Which are the basic terms related to accounting?
As it has been said, knowledge is power, so the more you know the more you grow! The same fundamentals are applicable in accounting also. Knowing basic accounting terms will enhance your knowledge regarding accounting and it will be helpful for you in your day to day accounting activities. This will give you more insight about your books of the company and you can understand what your accountant is describing in a more fruitful way. Here we will discuss about some of the terminologies and terms widely used in accounts and financial statements.
The expenses which are incurred or occurred in business but which are not paid till date are included in Accounts Payable. Since, it is a kind of debt that is owned by the company. Hence, in financial statements and Balance Sheets, they are recorded in the liability section.
All the sales or revenues that are made by the business but are yet to be collected as payments are included in Accounts Receivable. Since in future these sales are revenues are likely to get converted in cash in a short span of time, these are recorded as an asset in the Balance Sheet.
Every entity in the business plus anything which is owned by the business, which possesses a certain kind of monetary value, are known as the assets of the business.
Examples: Land, Labour, Capital, Infrastructure, Machines, Cash, Accounts Receivable etc.
In very simple words, the Balance sheet is nothing but a financial statement in which all the assets, liabilities, and equity of the company are recorded.
The Balance sheet is based on the basic fundamental equation comprising of all these terms:
Assets = Liabilities + Equity.
The overall inflow and outflow of cash of the company are seen in the cashflow statements of the company. In simple words, it represents and records where the flow of cash is moving in the business. Positive cash flow indicates that the inflow of cash exceeds the outflow of cash, where as negative cash flow suggests that the outflow of cash is more than that of the inflow of cash.
Equity in simple words means the overall value of the shares which are issued by the company. Equity can be easily calculated by the basic fundamental equation:
Equity = Assets – Liabilities.
In simple words, liabilities are the debts that are owned by the company at the present moment.
Examples: Short term and long term loans, payrolls, interest to be paid for debentures, Accounts payable etc. Liabilities of a business are calculated with the basic fundamental accounting equation:
Liabilities = Assets - Equity
An ultimate document that contains a complete and full-fledged record of all the financial transactions of the company is known as General Ledger. The General Ledger is used to prepare all the other kinds of financial transactions.
Overhead included all the expenses incurred in the business to run a business, except the expenses to make a product of delivering a service for the product.
Examples: Rent of the factory, salaries of executives, etc.
Profit and Loss Statement or P&L statement
In simple words, a Profit and Loss statement is a financial statement that represents and summarizes the overall expenses, revenues and profit made by the company over a certain period of time.
The process of matching that the records in the books and bank records are exactly the same for a company is known as the reconciliation process. Whenever a bookkeeper reconciles a company’s account, it simply means that he is ensuring that the records in the books of the company are matching with the bank records. This process has to be followed on day to day basis to avoid or rectify mistakes if any in the initial stages.
As it was said that the more information and knowledge you have, the more you will grow and learn about accounts and the process of accounting. You can review these terms till the time you are comfortable with the terms, and till the time you can easily use and understand these terms while understanding the accounts of your business. Knowing these terms will eventually help you to make better financial decisions in business.