Basic Accounting Terms

Basic Accounting Terms

Basic Accounting Terms

The term accounting can be defined as the process of identifying, recording, classifying and summarizing the financial transaction or economic events of the business so that the profitability and the overall financial position of the business can be ascertained. There are various accounting terms used.

Some of the basic accounting terms are as follows:

 1. Business:

Business is defined as any activity that is started for earning profits/ income. These activities mainly involve the supply of goods or service by the owners of the business in exchange of money. For example nearby stores of groceries, supermarkets, stationery shops etc. 

2. Event

Event refers to any activity that happens in the business while doing day to day operations. These activities may or may not involve money. For example death of an employee (not involving money), purchase and sell of goods (monetary transaction) and other activities but only activities that involve money are recorded while doing accounting. 

3. Financial Transaction: 

The event that involves money is the financial transaction and it is to be recorded in the accounts books of the enterprise. For example purchase and sell of goods on cash or on credit, payment to outsiders, salaries payable etc.

 4. Assets

Assets are the economic resources, tangible or intangible, owned by the business enterprises and are used for the furtherance of business i.e. in the future, economic benefits are expected to flow from the use of such assets such as plant and machinery, Cash, inventory, accounts receivable etc.

 5. Liabilities

Liabilities are the obligations that the business owes to the outsiders i.e. the debt and obligations that the business has to discharge by paying cash in future. For example creditors that are created against purchase of goods on credit, loan taken by the business etc. 

6. Capital

Capital is the amount of investment done by the business owner into the business. The investment can be in the form of cash or in kind such as bringing plant & machinery, office equipment etc. into the business. 

7. Sales

Sales refer to the supply of goods and services by the business to the customers from which the income is generated. The sales can be provided in cash or on credit ( cash is to be received in future) 

8. Revenues

The Revenue is the income earned from the sale of goods and services during the normal course of business or from other activity not directly linked to the main activity such as interest income earned from investments, commission earned etc.

 9. Expenses

The expenses refer to the cost incurred by the business during the normal course of business operations to generate revenue. For example salaries payable, wages payable, rent, power & fuel etc. and the benefit of expense generally lasts in a year. 

10. Expenditure

The cost incurred by the entity for getting long term benefits is known as expenditure such as money invested on purchase of furniture, Plant & Machinery etc. The benefit of expenditure generally lasts for more than a year. 

11. Profit

The excess of revenue earned over the related expenses incurred is the profit of the business and is calculated by subtracting all the business expenses  from the total revenue earned. The profit is generally calculated at the end of an accounting year to know the actual earnings of the business.

12. Gain

Gain refers to the profit that is earned from the transactions that are incidental to business i.e. not directly related to the usual business. For example income earned from sale of fixed asset (if sale value of the fixed asset is more than its purchase cost), appreciation in the value of asset and gains from winning of a court case etc.

13. Loss

If over a period, expenses of the business are more than the revenue earned then that deficit is termed as loss. Besides this, the loss can also be incurred on the sale of fixed assets (if sale value of fixed asset is less than the purchase cost). 

14. Discount:

Discount refers to the reduction in the selling price of goods. The discount is of two types and they are as follows: 

a) Trade discount:

When the amount of selling price is reduced by fixed percentage then it is trade discount. For example a discount of 10% is given on selling price by the manufacturer while selling the goods to wholesalers is a trade discount.

b) Cash discount: 

Cash discount is given to the customers when the sales are made on credit and the debtor pay off the amount within the duration of credit period given by the supplier. Basically the cash discount is given to the customers to motivate them to pay the money within the given time. 

15. Voucher

The transactions are supported by the documentary evidences known as the voucher such as invoice generated when the goods are sold on credit and the cash memo is generated when sold in cash.

 16. Goods : 

Goods refer to the products/items that the business entity deals with i.e. the item that the entity purchase and sell in its routine operations. For example a trading concern who deals with Air conditioner, purchases Air conditioner and therefore, for that entity Air conditioner is a good but another dealer purchases Air conditioner for his office then that Air conditioner is a Fixed asset for such dealer. 

17. Drawings

Drawings refer to the money/goods withdrawn by the owner from his business for personal use and such drawings reduce the capital of the owner. 

18. Purchase

Purchase refers to the procurement of good by the entity for further sale (in trading concern)or procurement of raw materials for manufacturing of finished goods that are then sold to the customers(in manufacturing concern). Purchases can be made in cash or on credit. 

19. Stock/Inventory

Stock/Inventory refers to the raw materials, materials under Work in progress and finished goods that are lying unsold at a specific point of time. In trading concern only finished goods are there in stock. 

20. Debtors

Debtors are the individuals or entities that owe money to the business i.e. the parties to whom the business entity sells the goods on credit are recorded as debtors in the accounts books and are reported under the head current asset in the financial statements of the organisation.

21. Creditors

Creditors are the individuals or entities to which the entity owes money i.e. the parties from whom the business entity purchases the goods on credit and now the money is payable to them are recorded as creditors in the accounts books and are reported under the head current liability in the financial statements of the company.

These are some of the frequently used accounting terms. Apart from this there are several other accounting terms which are used commonly.

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12 thoughts on “Basic Accounting Terms

  1. The explanation of basic terms are very crystal clear. Pl post more articles which will be helpful for my students for reference.

  2. We are a group of volunteers and opening a new scheme in our community. Your website provided us with valuable information to work on. You have done a formidable job and our entire community will be thankful to you.

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