Definitions with Example

 Asset:
An asset is a resource with economic value that an individual, corporation or
country owns or controls with the expectation that it will provide a future benefit.
Assets are reported on a company's balance sheet and are bought or created to
increase a firm's value or benefit the firm's operations.
Assets are the properties and possessions of the business to pay in future. Can
be amount payable
for material purchased, expenses etc.
Properties and possessions can be of two types:

 Tangible Assets
that have physical existence (are further divided into Fixed Assets and
Current Assets).

 Intangible Assets that have no physical existence

Examples of both are as follows:
o Tangible Assets – Furniture, Vehicle etc.
o Intangible Assets – Right to receive money, Good will etc.

 Liabilities
Liabilities are the debts and obligations of the business. Liability is the obligation
of the business to
provide a benefit or asset on a future date.
Asset is a right to receive and liability is an obligation to pay, therefore, these are
opposite to each other.
Examples of liabilities are:
Accounts payable, Accrued liabilities, Deferred revenue, Interest payable, Notes
payable, Taxes payable and Wages payable
  Capital/ Owner’s equity:
Wealth in the form of money or other assets owned by a person or organization or
available for a purpose such as starting a company or investing.
Capital includes the cash and other financial assets held by an individual or
business
Examples of Capital/ Owner’s Equity: company cars, patents, software, brand
names, bank accounts and stock.

 Retained Earnings:
Undistributed profit
That profit which we give to dividend and it remain save.
Example:
Let's assume Company XYZ has been around for five years. During this time, it
reported the following net income:
Year 1: $10,000
Year 2: $5,000
Year 3: -$5,000
Year 4: $1,000
Year 5: -$3,000
Assuming Company XYZ paid no dividends during this time, XYZ's retained
earnings equal the sum of its net profits since inception, or in this case, $8,000. In
subsequent years, XYZ's retained earnings will change by the amount of
each year's net income, less dividends.

 Dividends:
A sum of money paid regularly by a company to its shareholders out of its profits
Example:
  Depreciation:
Net decrease in the value of fixed asset over its useful life.
Example:
If a delivery truck is purchased a company with a cost of Rs. 100,000 and the
expected usage of the truck are 5 years, the business might depreciate the asset
under depreciation expense as Rs. 20,000 every year for a period of 5 years.

 Accumulated Depreciation:
Accumulated depreciation is the total sum of depreciation expense recorded for an
asset. In other words, it’s the amount of costs the asset has been allocated thus far
in its useful life.
Example:
For example, at the end of five years the annual depreciation expense is still
$10,000, but accumulated depreciation has grown to $50,000. That is, accumulated
depreciation is a cumulative account. It is credited each year as the value of the
asset is written off and remains on the books until the asset is sold. It is important
to note that accumulated depreciation can't be more than the asset's cost even if the
asset is used after its useful life.
Formula:
Cost Of building= 50000, Life=25.
Depreciation expense: Building 24000
TO Accumulated Depreciation: Building 24000

 Trail Balance
A listing of the accounts in the general ledger along with each account's balance
in the appropriate debit or credit column. The total of the amounts in the debit
column should equal the total of the amounts in the credit column. At the end of
accounting period, a list of all ledger balances is prepared. This list is called trial
Balance.

 Adjusting Entries:
An adjusting journal entry is an adjustment recorded at the end of an accounting
period to an asset or liability account and related expense or income accounts to
record business events that occurred in the period but were not recorded.
Example:
Relevant information for the preparation of adjusting entries of Company A
1. Office supplies having original cost $4,320 were unused till the end of the
period. Office supplies having original cost of $22,800 are shown on
unadjusted trial balance.
2. Prepaid rent of $36,000 was paid for the months January, February and
March.
3. The equipment costing $80,000 has useful life of 5 years and its estimated
salvage value is $14,000. Depreciation is provided using the straight line
depreciation method.
4. The interest rate on $20,000 note payable is 9%. Accrue the interest for one
month.
5. $3,000 worth of service has been provided to the customer who paid
advance amount of $4,000.
The adjusting entries of Company A are:

Date Account Debit Credit

Jan 31 Supplies Expense 18,480
Office Supplies 18,480
Supplies Expense = $22,800 − $4,320 = $18,480
Jan 31 Rent Expense 12,000
Prepaid Rent 12,000
Rent Expense = $36,000 ÷ 3 = $12,000
Jan 31 Depreciation Expense 1,100
Accumulated Depreciation 1,100
Depreciation Expense = ($80,000 − $14,000) ÷ (5 × 12) = $1,100
Jan 31 Interest Expense 150
Interest Payable 150
Interest Expense = $20,000 × (9% ÷ 12) = $150
Jan 31 Unearned Revenue 3,000
Service Revenue 3,000

 Book Value:
The value of a security or asset as entered in a firm's books.
Example:
Book value is calculated by taking a company's physical assets (including land,
buildings, computers, etc.) and subtracting out intangible assets (such as patents)
and liabilities -- including preferred stock, debt, and accounts payable. The value
left after this calculation represents what the company is intrinsically worth. Thus,
book value is calculated:
Book value = total assets - intangible assets – liabilities

• Accrued Expenses:-
The expenses have been incurred during the current year (the services have been
received during the year) but have not yet been paid till the end of year.
Example:-
Entry will always be
(Can be any expense) salaries expense
To Salaries payable

• Prepaid Expenses:-

The expenses have been paid during the current year but the services (against
them) have not been received till the end of month or year (services will be
received in the next month or year)

Example:-
Adjusting entry will be:-
(Can be any expense) Rent expense
To prepaid rent expense

• Accrued Revenue:-
Revenue may be earned or accrued during the current period but has not been
received in cash within the current period. Cash will be received in next month or
period.

Example:-

We have given services that are earned and company is liable to give it.
The entry will be:-

(Can be any revenue) Revenue receivable

To revenue

• Unearned Revenue:-

It is an liability to provide services in near future for which payment has already
been received. In it we have taken cash but didn’t give services.

Examples:-

Our entry will be:-

(Can be any revenue) unearned revenue
To earned revenue

• Revenue:-

It is the price of goods sold and services rendered during a given accounting
period. Earning revenue causes owners equity to increase.
Examples:-

A business that sells merchandise rather than services such as Wal-Mart or General
Motors uses the term sales to describe its revenue.

• Direct Revenue :-

The revenue earned in routine business activities is known as direct revenue.

Examples:-
Sales, advertisement as they are our daily routine business.

• Indirect Revenue:
Any revenue arising from sources other than normal business activities are
known as indirect revenue.
Examples:-
If you have a workshop that you use for manufacturing but you rent it out for a
photography shoot, that's indirect revenue.

• Expenses:-
An expense is the money spent or cost incurred in an entity's efforts to generate
revenue. Expenses represent the cost of doing business where doing business is the
sum total of the activities directed towards making a profit.
Examples:-
Expenses include advertising expense, commission expense, rent expense, cost of
goods sold, salaries expense, and so on. Expenses also include costs used up during
the accounting period such as interest expense, insurance expense, and
depreciation expense.

• Direct Expenses:-
It is an expense that is mainly related to the purchase of products or
services. And also those expenses which are completely related and assigned to the
core business operations of a company.
Examples:-
Rent, light, salaries, wages, sales, etc.

• Indirect Expenses:-

Indirect expenses are the costs incurred in the daily operation of a business. They
are not related to the sold products.

Examples:-

Salaries, Telephone bills, Printing & stationery.

• Closing Entries:-
Closing entries are journal entries made at the end of an accounting period which
transfer the balances of temporary accounts to permanent accounts. They are based
on the account balances in an adjusted trial balance.
Examples:-
Below are examples of closing entries that 'zero' the temporary accounts in the
income statement and transfer the balances to the permanent retained earnings
account.
• Close Revenue Accounts. Clear the balance of the revenue. ...
• Close Expense Accounts. ...
• Close Income Summary. ...
• Close Dividends.

• After closing trail balance:-

It is a trail balance which prepared after all closing entries have been made.
It consists of accounts for assets and liabilities and owner’s equity. Also known as
post trail balance and is prepared from ledgers.
Examples:-

• Income Summary:-
An income summary is a temporary account into which the balances of the
revenue and expense accounts are transferred at the end of the accounting period.
The net amount in the income summary account is the profit or loss for that period.
Examples:-

After this entry is made, all temporary accounts, including the income summary
account, should have a zero balance.

• Account Receivable:-
They are amounts of money owed by customers to another entity for goods or
services delivered or used on credit but not yet paid for by clients.
Examples:-
Interest receivable that individuals usually get from making investments or putting
money into an interest-bearing savings account.

• Account Payable:-
Accounts payable is a current liability account that keeps track of money that you
owe to any third party. The third parties can be banks, companies, or even someone
to whom you borrowed money from.
Examples:-
One common example of accounts payable is a mortgage payable. When you take
out a mortgage, you sign a contract that states that you will pay the loan back over
a period in installments.

 Notes Payable
The account Notes Payable is a liability account in which a borrower's written
promise to pay a lender is recorded. (The lender record's the borrower's written
promise in Notes Receivable.) Generally, the written note specifies the principal
amount, the date due, and the interest to be paid.
Example:
If a company borrows money from its bank, the bank will require the company's
officers to sign a formal loan agreement before the bank provides the money. The
company will record this loan in its general ledger account, Notes Payable. In
addition to the formal promise, some loans require collateral to reduce the bank's
risk.

 Notes Receivable:
Notes receivable is an asset of a company, bank or other organization that holds a
written promissory note from another party. (The other party will have a note
payable.)
Example:
Notes receivable 80,000
Cash 80,000

 Income Statement:
Income statement shows the performance of a business in the form of profit or loss.
It includes revenue and expenses.
Revenue-Expenses= If Positive then Profit and If Negative then Loss
Example:

 Cost of Goods sold (CGS):

Cost of goods sold (COGS) refers to the direct costs attributable to the production
of the goods sold in a company. This amount includes the cost of the materials
used in creating the good along with the direct labor costs used to produce the
good.
Example:
a company has $10,000 of inventory on hand at the beginning of the month,
expends $25,000 on various inventory items during the month, and has $8,000 of
inventory on hand at the end of the month. What was its cost of goods sold during
the month? The answer is:
$10,000 Beginning inventory + $25,000 Purchases - $8,000 Ending inventory
= $27,000 Cost of goods sold
  Gross profit:
Gross profit is a required income statement entry that reflects total revenue minus
cost of goods sold (COGS). Gross profit is a company's profit before operating
expenses, interest payments and taxes. Gross profit is also known as gross margin.
Example:

 Gross Loss
Where the cost of goods sold exceeds the sales revenue.
Example:
Company ABC might earn revenues worth $150,000 in a specific period and
COGS are $100,000 while expenses mount up to $60,000 against the revenues
earned.

 Operating expenses:
An operating expense is a day-to-day expense incurred in the normal course of
business. These expenses appear on the income statement.
Example:
Operating expenses are costs associated with running a business's core operations
daily. Common examples are cost of goods sold (COGS) and labor costs.

 Net Profit:
Net profit is the result after all expenses have been subtracted from revenues.
Example:

 Net loss:
Net loss, also called loss, refers to a company’s financial position when total
expenses exceed total revenues. In other words, net loss is the amount of money
the company lost during the period. This is the negative amount of cash that is left
over after all the expenses have been paid during the period.
Example, let's say Company XYZ sold 100,000 widgets for $1 each this year,
generating an annual revenue of $100,000. To operate the business, Company
XYZ needed to pay $120,000 this year to purchase materials to make the widgets
and pay its employees.
$100,000 - $120,000 = -$20,000

 Statement of retained earnings

That shows the company’s overall stockholders’ equity that included opening
retained earnings and net income transferred from Income statement to retained
earning and subtracted all the dividends that come from closing retained earnings.
Example:
Format of Retained earning’s table.
  Balance sheet:
It shows the financial position of the business in the form of assets, capital and
liabilities.
Example:
Format of balance sheet’s table

 Perpetual Inventory System:

A perpetual inventory system is a method of tracking and recording inventory and
costs of goods sold on a continual basis, so a current inventory balance can be
calculated in real time.

Example:
All the entries of perpetual inventory system are included

 Periodic Inventory System:

A periodic inventory system or the periodic inventory method is an accounting
method in which you determine the amount of inventory at the end of each
accounting period or in specified periods.
Example:
All the entries of periodic inventory system are included.

 Merchandising Organization:-
They are those organizations in which we buy finished products which will go to
customers or retailers. In this we are not producing.
Examples:-
Medina cash and carry, Save mart.

• Manufacturing Organization:-
They are those organizations which make any product and from raw material to
final or finished good are involved.
Examples:-
In North America General Motors Corporation, General Electric, Procter &
Gamble, and General Dynamics. These all are manufacturing organization

• Services Organization:-.
They are those who gave services to people and receive some money.
Examples:-
Doctors, lawyers and teachers.

• Retailer:-
Retail is the process of selling consumer goods or services to customers through
multiple channels of distribution to earn a profit.
Examples:-
The most common examples of retailing are the traditional brick-and-mortar stores.
These include giants such as Best Buy, Wal-Mart and Target. But retailing
includes even the smallest local mall. Similarly Examples of online retailers are
Amazon, eBay, and Netflix.

• Wholesaler:-
A wholesaler is a company or individual that purchases great quantities of products
from manufacturers, farmers, other producers, and vendors. Wholesalers store
them in warehouses and sell them on to retailers (shops and stores) and businesses.
Examples:-
Companies like Sam's Club and BJ's are wholesalers that buy their products from
manufacturers and sell them directly to the public.

 Physical inventory linkage:-

Physical inventory is an actual count of the goods in stock. This can involve
counting, weighing, and otherwise measuring items, as well as asking third parties
(banks, companies) for counts of inventory items that have been consigned to
them.
Examples:-
Cost of good sales 2200
To inventory 2200

• Inventory shrinkage:-
It refers to unrecorded decreases in inventory resulting from such factors as
breakage, spoilers, employee theft and shoplifting,
Examples:-
If the inventory records of a retailer report that 3,261 units of Product X are on
hand, but a physical count indicates that there are only 3,248 units on hand, then
there is inventory shrinkage of 13 units.

• Net cost Method:-

Net cost is the gross cost of an object, reduced by any benefits gained from
owning the object.
Examples:-
The gross cost of a machine, minus the margin on all goods produced with that
machine.

• Gross invoice Method: -

The gross method, opposed to the net method, records an invoice at full price
without regard to any cash discounts offered. In other words, the gross method
assumes that the customer will not take advantage of the cash or early payment
discount.
Examples: -
Bob’s Brewery purchases mugs from his supplier the first week of every month.
This month’s order totals $10,000, but Bob’s supplier offers discount terms of
2/10, n/30.

• Credit Terms: -

The terms which indicate when payment is due for sales made on account (or
credit)
Examples: -
The credit terms might be 2/10, net 30. This means the amount is due in 30 days;
however, if the amount is paid in 10 days a discount of 2% will be permitted .

• Cash discount:-
A cash discount is a deduction allowed by some sellers of goods or by some
providers of services in order to motivate customers to pay within a specified time.
The cash discount is also referred to as an early payment discount.
Examples: -
If the buyer is paying $980 on a $1,000 invoice, with the $20 difference being a
cash discount for early payment, record a debit of $980 to the cash account, and
$20 to the sales discounts expense account, and a credit of $1,000 to the accounts
receivable account.

 Purchase Return:
A purchase return occurs when a buyer returns merchandise that it had purchased
from a supplier.
Example:
Purchase a/c
To A/P a/c

 Sales Return:
A sales return is merchandise sent back by a buyer to the seller, usually for one of
the following reasons:
Defective goods, Goods shipped too late, Product specifications are incorrect,
Wrong items shipped etc.
Example:
Sales returns and allowances xx
To Accounts receivable/cash xx
  Sales Discount:
A sales discount is a reduction in the price of a product or service that is offered by
the seller, in exchange for early payment by the buyer.
Example
A/P 9,800
To Cash 10,000

 Purchase Discount Lost:

Discounts lost are expenses that occur because a cash discount was not taken.

Example:
A/P xx
Purchase Discount Lost xx
To Cash xx

 Delivery Expenses:
Delivery Expense refers to cost incurred by a business in transporting its goods to
customers. It includes gas and oil costs, payments to third-party delivery
companies, and other transportation costs.
Example:
Delivery Expense xx.xx
To Cash / Payable xx.xx

 Transportation Expense:
Transportation expenses for an employee or self-employed taxpayer include only
the cost of transportation incurred during business or employment when the
taxpayer is not away from home in a travel status.
Example:
Bus Expenses, Car expenses etc

 Operating cycle:
The operating cycle is the average period required for a business to make an initial
outlay of cash to produce goods, sell the goods, and receive cash from customers in
exchange for the goods
Example:
A manufacturer's operating cycle is amount of time required for the manufacturer's
cash to be used to:
pay for the raw materials needed in its products, pay for the labor and overhead
costs needed to convert the raw materials into products

 Gross profit Margin:

Gross profit margin is a profitability ratio that measures how much of every dollar
of revenues is left over after paying cost of goods sold (COGS).
Example:
let's say Company ABC makes shoes. If ABC reported $5 million in total revenue
for the year and cost of goods sold (cost of materials and direct labor) of $2
million, then we can use the formula above to find ABC's gross profit margin.

 Net sales:
Net sales are total sales after subtracting discounts, returned goods, and allowances
for damaged goods.
Example:
Let's assume restaurant chain XYZ sold $1 million worth of sales for the year.
However, the chain also offered $30,000 worth of discounts throughout the year to
senior citizens, student groups and people who redeemed a certain coupon. It also
refunded $5,000 to unhappy customers during the year. As a result, restaurant
chain XYZ's net sales are:
$1 million - $30,000 - $5,000 = $965,000
Typically, the company records the discounts and refunds near the top of the
income statement, just under the gross revenue number.