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Question 13

Giving examples, explain each of the following accounting terms:
Fixed assets
Gain
Profit
Revenue
Expenses
Short-term liability
Capital

Answer

• Fixed assets− These are held for 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.

• Gains− Gains are incidental to the business. They arise from irregular activities or non-recurring transactions; for example, profit on sale of fixed assets, appreciation in value of asset, profit on sale of investment, etc.

• Profit− This refers to the excess of revenue over the expense. It is normally categorised 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.



• Revenue− It refers to the amount received from day to day activities of business, viz. amount received from sales of goods and services to customers; rent received, commission received, dividend, royalty, interest received, etc. are items of revenue that are added to the capital.

• Expenses− Expenses are those costs that are incurred to maintain the profitability of business, like rent, wages, depreciation, interest, salaries, etc. These help in the production, business operations and generating revenues. 

• Capital− It refers to the amount invested by the owner of a firm. It may be in 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.

 

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