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Accounting Terminology - Coggle Diagram
Accounting Terminology
(a) Transaction
A transaction is a completed agreement between a buyer and a seller to exchange goods, services, or financial assets. But in business bookkeeping, this plain definition can get complicated. A transaction will be recorded earlier or later depending on whether the company uses accrual accounting rather than cash accounting.
Example:
Purchase of inventory on cash or credit.
Purchase of an asset.
Disposal of an asset.
Payment of salaries to employees.
Cash Transaction - A cash transaction is a transaction where there is an immediate payment of cash for the purchase of an asset. It differs from other types of transactions that involve delayed delivery of the purchased item, or delayed payment for the item, such as forward contracts, futures contracts, credit transactions, and margin transactions.
Credit Transaction - A credit transaction is a business transaction which although has monetary impact does not involve the exchange of cash at the time of occurrence of the transaction, but is settled in cash at a subsequent date. For example, a manufacturer sells his goods to a wholesaler who does not pay for them immediately but is allowed a credit period of 30 days for making payment.
(b) Proprietor / Trader
A proprietor is an individual who owns a business establishment or sole proprietorship. This person has legal use of the assets and their operations.
(c) Sales
A sale is a transaction between two or more parties in which the buyer receives tangible or intangible goods, services, or assets in exchange for money. In some cases, other assets are paid to a seller. In the financial markets, a sale can also refer to an agreement that a buyer and seller make regarding the price of a security.
Example of a Sale
When an individual is purchasing their first home, a sale occurs when the home is sold to the buyer. However, there are many layers of sales surrounding the deal, including the process of a lending institution providing financing in the form of a mortgage to the homebuyer. The lending institution can then sell that mortgage to another individual as an investment. An investment manager could earn his living trading bundles of mortgages, called mortgage-backed securities, and other kinds of debt financing.
(d) Purchases
A purchase means to take possession of a given asset, property, item or right by paying a predetermined amount of money for the transaction to be completed successfully. In other words, its’ an exchange of money for a particular good or service
Example
Inspiration Clothing Co. is a company that sells apparel for women. The company business model is fairly straightforward; they have a supplier based in Los Angeles, called Wholesalers, Inc., that provides all the merchandise for Inspiration. The company has a purchasing department that deals with Wholesalers, Inc. and places purchase orders to keep the company stores fully inventoried. They have a pre-negotiated credit period of 15 business days after the order is received.
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(j) Inventory / Stock
Stock or inventory is the total of raw materials, work in progress (WIP), and finished goods that a business holds for the purpose of resale. The important point to remember here is that the goods are intended for resale.
Raw materials are items waiting to be used in the manufacturing process, work in progress are partially manufactured goods, and finished goods are those held for resale.
Beginning stock is the goods unsold at the start of the accounting period, and ending stock is the goods unsold at the end of the accounting period
Stock or inventory is recorded in the balance sheet of the business at cost, or if lower market value, under the heading current assets, that means it is expected to be convertible into cash within a year. Cost in this context means the price paid plus the direct and indirect costs of bringing the item to its existing condition and location ready for sale.
(K) CARRIAGE INWARDS
Carriage inwards refers to the transportation costs required to be paid by the purchaser when it receives merchandise it ordered with terms FOB shipping point. Carriage inwards is also known as freight-in or transportation-in.
Carriage inwards is considered to be part of the cost of the items purchased. Hence, for inventory items carriage inwards will be part of the cost of the goods available, the cost of inventory, and the cost of goods sold
Example of Carriage Inwards
Assume that a company uses the periodic inventory method and it purchases goods with terms FOB shipping point. As a result the company is responsible for paying the cost of the carriage inwards. The company will record the amount in the general ledger account Carriage Inwards (or Freight-in or Transportation-in). The carriage inwards costs are considered to be part of the cost of items purchased, since an asset's cost is defined as all costs that are necessary to get the asset in place and ready for use.
(L) CARRIAGE OUTWARDS
Carriage outwards refers to the transportation costs that a seller must pay when it sells merchandise with the terms FOB Destination. Carriage outwards is also referred to as freight-out, transportation-out, or delivery expense.
The cost of carriage outwards should be reported on the income statement as an operating expense in the same period as the revenue from the sale of the goods. (Carriage outwards is not part of the cost of goods sold.)
Example of Carriage Outwards
Assume that a supplier sells $700 of merchandise with the terms FOB Destination. The supplier ships the goods via United Parcel Service at a cost of $50. The supplier's income statement will report sales of $700. In addition, it will report the operating expense carriage outwards (or delivery expense) of $50.
(M) Trade Discount
A trade discount is a routine reduction from the regular, established price of a product. The use of trade discounts allows a company to vary the final price based on each customer's volume or status.
Note that trade discounts are different from early-payment discounts. (Early-payment discounts of 1% or 2% are usually recorded by the seller in an account such as Sales Discounts and by the buyer using the periodic inventory method in an account such as Purchase Discounts.) Trade discounts are not recorded in a separate account by either the seller or the buyer.
Example of Trade Discounts
A distributor of merchandise may have a single catalog which displays a single price for each product. However, the distributor allows a trade discount from the catalog price based on each customer's volume. For example, one product may have a catalog price of $100. A casual buyer will be charged $100. However, a reseller will be given a trade discount of 20% from the catalog price, and will be charged $80. Lastly, a registered high-volume wholesaler will be given a trade discount of 27% and will be charged $73.
(N) Cash Discount
A cash discount is a deduction allowed by some sellers of goods or by some providers of services in order to motivate customers to pay within a specified time. The cash discount is also referred to as an early payment discount.
The sellers and providers offering a cash discount will refer to it as a sales discount, while the buyer will refer to the same discount as a purchase discount.
Examples of a Cash Discount
Let's assume that a company offers a cash discount and it is printed on its sales invoices as 1/10, net 30. Let's also assume that a sales invoice is for $1,000 and the buyer has been authorized to return $100 of goods. Therefore, the net amount due to the seller within 30 days is $900. However, the buyer may deduct $9 (1% of $900) if the buyer pays the seller $891 within 10 days of the invoice date. The seller will usually record the $9 cash discount with a debit to the account Sales Discounts. The buyer will record the $9 savings as a credit to Purchase Discounts or as a reduction to the cost recorded in inventory.