Basic Accounting Terminologies

Basic accounting terminologies are fundamental for understanding financial reports and conducting accurate financial analysis.

• Assets:

Resources owned by a business that have economic value and can generate future benefits. Examples include cash, inventory, property, and equipment.

• Liabilities:

Obligations or debts that a company owes to outsiders, such as loans, accounts payable, or mortgages. Liabilities are classified as either current (due within one year) or long-term (due after one year).

• Equity:

The owner’s interest or claim on the assets of the business after all liabilities have been deducted. In simple terms, equity represents ownership in the company and is often calculated as assets minus liabilities.

• Revenue:

The total income generated from the sale of goods or services before any expenses are deducted. Revenue is also called sales or turnover.

• Expenses:

Costs incurred by a business in the process of earning revenue. Common expenses include wages, rent, utilities, and materials.

• Profit:

Also called net income, profit is the financial gain after subtracting all expenses from revenue. It reflects the business’s financial performance over a specific period.

• Loss:

The opposite of profit, a loss occurs when expenses exceed revenues. It indicates that a business has not performed well financially over a given period.

• Accounts Receivable:

The money owed to a business by its customers for goods or services sold on credit. It is classified as a current asset on the balance sheet.

• Accounts Payable:

Amounts a business owes to its suppliers or creditors for products or services purchased on credit. This is a current liability on the balance sheet.

• Accrual Accounting:

A method of accounting where revenue and expenses are recorded when they are earned or incurred, regardless of when the cash is received or paid.

• Cash Accounting:

An accounting method where revenue and expenses are recorded only when cash is actually received or paid. This method is simpler but may not always reflect the true financial position of a business.

• Balance Sheet:

A financial statement that provides a snapshot of a company’s financial position at a specific point in time. It lists assets, liabilities, and equity.

• Income Statement:

A financial report that shows a company’s revenue, expenses, and profit or loss over a specific period, usually a quarter or year. Also called the profit and loss statement (P&L).

• Cash Flow Statement:

A financial statement that summarizes the amount of cash entering and leaving a business over a specific period. It is divided into three sections: operating activities, investing activities, and financing activities.

• Depreciation:

The process of allocating the cost of a tangible asset over its useful life. It represents the reduction in value of an asset over time due to wear and tear, usage, or obsolescence.

• General Ledger:

A complete record of all financial transactions over the life of a company. It is the foundation of the accounting system and is used to prepare financial statements.

• Trial Balance:

A report that lists all the balances of a company’s general ledger accounts at a given time. It is used to check the accuracy of bookkeeping and to prepare the financial statements.

• Dividend:

A portion of a company’s earnings that is distributed to shareholders, usually in the form of cash or additional shares.

• Capital:

Financial resources or assets used by a business to fund its operations and growth. Capital can come from equity (owner’s investment) or debt (borrowed funds).

• Inventory:

The goods a company holds for the purpose of resale. Inventory is classified as a current asset on the balance sheet.

• Ledger:

A book or digital record that summarizes all the transactions of a business, categorized by accounts. It is used for double-entry bookkeeping.

• Journal:

The chronological record of financial transactions before they are posted to the ledger. Journals typically include details like dates, descriptions, and amounts.

• Debit:

An entry on the left side of an account that increases assets or expenses and decreases liabilities or equity.

• Credit:

An entry on the right side of an account that increases liabilities or equity and decreases assets or expenses.

• Trial Balance:

A report that lists the balances of all general ledger accounts to verify that total debits equal total credits.

• Fiscal Year:

A 12-month period used for accounting purposes, which may or may not coincide with the calendar year. Businesses choose a fiscal year for tax reporting and financial planning.

• Prepaid Expenses:

Payments made for goods or services to be received in the future, such as rent or insurance. These are recorded as assets until they are used.

• Accrued Expenses:

Expenses that have been incurred but not yet paid. They are recorded as liabilities on the balance sheet until payment is made.

• Cost of Goods Sold (COGS):

The direct costs associated with producing goods or services sold by a company. This includes materials and labor but excludes indirect costs like overhead.

• Retained Earnings:

The cumulative amount of net income earned by a company that has not been distributed to shareholders as dividends. It is reinvested back into the business.

• Fixed Assets:

Long-term tangible assets such as buildings, machinery, and equipment that are used in operations and not expected to be sold or consumed within a year.

• Amortization:

The process of spreading the cost of an intangible asset (such as patents or trademarks) over its useful life, similar to depreciation but for non-physical assets.

• Current Assets:

Assets that are expected to be converted into cash or used up within a year, such as cash, accounts receivable, and inventory.

• Current Liabilities:

Obligations or debts that a company must settle within a year, such as accounts payable, short-term loans, and taxes payable.

• Liquidity:

The ability of a company to meet its short-term financial obligations, usually measured by the availability of liquid assets such as cash and marketable securities.