Basic Terms of Accounting
Accounting is the process of tracking and recording financial activity. Moreover, the history of accounting dates back to ancient times, and it is most closely related to a company's financial reporting in the modern world.
Accountants and businesses use accounting principles to assess financial soundness and performance. Bookkeeping in accounting also serves as a convenient way for individuals and businesses to meet their tax obligations. Also, basic accounting terms like balance sheet, profit and loss etc., are inevitable in every business and stage of an organization. Moreover, everyone can take benefit just by knowing the basics of accounting terms. So let us explore some of the basic terms of accounting.
An accountant is the first accounting term on this list. An accountant is a professional who provides accounting services like auditing, financial statements etc. So he is someone who documents business transactions, reports on the performance of the company to managers, and prepares financial statements. People frequently confuse the terms' bookkeeper and accountant. Similarly, an accountant is someone who prepares annual financial accounts and tax calculations.
A record in an accountancy system that tracks and maintains the financial operations of a certain asset, liability, equity, income, or expenditure is referred to as an account. It includes debit and credit entries, often known as account transactions.
A business is a legal entity established to generate income or profit through commercial activities. It can include producing goods and services, purchasing and selling goods and services, banking, insurance, education, transportation, and other commercial activities. Businesses can be proprietorships, partnerships or LLPs.
The purchase and sale of products and services for profit is a trade.
A profession is defined as any activity requiring prior training and education, such as doctors, attorneys, and engineers.
It refers to an unincorporated enterprise owned and controlled managed by a single person who bears responsibility for its liabilities and earnings. The owner of such a firm is known as a proprietor. He is the individual who puts capital in the industry/company and is entitled to all earnings and losses. The proprietor's nature is determined by the type of disposition of the business organization. A sole trader is a proprietor in a sole trade business, partners or proprietors in a partnership firm, and shareholders in a corporation are proprietors.
An investment is an asset purchased or invested to accumulate wealth and save money from hard-earned income or growth. Whereas capital is the amount of money, goods, or assets, an owner invests while starting a firm.
All of a company's resources with monetary value are referred to as an asset. These resources enable the company to make a profit and retain its worth in the future. These are essential for running a business and are held by business owners. There are two types of this.
a) Non-current assets
Fixed assets are assets that a company/firm uses for a long period of more than one year. For example, land, a building, a plant, machinery, furniture, a vehicle, etc.
b) Short-term assets
This is the asset that is used within a year or is immediately converted to cash. For instance, cash and its equivalents, inventories, etc.
These are the resources with worth but no substance, such as copyrights, trademarks and intellectual property.
Liabilities are legal responsibilities or debts owed to another individual or business. The amount a company pays to others is known as its liability. In other terms, liabilities are future economic gains sacrificed by one entity to another as a result of past events or transactions.
Liabilities are classified into two types: -
a) Long-term obligations
The liabilities are typically due after one year. Long-term loans from financial institutions and corporate bonds.
b) Short-term commitment
These must be paid within a year. For example, accounts payable, overdrafts, etc.
Drawings are the sum of money or items taken out of a business by the proprietor for personal use. It lowers the company's capital.
The items purchased and sold by businesses are referred to as goods. Raw materials may be used in the manufacture of final products. When things are purchased, they are recorded as purchases in accounting. When products are sold, they are referred to as sales. If unsold at the end, it will be reported as inventory.
Purchases are goods purchased for resale, which could be raw materials or finished commodities. Asset acquisition is not considered purchase as the asset is not acquired for resale.
The total amount of income produced by the selling goods or services connected to the company's principal operations is referred to as revenue. Since it appears at the top of the income report, revenue, also referred to as gross sales, is sometimes referred to as the "top line." Income, often known as net income, is the overall earnings or profits of a business. Sales are made when purchased goods are to be sold for a profit. When products are sold for cash, they are referred to as cash sales; when items are sold on credit, they are referred to as credit sales.
14. Purchase Refund
When goods acquired by a firm or the buyer are returned to the seller for any reason, this is referred to as a purchase return or return outwards.
15. Return on Sales
Return on sales (ROS) is a metric that measures how effectively a company converts sales into profits. ROS is computed by dividing operational profit by net sales. ROS is only effective when comparing firms in the same industry and of similar size.
These are items left unsold by the company at the end of the year.
It refers to items that remain unsold at the end of the fiscal year.
At the start of a new fiscal year, the same stock is referred to as opening stock.
Expenses are the costs that a company incurs when producing goods and services or using services. It includes wages, salaries, freight, advertising, rent, and insurance payments. In other words, the cost of generating money is an expense.
Investing operations are the purchases and sales of long-term assets and other corporate investments during a certain reporting period. So the investment is an amount paid in buying an asset or item with the aim of increasing the profit-making capacity. It is usually of long duration.
Income or earnings is the amount that grows the firm's capital. It is the amount received by the form or organization. Also, the difference between revenue and expenses is referred to as income.
When expenses exceed revenue, the excess of costs is called loss. It diminishes the company's capital.
A monetary gain or profit resulting from a business transaction is referred to as gain, and gain is defined as the excess of revenue over expenses.
The total of direct or indirect expenses incurred for producing goods and services is referred to as cost. The total price of an article includes the cost of raw materials, labour, and other services utilized to create it.
A concession or a discount is a refund given by a businessman or a company to a consumer. It might be of two varieties:
a. Trade Discount
A trade discount is a sum by which a manufacturer decreases an item's retail value when it sells to the resellers rather than the end consumer.
b. Cash Discount
A cash discount is a decrease in the value of an invoice allowed by the seller to the customer. This discount is granted in exchange for the purchaser paying the invoice before the due date.
Debtors of the business are individuals, firms, or organizations who purchase goods or services on credit from the company. In other words, a debtor is a person, entity, or organization that owes money or equivalent to a business.
The business's creditors refer to the individual, firm, or organization that lends money to the firms or individuals. So they, therefore, owed money.
The total amount of money owed to the company by the clients for the services and the invoices raised is called receivables.
The total amount a company owes to its retailers and vendors is referred to as payables.
A formal recording that details a transaction is known as an accounting entry. In most circumstances, an accounting entry is made using the double-entry bookkeeping approach, which needs both a debit and a credit entry and ultimately results in the development of a full set of financial records.
The entire quantity of cash and credit sales made by a company during a specific period is called turnover.
Bankruptcy is a legal process in which a person or company is unable to repay its existing debts. Moreover, it involves the process of liquidation and relieves the debtor of any future obligations and liabilities.
This is the term in which when a person is unable to pay their liability against an asset. In this case, the firm has more liabilities than assets. In such a case net worth of the firm on books is negative.
A voucher is a document that is generally issued by the accounts payable section to authorize payments. It is also known as a liability memo to any organization.
33. Debit and credit
Debit is the side in which the organization includes all the expenses or revenue that is flowing out of the account. In contrast, credit refers to all the income coming into the account. Dr. and Cr denote these.
A commission is a charge paid to a salesman by a company in exchange for his or her services in initiating, managing, or closing a sale.
35. Present Value (PV)
The present value measures the current amount of money or stream of cash flows that are expected in the upcoming time. The present value is calculated by taking the future value and multiplying it by a discount rate or the rate of interest that might be earned if invested.
36. Profit and Loss (P & L) Statement
An annual financial statement summarizes a company's performance and financial position by showing revenue, costs, profitability and expenses over a defined period.
37. Return on Investment (ROI)
A metric is used to assess financial performance about the amount of investment compared to the cost invested. ROI is calculated by dividing net income by investment cost multiplied by 100. The outcome is frequently stated as a percentage.
38. Individual Retirement Account (IRA)
IRA is a means of saving for retirement with benefits of the tax. An IRA is a financial institution-set up an account that enables individuals to save for retirement with tax-free earnings or on a tax-deferred basis. Traditional IRA allows individuals to divert pre-tax money to investments that allow tax deferral. That is, capital gains and dividend income are not taxed until they are withdrawn and are, in most cases, tax-deductible. Also, IRAs are not tax-deductible. However, eligible distributions are tax-exempt, so your withdrawals will not be taxed as your money grows.
39. Subchapter S Corporation (S-CORP)
It is a corporate form which meets certain IRS requirements. If it meets the requirements, it can pass its income to the shareholders without the need to pay federal taxes.
40. Bonds and coupons (B&C)
Bonds and coupons (B&C) are a kind of debt funding considering fixed-profit security. An investor, whether an individual, a corporation, a municipality, or the government, lends money to a business with the expectation of receiving their money back plus interest. A bond is a borrower's guarantee to pay a creditor the principal and, in most cases, interest on a loan. Also, the annual interest paid on a bond is called the"coupon."
41. Net Margin
Net Margin is a percentage that shows a company's profit in proportion to its revenues. It is computed by dividing Net Income by Revenue for a specified timeframe.
A bookkeeper is a professional and qualified individual who collects, records, and reports on a company's financial activities.
43. Bookkeeper Balance
The balance is called the amount left or remaining in the organization. It could be a cash, goods, accounts receivable, or accounts payable balance that is carried down/forward for treatment to the next period. The difference between the sum of credit entries and debit entries of an account is called the bookkeeper balance.
A firm that is unable to pay its debts is referred to as bankrupt or insolvent.
A bank is a financial institution where people and corporations deposit their earnings and use them to pay their bills. Banks offer a variety of financial services. A bank is a financial entity that receives public deposits and develops demand deposits while also issuing loans. Banks might carry out lending activities or loans directly or indirectly via financial markets.
A budget is a financial plan in which a company decides how much money it expects to spend in the next year, where that money will be spent, and then compares/checks the actual statistics and the budgeted data. So it is the estimate of revenue or expenditure.
47. Bad Debts/Uncollectable
The amount of money owed to the creditor that cannot be collected or received from the debtor is called bad debt.
Amortization is an accounting practice that is used to reduce the book value of a debt or intangibles on a regular basis over a predefined timeframe. So, it reflects the decrease in the value of an intangible asset over a lifetime.
49. Limited Liability Corporation (LLC)
An LLC is a corporate form in which members are not personally liable for the firm's debts or liabilities. It would protect the employer from losing all of his savings.
50. Balance Sheet
It is a financial statement showing a business's assets and liabilities at a certain point in time. It is one of three fundamental financial statements used to evaluate a company's performance (the other two being the income and cash flow statement).
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