20 January 2020

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Some Common Terms Associated with Accounting

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Accounts: It is the area or item where value (i.e. money) comes in or out. Example: Your bank savings account.

Debit and Credits: All business transactions are recorded as either a debit or a credit. A debit “adds value” to an account while a credit “removes value” to an account.

Assets: Things that the business owns such as cash on hand, the value of equipment and machinery, future money collections, intellectual properties and many others.

Liabilities: The opposite of assets, these are financial obligations of the business such as bank loans, credits to suppliers and so on.

Equity: Also called the owner’s equity, at the most basic, this is assets less liabilities and represents the net worth of the business. Equity can also refer to the amount of money invested into the business.

Revenue (Income): This is the account that tracks the income of the company such as product sales, service fees and commissions.

Expenses (Cost):  The opposite of revenue, this is the account that tracks the costs of generating the income for the business such as salaries, utility bills, depreciation, rent and others.

Owner’s Investments: Increase in owner's equity (capital) resulting from additional investments of cash and/or other property made by the owner.

Owner's Drawing: Decrease in owner's equity (capital) resulting from withdrawals made by the owner.

Budget: A formal quantitative expression of management’s plans or expectations. Master budgets are the forecast or planned Profit and Loss, Account and Balance Sheet. Subsidiary budgets include those for sales, output, purchases, labor, cash etc.

Capita:l An imprecise term meaning the whole quantity of assets less liabilities owned by a person or a business.

Inventory Records:  A Record of purchases made in a company which may include-date purchased, stock number of item purchased, purchase price, date sold, and sale price.

Accounts Receivable:   If you provide services or products for which people pay you at a later date, the amount they owe is your account receivable with that client

Accounts Payable:   Accounts payable are debts owed by your company for goods and services.

The Accounting Equation

The accounting equation states that the sum of the assets and expenses must be equal to the sum of the liabilities, equity and revenue of the business. This is the equation that the general ledger or an accounting system must keep balanced: Assets + Expenses = Liabilities + Equity + Revenue

By ensuring that this equation holds true for your business, you can have the guarantee that all business transactions are properly accounted for.

Compiled by Nisary Mahesh


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