User:Miems/Accounting/Concepts and Terminology

In this unit we'll have a brief discussion on the basic concepts and terminology in Accounting.

Objectives

At the end of this lesson you will be able to: define the concept transactions differentiate between the different types of transactions differentiate between the different source documents differentiate between the different types of accounts

Transactions

Transactions refer to the buying and selling of goods or rendering services which happens between a business and its customers at certain times. The money value (monetary value) of these transactions is recorded in the books of the business on a daily basis.

The buying and selling of goods is normally happening in a trading business, whilst the rendering of services to customers takes place in a service business.

Types of transactions

Transactions can either be cash or on credit. Each transaction should indicate the parties involved, normally a buyer and a seller, the nature of the transaction (are you buying or selling, is it cash or credit), as well as the date and amount involved.

Cash transactions: refer to when the business sells goods or render services and received payment from customer immediately. It also refers to when the business immediately pay its supplier for goods bought or services rendered.

Credit transactions: refers to when the business sells goods or render services on credit to the customer. The customer will only pay at a later stage as arrange between the business and the customer, normally at the end of the month. The business can also buy goods on credit from its suppliers.

Source documents

A source document is proof of a transaction between two or more parties. If you have original source documents, then it is normally external documents because you received them from another business/organisation. If you have a copy, it is an internal document, as the customer received the original document and the business works from the duplicate document.

• If you pay cash, you receive a cash register slip.
• If you buy on credit, you receive an invoice and later in the month a monthly statement/statement of account to show the amount of money you owe the business.
• If you have a cheque account, you can write out a cheque for the amount you owe, or you can pay with a credit card. When you pay money into your bank account you fill in a deposit slip.
• If you return goods, you receive a credit note.

That means that the first action of the transaction is to issue a source document – as you can see it differs from transaction to transaction. The source document is used to write up/draw up/complete the books of first entry or the journals of the business.

Activity

Define the term transaction. Explain in your own words the difference between a cash receipt and a cash payments transaction. You are an assistant accountant in a local business. Identify different source documents that you will classify as internal and external documents.

Types of Accounts

We divide all accounts into five main groups of accounts namely owner's equity, assets, liabilities, income and expenses.

Assets, Owner's Equity and Liabilities

When starting a business you need at least a building, a vehicle and some cash registers, shelves and refrigerators. If you buy some of these items, they belong to the business and are called assets'. This means that assets are belongings/possessions of the business.

You can either buy this paying cash or per cheque or you can buy on credit. Buying on credit means you receive the article now and only pay for it at the end of the month.

The opposite of assets are liabilities. Liabilities refer to money owed by the business to outside persons or businesses, e.g. loans, creditors.

The owner of the business normally provides cash and/or assets to start a business. These assets provided by the owner are called the 'owner’s equity. The business owes this to the owner. The owner's equity, being what the owner provided to the business, shows the owner's interest in the business.

Income and Expenses

Income earned is money coming into the business and expenses incurred are the payments made to various parties involved, or money going out of the business.

Income Accounts are used to write up all the money which the business receives for doing business with customers - any money which the business receives for rendering a service (current income) or for selling goods (sales) to customers.

Money received from goods sold is called sales. The account for money received for the rendering of services is called current income. Any other money received in a business is called other income, each income having its own account.

Expenses Accounts are used to write up all the money that the business has to pay so that it is possible for them to keep on doing business with customers. It is also called paying for the day-to-day running of the business.

• If we render services we need equipment to be able to do it, e.g. a hairdresser will need shampoo, conditioners, etc. The buying of this is called material costs.
• We need to buy goods in order to sell them in a trading business, and this is called purchases.
• When we pay for goods to be delivered at the business it is called carriage inwards

All other things that need to be paid for so that the business can continue doing business are called expenses, each one with its own account. Examples of expenses are: paying wages to workers, paying the water and electricity,etc. If expenses are not paid, then the business cannot continue to do business.

Activity

Accounts are divided into the five main groups. Name the five groups of accounts and indicate the sub-groups of each. We distinguish between three kinds of assets in a business. Divide the assets in your household into fixed and current assets. How do drawings affect an owner's Capital?