Keywords of Accounting, GAAP

Keywords of Accounting

Capital:
The amount invested by the owner into the business is called Capital.

Assets:
Economic resources under of the control of the business are Assets.

Liabilities:
Present obligations due to past events are Liabilities.

Revenues:
Earnings of a business are Revenues.

Expense:
Expenditure against which the benefit has been taken is Expense.

Profit/Loss:
Difference between Revenues and Expenditure is Profit/Loss. If the Revenues are greater then it’s Profit otherwise it’s Loss.

Purchases:
Goods which are bought with intention to sell out are Purchases.

Purchase Return:
Goods bought, returned to the supplier are Purchase Return.

Sales:
Goods or Merchandize sold out are Sales of the business.

Sales Return:
Goods sold, returned by the customer are Sales Return.

Drawings:
Amount de-invested by the owner of the business are Drawings.

Discount:
The rebate or reduction in price is discount. Discounts are of two types:
Trade Discount: Discount which is not disclosed in the books of Accounts.
Cash Discount: Discount which is disclosed and mentioned in books of Accounts.

Creditors or Accounts Payable:
The suppliers who provide goods on credit are Creditors of the business. Creditors are the Liabilities of the business.

Debtors or Accounts Receivables:
The Customers to whom goods are sold on credit are the Debtors of the business. They are the Assets of the business.

Transaction:
The event which can be expressed in terms of money and can bring changes in the financial position of the business is a Transaction. Transactions are of four types:
Cash Transaction: Immediate receipt and payment of cash.
Credit Transaction: Goods are delivered but payment will be made later.
External Transaction: Transactions with other businesses.
Internal Transaction: Transactions within the business.

Generally Accepted Accounting Principles (GAAP)

“A collection of rules and procedures and conventions that define accepted accounting practice; includes broad guidelines as well as detailed procedures.”

1. Money Measurement:
Only those Transactions are recorded which are measured in monetary terms.

2. Going Concern:
It’s an estimation and assumption that the business will proceed till the foreseeable future.

3. Accounting Period:
The time period which is assumed for reporting is called Accounting Period. Usually it’s a 12 month period but it can be any period set by the business.

4. Duality:
The principles of duality describes that every transaction has two aspects of treatment in books of accounts.

5. Evidence:
The written source of document of a transaction is called evidence.

6. Accruals:
It means every aspect of a transaction should be recorded according to GAAP.

7. Matching:
It means the Revenues of current year should be adjusted against the Expense of the same year.

8. Materiality:
The omissions and miss-statements which can influence the decision of the investors are material for the business.

9. Consistency:
Disclosing and presenting criteria must be consistent while presenting Reports.

10. Prudence:
Expected Losses are recorded but expected profits are not.
Assets will not be over stated and Liabilities will not be under stated.

11. Substance over Form:
The control will supersede the ownership.