2.6 Common Terms Used in Accounting
To understand the subject properly first of all one should understand the basic terms described below.
Funds brought by the owners to start a business is called capital. In company capital is collected by issuing
shares. Capital used to purchase fixed asset is called fixed capital. Capital used for purchase day to day business
affairs is called working capital.
Every enterprise has assets. It is divided into two types such as i) Movable assets ii) Immovable assets.
Furniture, machineries, fixtures, cash in hand, stocks are the movable assets. Buildings, plants are immovable
Asset may be fixed, current and liquid. Fixed assets are used in the production of goods and services. Examples of
fixed assets are plant and machinery and so on.
Current assets are those which are receivable within a year. Example- stock in trade, debtors, any receivable and
Liquid assets are those which can be easily converted into cash. Ex- investment, cash in hand, cash in bank etc.
The amount which is to be paid in future with respect to payment towards acquisition of an asset or
performance of a service. Current liability has to be paid within a year. Ex- Loans taken
Commodities and articles purchased for resale is called
. Ex- If a sugar dealer purchase sugar for resale
then the sugar is called goods. If the sugar dealer purchases a bike for personal use then the bike is called asset.
Debtor is a person who owes something to business. A person to whom goods are sold on credit becomes
a trade debtor to the business.
A creditor is a person to whom the business owes something. Ex- a person from whom goods are
purchased on credit and amount is yet to be paid.