Accounting Terms Explained

Accounting is the backbone of the organization. Whether you work in that department or no, there are certain accounting terms that you come across daily. It is vital that you know the meaning of these accounting terms as they are concerned with your work. Unless you know what they are and what they stand for, you will not be able to understand their significance.

Accounting: Accounting is the recording of all the financial transactions undertaken by the organization.

Accounting Period: Accounting period is a pre-determined time frame for easy measurement of the expenditures and incomes.

Assets: Assets are defined as the tangible and intangible properties of the organization. They are further categorized as fixed and liquid.

Adjusting Entries: They are defined as the special accounting entries that are made in the books of accounts in order to bring the ledger up-to-date.

Audit: Audit is the scrutiny of all the books of accounts along with all the documents to support the accuracy and prove the legitimacy of the transactions.

Auditor: An auditor is the person who checks the financial and accountancy records of an organization.

Balance Sheet: A balance sheet is a statement with the assets on one side and the liabilities on the other, for a particular time period, usually a financial year. The amount of assets and liabilities should tally.

Bad Debt: A bad debt is a debt which cannot be recovered from the borrower and is written off as it is not expected that the borrower will pay the amount due from him. It is called bad as the money is irrecoverable.

Budget: Budget is the detailed maximum spending plan for a particular period of time. Budgeting helps the company to plan the expenses well ahead of time.

Capital Investment: Capital investment, also known as capital expenditure is the amount of money that is invested in the business and is used to buy the capital assets.

Capital Gains: In simple words, capital gains are an increase in the value of the capital assets.

Cash Ratio: Cash ratio is the ratio of the cash with the current liabilities of the organization.

Debit: A debit is an entry on the left hand side of the ledger account and it depicts an increase in the assets and expenses or a decrease in the liabilities or revenue.3

Debt: Debt is the money or goods and services which is owed by one organization/business to another.

Debtor: A debtor is one who owes the money to the business or the organization. He could be an individual or a business entity.

Deficit: Deficit is the difference between the revenue and the expenditures. Here, the expenditures are more than the revenue.

Depreciation: Depreciation is the cost of the wear and tear caused to the fixed assets like machinery, which is written off every year.

Drawee: A drawee is the person or an organization/business on whose name a check or a bill is drawn.

Earnings: Earnings is the net income of the organization. It is the excess of income that the organization has earned within a particular time period.

Embezzlement: Embezzlement is taking the organization's money for one's own benefit or personal gains and transferring it illegally in one's name.

GAAP: Generally Accepted Accounting Principles or GAAP are the accounting rules and regulations that are accepted and followed by the organizations in the US.

Goods: Goods are the physical and tangible products that are sold by the organization to earn profits.

Goodwill: Goodwill is the intangible asset of the organization. Goodwill shows that the organization is well-known and can be trusted.

Income: Income of the corporation or organization is the amount derived after the cost of sales, expenses and taxes. This income is calculated for a given period of time.

Interest: Interest is the fee that you pay for the capital or loan borrowed. It is also an income when you receive it from some organization to whom you have lent money.

Journal: A journal is a book wherein all the transactions of the organization are recorded in a chronological order.

Journal Entry: A journal entry is the transactions that are recorded into the journal. These transactions are recorded under different accounts in the journal.

Liabilities: Liabilities are the loans which need to be paid before the end of a stipulated time period. It is important for an organization to be able to pay off all the liabilities in a short time to earn more profits and to continue in the business.

Ledger: A ledger is where all the accounting entries are posted. The debits are posted on the left and the credits are posted on the right side. Double entry accounting system is followed in the ledger.

Net: Net is the final amount, be it profit or loss, income or expenses. This amount is arrived at after making all the necessary deductions like tax. The gross amount minus the taxes gives you the net amount.

Opening Stock: Opening stock is the amount of the stock at the beginning of each accounting year that the organization has. The closing stock of the previous accounting year becomes the opening stock of the current accounting year.

Overhead: Overheads are expenses that do not, directly affect the production. These are, however, needed to be incurred for the production to take place. For example, lighting, rent, are all overhead costs and if they are not incurred, production cannot take place.

Paid up Capital: Paid up capital is the amount paid by the shareholders to acquire the stock of the company. Paid up capital is necessary for any organization as this capital is used to start with the production of the goods.

Petty Cash: Petty cash is the amount that is required for day-to-day expenses incurred to run the organization. Stationery, snacks, tea all come under petty cash.

Profit: Profit is the earnings of the company. When the income is higher than the expenses, the organization is said to have made profit.

Quotation: Quotation is what the organization receives from the seller or what the organization sends to the buyer. It is a document that states the price at which the goods will be sold or bought.

Revenue: Revenue is the amount that is received after you sell your goods.

Sales: Simply put, sales is the money received after selling the goods to the buyer.

Simple Journal Entry: When a journal entry has one debit and a corresponding credit, it is said to be a simple journal entry.

Sinking Fund: Each year an organization earns profit and at the same time has certain debts to pay off. A sinking fund, in bookkeeping, is a fund that is created out of these profits. This fund is used to pay off the creditors to whom the money is owed.

Solvency: As mentioned above, each organization has assets and liabilities. When the ratio of the assets is greater than those of the liabilities, the organization is said to be solvent. In other words, if the organization has more assets, it means that it can take care of the liabilities and pay off the creditors. This is a desirable situation and is known as solvency.

Tangible Assets: All the assets that can be seen, touched and sold at a profit to pay off debts, are called tangible assets. The asset management of any organization needs to be handled with care or there are chances of the organization facing bankruptcy.

Tax: Tax is the amount paid to the government, for your earnings. Each country has its own tax limit. This tax is like a fee for allowing the organization to work in the country.

Trial Balance: Trial balance is nothing but the listing of all the ledger accounts. Both the sides of a trial balance should tally.

Turnover: Turnover is the sales that an organization has been able to make in a particular financial year. A good turnover means profits for the company. It also means that there are less products left over from the production in that particular time period.

These accounting terms explained above are the most commonly used. I hope you have understood the accounting and finance terms explained above. We use these financial terms explained above on a regular basis. It is better to know the basic accounting concepts and principles before using the terms. All the best!!