Basic Accounting Terms
Here is a quick look at some important accounting terms.
1. Transactions: Any sale or purchase of goods of services is called
the transaction. Transactions are two types.
[a]. cash transaction: cash transaction is one where cash
receipt or payment is involved in the exchange.
[b]. Credit transaction: Credit transaction will not have
cash, either received or paid, for something given or
received respectively.
2. Goods: Fill those things which a firm purchases for resale are called
goods.
3. Purchases: Purchases means purchase of goods, unless it is
stated otherwise it also represents the Goods purchased.
4. Sales: Sales means sale of goods, unless it is stated otherwise it also
represents these goods sold. Expenses: Payments for the purchase
of goods as services are known as expenses.
5. Revenue: Revenue is the amount realized or receivable from the
sale of goods or services.
6. Debtors: Debtors means a person who owes money to the trader.
7. Creditors: A creditor is a person to whom something is owned by the
business.
8. Drawings: cash or goods withdrawn by the proprietor from the
Business for his personal or Household is termed to as ―drawing‖.
9. Reserve: An amount set aside out of profits or other surplus
and designed to meet contingencies.
10. Account: A summarized statements of transactions relating to a
particular person, thing, Expense or income.
11. Discount: There are two types of discounts..
cash discount: An allowable made to encourage frame
payment or before the expiration of the period allowed for
credit.
Trade discount: A deduction from the gross or catalogue
price allowed to traders who buys them for resale.
12. Accounting equation: The accounting equation, the basis for the
double-entry system (see below), is written as follows:
Assets = Liabilities + Stakeholders’ equity
This means that all the assets owned by a company have been
financed from loans from creditors and from equity from
investors. ―Assets‖ here stands for cash, account receivables,
inventory, etc., that a company possesses.
13. Accounting methods: Companies choose between two methods—
cash accounting or accrual accounting. Under cash basis
accounting, preferred by small businesses, all revenues and
expenditures at the time when payments are actually received or
sent are recorded. Under accrual basis accounting, income is
recorded when earned and expenses are recorded when incurred.
14. Account receivable: The sum of money owed by your customers
after goods or services have been delivered and/or used.
15. Account payable: The amount of money you owe creditors,
suppliers, etc., in return for goods and/or services they have
delivered.
16. Accrual accounting: See ―accounting methods.‖
17. Assets (fixed and current): Current assets are assets that will be
used within one year. The valuable things owned by the business
are known as assets. These are the properties Owned by the
business.
For example, cash, inventory, and accounts receivable (see above).
Fixed assets (non- current) may provide benefits to a company for
more than one year—for example, land and machinery.
18. Liabilities: Liabilities are the obligations or debts payable by the
enterprise in future in the term Of money or goods.
19. Balance sheet: A financial report that provides a gist of a
company‘s assets and liabilities and owner‘s equity at a given time.
20. Capital: A financial asset and its value, such as cash and
goods. Working capital is current assets minus current liabilities.
21. Cash accounting: See ―accounting methods.‖
22. Cash flow statement: The cash flow statement of a business shows
the balance between the amount of cash earned and the cash
expenditure incurred.
23. Credit and debit: A credit is an accounting entry that either
increases a liability or equity account, or decreases an asset or
expense account. It is entered on the right in an accounting entry. A
debit is an accounting entry that either increases an asset or expense
account, or decreases a liability or equity account. It is entered on
the left in an accounting entry.
24. Double-entry bookkeeping: Under double-entry bookkeeping,
every transaction is recorded in at least two accounts—as a credit in
one account and as a debit in another.
25. For example, an automobile repair shop that collects Rs. 10,000 in
cash from a customer enters this amount in the revenue credit side
and also in the cash debit side. If the customer had been given
credit, ―account receivable‖ (see above) would have been used
instead of ―cash.‖ (Also see ―single-entry bookkeeping,‖ below.)
26. Financial statement: A financial statement is a document that
reveals the financial transactions of a business or a person. The
three most important financial statements for businesses are the
balance sheet, cash flow statement, and profit and loss statement (all
three listed here alphabetically).
27. General ledger: A complete record of financial transactions over the
life of a company.
28. Journal entry: An entry in the journal that records financial
transactions in the chronological order.
29. Profit and loss statement (income statement): A financial
statement that summarizes a company‘s performance by reviewing
revenues, costs and expenses during a specific period.
30. Single-entry bookkeeping: Under the single-entry bookkeeping,
mainly used by small or businesses, incomes and expenses are
recorded through daily and monthly summaries of cash receipts and
disbursements. (Also see ―double-entry bookkeeping,‖ above.)
31. Types of accounting: Financial accounting reports information
about a company‘s performance to investors and credits.
Management accounting provides financial data to managers for
business development.
