Basic Terms in Accounting

Basic Terms in Accounting - Exam Analysis

These are the following Basic Terms in Accounting:


Assets are economic resources of an enterprise that can be usefully expressed in monetary terms. Assets are items of value used by the business in its operations. Fixed Assets are assets held on a long-term basis, such as land, buildings, machinery, plant, furniture and fixtures. These assets are used for the normal operations of the business. Current Assets are assets held on a short term basis such as debtors (accounts receivable), bills receivable (notes receivable), stock (inventory), temporary marketable securities, cash and bank balances.


An event involving some value between two or more entities. It can be a purchase of goods, receipt of money, payment to a creditor, incurring expenses, etc. It can be a cash transaction or a credit transaction.


Entity means a reality that has a definite individual existence. Business entity means a specifically identifiable business enterprise like Super Bazaar, Hire Jewellers, ITC Limited, etc. An accounting system is always devised for a specific business entity (also called accounting entity).


Liabilities are obligations or debts that an enterprise has to pay at some time in the future. They represent creditors’ claims on the firm’s assets. Both small and big businesses find it necessary to borrow money at one time or the other, and to purchase goods on credit. Liabilities are classified as long-term liabilities and short term liabilities (also known as short-term liabilities). Long-term liabilities are those that are usually payable after a period of one year, for example, a term loan from a financial institution or debentures (bonds) issued by a company. Short-term liabilities are obligations that are payable within a period of one year, for example, creditors, bills payable, bank overdraft.


Amount invested by the owner in the firm is known as capital. It may be brought in the form of cash or assets by the owner for the business entity capital is an obligation and a claim on the assets of business. It is, therefore, shown as capital on the liabilities side of the balance sheet.


Sales are total revenues from goods or services sold or provided to customers. Sales may be cash sales or credit sales.


These are the amounts of the business earned by selling its products or providing services to customers, called sales revenue. Other items of revenue common to many businesses are: commission, interest, dividends, royalities, rent received, etc. Revenue is also called income.


Costs incurred by a business in the process of earning revenue are known as expenses. Generally, expenses are measured by the cost of assets consumed or services used during an accounting period. The usual items of expenses are: depreciation, rent, wages, salaries, interest, cost of heater, light and water, telephone, etc.


Spending money or incurring a liability for some benefit, service or property received is called expenditure. Payment of rent, salary, purchase of goods, purchase of machinery, purchase of furniture, etc. are examples of expenditure. If the benefit of expenditure is exhausted within a year, it is treated as an expense (also called revenue expenditure). On the other hand, the benefit of an expenditure lasts for more than a year, it is treated as an asset (also called capital expenditure) such as purchase of machinery, furniture, etc.


The excess of revenues of a period over its related expenses during an accounting year is profit. Profit increases the investment of the owners.


A profit that arises from events or transactions which are incidental to business such as sale of fixed assets, winning a court case, appreciation in the value of an asset.


The excess of expenses of a period over its related revenues its termed as loss. It decreases in owner’s equity. It also refers to money or money’s worth lost (or cost incurred) without receiving any benefit in return, e.g., cash or goods lost by theft or a fire accident, etc. It also includes loss on sale of fixed assets in accounting.

Questions About Basic Terms in Accounting
What is a simple definition of accounting?

In its most basic sense, accounting describes the process of tracking an individual or company’s monetary transactions. Accountants record and analyze these transactions to generate an overall picture of their employer’s financial health.

What are the basics of accounting?

Basic accounting concepts used in the business world cover revenues, expenses, assets, and liabilities. These elements are tracked and recorded in documents including balance sheets, income statements, and cash flow statements.

What are some accounting concepts?

Introduction to accounting frequently identifies assets, liabilities, and capital as the field’s three fundamental concepts. Assets describe an individual or company’s holdings of financial value. Liabilities are debts and unpaid expenses. Capital describes the money the entity has on hand.

What are the different types of accountants?

Certified public accountants and management accountants are two of the profession’s most common specializations. Management accountants are also known as cost accountants. Auditors and forensic accountants are another important branch of the field.

What is working capital?

It refers to the capital that is used in day-to-day trading. It is calculated by subtracting current liabilities from current assets. Working capital helps in calculating the resources that a company can count on to carry out its operations for the short term.

How to maintain accounting accuracy?

There are some ways that can help you in maintaining accounting accuracy. Let’s take a look:

  • You need to identify revenue streams to maintain accounting accuracy.
  • You need to keep a track of invoices and receipts
  • Preparing tax returns is a good way to avoid penalties
  • Preparing financial statements is another way to maintain accounting accuracy.
  • You should always keep an eye on the deductible expenses

Basic Terms in Accounting
Basic Terms in Accounting
Basic Terms in Accounting
Basic Terms in Accounting
Basic Terms in Accounting

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