Accounting is the lifeblood of business. Carrying out the recording, tracking, and analysis of finances helps inform better decisions. Assets and liabilities can be easily defined as what a company owns and owes. Understanding these and other basic accounting terms is necessary to run a business efficiently.
Key Basic Accounting Terms
To grasp accounting better, you must first understand the basics of accounting terms. These are used in almost every business transaction. Knowing the basic accounting terms and concepts will help you interpret financial documents and manage resources wisely.
Assets
Assets are valuable things a business owns that provide future economic benefits. They form a key component of the basic accounting terms and meaning.
Types of Assets
- Current Assets: These assets can be converted into cash within one year.
- Examples include:
- Cash
- Accounts receivable
- Inventory
- Non-Current Assets
- Long-term resources such as:
- Buildings
- Land
- Equipment
- Tangible Assets
- Physical items such as:
- Furniture
- Machines
- Vehicles
- Intangible Assets
- Non-physical resources like:
- Patents
- Trademarks
- Brand name reputation
Management of these assets guarantees healthy functioning and increased profitability.
Liabilities
Liabilities are what the business owes to others. This is a core part of basic accounting terms.
Types of Liabilities
- Current Liabilities
- Due within a year.
- Examples:
- Bills payable
- Short-term loans
- Salaries payable
- Non-Current Liabilitiee
- All unpaid debts for more than one year would fall under the long-term debts category.
- Examples:
- Mortgages
- Long-term bank loans
Understanding liabilities is critical to maintaining the financial balance of any business.
Capital
Capital refers to the owner’s share in the business that combines assets and liabilities using the formula:
Capital = Assets – Liabilities
Regarding basic accounting terms and meaning, capital is the foundation on which a business stands.
Types of Capital:
- Fixed Capital – Used to purchase long-term assets
- Working Capital – Daily operational funds
Capital also includes retained earnings and profits that are reinvested in the business.
Financial Transactions
A typical financial transaction is deemed as the movement of money within the business or outside the company. These are the fundamental base terminologies and concepts of basic accounting.
Some examples are:
- Purchases– The act of acquiring raw materials or goods.
- Sales- Selling goods to customers.
- Receipts– Cash inflow from sales
- Payments– Any outflow like paying bills, employee salaries, etc. Recording them carefully ensures accuracy in financial reporting.
Revenue
Revenue is the total income a business earns through its core operations. It is the primary indicator of business health and is among the elementary accounting terms.
Types
- Operating Revenue – Earned from core business activities.
- Non-operating Revenue – Accrued from other activities, like interest or investment.
Steady revenue indicates the capacity of a business to run and grow itself.
Expenses
Expenses are the costs needed to earn revenue. This is one of the most used basic accounting terms.
Types:
- Operating Expenses – Wages, rent, utility bills.
- Non-operating Expenses – Losses, interests.
Keeping expenses under control increases profit margins.
Common Accounting Terms in Business Trade
These basic accounting terms and concepts are widely used in daily business transactions. They help manage the buying and selling process smoothly.
Purchase and Sales
These two activities drive most businesses.
- Purchase: Acquiring goods or services for use or resale. Can be a cash or credit purchase.
- Sales: Selling goods or services to customers. It can also be in cash or credit.
Both are part of daily trade and crucial to cash flow.
Goods and Stock
- Goods: Items purchased to sell to customers.
- Stock (Inventory): Unsold goods are available for sale. It is a current asset and essential to retail and wholesale businesses.
Proper stock management avoids overstocking or stockouts.
Debtors and Creditors
These terms are key to understanding the basics of accounting.
- Debtors: Customers who owe money to the business. Shown as assets.
- Creditors: Suppliers to whom the business owes money. Shown as liabilities.
Maintaining good records of debtors and creditors helps in smooth financial operations.
Discounts and Vouchers
Discounts
- Trade Discount – Given during purchases. Not recorded in books.
- Cash Discount – Given for prompt payment.
Vouchers
Vouchers ensure accuracy and reduce the chances of fraud.
- Acts as evidence for financial transactions.
- Examples: Invoices, Receipts, Payment slips.
Assets, Liabilities, and Capital in Accounting
These three components are shown in the balance sheet, one of the main financial statements. Their understanding forms the basics of accounting terms.
Assets
These are assets. Assets are those that create value and allow business growth. Proper asset management enables operating at a more efficient level.
Liabilities
Business obligations are liabilities. A company has healthier finances by decreasing liabilities.
Capital
Owner’s contribution. Expansion and stability are brought about through a strong capital base.
Understanding Key Financial Terms
Knowing the following basic accounting terms and their meanings helps analyse a company’s financial health.
Accounts Payable vs. Accounts Receivable
- Accounts Payable – Amount to be paid to suppliers (liability).
- Accounts Receivable – Amount expected from customers (asset).
Profit vs. Loss
- Profit – Revenue exceeds expenses.
- Loss – Expenses exceed revenue.
This determines business success.
Accrued Income and Prepaid Expenses
These entries ensure that the financial statements depict an accurate and fair status.
Accrued Income – that is earned, not yet received, and recorded as an asset.
Prepaid Expenses are payments made in advance but have not yet been consumed. They are also assets.
Debtors and Creditors in Accounting
Debtors and creditors are cardinal to cash flow and long-term survival. They are major accounting terms and concepts.
Debtors
Good debtor management maintains timely collections, minimises bad debts, and enhances cash flow.
Creditors
Good creditor management will ensure timely payments that keep good supplier relations and avoid interest penalties.
Basic Accounting Terms FAQS
1. Distinction between assets and liabilities?
A business’s Assets are resources that provide future economic benefits, like cash or equipment. Liabilities are obligations the company owes to others, such as loans or unpaid bills.
2. What are the basic accounting terms?
Terms like assets, liabilities, capital, revenue, expenses, etc., are the main ones we deal with in financial accounting.
3. Why is it necessary to have a general knowledge of accounting terms?
This information may be useful in determining the health of a business, making wise decisions regarding it, and handling its finances well.
4. What are the definitions of the fundamental accounting terms and concepts?
Refers to the basic concepts and definitions applied in accounting, describing how companies handle money.
5. What do we mean by basic accounting terms and their meaning?
It involves understanding the actual role of each accounting term in financial management.