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Unit 1: Basic Accounting Review

they are amounts owned to creditors.” In other words, liabilities mean liabilities other Notes
than the capital (contributed by the owner of the business). F.A.S.B. Stanford, 1980 has
defined liabilities as “liabilities are probable future sacrifices of economic benefits arising
from present obligations of a particular entity to transfer assets or provide services to
other entities in the future as a result of past transactions or events”. Whereas according to
Accounting Principles Board (APB), liabilities are defined as, “economic obligations of an
enterprise that are recognized and measured in conformity with generally accepted
accounting principles.” Thus, it is clear from the above definitions that liability is a legal
obligation to pay for the transaction that has already taken place. Liabilities may be
classified into three types namely:
(i) Short-term liabilities are such obligations which are payable within one year. Examples
are creditors, Bills payable, overdraft from a bank, etc.
(ii) Long-term liabilities are such obligations which are payable after a period of one year
such as debentures, bonds issued by the company, etc.
(iii) Contingent liability is a liability which arises only on the happening of an uncertain
event. If it happens, the contingent liability is there. If it does not happen, there is no
liability. Such liabilities are not shown in the balance sheet, but are given as a foot
note. Example of such liabilities are (i) Liability on account of bills discounted,
(ii) Claims against the firm not acknowledged as debts.
4. Debtors: The debtors are the persons who owe to an enterprise an amount for receiving
goods or services on credit. The total balance outstanding at the end of a particular date is
shown as an asset in the balance sheet of an enterprise. The debtors are also known as
accounts receivables.
5. Creditors: The creditors are the persons to whom the firm owes for providing goods or
services.

6. Revenue: The amounts which earned by a business by selling a product or rendering its
services to the customers is called revenue. Such as sales, commission, interest, dividends,
rent and royalties received. It is the amount which is added to the capital as a result of
business operations.
7. Equity: Equity is, normally, ownership or percentage of ownership in a company or items
of value
8. Bills of Exchange: A written order from one person (the payor) to another, signed by the
person giving it, requiring the person to whom it is addressed to pay on demand or at
some fixed future date, a certain sum of money, to either the person identified as payee or
to any person presenting the bill of exchange.
9. Income: The financial gain (earned or unearned) accruing over a given period of time.
10. Expenditure: A payment or incurrence of an obligation to make a future payment for an
asset or service rendered.
11. Profit and Loss A/c: Profit & Loss Account is the second part of Trading and Profit & Loss
Account. Trading Account shows the gross profit which is the difference of sales and cost
of sale. Thus the gross profit can not treated as net profit while the businessman wants to
know how much net profit he has earned from the operating activities during a period.
For this purpose Profit & Loss Account is prepared keeping in mind all the operating and
non-operating incomes and losses of the business. In the debit (left hand side) side all the
expenses and losses are disclosed and in the credit side (right hand side) all the incomes
are disclosed. The excess of credit side over debit side is called net profit while the excess
of debit side over credit side shows net loss.

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