Basic Accounting Terms

After going through this lesson, you will be ready to understand the ‘Basic Accounting Terms’ that we commonly use in Accountancy.

Basic Accounting Terms

Here are the top 40 Basic Accounting terms for you

Transaction: Transactions are all those instances, where there exists either outflow or inflow of cash. For example purchase of furniture or goods, sales of products, etc.

Event: Happenings that occur thanks to transactions, causing a change within the financial position of the business.

Entity: An entity means a unit that has an independent or real existence.

Proprietor: A proprietor may be one that makes an investment within the business.

Capital: Capital is that the amount invested by the proprietor within the business. Capital has a credit balance. An increase in capital is credited and reduce in the capital is debited.

Drawings: Goods or cash that’s withdrawn by the proprietor from the business for his/her personal use is termed as Drawings.

Debtors: Persons or organizations that are susceptible to pay money to a firm are called Debtors.

Creditors: Persons or organizations to whom the firm is susceptible to pay money are called Creditors.

Assets: Assets include all properties or legal rights owned by a firm for its operations, like take advantage of hand, plant, and machinery, bank, land, building, etc. All assets have a debit balance. An increase in assets is debited and reduce in assets is
credited. The assets can be classified as:

  • Tangible Assets: Assets that will be seen or touched, i.e. those assets that have a physical existence, are termed as Tangible Assets; for instance, Plant and Machinery, Land and Building, etc.
  • Intangible Assets: Assets that can’t be seen or touched, i.e. those assets that do not have a physical existence, are termed as Intangible Assets; for instance, Goodwill, Patents, Trademark, etc.
  • Current Assets: Assets that will be easily converted into cash or cash equivalents are termed as current assets.
  • Fictitious Assets: These are the heavy revenue expenditures, the advantage of which is often derived in additional than one year. It is also referred to as deferred revenue expenditure.
  • Liquid Assets: Those assets which may be easily and quickly convertible into cash are termed as Quick Assets. These also are referred to as quick assets.

Liability: Liability is an obligation of the business like Creditors, Bills Payable, etc. to whom the payment is to be made.

  • Internal Liabilities: Internal liabilities represent the number of funds that a business owes to its owners. For example, capital contributed by the owners is considered an internal liability.
  • External Liabilities: External liabilities represent the number of funds that a business owes to outsiders. For example, creditors, suppliers, banks, etc.
  • Contingent Liabilities: Liabilities that will or might not become payable, depending on the outcome of a future event.

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Goods: Those items which are either produced or purchased for the aim of sale within the business are termed as Goods.

Cost of products Sold: The cost of products sold (COGS) is that the cost of merchandise that’s sold to the customers.

Stock: Goods that are held by the firm for the aim of sale within the normal course of business is termed as stock.

Stock of Raw Material: It means the stock of products that are employed for manufacturing products and converting them into finished goods.

Stock of Finished Goods: It comprises those goods which are manufactured for the purpose of sale but remained unsold. Purchases: Purchases means the goods which are purchased for resale or for producing the finished goods from it. It includes both cash as well as credit purchases.

Stock of Work-in-Progress: Those goods which are within the process of becoming finished goods are termed as add progress.

Sales: The sale of products either in cash or credit is termed as Sales.

Purchases Return/Returns Outward: Goods that are purchased and are returned to the suppliers are referred to as Purchases Return. It is also known as Return Outward.

Sales Return/Returns Inward: Goods that are sold to the purchasers and are returned by them are known as Sales Return. It is also referred to as Return Inwards.

Bills Payable: Bills Payable may be a legal document accepted by the business and returned to the creditor for paying the required amount on maturity.

Bills Receivable: Bills Receivable may be a legal document that’s received by the business and accepted by a debtor, to pay the required amount on the maturity.

Profit: Profit is that the amount that’s earned over its cost during an Accounting Period. It is also known as Income.

Loss: more than expenses over revenues is termed as Loss.

Gain: Gains are incidental to the business. They arise from irregular activities or non-recurring transactions.

Income: Income means profit earned during an accounting period from any source. Income also means more than revenue over its cost during an accounting period. Income has a credit balance. It is also known as profit.

Prepaid Expenses: Expenses that are paid beforehand by the business for the current accounting period are referred to as Prepaid Expenses.

Outstanding Expenses: Expenses associated with the present period that are still to be paid are termed Outstanding Expenses.

Accrued Income: Income that’s earned during the accounting period but not received within the same year is termed as Accrued Income.

Income Received in Advance: Income that isn’t associated with the present year but received during the year is understood as Income received beforehand. It is also known as Unearned income.

Account: An account may be a record of transactions within the debit and credit column related to a particular head.

Accounting Period: The interval that accounts are maintained by an organization is understood as an accounting period or accounting year which varies from company to company.

Accounting Year: Accounting year refers to the annual period of time when the books of accounts are closed. An accounting year consists of twelve months. It may be the same or different from the calendar year.

Amortization: It refers to writing off the worth of intangible assets like copyrights, trademarks, etc. over its useful life.

Depreciation: Depreciation is a reduction within the value of fixed assets related to their continuous use in the business or due to obsolescence, accident, or efflux of time.

Expense: it’s made to run business smoothly and to hold day-to-day business activities. it’s the value that’s incurred on the activities of the business. The expenses can be classified into:

  • Capital Expenditure: Expenditures that are incurred on the acquisition of fixed assets and which are nonrecurring in nature are termed as cost.
  • Revenue Expenditure: Expenses associated with the day-to-day activities and which are recurring in nature are termed as Revenue Expenditure.
  • Deferred Revenue Expenditure: These are the heavy revenue expenditures, the benefit of which is often derived in additional than one year. It is also known as fictitious assets.

Receipts: All inflows from various sources during an accounting year. The receipts can be classified into:

  • Revenue Receipts: Those receipts which are received during the traditional course of business i.e. receipt from the sale of goods etc.
  • Capital Receipts: These receipts are earned from those transactions which aren’t revenue in nature like proceeds from the sale of machinery etc.

Books of Accounts: Books of accounts are the accounting records in which transactions of a business are recorded.

Debit: Debit comes from the Italian word debito, which springs from the Latin word debeo, which means, ‘owed to proprietor’.

Credit: Credit comes from the Italian word credito, which springs from the Latin word credo, which suggests belief, i.e., ‘owed by proprietor’.

Balance Sheet: a press release of a monetary position of the business at a given date.

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