Basic Accounting Terms

These basic accounting terms are critical for any student who wants to develop a deeper understanding of the subject and pursue further studies in this stream. These terms and their definitions are as follows:

  • Business Transaction – A business transaction is a financial event between two or more parties. It involves an exchange of goods, services or money and gets recorded in the books of accounts for the organisations involved.
  • Capital – Capital is a critical component of any business to run its daily operations and help its future growth. The capital for a business comes either from its owners or from outsiders (shares, debentures or bonds).
  • Drawings – Drawings refer to the withdrawals made by the owners of a business for personal use. It gets deducted from the Owner’s Capital in the Liabilities side of a Balance Sheet.
  • Liabilities (Non-Current and Current) – Current Liabilities are the amount due to the creditors of a business that has to be paid back within twelve months. Non-Current Liabilities are the long-term obligations of a company that are not due for payment before a year.
  • Assets (Non-Current and Current) – Current Assets are the assets that a firm can liquidate within twelve months. Non-Current Assets are the long-term investments of a business that they cannot liquidate within a year.
  • Fixed assets (Tangible and Intangible) – Tangible Fixed Assets are the long-term investments of a business that have a physical existence. Intangible Fixed Assets are the long-term investments made by a company that doesn’t have a physical existence.
  • Expenditure (Capital and Revenue) – A business incurs Capital Expenditure to acquire assets for long-term income generation. It also incurs Revenue Expenditure to run the day-to-day operations of a business.
  • Expense – Expenses in accounting refer to the cost incurred or money the business owners spend to generate revenue. A business must keep its expenses under control to generate profits both in the short and long run.
  • Income – Income is the revenue that a business earns from the sale of its goods or services. It is essential for the survival and growth of any enterprise, and the failure to generate revenue can lead to a shutdown of the business.
  • Profit – Profit is the positive difference between the income generated from selling goods or services and the Expenses incurred to perform that business activity. Profit is the excess of revenues over the expenses.
  • Gain – A Gain is an increase in the total value of an asset of a business. It takes place when the current price of the asset exceeds its original purchase price. It can occur at any time during the useful life of an asset.
  • Loss – Loss is the excess of the Expenses incurred from selling goods or services over the income generated to perform that business activity. Sustained losses over time can lead to the shutdown of a business organisation.
  • Purchase – Purchase is the activity of buying an item to either use it in the production of goods and services or resell it to another entity.
  • Sales – Sales is an economic activity where a business exchanges goods or services with another entity for money. It is the primary source of revenue for any organisation.
  • Goods – Goods are the items that a company manufactures to sell to another entity in exchange for money. When an organisation buys goods, it is known as purchases, and when it sells goods, it is known as sales.
  • Stock – A stock is a financial instrument that represents the part ownership of a company. Organisations use this instrument to raise capital for their business.
  • Debtor – A debtor is an individual or entity that owes money to a business. Companies treat it as an asset because they will get money from them in the near or distant future.
  • Creditor – A creditor is an individual or entity to whom a business owes money. Companies treat it as a liability because they will have to pay them in the near or distant future.
  • Voucher – A Voucher is an internal document that a company uses as supporting evidence for accounting entries. Businesses treat it as a redeemable transaction bond as it has a monetary value and is helpful in specific cases.
  • Discount (Trade Discount and Cash Discount) – A Trade Discount is a discount that a seller can offer to the buyer by reducing the price of an item. It helps to increase sales of a product, and it doesn’t get recorded in the accounting books. A Cash Discount is a discount that a seller can offer to the buyer at the time of payment by reducing the invoice price of an item. It helps to ensure timely payment for a product, and it gets recorded in the accounting books.

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