Accounting has always been a course I dreaded since my secondary school days. Growing up, If only I had the slightest clue that I would do an MBA, I probably would have taken the course more seriously. First and foremost, in understanding accounting, I knew I had to familiarize myself with the various accounting terminologies. This came easy as most of these terms were explained during our first Corporate Financial accounting session in LBS.
A few things I learned from my first accounting session are the meaning of Accounting and some of its terminologies. Accounting is a series of steps designed to record, organize and summarize a business transaction.
Below are a few of the various basic accounting terminologies explained in simple words:
- Assets – An asset is something a business owns. Simple right? We can also say they are tangible or intangible resources owned by a company and provide economic benefits to the business. Furthermore, an asset can also be referred to as physical (cash, Land, Furniture, Office equipment) and non-physical(Goodwill) resources owned by a business.
- Liability – This is an amount a business owes. We can also refer to it as debts owed by a company used to purchase goods and services. They are divided into short-term (Current Liabilities) and long-term (Non-current Liabilities). Examples of Liabilities are loans, Mortgages, bonds, and Accrued expenses.
- Owner’s equity – This is the amount contributed by shareholders or investors in a company. It also includes the Company’s profit left for owners after all liabilities have been satisfied. Owners can invest directly in a company by exchanging cash or other assets for shares or stock. They can indirectly support the Company by allowing it to retain some of the earnings that would otherwise be paid to them.
- Contributed Capital – This is the investment by owners. Here, the owners of a business invest their assets in the Company. A good example is when the owner takes personal cash and puts it into her business bank account, or the owner takes private money and gives it to a Corporation in exchange for shares of the corporation’s stock.
- Dividends – These are rewards paid to shareholders for their investment in a company’s equity, usually from the Company’s net profits.
- Revenue – This means earning. Generally, businesses make revenue by providing services or by selling merchandise. We can further say it is the amount a company receives from its business activities which can also be referred to as Gross sales.
- Goodwill – This is the extra value paid for the acquisition of a company after subtracting the difference between the current market value of the asset less the liability. It is an intangible asset such as the Company’s brand name, broad customer base, and intellectual property.
- Inventory – These are the number of raw materials used in producing goods, the cost of goods in production (work-in-progress), and the completely processed goods owned by a company. Inventory is a company’s current asset with a high liquidity ratio.
- Investment – This Involves using part of a company’s capital or income to generate future income or value appreciation. A Company’s Investment can be purchasing shares or stock of other businesses, bonds, or real estate property.
- Plant and Equipment – This includes the cost of land (location of a factory), machinery or equipment, buildings, and trucks used in carrying out the day-to-day activities of a business; these are categorized under a company’s fixed assets. This type of tangible asset usually undergoes depreciation over its useful life span.
- Liquidity – These are current assets that can be easily converted to cash. A good example is cash at hand, cash at the bank, stock, and shares. It refers to a company’s ability to pay its debts by easily converting its assets into cash.
- A balance sheet is a financial statement that looks at a company’s assets, liabilities, and shareholder’s equity at a specific time. It summarizes what a company owns and owes, as well as the amount of money invested by the owners. The balance sheet formula is Asset = Liability + shareholder equity.
Written by Tutty Tero