explain each of the following accounting terms with examples.
- Fixed assets
- Revenue
- Capital
- Gains
- Expenses
- Profit
- Short-term liabilities
1 Answer
- Fixed assets- These are held for the long term and increase the profit earning capacity of the business, over various accounting periods. These assets are not meant for sale; for example, land, building, machinery, etc.
- Revenue- It refers to the amount received from day to day activities of a business, viz. amount received from sales of goods and services to customers; rent received, the commission received, dividend, royalty, interest received, etc. are items of revenue that are added to the capital.
- Capital- It refers to the amount invested by the owner of a firm. It may be in the form of cash or asset. It is an obligation of the business towards the owner of the firm since business is treated separate or distinct from the owner.
Capital = Assets – Liabilities. - Gains- Gains are incidental to the business. They arise from irregular activities or non-recurring transactions; for example, profit on the sale of fixed assets, appreciation in the value of an asset, profit on the sale of an investment, etc.
- Expenses- Expenses are those costs that are incurred to maintain the profitability of the business, like rent, wages, depreciation, interest, salaries, etc. These help in production, business operations, and generating revenues.
- Profit- This refers to the excess of revenue over the expense. It is normally categorized into gross profit or net profit. Net profit is added to the capital of the owner, which increases the owner’s capital. For example, goods sold above its cost.
- Short term liabilities- Those liabilities that are incurred with an intention to be paid or are payable within a year; for example, bank overdraft creditors, bills payable, outstanding wages, short-term loans, etc.
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