Basic Accounting Terms
To study accountancy as well as to step into the corporate world and do accounting practices, 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 payable 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 Receivable 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 Sheet is a reconciliation of assets (current and fixed) along with the liabilities (current and non-current) and capital invested 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 assets 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 loans and advances, sundry debtors, short term investments, 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 expenses) and incidental to the business (indirect expenses) as well as ancillary to the running of an organization are referred to expenses.
#7 – Fixed Assets
Fixed assets 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
Ledger 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 statement 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 debentures, term loans from a bank, long term loans and advances, etc. which come under long term liabilities.
#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 income 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 debited, 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 statements along with finding out any discrepancies in the books, including frauds if any hidden by the employees of the organization.
Conclusion
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.
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