Basic accounting terms clarified

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Accounting is a career that is often overlooked, yet it is a competency that has been used consistently in daily life. Although it is true that accounting is most commonly seen as an important part of a business world, people are also most likely to perform some kind of accounting tasks in the “actual life” too.

 If you are beginning to wonder about wanting to pursue a career in accounting, the first phase is to get intimately familiar with some of the fundamental accounting terms, acronyms, and abbreviations used today. Because of the complicated qualification, various accounting myths, and these industry terms, it is not unexpected for people to assume that accounting work is difficult to access when it only has its own unique language. Even if one is not pursuing a career in accounting, it is essential to be familiar with the basic accounting terms as it is something which is a part of our daily lives no matter in which profession we are working. 

We all have bank accounts, do transactions in the physical form a well as through internet banking, and if at all we own a business, then we have an accountant to handle our finances. To understand the deeper nuances of how-to cur costs, increase profits, invest wisely, etc. we all need to have a fair idea of basic accounting concepts. 

What is accounting?

Accounting is defined as the systematic and comprehensive recording of a company’s financial transactions. There are several types, from small business accounting, government, forensic and management accounting, to corporate accounting.

Basic accounting terms

It is now time to build the accounting vocabulary. Check out these accounting terms and get familiar with them to help yourself understand accounting processes better. This is a compilation of 15 basic accounting terms, which are essential to understand the accounting concepts in depth.

 

  • Accounts receivable 

 

It is the total outstanding amount that the company has yet to receive from the customers or clients in lieu of the services or products supplied.

 

  • Accounts payable 

 

The sum of money a company owes to the creditors (suppliers, etc.) in exchange for goods and/or services provided to them.

 

  • Assets

 

Current assets (CAs) would be those that can be turned into cash within one year. Some of the most common current assets are cash, stock of goods, or accounts receivable/debtors. 

Fixed Assets (FAs) are also known as a capital asset. They are not readily saleable but, in turn, offer long-term benefits to the company. Some of the most popular fixed assets include land, plant, and machinery, vehicles, etc. 

 

  • Balance sheet 

 

The balance sheet is a financial statement that offers a summarised picture of the assets, liabilities, and capital of a firm. The balance sheet is among the three core financial statements used to evaluate a business (the income statement and the cash flow statement would be the other two).

 

  • Capital 

 

A financial asset or the valuation of a financial asset, like money or goods. There are two types of capital, i.e., fixed capital and working. Fixed capital is the contribution of the shareholders or owners of the business, while working capital is determined by taking the current assets and subtracting them from the current liabilities. Basically, the money or assets that a company can utilize.

 

  • Cash flow 

 

The quantity of cash or cash equivalent that the organization earns or offers through the payment(s) to creditors is known as cash flow. If the difference is negative, it means that you do have a lower amount of cash at the end of the term, particularly in comparison to the opening balance at the start of the period.

 

  • Cost of goods sold 

 

It encompasses all the expenses incurred by the company on the production of the goods, including the cost of the raw material as well as the manufacturing cost such as labor, electricity, rent, etc. 

 

  • Liability 

 

Liabilities are the financial debts that the company has incurred in the course of the business, such as for the purchase of raw material, machinery, transportation, loans, etc. Current liabilities (CLs) are those debts that are to be repaid within a period of one year, such as money payable to vendors. Long-term liabilities (LTL) have a repayment period of more than one year. An example of long-term liability would be a business loan.

 

  • Expenses 

 

Fixed expenses (FE): These expenses are due at a regular time rate, such as rent or EMI payments.

Variable expenses (VE): Expenses, such as labor costs, which may alter over a stated amount of time.

Accrued expenses (AE): An expense incurred that has not yet been reimbursed or paid.

Operational expenditure (OE): Company expenses not related directly to producing goods and services, e.g., advertising costs, taxes of property, expenses on insurance, etc. 

 

  • Debit 

 

It is an accounting entry in the journal when there is an increase in the assets or a reduction in the liabilities of the company.

 

  • Credit 

 

An accounting entry that is passed when there is a reduction in the assets or an increase in the liabilities and equity of the firm, depending on the type of transaction. There will be two recorded entries for each transaction when using the double-entry accounting method: a credit and a debit.

 

  • Profit and Loss statement 

 

A financial statement that is being used to encapsulate the company’s overall financial position by scrutinizing revenues, costs, and expenses over a specific time period, such as quarterly or annually.

 

  • General ledger and trial balance 

 

General ledger has the record of all the financial transactions pf the company over its lifetime. Trial balance is a document that has a compilation of all the ledgers in the form of debit and credit columns, which is done to ensure that the company’s bookkeeping system remains correct mathematically. 

 

  • Net income 

 

Also known as the net profit, it refers to the total earnings of a company. It is calculated by the subtraction of total expenditure from the value of total revenue. 

 

  • Return on investment 

 

It simply refers to the rate of return received by an investor against a sum of money invested in the venture. The return on investment is computed by dividing net profit by the investment cost. The result has also been frequently expressed in terms of percentage

Understanding these accounting terms is quintessential for any individual looking to develop a firm grasp over the accounting and finance operations of an organization.

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