12 Basic Terminologies of Accounting | Principles of Accounting

How often have you hung up a call with your accountant feeling more demented than you were before it started? If your response is a variation of, “pretty much every time” we got your back!

Every subject has got its own terminology. Accounting has got its own accounting terminologies. We’ve compiled a list of the 12 most common accounting terms or terminologies, along with their abbreviations and definitions.

Basic Accounting Terminologies

Following are some of the basic and most used terminologies of accounting:-

1. Capital (C)

Capital is an investment made for profit by the businessman. The amount of money or money’s worth invested by the businessman to start and during the lifetime of the business is called capital.

In other words, the difference between the total assets and the liabilities of the business is called capital. Capital is the lifeblood of any business organization. It is used to purchase of fixed assets and current assets and operate day to day activities. No one can start and operate a business in the absence of capital.

2. Liabilities (L)

Liabilities are the amount to be paid to outsiders after a certain period of time. They are legal obligations to be paid to somebody for some reason. For example, goods purchased on credit, a loan is taken from the bank and other institutions, expenses to be paid, etc. There are two types of liabilities.

  • Short-term Liabilities
  • Long-term Liabilities.

2.1 Long-term Liabilities

The amount of money owed by the company that is not due within the next twelve months. Those are the outsider’s obligations of the firm which must be paid in a longer period such as 2, 4, 8 years or so on. Examples are mortgages, loans for equipment, land and building, trucks and any long-term loans.

2.2 Short-term Liabilities

The amount of money owed by the company that is due within the next twelve months. Those are the financial obligations of the business which must be paid in a short period such as 2, 3, 6, 9, 12 months or so. Examples are bills payable, creditors, bank overdraft and outstanding expenses, etc.

3. Assets (A)

Things of value that the company owns, and plans to use in the future to make money and that the item can be assigned in amounts. Examples of assets are cash, cash at bank, bills receivables, stock, investments, land, building, machinery, furniture, investment, and loans in advance, etc. The types of assets are listed below:

  • Fixed Assets
    • Tangible Fixed Assets
    • Intangible Fixed Assets
      • Goodwill
      • Patent
      • Copyright
  • Current Assets

3.1 Fixed Assets

Those assets, which owe, and plan to use in the future to make money for a longer period are called fixed assets. Plants and machinery, land and building, furniture, leasehold, business premises, vehicles, etc. arc the examples of fixed assets.

Tangible Fixed Assets – Those fixed assets which can be seen and touched and remain in physical forms are called tangible fixed assets. Examples of tangible fixed assets are land and building, plant and machinery, furniture, etc.

Intangible Assets – Those assets which can’t be seen and touched, but exist only in their financial values are called intangible assets. Goodwill, Patent, Copyright, Trademarks, designs, and patterns are some examples of intangible assets.

  1. Goodwill – Goodwill is a long-term asset categorized as an intangible asset. Goodwill arises when a company acquires another entire business. It may result from a good location, good management team and success of the business and so on. It is the name and fame of the business.
  2. Patent – A patent produces new inventions and covers how things work. If a patent application is granted, it gives the owner the ability to take legal action under civil law to try to stop others from making, using, importing or selling the inventions without permission.
  3. Copyright – A copyright is a legal device that gives the creator of a literary artistic musical or other creative work the sole right to publish and sell that work. Copyright Owners have the right to control the reproduction of their work including the right to receive payment for that reproduction.

3.2 Current Assets

Those assets which can be convertible into cash within a period of one year are known as current assets. Current assets are assets held on a short-term basis such as debtors, account receivable, bills receivable, stock (inventory), short-term investment, cash and bank balances.

4. Sales

Sales are total revenues from goods sold and services sold or provided to customers. Sales may be Cash sales or credit sales. The transfer of other assets than goods is not regarded as a sale. The sale of furniture is treated as a furniture account instead of a sales account.

5. Purchase

Purchases are total amounts of goods procured by a business on credit and for cash for use or sale. In a manufacturing concern, raw materials are purchased. in a trading concern, purchases are made of merchandise for resale with or without processing. Purchases may be cash purchases or credit purchases.

6. Debtors/Account Receivable (AR)

Debtors (account receivable) are persons and/or other entities who owe to an enterprise an amount for receiving goods and services on the credit. The total amount due to such persons on the closing date is shown in the balance sheet on the asset side as the sundry debtors.

7. Creditors/Account Payable (AP)

Creditors (account payable) are persons and/or other entities that have to be paid an amount for providing the enterprise goods or services on credit. Creditors represent the amount payable on the account. Credit purchase to the sellers or providers of goods or services.

8. Stock/Inventory

Stock (inventory) is a measure of something on hands such as goods, spares and other items in a business. It is also called stock in hand. In a manufacturing company, closing stock comprises raw materials, semi-finished goods, and finished goods on hand on the closing date. In a trading concern, the stock on hand is the number of goods that have not been sold on the date on which the balance sheet is prepared.

9. Revenue

These are the amounts the business earns by selling its products or providing services to customers. These are called ‘sales revenues’. Other items are sources of revenue common to many businesses like fees, commission, interest, dividends, royalties, and rent received, etc.

10. Expenses (Cost)

These are costs incurred by a business in the process of earning revenues. Generally, expenses are measured by the cost of assets (goods) consumed or services used during an accounting period.

11. Profit/Gain

It is the difference between revenue and expenses of a particular period of time is known as profit or gain. In other words, profit is the net difference between total revenue and total expenditure.

12. Loss

It is the difference between expenses and revenue of a particular period is known as loss. It is also known as an excess of expenses over the revenue.