to the employee (d) Buying a good for personal use from the office money

Correct Answer is Option (c) In the context of accounting, a nonfinancial transaction is a transaction in which assets, liabilities, expenses, income, and equity do not change. An example of this would be hiring an employee. No journal entry is necessary for a non-financial transaction.

Question 8: Every business transaction is accompanied by _______________ voucher.

Answer:  Separate uniquely numbered

Question 9: Pick the odd one out: (a) Bank Loan (b)  Cash at Bank (c)  Creditors (d)  Bills Payable

Correct Answer is Option (b) Cash at Bank: The total amount of money held at the bank by a person or company, either in current or deposit accounts. It is included in the balance sheet under current assets.

Question 10: Pick the odd one out: (a)  Cash in Hand (b)  Cash at Bank (c)  Debtors (d) Creditors

Correct Answer is Option (d) A creditor is an entity (person or institution) that extends credit by giving another entity permission to borrow money intended to be repaid in the future. Creditors can be classified as either personal or real. People who loan money to friends or family are personal creditors.

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