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SEBA Class 9 An Introduction to Commerce Chapter 6 Basic Accounting Terminology
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Basic Accounting Terminology
Chapter – 6
| UNIT – II INTRODUCTION TO BOOK-KEEPING AND ACCOUNTANCY |
| Questions |
1. What do you mean by Transaction? Give two examples of Business Transactions.
Ans: Transaction means buying or selling of goods and services (or both) in course of the business. The buying/purchase can be of two types-cash purchases and credit purchases. Same way, the sales can take place in two ways-cash sales and credit sales. So, transaction includes cash purchases, credit purchases, cash sales and credit sales. A transaction must carry a monetary value or be able to be expressed in terms of money. Usually, it is expressed in terms of domestic currency (INR) and in case of international trade, it is expressed in terms of US Dollar ($). A transaction should consist of the date of occurrence, month, year and nature (buy, sale, income, expenses etc.) with a monetary value.
Two examples of Business Transactions are mentioned below:
(i) 01.01.2019: Purchased a computer worth Rs. 30,000 for the business in cash.
(ii) 14.01.2019: Sold goods worth Rs. 12,000 to Ankita on credit.
2. What do you mean by Goods? Give two examples of Goods.
Ans: It represents all those items or products which are purchased by the business in order to sale it to the customers. Goods are tangible in nature, means they have a physical existence, which can be touched or seen. Generally, in a business any items which are purchased for selling purpose, termed as goods. They are purchased at a lower price and sold it to the customer comparatively at a higher price & out of this process profit is being earned by the business. Any item which are purchased not to sell but to use in the business, is not called goods.
For example: A refrigerator purchased by retailer to keep chocolate, ice cream, cold drinks etc. Is not considered as goods because the purpose behind the refrigerator is not to sell but keep goods in a good condition. But these chocolates, ice cream, cold drinks & other products which are purchased for the purpose of selling, are considered as goods.
3. Why goods are important for Business?
Ans: Goods are essential for businesses as they represent the primary products or services sold to generate revenue. Without goods, a business cannot operate or satisfy customer needs, making them the foundation of any commercial activity. The sale of goods drives income, helps businesses grow, and enables them to compete in the market.
4. What do you mean by Services?
Ans: Services are non-physical or intangible parts of an economy which can be delivered or entertained. It excludes goods or products, as it doesn’t have any physical existence, they can be neither seen nor touched but the benefit is entertained. Services carry a specific monetary value.
For example: banking service, medical treatment, education, mobile network etc.
5. How will you distinguish services from Goods?
Ans: Services and goods differ fundamentally in several ways. Goods are tangible, physical items that can be touched, seen, and stored, such as books, cars, or clothing. In contrast, services are intangible and cannot be physically touched or stored; examples include medical treatment, education, or haircuts. Ownership also distinguishes the two; goods can be purchased and owned outright, while services provide access or benefits without transferring ownership, such as staying in a hotel room. Another key difference lies in production and consumption. Goods are typically produced first and consumed later, allowing for a time gap, whereas services are produced and consumed simultaneously, such as during a live concert or a doctor’s consultation. Additionally, goods can often be standardized and mass-produced, like identical chairs, whereas services tend to vary based on the provider and the delivery process. Goods can also be stored for future use, making them less perishable, whereas services are time-sensitive; an unused service opportunity, like an empty seat on a flight, cannot be reclaimed. Lastly, customer involvement differs; goods require minimal customer input during production, while services often need active participation, such as working with a fitness trainer. These distinctions highlight the unique characteristics of services compared to goods.
6. What is Book-keeping?
Ans: Book-keeping is a systematic method of recording all financial transactions in books of accounts. It states how the books of accounts are maintained during a particular period of time. It is the first step of accounting. From Book-keeping, Journal Entries and Ledger Accounts are prepared.
7. What is a Journal?
Ans: Journal refers to recording of financial transactions in order according to date value and nature of transaction. It is called the book of original entry. First, a transaction is recorded and then journal is prepared by identifying the transaction in terms of debit or credit.
8. What is a Ledger?
Ans: Ledger is a set of books which are prepared by following the double entry system of book-keeping. Here, a particular transaction is classified in terms of debit and credit. It is also called the book of final entry. It is summarized financial information from journals.
9. What do you mean by Capital? Describe with examples.
Ans: Capital represents the sum of money required in order to start a business or required at the time of commencement of a business. Money is considered as life blood for all types of business organization and it is required in each and every step.
For example: Mr. X started a new business by investing Rs. 2, 50,000. Here, the amount of Rs. 2,50,000 is called capital.
10. What do you mean by Drawings? Give two examples of Drawings.
Ans: In the books of accounts only those transactions are recorded which are related to business only. Any non business and private/individual transactions are not considered in the books of accounts. While money is withdrawn from the business or any goods/assets of the business are used for private/ individual purposes, it is called drawings. The drawing in terms of cash reduces the strength of the capital. Drawings can take place in three ways-in terms of cash, in terms of cheque and in terms of goods.
(i) For example: Mr. Akash is the owner of a business. He has withdrawn Rs. 30,000 in cash from the business for a holiday tour with his family. Here, Rs. 30,000 is not a business expense, but is a personal expenditure, although he is the owner of business. So, an amount of Rs. 30,000 is termed as ‘drawings’.
(ii) For Example: Owner withdrawing cash from the business for personal use.
11. Why Drawings are not considered as Business Expenses?
Ans: Drawings are not considered business expenses because they represent the withdrawal of money or assets from the business by the owner for personal use, rather than being used to operate or maintain the business. Business expenses are typically costs incurred in the process of running the business, such as rent, salaries, utilities, and raw materials. These expenses are necessary for generating revenue and are deducted from the business income to calculate taxable profit. On the other hand, drawings do not contribute to business operations and are therefore not treated as expenses. Instead, they reduce the owner’s equity in the business. Since they are personal withdrawals and not related to the business’s income-generating activities, they are not deductible from the business’s profits for tax purposes.
12. What do you mean by Assets? Give two examples of Assets.
Ans: It represents all those items (both tangible and intangible) which are purchased or acquired or owned by the business except goods, to use in the future course of time. Assets generate future benefit for the business. These are the items which are purchased not in order to sale them to customer, but to use in the business. Asset helps a business in production, generating revenues, in smooth running of business etc. There are various types of assets-tangible and intangible assets, fixed assets, investment, current assets and liquid assets.
For example: Goodwill, Land & Building, Machinery, Stock, Cash etc.
13. Why Assets are important for the business?
Ans: Assets are important for business because they provide the resources necessary to generate revenue and profit. Assets, such as cash, property, inventory, and equipment, enable a business to carry out operations, produce goods or services, and meet its financial obligations. Efficient use of assets contributes to the growth and success of the business. Revenue is generated through the use of these assets, either in production or through other business activities like sales and marketing. Therefore, managing assets effectively is crucial for sustaining and expanding business operations.
14. What do you mean by Liabilities? Give two examples of Liabilities.
Ans: It represents the company’s legal financial debts or obligations. Debt arises during the course of business operation. Liabilities are settled over time through the transfer of economic benefits. It also represents the sources of fund from different sources with different manners. A business has to pay all these liabilities in future course of time.
For example: A business has taken a loan of Rs. 5,00,000 from the bank. So, loan from bank amounting to Rs. 5, 00,000 will be a liability in the books of the business till the loan is fully repaid.
Example: Accounts Payable and Bank Loan.
15. What do you mean by Sundry Debtors? Give an example of Sundry Debtors.
Ans: The term ‘Sundry Debtors’ represents the value of total credit customers of a business. When a business sell goods/services in terms of credit, those credit customers’ names and details of transactions are recorded in the books of accounts. A business is supposed to receive money from the debtors in future course of time. So it is considered as assets (current assets). Sundry debtors never arise from cash sales.
For example: ABC Enterprise sold goods to Mr. X for Rs. 10,000 and to Mr. Y for Rs. 5,000 on credit. While it sold goods to Mr. Z for Rs. 4,000 in terms of cash. Here, X and Y will be considered as debtors in the books of ABC Ltd. and the value of sundry debtors will be Rs. 15,000. Here, Mr. Z will not be considered as debtor as the business is selling goods to him in terms of cash.
16. What is Sundry Creditors? Give an example of Sundry Creditor.
Ans: The word ‘Sundry’ means total and ‘creditors’ means suppliers. It represents all those parties which allow credit to the business. A firm has to pay to those creditors in future course of time. So it is considered as liability (current liabilities). Sundry creditors never arise from the cash purchases.
For example: Z Ltd. Purchased stationery items from A store for Rs. 3,000 and from B store for Rs. 4000 on credit. While it was purchased from the C store for Rs. 10,000 in cash. Here, A store and B store will be considered as creditors in the books of Z ltd. and the value of sundry creditors will be Rs. 7,000. C store will not be considered as a creditor, as the business has purchased from it in terms of cash.
17. What do you understand by Investment?
Ans: An investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in future or will be sold at a higher price later for profit. Investment can generate return for the investor/business in the future course of time.
18. What do you mean by Revenue?
Ans: The income generated from the sale of goods/services in the business is considered as revenue. The sales are considered as the main source of revenues for the business. A firm may have different sources of income but amongst all, the sale is considered as the main source of generating revenues. So, all business mainly focuses on increasing sales.
19. What do you mean by Expenses?
Ans: Expenses money spent or cost incurred in the business to generate revenue is termed as expenses. It does not consider the amount spent on acquisition of assets. The benefit arises out of expenses are short term in nature and usually entertained within one financial year.
20. What is a Profit? How Profit is calculated in a business?
Ans: Profit means excess of income over expenditure of a business during a particular period of time. When the amount of income earned is more than the amount of expenses incurred, it is called profit. Usually profit is calculated at the end of the financial year and on an annual basis in the business.
Purchase garments for Rs. 40,000 and sold it to customers at Rs.55,000. Here, the amount of profit is Rs. 15,000 (Rs. 55,000 – Rs. 40,000)
Profit = Income – Expenses.
21. What is a Loss? How Loss is calculated in a business?
Ans: The excess of expenses over income is called losses.
When the income earned is lower than the expenses incurred or sales revenues falls short of the purchase price or cost incurred, loss is suffered in the business.
For example: Purchased a machine Rs. 40,000 and sold it for Rs. 30,000. Here, the amount of loss is Rs. 10,000 (Rs. 40,000 – Rs.30,000).
Loss = Expenses – Income
22. What do you mean by Stock?
Ans: It represents goods or materials that a business holds for selling purpose. It refers the unsold items or items yet to be sold in the business. Normally, stocks are valued at a price at which it is originally purchased.
23. What do you mean by Discount? Write the types of Discount.
Ans: Discount is the reduction in price given or received in case of making payment or receiving payment in the business. Discount is two types-discount allowed/paid and discount received. Discount which is given by the business at the time of sale is called discount issued or allowed for the business. It is a loss for the business. On the other hand, discount received at the time of purchase, is called discount received. It is a profit for the business.
The types of Discount are mentioned below:
(i) Trade Discount: This is a discount given by the seller to the buyer at the time of sale, usually based on the volume of the goods purchased. It is typically offered to encourage bulk purchases and is deducted from the list price or catalog price before the transaction is recorded in the books of accounts.
(ii) Cash Discount: This is a discount offered to customers as an incentive for early payment of their bills. It is usually a percentage of the invoice amount and is offered within a specific time frame, such as a 2% discount if paid within 10 days.
(iii) Quantity Discount: This is a discount given based on the quantity of goods purchased. The more items a buyer purchases, the higher the discount they may receive. This type of discount is commonly offered to wholesalers or buyers purchasing in large quantities.
24. What is Cost? Write with examples.
Ans: There are two types of business – Manufacturing Concern (i.e. factory, producer, etc.), and Trading Concern. For manufacturing concern, cost means the total of all expenditures which are incurred in order to manufacture a particular unit of product and in case of trading concern, cost means the purchase price of a product/service. Usually, profit is added with the cost price to ascertain selling price.
For example:
(i) M Ltd. sold a decorating item at Rs. 300. The total expenses incurred on manufacturing that item was Rs. 200, the cost of that item is Rs. 200.
(ii) N Ltd. purchased a printer from the dealer at Rs. 8500 and sold it to customer at Rs. 9700. Here the cost price is Rs. 8500.
