Basic terms I

Now some words you will use in every chapter. An entity is a particular business, like Super Bazar or ITC Limited. A transaction is a deal between two or more parties that involves value, like buying machinery or selling goods. It can be for cash or on credit (pay later). It does not have to be in cash.

Assets are what the business owns that have a money value. They come in two kinds.

• Non-current assets stay for a long time. These are fixed assets you can touch, like land, buildings, machinery and furniture; fixed assets you cannot touch (intangible), like goodwill, patents and trademarks; and long-term investments.
• Current assets turn into cash within a year: inventories (stock of goods), trade receivables (money customers owe you), cash and short-term investments.

Liabilities are what the business owes and must pay later.

• Non-current liabilities are due after a long time, like a three-year bank loan (a long-term borrowing).
• Current liabilities are due within a year, like trade payables (money owed to suppliers for goods) and short-term borrowings.

The test is simple: if it will be turned into cash or paid off within twelve months (or within the normal trading cycle of the business), it is current. Otherwise it is non-current.

Capital is the money or assets the owner puts into the business. The business treats it as the owner's claim on it, so capital is shown on the liabilities side of the balance sheet, next to what is owed to outsiders.