What are the accounting terms?
Accounting terms are accounting terminology, accounting jargon, accounting acronyms, and accounting vocabulary that are commonly used to understand accounting fundamentals. It would be difficult for anyone to read, understand, and interpret the company's financial statements if they did not understand and know the meaning of the basic accounting terms.
Basic Accounting Terms to Know
Debit and Credit
A debit is an accounting entry made on the account's left side. Debits are used in double-entry bookkeeping systems to increase or decrease expense or asset accounts.
Credits are accounting entries that increase or decrease an equity or liability account. Credits are recorded on an account's right side.
For an account to be in balance, debits must equal credits.
Types of accounts
Personal Account: A personal account is held by a person, a representative person, or an artificial person on behalf of an individual, a company, a trust, or another entity. XYZ's account, ABC. Pvt. Ltd. account and outstanding wages account are all examples of personal accounts. The golden accounting rule for personal accounts is to debit the receiver and credit the giver.
Real Account: A real account represents a company's or individual's tangible and intangible assets, such as a building account, goodwill account, and machinery account. In the case of real accounts, the golden rules of accounting require debiting what comes in and crediting what goes out.
Nominal Account: A nominal account holds records of business expenditures or income, as well as any form of gain or loss. Accounting's golden rules require debiting all expenses and losses and crediting all incomes and gains.
A journal entry is a method of recording transactions in the book of original entry by debiting and crediting the accounts affected by a transaction in the general ledger of a business entity using the golden rules of accrual accounting.
Incomes and expenses
Income is a sum of money received by an individual or business in exchange for the provision of a service or product. On the other hand, an expense is a sum of money spent on normal business operations to generate revenue.
An accrued expense or income is defined as expenses or income that have been incurred or earned but have not yet been paid or received. The accrual method of accounting requires accruing income earned and expenses incurred during a reporting period.
Outstanding includes any income earned or expense owed that has not been received or paid during the reporting period. A current asset is an outstanding income, whereas a current liability is an outstanding expense.
Profit and Loss
A profit is the excess of revenue over expenses in a business's income statement during a specific reporting period. A loss is the inverse of the profit, where the expenses exceed income.
Capital is defined as cash or equivalents raised by the owners to initiate and sustain the businesses' functional operations. Different types of businesses raise capital in various ways. A proprietor introduces capital on his own, a partnership raises capital through the contributions of its partners, and a corporation raises capital by issuing shares and bonds.
Drawings in a business are withdrawals of cash, cash equivalents, or assets for the owner's personal use. The owners' drawings are deducted from their outstanding capital balances.
A financial year, also known as a reporting period, is when a company's or individual's financial statements are prepared, typically lasting a year. This year could be a calendar year or any other duration determined by the taxation authorities or other regulatory bodies, and it may differ from one country to the next.
Every business owner must keep track of their daily activities, referred to as financial statements. A profit and loss statement, balance sheet, journals, ledgers, cash flow statement, statement of change in equity, and other financial statements are included.
Bookkeeping is the process of recording daily transactions in books of accounts. Bookkeeping begins with creating source documents for all transactions and ends with their final treatment in financial statements. Accounting and bookkeeping have a fine line between them but can be used interchangeably.
The balance sheet is a record of the assets and liabilities of the organization. The balance sheet also includes the owner's equity. The balance sheet is a quick snapshot of the company's financial situation. Stakeholders use the balance sheet to make decisions.
Stakeholders are the company's interested parties. These are the people the company's activities may directly or indirectly impact. Stakeholders are further classified as primary and secondary stakeholders.
Accounts receivable refers to any money owed to the company for goods sold or services rendered. Accounts receivable are the company's current assets, recorded on the balance sheet.
A general ledger is simply a ledger where bookkeeping is done. Journal entries are posted to the appropriate ledger accounts. Each main head has its ledger account. For example, if A and B are two debtors of a company, each debtor will have its ledger account.
The income statement is very similar to the profit and loss statement, with a few exceptions. Unlike the profit and loss statement, the income statement has no set format. Aside from that, deferred income is not recorded on the income statement.
A financial transaction is any transaction that takes place within the scope of a business. Buying, selling, negotiating, mortgaging, and other financial transactions are examples of financial transactions. These financial transactions, however, can be divided into several categories.
Cash flow refers to any movement of money within an organization. In this case, cash flow includes both inflow and outflow and receivables and payables. It is critical to understand that in this context, cash refers to hard cash and electronic money.
Cash flow statement
The cash flow statement is one of the most important financial statements. A cash flow statement only records cash transactions, implying that it does not use accrual accounting. The cash flow statement displays the net cash balance available on the balance sheet on a given date.
Net present value
Net present value is a very common and important accounting terminology used in finance. The difference between the present value of future cash inflows and the present value of future cash outflows is the net present value. Financial reporting in modern accounting is based on the concept of present value.
A variable cost changes with each additional unit of output. Variable cost remains constant per unit, but changes in the total amount as output units change. For example, consider the cost of materials per unit.
The term "fixed cost" refers to any cost that does not change with the business' operating activities. Even when production is at zero, the fixed cost remains constant. For instance, warehouse rental.
Every asset has a useful life, after which its activity level declines, or it is scrapped. Since the fixed assets are capitalized, the asset's normal wear and tear are recorded yearly in the profit and loss statement.
A fixed asset is an asset with a life of more than one year. These cannot be easily converted into cash. This category consists primarily of plant, property, and equipment.
Cash and cash equivalents
Cash and cash equivalents are the organization's current assets. These assets typically have a lifespan of less than a year. Cash equivalents include short-term investments, debtors, and bank balances.
Stock and inventory are frequently used interchangeably, but this is not correct. Stocks are part of the inventory, which is a broad term. Stocks, merchandise, office supplies, and other items are recorded in inventory.
The capital invested by the owner to start or run the business is referred to as equity. The term "equity" is most commonly associated with corporations, whereas other businesses use capital in place of equity, though both are equivalent.
Debtors are the company's accounts receivable. Both terms have the same meaning and can be used interchangeably. Debtors are listed under the heading assets on the balance sheet. Bad debt is any amount that cannot be collected from a debtor for any reason.
The organization's creditors are its accounts payable. Creditors are the vendors from whom goods are purchased on credit.
Reserves and surplus
Reserves and surplus are the company's accumulated profits earned over time. This is shown on the balance sheet as part of the equity under the liabilities heading.
Insolvency denotes a situation where the company is struggling, and the revenue generated from operations is less than the expense. This is a situation in which the company considers closing down.
The terms listed above are only a small selection of the most important accounting terms. On the other hand, accounting and finance have a plethora of jargon. Accounting terms will be useful in accounting and finance, taxation, law, auditing, cost management, and capital markets.
Context and Applications
This topic is significant in the professional exams for both undergraduate courses & postgraduate courses and competitive exams, especially for:
- Master of Business and Administration
- Master of Commerce
- Bachelor of Business and Administration
- Bachelor of Commerce
Question 1: Identify the long-term assets having lived more than a year.
a. Current Assets
b. Fixed Assets
c. Non-Fixed Assets
d. None of the above
Explanation: The life of the fixed asset is higher than one year. Although life differs for various assets, it is more than a year for fixed assets.
Question 2: Identify the item commonly used on behalf of stock.
a. Fixed Asset
c. Current Assets
Explanation: Inventory and stocks are the words that are used interchangeably. The terms inventory and stocks both have common meanings.
Question 3: Identify the term used for recording day-to-day transactions.
c. Daily Journal
d. Cash Book
Explanation: Bookkeeping comprises the various techniques and processes that are used for recording purposes. So, it is a part of the whole accounting process.
Question 4: Identify which of the following include bank balance and track of electronic money.
a. Cash and cash Equivalent
b. Current Assets
c. Fixed Assets
d. Trade Receivables
Explanation: Cash and cash equivalent can be used for the tracking of bank balances and electronic money. Cash and cash equivalents are the most liquid current assets.
Question 5: Identify the term where income and expenses are recorded in
a. Balance Sheet
b. General ledger
C. Profit and Loss Statement
d. Cash Book
Explanation: A profit and loss statement is used for recording the income and expenses of a particular period of time. So, it is the correct answer.
Students get confused between similar terms, so it is critical to understand all of the fundamental terms. Students should not begin with terms of a complex or advanced level. This will only cause confusion and stress as a result of not learning.
While studying this topic, it is important to read the following topics to get a better knowledge:
- Basis of accounting
- Principles of accounting
- Main elements of accounting
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