Basic Accounting Terms & Their Meanings
This brief guide includes definitions, alternative words uses, and the importance of the words or concepts to Accounting.
Accounts payable refers to the money a business owes to vendors or suppliers for goods and services received have not been paid for. Accounts payable shows up as a liability on a balance sheet.
Accounts receivable refers to the money owed to a business by its customers for goods and services delivered. Accounts payable will be a current asset in the balance sheet as it is foreseen to receive payment in the immediate future.
Accrual Based Accounting
Accrual accounting is a method of record adjustment. Accrual accounting recognise a business’ expenses and earnings when a transaction occurs, rather than when payment is received or made.
An asset is a resource that is owned or controlled by a business and is expected to generate future benefits for the business.
A balance sheet is a financial statement for a business that lists assets, liabilities, and equity. It shows the detailed balance of income and expenditure over a period.
Capital refers to an individual or organizations financial assets. Capital includes cash and other financial assets held.
Cash Basis Accounting
Cash basis accounting is a method that does not recognize transactions until the business receives or pays cash for goods and services. The opposite to accrual based.
Cash flow is the total amount of cash or cash equivalent which a business receives or pays. Net cash flow is the sum of all money a business makes. A cash flow statement is a financial statement that includes all cash a business receives from its operations.
Cost of Goods Sold
The cost of producing goods sold by a business. Cost of Goods sold (COGS) includes any direct cost of creating the goods sold including materials and labour and excludes indirect costs such as distribution expenses.
Credits are accounting entries that increase an equity or liability account or decrease and expense or asset account. Credits are made on the right side of an account.
Debit is an accounting entry that increase an expense or asset account and decrease an equity or liability account. Debits are made on the left side of an account. Debits must always equal credits for an account to be in balance.
Depreciation method in accounting determines the decreasing value of a tangible asset over its lifetime. A business can make money by depreciating an asset by expensing or deducting part of the asset each year it is used for tax and accounting purposes.
Expenses are the cost of conducting business. Types of expenses include fixed, variable, accrued and operation expenses. Fixed expenses don’t change from month to month e.g. rent. Variable change monthly.
Equity is the amount of money that would be left over and returned to shareholders if the business sold all assets and paid of all debt, represented by the equation “Equity = Assets – Liabilities”
Equity exists as a record on a business ‘ balance sheet. A sole proprietor would only use the term owners’ equity as there are no shareholders.
A liability is when as business or individual owes someone else money for goods and services. Types can include loans, mortgages and accounts payable. Short term liabilities conclude less than a year, while long term liabilities are expected to take longer than a year.
Profit and Loss Statement
Profit & Loss statement, also known as income statement, shows the expenses, costs and revenue for a business during a specific period. This financial statement along with the balance sheet and cash flow statement, provide information about a business’ financial position.
Revenue, also called sales, is the gross income a business makes via normal business operations.
A trial balance compiles the balance of ledgers into Debit and Credit columns that equal the same. Trial balances ensure the mathematical accuracy of their bookkeeping systems.