Basic Accounting Terms
In order 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 very important 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 which arise during the course of business from trading activities and other business-related expenses and includes parties from whom we have purchased goods or services and/or incurred expenses 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 which may include debtors, bills receivable, etc. which can be converted into cash in short term so as to ensure liquidity of the organization.
#3 – Balance Sheet
Balance Sheet is a reconciliation of assets (current as well as fixed) along with the liabilities (both current and non-current) and capital invested, of an organization, to provide the stakeholders such as creditors, shareholders, banks which have granted loans to the organization and government at large, for the analysis of financial position, growth and stability of the organization.
#4 – Current Assets
Current assets refer to those resources of an organization which is realizable in short term, generally during the same financial year, and 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
The amount invested in the business of an organization by its owners, in the form of capital in case of sole proprietorship and partnerships, or in the form of shares (equity and preference) of varying denominations in case of companies (public or private) is referred to as Equity.
#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 with an intention to be sold in 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 so as 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 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 represent 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 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 with the objective of validating the entries recorded and ensuring 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.
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 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 –