Some basic accounting terms used in business are entity, business transaction, capital, drawings, equity, liabilities, assets, expenses, expenditure, revenue, income, gain, loss, purchase, sales, goods, debtor, creditor, voucher, depreciation, balance-sheet, income-statement.
Table of Contents
Basic Accounting Terms:
Entity:
In business, entity means a distinct unit or organization, that formed for earning profits. Example- Sole proprietorship, partnership, LLC or corporation. They are responsible for their own actions and debts.
Business Transaction:
Business transactions is a financial or economic activity. That involves, movement of money, goods or services, these transactions always happen between two or more parties. These business transactions are recorded in certain account for a accounting purpose.
Capital:
In simply, capital refers to “owner’s fund”. The total amount which is invested by the owner, that amount may be in the form of cash, goods or assets. That helps to running the business.
Drawings:
Any amount of cash, goods and materials withdrawn by the owner, from business for his personal use that known as, drawings. Drawings leads to reduction in the capital of the business.
Equity:
In simple terms, equity means ownership. It represents the owner’s stake in a company.
Equity = Assets - Liabilities.
Liabilities:
Liabilities are those obligations or debts, that a business needs to pay in its future time. Liabilities are mainly 2 types.
Accounts receivable:
Accounts receivable is an accounting term. When, company sales their product to customers in credit and that amount receives in future, that is called accounts receivable. This comes under current assets in the balance-sheet.
Accounts payable:
When company buy/purchase something on credit and that money has to payable in future by company to his suppliers, that is called accounts payable. This comes under current liability in the balance-sheet.
Cash-flow:
It is a financial term. It refers to inflow and outflow of cash or cash equivalents in an organization in a specific period. Cashflow shows the clear picture of a company’s ability to meet it’s short-term and long-term financial obligations.
Journal:
Journal is a book of primary entry. In which, all business transactions are recorded in chronological order. It is also known as “book of original entry”. Journal is the foundation for preparing financial statements and reports.
Ledger:
Ledger is the principal book. After recording journal, those journalized transactions/ data are classified and all similar nature of transactions are put together under one head/ account.
Current / Short-Term Liabilities :
Current liabilities are those type of debts, which a company needs to pay under one year. Example- Accounts payable, Provisions, Short-term debts.
Non-current or Long-term Liabilities:
Non-current liabilities are those type of debts, which a company can pay in a long time gap. Example- Bonds, Long-term loans.
Assets:
Assets means, anything that provide economic benefits in the future. Assets can be physical item like- land, building, property, equipment or intangible resources like- goodwill, intellectual property.
Expenses:
Expenses are the cost of money, used in a business to generate revenue. Example- Cost of goods sold, maintenance, rent, etc.
Expenditure:
Expenditure means, payment of cash for goods or services or assets, encompassing both capital and revenue expenditures.
Revenue:
Revenue refers to total income of the business. That means, gross income without deduction of any expenses.
Income:
Here income means, net income. It represent the actual profit after deducting all the expenses from it’s revenue.
Gain:
Gain is generally like, profit of the business. That profit is arise from events or transactions other than normal course of business activity. Example: Sales of fixed assets.
Loss:
Loss refers to, when company’s expenses exceeds from company’s net income or when the value of assets decrease from their original cost.
Purchase:
Purchase means buying goods or services with an intention of re-sale in the normal course of business.
Sale:
Sales refer to, transferring of ownership of goods or services to the customer for a price.
Goods:
The main selling product of the business is called goods. Goods are physical product for which a demand exists and whose ownership can be transferred from business to other entity or customer through transactions.
Debtor:
Debtor is an individual, company or entity, from whom certain amount of money is receivable.
Creditor:
Creditor is an individual, company or entity, to whom certain amount of money is payable.
Voucher:
Voucher is an internal document. It works like evidence for business transactions. In the support of voucher, all the entries are made in accounting book.
Depreciation:
Depreciation refers to, gradually decrease in the value of fixed assets due to, wear and tear, use or obsolescence. It is a non-cash expenses.
Balance-sheet:
Balance-sheet is a financial statement that shows us company’s asset and liability at a specific point in time.It is also know as positional statement. In there, company knows the financial position of the business.
Income statement:
Income statement is a financial statement in which, we know company’s revenue, expenses, and net income (or loss) over a specific period. It is also known as a profit and loss statement.
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