Basic Accounting Terms
To study accountancy as well as to step into the corporate world and do accounting practicesAccounting PracticesAccounting practice is a set of procedures and controls used by an entity's accounting department to keep track of accounting records and entries. Other reports are generated based on accounting records, such as financial statements, cash flow statements, fund flow statements, payroll, tax workings, payment and receipts statements, and so on, and they form the basis of the auditor's reliance while auditing the financial statements., we need to be aware of the basic accounting terminology to understand the concepts and the subject as a whole. For those who are new to this subject, it is essential to be familiar with the technical jargon; used in businesses by those who are in office, and classrooms by those who are studying accountancy, and want to move ahead in this sector to make a career in this prominent field.
List of Basic Accounting Terminology
Given below, is a list of the basic accounting terminology which will help you in enhancing your knowledge of the subject:
#1 – Accounts Payable
Accounts payableAccounts PayableAccounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period. are short term obligations to be paid by an organization. It arises during the business from trading activities and other business-related expenses, including parties from whom we have purchased goods or services and/or costs incurred for which money is yet to be paid, generally in the same financial year.
#2 – Accounts Receivable
Accounts ReceivableAccounts ReceivableAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. form part of current assets and refer to amounts due from parties to whom we have sold goods or services or incurred expenses on their behalf for which money is yet to be realized. It may include debtors, bills receivable, etc. which can be converted into cash in the short term to ensure the liquidity of the organization.
#3 – Balance Sheet
Balance SheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company. is a reconciliation of assets (current and fixed) along with the liabilities (current and non-current) and capital investedCapital InvestedInvested Capital is the total money that a firm raises by issuing debt to bond holders and securities to equity shareholders. Invested Capital Formula = Total Debt (Including Capital lease) + Total Equity & Equivalent Equity Investments + Non-Operating Cash in an organization. Stakeholders such as creditors, shareholders, banks, which have granted loans to the organization and government at large use Balance Sheet for the analysis of the financial position, growth, and stability of the organization.
#4 – Current Assets
Current assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc. refer to those resources of an organization that is realizable in the short term, generally during the same financial year. They include cash/bank balance along with those assets which are capable of being converted into cash, which ranges from short term loansShort Term LoansShort-term loans are defined as borrowings undertaken for a short period to meet immediate monetary requirements. and advances, sundry debtors, short term investments Short Term InvestmentsShort term investments are those financial instruments which can be easily converted into cash in the next three to twelve months and are classified as current assets on the balance sheet. Most companies opt for such investments and park excess cash due to liquidity and solvency reasons., etc.
#5 – Equity
Equity is the amount invested in the business by its owners, in the form of capital in case of sole proprietorship and partnerships, or form of shares (equity and preference) of varying denominations in case of companies (public or private).
#6 – Expenses
All the money outflow (present or future) incurred for procuring goods and services to affect sales in a business (direct expensesDirect ExpensesDirect costs are costs incurred by an organization while performing its core business activity and can be attributed directly in the production cost, such as raw material costs, wages paid to factory staff, power & fuel expenses in a factory, and so on, but do not include indirect costs such as advertisement costs, administrative costs, etc.) and incidental to the business (indirect expensesIndirect ExpensesIndirect expenses are the general costs incurred for running business operations and management in any enterprise. In simple terms, when you want to buy grocery from a supermarket, the transportation cost to get you to the supermarket and back is the indirect expenses.) as well as ancillary to the running of an organization are referred to expenses.
#7 – Fixed Assets
Fixed assetsFixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples. are tangible resources that are used by an organization for carrying out daily operations of a business such as land, plant and equipment, furniture and fixtures, buildings, machinery, etc. which are not purchased to be sold in the short term.
#8 – Ledger
LedgerLedgerLedger in Accounting, also called the Second Book of Entry, is a book that summarizes all the journal entries in the form of debits & credits to use for future reference & create financial statements. is the book of entry for recording transactions in such a way that we come to know the outstanding debit or credit balance of an account in our business for which we record the opening balance, transactions made in that account and the closing balance to find out the exact position of that particular account.
#9 – Income Statement
Income statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements. forms part of the financial statements and tells us the exact position of our gross as well as net profit at a particular cut-off date. It is done by recording all the direct incomes and closing stock on the credit side and all direct expenses and opening stock on the debit side to find the gross profit and all the indirect incomes and indirect expenses similarly to find out the net profit.
#10 – Liabilities
Liabilities are the present (short term) and future(long term) obligations on an organization which represents the debts due to be paid for goods and services procured for the business in the past and include sundry creditors, short term loans and advances, bills payable, etc. which come under short term liabilities and debenturesDebenturesDebentures refer to long-term debt instruments issued by a government or corporation to meet its financial requirements. In return, investors are compensated with an interest income for being a creditor to the issuer., term loans from a bank, long term loans and advances, etc. which come under long term liabilitiesLong Term LiabilitiesLong Term Liabilities, also known as Non-Current Liabilities, refer to a Company’s financial obligations that are due for over a year (from its operating cycle or the Balance Sheet Date). .
#11 – Net Income
The profit or loss arrived at after deducting all direct and indirect expenses from all the direct and indirect incomes equals to net income made by a business which is the earning done by the business at a cut-off date and is very useful in comparing the growth and financial position of an organization from previous years as well as for adopting measures for the betterment of the profitability levels of the business.
#12 – Revenue
The gross incomeGross IncomeThe difference between revenue and cost of goods sold is gross income, which is a profit margin made by a corporation from its operating activities. It is the amount of money an entity makes before paying non-operating expenses like interest, rent, and electricity. earned by the organization from carrying out core business activities without deduction of any kind of expenses is termed as revenue earned by the organization, which also indicates the sale and other incomes in total.
#13 – Credit
Wherever an account is credited, it has the effect of reducing the balance of an account in case of real accounts, creating an obligation to pay an individual in case of personal accounts and increasing the income side if a nominal account is credited.
#14 – Debit
Wherever an account is debitedDebitedDebit represents either an increase in a company’s expenses or a decline in its revenue. , it has the effect of increasing the balance of an account in case of real accounts, creating an obligation to receive money from an individual in case of personal accounts, and increasing the expenses side if a nominal account is debited.
#15 – Audit
An audit is an examination of books of accounts prepared by an organization to validate the entries recorded and ensure the accuracy and correctness of the financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels. along with finding out any discrepancies in the books, including frauds if any hidden by the employees of the organization.
The above accounting terms explained above are not exhaustive. The list does not end here as there are a plethora of accounting concepts and terms which are used in daily life. Though, the ones explained above can help in understanding accounting at a beginner’s level.
This article has been a guide to Accounting Terminology. Here we discuss the top 15 basic accounting terminology along with its definition and detailed explanations. You can learn more about accounting from following articles –