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Basic Accounting Terms

The document outlines fundamental accounting terms essential for understanding financial processes and statements, including definitions of assets, liabilities, equity, revenue, and expenses. It also explains key financial statements such as the balance sheet, income statement, and cash flow statement, along with concepts like depreciation, amortization, and working capital. Additionally, it covers accounting methods, journal entries, and performance measures like return on investment and break-even point.

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Mani Sankar
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3 views

Basic Accounting Terms

The document outlines fundamental accounting terms essential for understanding financial processes and statements, including definitions of assets, liabilities, equity, revenue, and expenses. It also explains key financial statements such as the balance sheet, income statement, and cash flow statement, along with concepts like depreciation, amortization, and working capital. Additionally, it covers accounting methods, journal entries, and performance measures like return on investment and break-even point.

Uploaded by

Mani Sankar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Part-1.

These terms are fundamental for


understanding accounting processes and
financial statements
Compiled by
P.Mani Sankar, Auditor.
Call for IT and GST filing
Ph:9976815903
(Services available all over India)

1. **Assets**
- Resources owned by a company that are expected to bring future economic benefits. They can be
classified as current (e.g., cash, inventory) or non-current (e.g., property, equipment).

2. **Liabilities**
- Obligations a company owes to outside parties. Liabilities can be current (due within a year, like
accounts payable) or long-term (due after a year, like long-term loans).

### 3. **Equity**
- Also known as shareholder's equity or owner's equity, it represents the residual interest in the assets
of a company after deducting liabilities. It includes capital contributed by owners and retained earnings.

4. **Revenue**
- The total income generated by a company from its normal business operations, usually from the sale
of goods or services.

### 5. **Expenses**
- Costs incurred by a business in its effort to generate revenue. These can include wages, rent, utilities,
and materials.

6. **Net Income**
- Also known as profit, net income is the difference between total revenue and total expenses. A
positive figure indicates profit, while a negative figure indicates a loss.

7. **Gross Profit**
- The difference between sales revenue and the cost of goods sold (COGS). It shows how efficiently a
company is producing or selling goods.

8. **Balance Sheet**
- A financial statement that shows a company's assets, liabilities, and equity at a specific point in time.
It follows the accounting equation:
**Assets = Liabilities + Equity**.

9. **Income Statement**
- Also known as the profit and loss (P&L) statement, it summarizes revenues, costs, and expenses over
a period of time, showing the company’s financial performance.

10. **Cash Flow Statement**


- A statement that shows how changes in the balance sheet and income statement affect cash and
cash equivalents. It breaks down cash flows from operating, investing, and financing activities.

11. **Depreciation**
- The process of allocating the cost of a tangible asset over its useful life. This represents how much of
an asset's value has been used up over time.

12. **Amortization**
- Similar to depreciation but applied to intangible assets (e.g., patents, trademarks). It represents the
gradual write-off of the asset's cost over its useful life.

13. **Accrual Basis Accounting**


- A method of accounting that recognizes revenues and expenses when they are earned or incurred,
regardless of when cash is received or paid.

14. **Accounts Receivable**


- Money owed to a company by customers for goods or services delivered but not yet paid for.

15. **Accounts Payable**


- Money a company owes to suppliers or vendors for goods and services received but not yet paid for.

16. **Inventory**
- Goods or materials a company holds for the purpose of resale or production.

17. **Cost of Goods Sold (COGS)**


- The direct costs attributable to the production of the goods sold by a company. This includes
materials and labor but excludes indirect expenses like marketing and shipping.

18. **Working Capital**


- A measure of a company's liquidity, operational efficiency, and short-term financial health. It's
calculated as:
**Working Capital = Current Assets - Current Liabilities**.

19. **Trial Balance**


- A report listing all the accounts in the general ledger and their balances at a given time. It is used to
ensure that debits and credits are balanced.

20. **General Ledger**


- The master set of accounts that summarize all transactions occurring within a business. Each account
has its own ledger.

21. **Journal Entry**


- A record of a business transaction in the accounting system, showing the accounts affected and
whether the amounts are debits or credits.
22. **Double-Entry Accounting**
- A system of accounting in which every transaction affects at least two accounts and maintains the
balance between debits and credits.

23. **Dividends**
- Payments made to shareholders from a company's profits. They are usually paid in cash but can also
be in the form of additional shares.

24. **Retained Earnings**


- The portion of net income that is retained in the business rather than distributed to shareholders as
dividends.

25. **Fixed Assets**


- Long-term tangible assets like property, plant, and equipment that a company uses in its operations
to generate income.

26. **Current Assets**


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

27. **Liquidity**
- A measure of how quickly an asset can be converted into cash without significantly affecting its value.

28. **Capital Expenditure (CapEx)**


- Funds used by a company to acquire or upgrade physical assets such as buildings, machinery, or
technology.

29. **Return on Investment (ROI)**


- A performance measure used to evaluate the efficiency of an investment, calculated as:
**ROI = (Net Profit / Investment Cost) × 100**.

30. **Break-Even Point**


- The point at which total revenue equals total costs, meaning a company is not making a profit or loss.

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