Important Terminologies in Accounting: In the previous post we began discussing the topic “Fundamentals of Accounting.” Now, we will explore some important terms in Accounting.
Important Terminologies in Accounting : Basic Accounting Terms for Beginners
Understanding basic accounting terms is crucial for beginners in the field of business. Some commonly used accounting terms include:
Capital
The amount of money or money’s worth introduced into the business by the owner is indeed known as capital. In accounting, capital represents the owner’s investment in the business. It can take various forms, such as cash, equipment, or property. Capital is essential for the establishment and operation of a business as it provides the necessary financial resources for the purchase of assets, payment of expenses, and the overall financial stability of the enterprise.
Assets
In accounting terms, an asset is any resource owned or controlled by a business or individual that has the potential to generate future economic benefits. This means that assets have value and can be used to produce cash flow, reduce expenses, or improve a company’s overall financial position.
Assets are typically classified into different categories based on their characteristics, such as:
Current assets: These are assets that can be converted into cash within one year, such as cash, accounts receivable, and inventory.
Non-current assets: These are assets that are not expected to be converted into cash within one year, such as property, plant, and equipment, and intangible assets such as patents and trademarks.
Liability
Important Terminologies in Accounting
In accounting terms, a liability is a financial obligation that a company owes to another party. It represents a debt that the company must pay in the future. Liabilities are typically classified as either:
- Current liabilities: These are debts that are due within one year or within the company’s operating cycle, whichever is longer. Examples of current liabilities include accounts payable, accrued expenses, and short-term loans.
- Non-current liabilities (long-term liabilities): These are debts that are not due within one year or the company’s operating cycle. Examples of non-current liabilities include long-term loans, bonds, and mortgages.
Drawings
In accounting terms, drawings refer to the money or other assets withdrawn from a business by its owner(s) for personal use. This is most commonly seen in sole proprietorships and partnerships, where the owners are not considered separate entities from the business itself.
What is included in drawings?
- Cash withdrawals: This is the most common type of drawing, and it simply refers to taking money out of the business bank account for personal use.
- Non-cash withdrawals: This can include things like taking inventory items for personal use, using company assets for personal purposes (e.g., a company car), or receiving personal loans from the business.
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Bad debts
Bad debts, also known as uncollectible accounts, are debts owed to a business that are unlikely to be repaid. They arise when a customer or client fails to make their payments, and the business has exhausted all reasonable efforts to collect the debt. Bad debts are recognized as an expense on the income statement and can have a significant impact on a company’s profitability.
Important Terminologies in Accounting
Purchase
In accounting terms, a purchase refers to the acquisition of goods or services from a supplier in exchange for payment. It is an essential business activity that allows companies to obtain the resources they need to operate and generate revenue.
Goods purchased with immediate payment of cash are called cash purchases. Goods purchased on credit are called credit purchases.
Purchase Returns
In accounting, a purchase return occurs when a buyer returns goods to the seller for a full or partial refund. This is essentially the opposite of a purchase, where the buyer receives goods and owes money to the seller. Purchase returns can happen for various reasons, such as:
- Damaged or defective goods: If the buyer receives goods that are damaged or defective, they can return them to the seller for a refund or replacement.
- Incorrect items: If the seller sends the wrong items to the buyer, the buyer can return them for the correct items or a refund.
- Unwanted items: The buyer may simply decide they no longer want the items they purchased and return them for a refund, depending on the seller’s return policy.
Sales
Sales are the number of goods that businesses sell. When businesses receive immediate payment, it’s called cash sales. If they sell on credit, it’s called credit sales.
Sales Returns
In accounting, a sales return refers to a situation where a customer returns goods or services that they previously purchased from a business. This can happen for various reasons, such as:
- Defective product: The product is damaged or malfunctioning.
- Unsatisfactory quality: The product doesn’t meet the customer’s expectations.
- Wrong item: The customer received the wrong product by mistake.
- Change of mind: The customer simply decides they no longer want the product.
Debtor
A debtor, in accounting terms, is an individual or entity that owes money to another party. This means they have received goods or services and have not yet paid for them, or they have borrowed money and have not yet repaid it.
Important Terminologies in Accounting
Creditor
A creditor is an individual or entity who provides benefit without receiving immediate payment for the same, and who will claim the payment in future, is called creditor.
Stock
Stock refers to the unsold goods, raw material, etc,. that lie with the business are collectively known as stock.
Transaction
A transaction is a business activity involving the transfer of money or money’s worth between two accounts. There are two types of transactions.
Cash Transactions: A cash transaction is when money is given or received in the form of cash right away.
Credit Transactions: When you make a credit transaction, you enjoy the benefits right away but pay the money later.
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