Explanation of Certain Terms used in Book-Keeping:
Before we proceed with the study of the other aspects of book-keeping, it is better to know the exact meaning of certain terms used in book-keeping.
1. Business Transaction:
A business transaction refers to any activity, dealing or event which has value measurable in terms of money, and which involves exchange {i.e., transfer of money or money's worth (i.e., some value or benefit)}, between the business and any other person, including the proprietor of the business, dealing with the business.
Capital introduced into the business by the proprietor, amount withdrawn by the proprietor from the business for his domestic or personal use, purchase of goods for cash, purchase of goods on credit, sale of goods for cash, sale of goods on credit, purchase of a property, say, furniture, motor vehicle, machinery or building for cash, purchase of a property, say, land, plant or tool on credit, sale of a property, say, furniture or motor vehicle for cash, sale of a property, say, machinery on credit, payment made to a creditor on account (i.e., in settlement of his account), receipt of money from a debtor on account, borrowing of loan from a bank or any other lender, repayment of the loan borrowed, payment of an expense, say, salaries, rent, interest or commission and loss of goods by fire, loss of cash by theft, receipt of a revenue or income, say, interest received, discount received or dividend received are examples of business transactions.
However, sending of a price list, receiving of a price list, placing of an order, receipt of an order, appointment of an employee, dismissal of an employee, etc., cannot be considered as business transactions, as they do not involve any transfer of money between the business and others.
Similarly, proprietor's domestic or private expenses paid by him out of his private funds, sale proceeds of any of the private assets of the proprietor received by the proprietor and any private income earned and retained by the proprietor with himself also cannot constitute business transactions, as they do not concern (i.e., affect) the business. However, if any of the domestic or private expenses of the proprietor are paid out of the funds of the business, or if the sale proceeds of any of the private properties of the proprietor or any of the private incomes of the proprietor are brought into the business, they become business transactions, as they affect the business.
Examples : State with reasons which of the following are business transactions:
1.Ram started business with Rs.10,000.
This transaction means receipt of cash by the business from the proprietor. So, this transaction affects the business. As this transaction affects the business, it is a business transaction.
2. Received a price list from Rahim.
Mere receipt of a price list is not a transaction measurable in terms of money. So, it is not a business transaction.
3. Placed an order with Rahim for supply of goods worth Rs.5,000.
Placing of an order for the supply of goods cannot be considered as a purchase unless and until the goods ordered are legally transferred from the supplier to the business. As such, this cannot be considered as a business transaction.
4. Took a loan of Rs.2,000 from Richard for the marriage of his daughter.
This transaction is just a personal transaction of the proprietor. It does not concern the business. So, it is not a business transaction.
5. Purchased goods for cash Rs.3,000.
This transaction affects the business. So, it is a business transaction.
6. Received an order from Roshan for the supply of goods Rs.2,000.
Receipt of an order for the supply of goods cannot be considered as a sale unless and until the goods ordered are legally transferred from the business to the person who has placed the order. So, this cannot be considered as a business transaction.
7. Executed Roshan's order.
As the order of Roshan is executed, it becomes a sale. As it is sale of goods by the business, it is a business transaction.
8. Received goods from Rahim in response to the order placed with him.
As goods are received in response to the order placed by the business, the transaction amounts to purchase of goods by the business. As it is a purchase of goods by the business, it becomes a business transaction.
9. Repaid the loan taken from Richard for the marriage of his daughter out of the funds of the business.
No doubt, the loan repaid is a personal loan taken by the proprietor. But the personal loan of the proprietor is paid out of the funds of the business. As such, it amounts to withdrawal of money by the proprietor from the business for his personal purpose. As it is a withdrawal of money by the proprietor from the business, it affects the business. So, it is a business transaction.
10. Paid his club bill out of his personal funds.
As the personal expense of the proprietor is met out of his personal funds, the transaction does not concern the business. So, it is a personal transaction of the proprietor, and not a business transaction.
11. Appointed Raj as the manager of the business on a monthly salary of Rs.10,000.
Mere appointment of an employee by a business cannot be considered as a business transaction.
12. Office cash misappropriated by the manager Rs.1,000
As this event results in the loss of cash for the business, it affects the business. As it affects the business, it is a business transaction.
13. Dismissed the manager after paying him Rs.2,000 towards his salary.
Dismissal of the manager is not a transaction measurable in terms of money. So, it is not a business transaction.
However, the salary paid by the business to the manager for his services concerns the business. So, it is a business transaction.
14. Took goods from the shop for use at home.
This is a case of withdrawal of goods by the proprietor from the business for his domestic use. It affects the business. So, it is a business transaction.
15. Agreed to sell goods worth Rs.1,000 to Rahim.
This is only an agreement to sell and not a sale. So it is not a business transaction.
16. Gave presents to his grandson, Rakesh out of his personal funds Rs.500.
This is a case of meeting a personal expense of the proprietor out of his personal funds. That means, it is a personal transaction, and not a business transaction.
Before we proceed with the study of the other aspects of book-keeping, it is better to know the exact meaning of certain terms used in book-keeping.
1. Business Transaction:
A business transaction refers to any activity, dealing or event which has value measurable in terms of money, and which involves exchange {i.e., transfer of money or money's worth (i.e., some value or benefit)}, between the business and any other person, including the proprietor of the business, dealing with the business.
Capital introduced into the business by the proprietor, amount withdrawn by the proprietor from the business for his domestic or personal use, purchase of goods for cash, purchase of goods on credit, sale of goods for cash, sale of goods on credit, purchase of a property, say, furniture, motor vehicle, machinery or building for cash, purchase of a property, say, land, plant or tool on credit, sale of a property, say, furniture or motor vehicle for cash, sale of a property, say, machinery on credit, payment made to a creditor on account (i.e., in settlement of his account), receipt of money from a debtor on account, borrowing of loan from a bank or any other lender, repayment of the loan borrowed, payment of an expense, say, salaries, rent, interest or commission and loss of goods by fire, loss of cash by theft, receipt of a revenue or income, say, interest received, discount received or dividend received are examples of business transactions.
However, sending of a price list, receiving of a price list, placing of an order, receipt of an order, appointment of an employee, dismissal of an employee, etc., cannot be considered as business transactions, as they do not involve any transfer of money between the business and others.
Similarly, proprietor's domestic or private expenses paid by him out of his private funds, sale proceeds of any of the private assets of the proprietor received by the proprietor and any private income earned and retained by the proprietor with himself also cannot constitute business transactions, as they do not concern (i.e., affect) the business. However, if any of the domestic or private expenses of the proprietor are paid out of the funds of the business, or if the sale proceeds of any of the private properties of the proprietor or any of the private incomes of the proprietor are brought into the business, they become business transactions, as they affect the business.
Examples : State with reasons which of the following are business transactions:
1.Ram started business with Rs.10,000.
This transaction means receipt of cash by the business from the proprietor. So, this transaction affects the business. As this transaction affects the business, it is a business transaction.
2. Received a price list from Rahim.
Mere receipt of a price list is not a transaction measurable in terms of money. So, it is not a business transaction.
3. Placed an order with Rahim for supply of goods worth Rs.5,000.
Placing of an order for the supply of goods cannot be considered as a purchase unless and until the goods ordered are legally transferred from the supplier to the business. As such, this cannot be considered as a business transaction.
4. Took a loan of Rs.2,000 from Richard for the marriage of his daughter.
This transaction is just a personal transaction of the proprietor. It does not concern the business. So, it is not a business transaction.
5. Purchased goods for cash Rs.3,000.
This transaction affects the business. So, it is a business transaction.
6. Received an order from Roshan for the supply of goods Rs.2,000.
Receipt of an order for the supply of goods cannot be considered as a sale unless and until the goods ordered are legally transferred from the business to the person who has placed the order. So, this cannot be considered as a business transaction.
7. Executed Roshan's order.
As the order of Roshan is executed, it becomes a sale. As it is sale of goods by the business, it is a business transaction.
8. Received goods from Rahim in response to the order placed with him.
As goods are received in response to the order placed by the business, the transaction amounts to purchase of goods by the business. As it is a purchase of goods by the business, it becomes a business transaction.
9. Repaid the loan taken from Richard for the marriage of his daughter out of the funds of the business.
No doubt, the loan repaid is a personal loan taken by the proprietor. But the personal loan of the proprietor is paid out of the funds of the business. As such, it amounts to withdrawal of money by the proprietor from the business for his personal purpose. As it is a withdrawal of money by the proprietor from the business, it affects the business. So, it is a business transaction.
10. Paid his club bill out of his personal funds.
As the personal expense of the proprietor is met out of his personal funds, the transaction does not concern the business. So, it is a personal transaction of the proprietor, and not a business transaction.
11. Appointed Raj as the manager of the business on a monthly salary of Rs.10,000.
Mere appointment of an employee by a business cannot be considered as a business transaction.
12. Office cash misappropriated by the manager Rs.1,000
As this event results in the loss of cash for the business, it affects the business. As it affects the business, it is a business transaction.
13. Dismissed the manager after paying him Rs.2,000 towards his salary.
Dismissal of the manager is not a transaction measurable in terms of money. So, it is not a business transaction.
However, the salary paid by the business to the manager for his services concerns the business. So, it is a business transaction.
14. Took goods from the shop for use at home.
This is a case of withdrawal of goods by the proprietor from the business for his domestic use. It affects the business. So, it is a business transaction.
15. Agreed to sell goods worth Rs.1,000 to Rahim.
This is only an agreement to sell and not a sale. So it is not a business transaction.
16. Gave presents to his grandson, Rakesh out of his personal funds Rs.500.
This is a case of meeting a personal expense of the proprietor out of his personal funds. That means, it is a personal transaction, and not a business transaction.
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