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Definition of Commonly Used Basic Accounting Terms – Part 1

by | Oct 14, 2020

Definition of Commonly Used Basic Accounting Terms – Part 1

Language is a medium that eradicates confusion and provides accurate insights into the path you choose to explore. Every industry in the business world has its secret language and knowing the language is the gateway to the inner circle. Toddlers need to explore accounting or bookkeeping career; it is vital to familiarize yourself with basic accounting terms.

If you are looking forward to improvising your accounting vocabulary, you have come to the right place! This article is a part of our comprehensive accounting guide – the basic accounting principles for beginners/basic accounting rules. In the article, we have listed the essential basic accounting terminologies for beginners. It’s time to fasten your seat belts and get started! The alphabetical layout will help you look for just what you need to know.

Basic Accounting Terms – [A]

Account

An account helps you record all the financial entries of a specific period or purpose. An account is registered in an accounting system that tracks all the economic activities of assets, liabilities, equity, revenue, or expenses. For instance, the business’s income is recorded under the “sales” account, and costs incurred due to the purchase of pens, papers, staplers are registered under the “stationery” account, etc. Each account is stored in the general ledger that helps prepare financial statements at the end of an accounting period.

Accounts Payable (A/P)

The money owed by a business includes all the incurred expenses that are to be paid to its suppliers. These expenses are usually recorded as liabilities in the balance sheets of the company. Accounts payable is unlike notes payable liabilities since they are debts created due to formal legal instruments.

Accounts Receivable (A/R)

As the name infers, accounts receivable is defined as the legally enforceable claims for payments that include sales revenue that a business has rendered but has not yet received the payment for it. The particular account type is recorded as an asset in the company’s balance sheets. Accounts receivable are generally in the form of invoices sent to clients/customers for payment within a particular time and are likely to convert to cash in the agreed time frame.

Accrued Expenses

Accrued liabilities reflect the expenses that are yet to be paid or the ones that are stuffed under the account payable in a specific accounting period. In simple words, these are expenses that a company is obligated to pay for purchases on which invoices are yet to be received.

Basic Accounting Terms – [B]

Backup

Backup concerning the accounting system is the e-copy of financial data. Various backup facilities are starting from CDs, USD drives to online and cloud data storage. For any business, financial data is vital; thus, it is crucial to prevent data loss if a system crashes, or any other unfavorable situation. Modern companies usually opt for cloud-storage to rid of the risks of data loss and re-reconciliations.

Bad Debts

Bad debts are the type of expenses that list under the current accounts receivable. The overdue expense is less likely to be paid by the debtor and is also known as uncollectible accounts expense. Bad debts are one of those contingencies of businesses that need to be addressed by those that extend credits to their customers. Despite sending sales invoices, again and again, the chances of receiving the funds are doubtful.

Billing

Billing is one of the vital accounting processes that deals with issuing invoices for the total cost of goods and services purchased by a customer within a specific period.

Bookkeeping

It is a crucial business accounting process that includes collecting, recording, and reporting financial transactions carried out by a business. These transactions include sales, purchases, receipts, and payment by a person or entity.

Budget

Budget is an approximate estimation of expenses and revenue utilized to create an accurate financial plan that helps a person, business, or a government compile and re-evaluate the actual figures against the plan.

Book Value (BV)

The meaning of the term book value differs as per the context. However, it is commonly defined as the original value of an asset minus accumulated depreciation.

Basic Accounting Terms – [C]

Capital

The term capital refers to the financial assets that include funds obtained from deposit accounts or unique financing sources. Capital assets are commonly found under the current or long-term portion of a balance sheet.

Cash Flow

Cash flow is the movement of cash throughout the business; it gives a precise understanding of the amount of money or what is equivalent to cash received or paid out by a company. It provides a summary of money entering a business, from where and where to. Cash flow enables enterprises to make estimations concerning the income and expenses forecast for the coming year.

Chartered Accountant (CA)

A chartered accountant is an internationally recognized designation of qualified and trained accounting professionals in various countries worldwide, except the USA. In the United States, the equivalent to CA is known as Chartered Public Accountant (CPA). Regardless, both are engaged in public and private work employed by government bodies.

Cheque

A cheque is a specially printed piece of paper or slips in the format of a book provided by the bank to an account holder. Businesses use cheques to clear their bills instead of cash, as it has a higher command on banks to pay the specified amount in the cheque. It is mandatory for a cheque to be signed by the bank account’s authorized signatory and expires after 3 to 6 months from the issued date. Unlike cash that is prone to get stolen, a cheque is a secure way of carrying out transactions.

Conversion Balances

Conversion balances are a term used to define switching from one accounting system to another to convert the books of business. Comparative balances are old balances that are often compared with that of recent balances in a new system.

Cost of Goods Sold

The cost of goods sold is defined as the value of sales carried out during a particular period. Various factors influence the cost of products and services, such as manufacturing costs, average costs, specific identification, formulas, and more.

Credit

Credit is an entry made on the right-hand side of the double-entry bookkeeping method. A credit entry increases equity, liability, and income, wherein it decreases the expenses and assets. Alongside, in accounting terms, credit is also known as the money owed by an individual, business, or an entity. It can also be defined as the money owed to banks through credit cards.

Credit Card

A credit card is a small piece of a card made of plastic issued by banks, buildings, or societies that enables businesses or individuals to purchase goods or services on credit. This type of credit is collected back on a monthly installment until full repayment. Respective interest rates are applicable and charge each month as per the credit card balance owed to the card issuer.

Basic Accounting Terms – [D]

Debit

Opposite to credit, there is a debit balance on the left side of the double-entry ledger. The debit entry increases assets and expenses and reduces income, liabilities, and equity.

Debtor

The debtor is a customer owing money to your company.

Deposit

Deposit is defined as the money (cash or cheque) that is put into a bank account.

Deposit Slip

The sheet of paper that accompanies the cash or cheques shows the details of the bank account into which the money must be deposited, the amount of the deposit, and the date of the deposit.

Depreciation

Most of the assets that belong to a business lose value over time due to wear and tear, and daily use is termed as depreciation. The amount used to depreciate assets is calculated at special rates determined by the tax administration. It is usually calculated as a percentage of the cost price, minus the previously calculated depreciation. Depreciation can be claimed as a business expense to reduce income tax.

Description

The financial transactions section that describes the item or service purchased or sold.

Docket

A document containing information about a product sold from one company to another is termed a delivery docket.

Basic Accounting Terms – [E]

End of Month

The end of the month, often abbreviated as EOM, is an attribute that is used in many business credit terms to describe the due date and time to pay. Many vendors offer manufacturers and retailers a cash discount for paying bills early.

Entries

The accounting entry is an official record documenting a transaction. In most cases, the accounting entry is performed using a double-entry bookkeeping system, which requires a person to make credit and debit entry, ultimately creating a complete set of financial statements. Accounting entry can also be performed in a single-entry accounting system; this system generally tracks only cash receipts and cash payments and displays only the results necessary to create an income statement.

Equity

Equity is the residual value of the owner’s interest in the business, after deducting all liabilities. You may hear property rights referred to as “equity” (for companies) or “owner’s equity” (for individual ownership). Equity can be calculated as assets minus liabilities. The word ‘equity’ can also be used to refer to personal finances.

Basic Accounting Terms – [F]

File

The physical or digital place where the company places all its documents in a specialized way

Filing

Filing is the process of archiving documents systematically.

Financial Statements

Financial statements are written records that convey the business activities and financial performance of a company. The balance sheet provides an overview of shareholders’ assets, liabilities, and equity as a snapshot over time.

Basic Accounting Terms – [G-H]

Gains and Losses

The gains or losses are considered to be “realized” when the shares (or other investment) you own are sold. Unrealized gains and losses are also referred to as “paper” gains or losses. An unrealized loss occurs when the stock drops after the investor buys it but has not yet sold it.

Gross Profit

Gross profit is the income a business generates after deducting the costs associated with manufacturing, selling a product, or the costs associated with rendering a service. The total gain will appear on the company’s income statement. Further, it can be calculated by subtracting the cost of goods sold (COGS) from revenue (sales).

Hire Purchase

A hire purchase, also known as an installment plan, is an agreement by which a customer accepts a contract to acquire an asset by paying an initial premium and paying the balance of the asset price plus interest over a period of time.

Basic Accounting Terms – [I]

Import

An import is a good or service that has been purchased in one country and produced in another country. Imports and exports are components of international trade. If the value of a country’s imports exceeds its exports, the government has a negative trade balance, also known as a trade deficit.

Inventory

Inventory is the term used to define the goods available for sale and the raw materials used to produce goods available for sale.

Invoice

An invoice is a time-stamped business document that separates and records a transaction between a buyer and a seller. If the goods or services are purchased on credit, the invoice will generally specify the transaction terms and provide information on available payment methods.

Basic Accounting Terms – [J-L]

Journal

The journal is a detailed account that records all of the company’s financial transactions, which will be used for future adjustments and transfers to other formal accounting records, such as the general ledger.

Ledger

The general ledger is a book with accounts classified and summarized information from journals such as debits and credits. It includes accounts for assets, liabilities, equity, income, and expenses.

Loan

A loan is when money is given to another party to repay the principal amount of the loan plus interest. Each of the parties agrees on the terms of the loan before paying the money. It may be secured by collateral like a mortgage or unsecured, like a credit card.

Loss

Losses are a one-time removal or decrease in a resource or business asset. Losses are unexpected and non-refundable. Staying on top of your accounts can help you easily track your income and losses.

Basic Accounting Terms – [M-N]

Margin

In business accounting, a margin is a difference between income and expenses, as companies often keep track of gross margins, operating margins, and net profit margins. The gross profit margin measures the relationship between a company’s revenue and the cost of goods sold (COGS).

Net Profit

In simple terms, net profit is the remaining money after all of the company’s expenses have been paid. Percentage Net Profit Margin is an associated relationship. This number is calculated by dividing net profit by revenue or turnover and represents profitability as a percentage.

Basic Accounting Terms – [O-Q]

Opening Balance

The debit or credit balance of the accounting account that is carried over from the previous period to the new accounting period is called the opening balance. It will be the first entry in the ledger account at the start of an accounting period.

Payable

An invoice payable is called a payable and is included in the list of accounts payable.

Purchase

Purchasing is the process that a company or organization uses to purchase goods or services to achieve its goals. Although many organizations try to establish standards in the procurement process, the processes can vary significantly between organizations.

Quotation

Any document sent to a potential customer offering the sale of goods or services at a specific price, subject to particular conditions. A quote is used to let a potential customer know the cost of the goods or services before buying them. When a seller submits a quote, they are bound by a specific price.

Basic Accounting Terms – [R]

Receivable

In simple words, receivable means pending payments/assets. When a buyer holds the hold’s payment, a business accountant lists those details on the “account receivable report,” which generally indicates the expectation of the money to be received.

Reimburse

The amount of money that a business or an individual pays to another person or company, respectively, to compensate losses or expenditure incurred. In other words, it is a payback amount from or to the business for the act of spending or covering losses.

Remittance

Documents such as invoices or any other obligations representing a payment procedure, which indicates the amount to be paid/received by or to the business firm, are known as remittances.

Basic Accounting Terms – [S]

Salary

An employer’s reward or cash payment is an accountable amount to be given for work done by an employee, which is paid periodically and is generally talked in terms of the annual figure of numbers, is known as salary.

Sales

The goods and services or assets that a buyer receives in exchange for money create a transaction between the seller and the receiver known as sales.

Basic Accounting Terms – [T]

Tax (Income Tax)

A mandatory percentage of the amount that an entity pays to the government as a taxpayer, depending upon the range of annual income that a person earns, is known as Income tax. Each asset and liabilities have different tax rates to be paid that are fixed by the nation’s taxing system. This tax, in return, is used by the government for the development of the country.

Transaction

The exchange of money via different sources between a seller and a buyer when purchasing goods or services; is a transaction.

Transfer

A movement/flow of money/assets from one account to another through banks or even a ledger account can be termed transfer.

Basic Accounting Terms – [U-Z]

Undeposited Funds

Undeposited funds are referred to the amount of money in cash/cheques that are yet to be deposited into the bank account; once the customers fulfill the payments – the bookkeeper adds up all the payments of the day and deposits it into the bank regularly and then move the statement from undeposited account to bank account

Withdrawal

Withdrawal is a term used when a person converts the required amount of money from the bank account to real cash.

Year-End

All the tax-related works under the finance department by an accountant reconciling works by a bookkeeper to ensure all the bank transactions with documents, all the transaction entries to know the amount of tax to be paid to the government body, etc. calculated accurately at the Year-End. Therefore, Year-End is a term that indicates the financial business status of a specific year. It can also be stated as Financial Year–End.

Conclusion

While not everyone can study accounting, the CEO/accountant must possess knowledge of all aspects of the business that are successfully managed, including when the company outsources accounting. We hope our comprehensive definition guide will help you start communicating effectively with your online accounting service provider.

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