I wanted to do a blog on the accounting equation principle, then I realized I was writing a lot of terms that might confuse my readers. So, I decided to explain at least 10 accounting terms that are commonly used. I believe this would help everyone understand my subsequent blog posts on accounting.
Below are some of conventional accounting terms:
Entity: An entity is an economic unit or a business for which transactions are recorded. It is used to separate the business form its owner.
Debit Entry: These are entries that records increase an asset and expense account and decreases a liability and Equity. It is recorded in the left side of an accounting ledger.
Credit Entry: This is an entry that increases a liability and equity account and decreases an asset and expense account. It is recorded on the right side of an accounting ledger.
Ledger: A ledger is a book or account where accounting entries are recorded. It has an opening balance (balance brought forward) and a closing balance (balance carried down). Debit entries are recorded on the left side of the ledger, while credit entries are recorded on the right. It is normally Group by different accounts, which means each account has its individual ledger.
Accounts: The financial statements are made up of several accounts which in turn has sub accounts, e.g., Assets, revenue, expenses, liabilities, equity, etc.
Asset: These are items that are owned are controlled by the company and are expected to bring in future economic inflows. Assets are not just cash. We have, property, land, equipment, etc. It is categorised into two different sun accounts which are current Account and Non- current account.
Liability: This is a financial obligation, owed by an entity, from which future economic outflows are expected. It could be short term or long-term, just as asset, and it has a whole lot of different subaccounts. Examples are, account payable, overdraft, debentures, etc.
Owners’ Equity: Equally known as Sher capital. It is the total asset of the company less its liability. That is, Asset minus liability would give the total owners’ equity.
Expenses: Expenses are the costs incurred in the everyday running of the business. They’re incurred with relation to the company revenue and do not include capital items.
Cash or bank: This account includes the record of all the cash related transactions. It is popularly termed a bank, because for most businesses, all cash are eventually deposited in the bank account. A lot of people mistake cash with revenue, please know that they’re two completely different things as revenue is not always cash.
Revenue: This are income earned by a business or entity from rending goods or services. Revenue is recorded when sales are made but not necessarily when cash is paid. Also, it is the first line in an income statement.
Account Statements: These are the summaries of a business financial performance and position. There are 4 plus 1 statement which are,
- Statement of Profit or loss and other comprehensive income
- Statement of Financial position
- Statement of changes in equity
- Statement of cashflows
Plus 1: Notes to accounts
The above are just some accounting terms, believe me it barely scratches the surface, but I believe it’ll do, for now.