15 Basic Accounting Terms and Concepts

Accounting is known as the language of business, like other fields accounting and finance have their own terms to communicate, so before staring any business or business degree one must know its basic terms and concepts.

For accounting professionals these terms might be a piece of cake but new learners may feel bit difficulty, so from the viewpoint of new learners I tried my best to keep the constant simple and easy.

1. Accounting:
The system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results  is called Accounting.

2. Transaction:
An agreement between a buyer and a seller to exchange goods, services or financial instruments. For Example Purchasing fruits at a grocery store is a transaction, in which fruits are being purchased against the money.



3. Asset:

"An asset is a resource (tangible or intangible) controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity."
-IASB Framework

In simple words assets are the resources of business which help the business in earning revenue, these assets can be tangible and Intangible. Tangible assets are those which have physical existence (like land, building, inventory etc) and intangible assets are those which don't have any physical existence (like rights, account receivables etc). Assets are further divided into two main categories Current Assets and Non Current Assets.

4. Liabilities:

"A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits."
-IASB Framework

Liabilities are the obligations of an entity which it has to pay in future, or in other way Liabilities are the claim of third party on assets. Liabilities may arise by different means like purchase on credit, borrowing, bank loans etc. Liabilities, like assets, are divided into two main categories Current Liabilities and Non Current Liabilities.

5. Equity/ Capital:
On a company's balance sheet, the amount of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses) is called Capital/ Equity/ Shareholders' Equity.
In simple words Equity is that portion of the assets  that the owner fully owns. This represents the amount of capital that is kept by the entity after assets are used to pay off its liabilities. Equity therefore represents the difference between the assets and liabilities.

6. Income/ Revenue:

Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.
-IASB Framework

In other words, cash or cash-equivalents received from work (wage or salary), capital (interest or profit), or land (rent).

For Example: cash received against sale of shoes, cash received against the cleaning of house, check received against laundry services etc.

7. Expense:
The economic costs that a business incurs through its operations to earn revenue are called Expenses.
Simply the sacrifices a business make to earn Income are called Expenses. For Example salaries expenses, utility expenses, rent expense etc.
Expenses are further divided into to major groups Direct Expense and Indirect Expense

8. Profit:
A financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity

Profit is the amount which a business gets after paying all the expenses associated to that particular income.
Profit is calculated by subtracting Total Cost from Total Income

 Profit = Total Income - Total Cost

9. Debit:

A debit is an accounting entry (transaction) that either increases an asset or expense account, or decreases a liability or equity account.

10. Credit:
A credit is an accounting entry that either increases a liability or equity account, or decreases an asset or expense account.

11. Debtor:
A person or company that owes you money is known as Debtor in accounting language, For Example You sold 3 computers to Mr. XYZ on credit (promise to pay later), in this case Mr. XYZ is your debtor.

12. Creditor:  A person or company that you own money to, is know as Creditor in accounting language, For Example You purchased 2 mobiles from Mr. ABC on credit (promise to pay later), in this case Mr. ABC is is your creditor.

13. Balance Sheet / Statement of Financial Position:
Balance sheet is widely known as a snapshot of a company's financial health because Balance Sheet [Statement of Financial Position] is a summary of the financial balances of a business. It tells that how much a company own, owe and expected to receive (account receivable) in future. Usually it is prepared at the end of a fiscal year. Balance sheet can be expressed in following equation which is also known as A
accounting Equation.
Assets = Liabilities + Owner Equity

14. Income Statement / Profit and Loss Statement:
A statement that measures a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities.
Income statement can be express in  following equation:

Total Revenue - Direct Cost - Other Expenses = Net Income


15. Cash Flow Statement:
Cash flow statement of a business tells the movement of money in and out of a business during a specific time period. If the amount of incoming money is greater than the outgoing money then it is positive cash flow and if the amount of outgoing money is greater than the incoming money then it is negative cash flow.

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References:

http://www.wikipedia.com
http://www.investopedia.com
http://www.strategiccfo.com
http://www.businessdictionary.com