Basic Accounting Terms

1. Entity

• An entity is any business, organization, or individual for which financial records are kept separately. It could be a corporation, partnership, or sole proprietorship. In accounting, the business and its owner(s) are viewed as distinct entities to ensure objective record-keeping and reporting.

2. Business Transaction

• A business transaction is an economic event that affects the financial position of a business and can be measured in monetary terms. Examples include sales, purchases, paying salaries, and borrowing funds.

3. Capital

• Capital refers to the financial resources or assets that the owner invests in the business. It is often referred to as the owner’s equity and represents the net worth of the business. For example, if the owner invests $10,000 into their business, this amount is the capital.

4. Drawings

• Drawings are amounts withdrawn by the owner for personal use from the business. This reduces the capital and does not count as an expense. For instance, if the owner takes $1,000 from the business for personal expenses, this is recorded as drawings.

5. Liabilities

• Non-Current Liabilities: Long-term obligations, typically due beyond one year, such as long-term loans, bonds, or mortgages.
• Current Liabilities: Short-term obligations, typically due within one year, including accounts payable, short-term loans, and accrued expenses.

6. Assets

• Non-Current Assets: Long-term resources used in the operation of a business, such as buildings, machinery, and patents. They provide benefits over a prolonged period.
• Current Assets: Short-term resources that are likely to be converted into cash within a year, including cash, inventory, and accounts receivable.

7. Expenditure

• Capital Expenditure: Spending on acquiring or improving fixed assets like property, machinery, or equipment, which adds long-term value to the business.
• Revenue Expenditure: Costs incurred in day-to-day operations, such as rent, wages, or repairs, which do not add long-term value but are essential for running the business.

8. Expense

• An expense is the cost incurred in operating the business, typically to generate revenue. Examples include rent, utilities, and salaries. Unlike capital expenditure, expenses directly affect profit and loss and are recorded in the income statement.

9. Revenue

• Revenue, also known as sales or income, is the total earnings generated from normal business operations, such as the sale of goods or services. For instance, a bookstore’s revenue is the money received from selling books.

10. Income

• Income is the profit made by the business after subtracting expenses from revenue. In other words, it’s the net effect of revenues, gains, and losses on the financial statements.

11. Profit

• Profit is the positive financial gain obtained when revenue exceeds expenses. There are different types, including gross profit (revenue minus the cost of goods sold) and net profit (gross profit minus operating expenses). For example, if sales are $20,000 and expenses are $15,000, the net profit is $5,000.

12. Gain

• A gain is a positive outcome from transactions not directly related to regular business activities, like selling an asset for more than its book value.

13. Loss

• A loss occurs when expenses exceed revenues, or from transactions that result in a negative outcome, like selling an asset for less than its book value. Losses reduce the overall equity of the business.

14. Purchase

• Purchases refer to acquiring goods or materials intended for resale. For instance, a retailer’s inventory purchases are recorded as purchases.

15. Sales

• Sales represent the total revenue generated by selling goods or services to customers. They are recorded as income in the financial statements.

16. Goods

• Goods are the products that a business buys with the intention of reselling. In a grocery store, for example, items like packaged food, beverages, and household goods are considered goods.

17. Stock

• Stock, also known as inventory, represents the goods held by a business for resale. It is classified as a current asset since it’s expected to be sold within a short period.

18. Debtor

• A debtor is an individual or business that owes money to the company, typically as a result of purchasing goods or services on credit. For instance, if a customer buys on credit, they become a debtor.

19. Creditor

• A creditor is an individual or organization to whom the business owes money, often for goods or services purchased on credit. For example, a company’s supplier becomes a creditor if goods are bought on credit.

20. Voucher

• A voucher is a supporting document that authorizes and records a transaction. Examples include receipts, invoices, and payment slips. It acts as evidence for the transaction recorded in the books.

21. Discount

• Trade Discount: A reduction in price offered by a seller at the time of sale, usually given as an incentive for bulk purchases.
• Cash Discount: A discount offered to encourage early payment. For example, a vendor might offer a 5% cash discount if payment is made within ten days.