Introduction
When you are first starting in accounting, it can be daunting to learn all of the terminologies and accounting terms. Accounting terminology is essential because it enables accounting professionals to communicate in a common language, which facilitates communication and allows for better. But don’t worry, we’re here to help! In this article, we will go over some of the most basic accounting terms. This will help you get started in understanding accounting and its principles. So let’s get started!
What is accounting terminology?
Accounting terminology is the language of accounting. It is used to describe accounting concepts and terms such as income, expenses, assets and liabilities etc. These concepts are all essential elements in understanding how accounting works.
The basic accounting terms include:
- Assets
An asset is one of the most important basic accounting terminologies. They can be tangible (physical) or intangible (non-material). Examples of assets include cash at the bank, accounts receivable (money owed to the business by its customers), stock/inventory etc…
- Liabilities
These are obligations of accounting, such as a loan or accounts payable (money owed to suppliers, etc…).
- Equity
This is the difference between the total assets and the total liabilities of a company. It represents the net worth (or worth) of the business.
- Income
This is money that has come into the business, such as sales revenue or investment income.
- Expenses
This is money that has gone out of the business, such as salaries paid to employees or rent for premises.
- Profits
This is the difference between income and expenses. It can be either positive (if income exceeds expenses) or negative (if expenses are greater than income).
- Losses
These losses represent money that the business has lost as a result of accounting errors or other causes such as theft, embezzlement etc.
Accounting Terminologies In Detail
Now that we’ve gone over the basic accounting terms, let’s take a look at some of these concepts in more detail.
- Assets
Assets are anything that the business owns and can use to generate income. They can be either tangible (physical) or intangible (non-material). Tangible assets include equipment, buildings, and automobiles. Intangible assets include things like patents, copyrights, trademarks (brand names), and goodwill.
- Liabilities
Liabilities are amounts that the business owes to others. They can be either current (due within one year) or long-term (due in more than one year). Current liabilities include payables, notes payable, and accrued expenses. Long-term liabilities include long-term notes payable and mortgage loans.
- Owners’ Equity (Net Worth)
The accounting equation shows that all assets are financed by one of two sources: liabilities or owners’ equity. Owners’ equity is the residual interest in the assets of a business after liabilities are paid. It is calculated by subtracting liabilities from assets. The owners’ equity section of the balance sheet is also called the net worth or shareholder’s equity section.
- Revenue
Revenue is the income of a business. It is generated from the sale of products or services. Revenue can be either cash or accrual. Cash revenue is income that is received in cash, such as payments from customers. Accrual revenue is income that is earned but not yet received, such as sales that have been made but the payment has not yet been received.
- Expenses
Expenses are the costs of doing business. They are classified into two categories: operating expenses and non-operating expenses. Operating expenses are costs that are necessary to generate revenue; for example, the cost of goods sold and selling expenses. Non-operating expenses are costs that a business incurs that do not relate to the generation of revenue; for example, interest expenses and income taxes.
- Income Statement
The income statement is a financial report that summarises the revenues, expenses, and net income (profit) of a business for a specified period. It shows accounting profitability, which is an important indicator of how well a business is doing.
- Balance Sheet
The balance sheet, also called the statement of financial position, is one of the three key financial statements that businesses use to assess their financial health. It shows the assets, liabilities, and owners’ equity of a business as of a specific date. The balance sheet is used to calculate the financial leverage ratio, which measures a business’s debt-to-equity ratio.
In accounting, an account is a record in the accounting system used to sort and store transactions. Accounts are organised into two categories: balance sheet accounts and income statement accounts.
Balance sheet accounts are assets, liabilities, and owners’ equity. Income statement accounts are revenue and expenses.
Classification of Bank Accounts
Accounts are classified as permanent or temporary. Permanent accounts, also called real accounts, are balance sheet accounts that remain open from the accounting period to the accounting period. Temporary accounts, also called nominal accounts, are income statement accounts that close at the end of each accounting period.
Accounts are also classified as either normal accounting equation accounts or contra accounting equation accounts. The accounting equation is a mathematical expression of the relationship between assets, liabilities, and owners’ equity. Normal accounting equation accounts are those that increase (or decrease) the assets, liabilities, or owners’ equity of a business. Contra accounting equation accounts are those that have the opposite effect on the accounting equation.
Conclusion
In this post, we’ve covered some of the most important accounting terms that students need to know. We hope this has been helpful and provided a good foundation as you continue your studies in accounting. If you have any questions about these concepts or want more information, please don’t hesitate to reach out!
