20 Basic Accounting Terminology and Meaning

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20 Basic Accounting Terminology

  1. Assets: Resources owned or controlled by a business that has economic value, such as cash, accounts receivable, inventory, and property.

  2. Liabilities: Debts or obligations that a business owes to external parties, like loans, accounts payable, and accrued expenses.

  3. Equity: The residual interest in the assets of a business after deducting liabilities. It represents the ownership interest of the owners or shareholders.

  4. Income Statement: Also known as the profit and loss statement (P&L), it shows a company’s revenues, expenses, and net income (or net loss) over a specific period.

  5. Balance Sheet: A snapshot of a company’s financial position at a specific point in time, showing its assets, liabilities, and equity.

  6. Cash Flow Statement: Tracks the movement of cash into and out of a business over a specific period, categorized into operating, investing, and financing activities.

  7. Revenues: The income a company earns from selling goods, providing services, or other business activities.

  8. Expenses: The costs incurred by a company in its regular operations, such as wages, rent, utilities, and supplies.

  9. Net Income: The profit earned by a company after deducting all expenses from its revenues.

  10. Gross Profit: The difference between total revenue and the cost of goods sold (COGS).

  11. Cost of Goods Sold (COGS): The direct costs associated with producing or purchasing the goods that a company sells.

  12. Accounts Receivable: Money owed to a company by its customers for products or services sold on credit.

  13. Accounts Payable: Money owed by a company to its suppliers or creditors for goods or services received on credit.

  14. Depreciation: The systematic allocation of the cost of a long-term asset (like equipment or buildings) over its useful life.

  15. Amortization: Similar to depreciation, but applied to intangible assets like patents or copyrights.

  16. Accruals: Recognition of revenues and expenses when they are earned or incurred, even if the cash transaction hasn’t taken place yet.

  17. Prepaid Expenses: Costs paid in advance but recorded as expenses over time, like prepaid insurance.

  18. Trial Balance: A list of all the general ledger accounts and their balances to ensure they’re in balance before financial statements are prepared.

  19. Debits and Credits: The foundational concept of double-entry bookkeeping, where debits and credits are used to record transactions in accounts.

  20. Journal Entries: Records of individual transactions, often in chronological order, detailing the debits and credits associated with each transaction.

These terms provide a foundation for understanding basic accounting principles. They’re crucial for managing a business’s financial health, analyzing performance, and making informed decisions.

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