What are the Basic Terms used in

Accounting?
Financial Year:
A financial year is 12 months for which a business prepares its
books of accounts.
As per section 2(41) of the Companies Act, 2013 financial year
means the period ending on 31 March every year to any company
or body corporate and where it has been incorporated on or after
the 1st day of January of a year, the period ending on 31 March of
the following year.
In simpler words, the financial year starts on 1 April and ends on
31 March. For example, from 1 April 2018 to 31 March 2019. But
when the company is incorporated on or after 1 January, the
financial year will end up next year. For instance, from 1 January
2018 to 31 March 2019.

Assets:
Assets are anything having a value that can provide future
economic benefits. They are generally of three types Current and
Non-Current in accounting vocabulary.

 Current assets are short-term resources and expected to be

converted into cash within a year, such as cash, cash
equivalent, inventory, account receivables and other prepaid
expenses, etc.
 Non-current assets are not current assets, in a broader
sense, which are long-term resources such as land, building,
plants and machinery, etc.

Liabilities:
Liabilities are financial obligations or debts of a business which
will result in an outflow of resources. Liabilities can be current or
non-current, and in order of their classification, some basic
accounting terms are grouped in balance sheets.

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  Current liabilities have to be paid within a year, such as
trade payables.
 Non-current liabilities are longer payment periods, such as a
mortgage taken by a company for 15 years.

Accounts Receivables:
Accounts Receivable (AR) is the amount due for goods or services
sold or rendered but not yet paid by customers or clients. In other
words, AR is the amount customers owe to the company for
goods/services sold or rendered by such a company on credit to
such clients.

Intangible Assets
Intangible assets have no physical presence such as goodwill,
trademark, copyright, or patents of a company that comes under
basic terms in accounting.

Revenue:
Revenue is the amount a company receives or accrues during a
specific period in the ordinary course of business. The amount can
be earned from any normal or abnormal business activities.

Expenses:
An expense is an economical cost a business incurs to earn
revenue during its operation. Expenses are of two types direct
and indirect expenses.

Capital
Capital is the amount invested in the business by the owner in the
form of cash, kind or any other asset

Working Capital
Working capital or net working capital is the difference between
all the company's current assets and current liabilities.
Working Capital = Current Assets- Current Liabilities

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Bad Debt:
Bad debts are the amount that incurs when
customers/clients/Accounts receivable do not pay their amounts.
They are treated as an expense in the Profit & Loss account.

Depreciation:
Depreciation is the decline in the value of business assets such as
plants and machinery over time due to use or obsolescence.
Usually, there are three methods of depreciation that are followed
in India

 Straight-line method
 Diminishing value method
 Unit of production method

Balance Sheet:
A balance sheet is a financial statement that reports the assets
and liabilities of the company at a specific point in time. It is like a
snapshot of what a company owes in loans or equity and owns in
the form of assets.

Income Statement:
The Income Statement, also known as Income and expenditure or
Profit and Loss accounts, shows the company's revenues,
expenses, and profit during an accounting year. It provides a
complete picture of whether a business is profitable in that
particular accounting year.
Profit or Loss = Revenue - Expenses

Cash Flow Statement:

The Cash Flow Statement is a part of the financial
statement which shows the company's inflow and outflow of the
cash or cash equivalents during a given period. Most businesses
fail to survive in the market due to less inflow and more outflow of
cash.

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Ledger:
A general ledger shows financial data of the company with credit
and debit account records verified by a trial balance. The general
ledger provides records of all financial transactions that a
company has carried out.
Source https://www.mastersindia.co/blog/basic-accounting-
terms/

Balance Sheet Terms

The Balance Sheet is one of the two most common
financial statements produced by accountants. This
section pertains to potentially confusing basic
accounting terms related to the balance sheet.

1. Accounts Payable (AP)

Accounts Payable includes all expenses incurred by a
business but have not yet been paid. This account is
recorded as a liability on the Balance Sheet as it is a
debt owed by the company.

2. Accounts Receivable (AR)

Accounts Receivable includes all the revenue (sales)
that a company has provided but has not yet collected
payment. This account is on the Balance Sheet,
recorded as an asset that will likely convert to cash in
the short term.

3. Accrued Expense
An expense that has been incurred but hasn't been
paid is described by the term Accrued Expense.

4. Asset (A)
Anything the company owns that has monetary value.
These are listed in order of liquidity, from cash (the
most liquid) to land (least liquid).

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5. Balance Sheet (BS)
A financial statement reports all of a company's assets,
liabilities, and equity. As its name suggests, a balance
sheet abides by the equation <Assets = Liabilities +
Equity>.

6. Book Value (BV)

As an asset is depreciated, it loses value. The Book
Value shows the original value of an asset, less any
accumulated Depreciation.

7. Equity (E)
Equity denotes the value left over after liabilities have
been removed. Recall the equation Assets = Liabilities
+ Equity. If you take your Assets and subtract your
Liabilities, you are left with equity, which is the portion
of the company that the investors and owners own.

8. Inventory
Inventory is the term used to classify the assets that a
company has purchased to sell to its customers that
remain unsold. The inventory account will be lower as
these items are sold to customers.

9. Liability (L)
All debts that a company has yet to pay are Liabilities.
Common liabilities include Accounts Payable, Payroll,
and Loans.

Income Statement Terms

The Income Statement, Profit and Loss Statement, is
the second of the two common financial statements.
These are the most common basic accounting terms
used in this reporting tool.
10. Cost of Goods Sold (COGS)
Cost of Goods Sold is the expenses that directly relate
to creating a product or service. Not included in this
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category are those costs needed to run the business.
An example of COGS would be the cost of Materials or
the Direct Labor to provide a service.

11. Depreciation (Dep)

Depreciation is the term that accounts for the loss of
value in an asset over time. Generally, an asset has to
have substantial value to warrant depreciating it.
Common assets to be depreciated are automobiles and
equipment. Depreciation appears on the Income
Statement as an expense and is often categorized as a
"Non-Cash Expense" since it doesn't directly impact a
company's cash position.

12. Expense (Cost)

An Expense is any cost incurred by the business.

13. Gross Margin (GM)

Gross Margin is a percentage calculated by taking
Gross Profit and dividing it by revenue for the same
period. It represents a company's profitability after
deducting the Cost of Goods Sold.

14. Gross Profit (GP)

Gross profit indicates a company's profitability in
dollars without considering overhead expenses. It is
calculated by subtracting the Cost of Goods Sold from
Revenue for the same period.

15. Income Statement (Profit and Loss) (IS or P&L)

The Income Statement (often referred to as a Profit and
Loss, or P&L) is the financial statement that shows the
revenues, expenses, and profits over a given period.
Revenue earned is shown at the top of the report, and
various costs (expenses) are subtracted until all costs
are accounted for; the result is Net Income.

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16. Net Income (NI)
Net Income is the dollar amount that is earned in
profits. It is calculated by taking revenue and
subtracting all expenses in a given period, including
COGS, Overhead, Depreciation, and Taxes.

17. Net Margin

Net Margin is the percentage amount that illustrates a
company's profit to its revenue. It is calculated by
taking Net Income and dividing it by revenue for a
given period.

18. Revenue (Sales) (Rev)

Revenue is any money earned by the business.

19. Accounting Period

An Accounting Period is designated in all Financial
Statements (Income Statement, Balance Sheet, and
Statement of Cash Flows). The period communicates
the period that is reported in the statements.

21. Business (or Legal) Entity

This is the legal structure or type of business. Common
company formations include Sole Proprietor,
Partnership, Limited Liability Corp (LLC), S-Corp and C-
Corp. Each entity has a unique set of requirements,
laws, and tax implications.

22. Cash Flow (CF)

Cash Flow is the term that describes the inflow and
outflow of cash in a business. The Net Cash Flow for a
period of time is found by taking the Beginning Cash
Balance and subtracting the Ending Cash Balance. A
positive number indicates that more cash flowed into
the business than out, whereas a negative number
indicates the opposite.

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24. Credit
A credit increases a liability or equity account or
decreases an asset or expense account.

25. Debit
A debit increases an asset or expense account or
decreases a liability or equity account.

28. Fixed Cost (FC)

A Fixed Cost does not change with the volume of sales.
For example, rent and salaries won't change if a
company sells more. The opposite of a Fixed Cost is a
Variable Cost.

29. General Ledger (GL)

A General Ledger is the complete record of a
company's financial transactions. The GL is used to
prepare all of the Financial Statements.

30. Generally Accepted Accounting Principles (GAAP)

These are the rules that all accountants abide by when
performing the act of accounting. These general rules
were established so that it is easier to compare 'apples
to apples when looking at a business's financial reports.

31. Interest
Interest is the amount paid on a loan or line of credit
that exceeds the repayment of the principal balance.

32. Journal Entry (JE)

Journal Entries are how updates and changes are made
to a company's books. Every Journal Entry must consist
of a unique identifier (to record the entry), a date, a
debit/credit, an amount, and an account code (that
determines which account is altered).

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33. Liquidity
A term is referencing how quickly something can be
converted into cash. For example, stocks are more
liquid than a house since you can sell stocks (turning
them into cash) more quickly than real estate.

34. Material
Material is the term that refers to whether information
influences decisions. For example, if a company has
revenue in the millions of dollars, $0.50 is hardly
material. GAAP requires that all Material considerations
must be disclosed.

35. On Credit/On Account

A purchase that happens On Credit or Account is a
purchase that will be paid at a future time, but the
buyer gets to enjoy the benefit of that purchase
immediately.

36. Overhead
Overhead are those Expenses that relate to running the
business. They do not include Expenses that make the
product or deliver the service. For example, Overhead
often includes Rent and Executive Salaries.

37. Payroll
Payroll is the account that shows payments to
employee salaries, wages, bonuses, and deductions.
Often this will appear on the Balance Sheet as a
Liability that the company owes if there is accrued
vacation pay or any unpaid wages.

38. Present Value (PV)

Present value is a term that refers to the value of an
Asset today, as opposed to a different point in time. It is
based on the theory that cash today is more valuable
than cash tomorrow due to the concept of inflation.

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39. Receipts
A Receipt is a document that proves payment was
made. A business produces receipts when it provides
its product or service, and it receives receipts when it
pays for goods and services from other businesses.
Received receipts should be saved according to IRS
receipts requirements and cataloged so that a company
can prove that its incurred expenses are accurate.
40. Return on Investment (ROI)
Originally, this term referred to the profit that a
company was making (Return), divided by the
Investment required. Today, the term is used more
loosely to include returns on various projects and
objectives. For example, if a company spent $1,000 on
marketing, which produced $2,000 in profit, it could
state that its ROI on marketing spend is 50%.

41. Trial Balance (TB)

Trial Balance is a listing of all accounts in General
Ledger with their balance amount (either debit or
credit). The total debits must equal the total credits,
hence the balance.

42. Variable Cost (VC)

These are costs that change with the volume of sales
and are the opposite of Fixed Costs. Variable costs
increase with more sales because they are an expense
that is incurred to deliver the sale. For example, if a
company produces a product and sells more of that
product, it will require more raw materials to meet the
increase in demand.

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