20 Basic Accounting Terminology
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Assets: Resources owned or controlled by a business that has economic value, such as cash, accounts receivable, inventory, and property.
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Liabilities: Debts or obligations that a business owes to external parties, like loans, accounts payable, and accrued expenses.
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Equity: The residual interest in the assets of a business after deducting liabilities. It represents the ownership interest of the owners or shareholders.
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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.
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Balance Sheet: A snapshot of a company’s financial position at a specific point in time, showing its assets, liabilities, and equity.
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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.
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Revenues: The income a company earns from selling goods, providing services, or other business activities.
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Expenses: The costs incurred by a company in its regular operations, such as wages, rent, utilities, and supplies.
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Net Income: The profit earned by a company after deducting all expenses from its revenues.
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Gross Profit: The difference between total revenue and the cost of goods sold (COGS).
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Cost of Goods Sold (COGS): The direct costs associated with producing or purchasing the goods that a company sells.
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Accounts Receivable: Money owed to a company by its customers for products or services sold on credit.
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Accounts Payable: Money owed by a company to its suppliers or creditors for goods or services received on credit.
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Depreciation: The systematic allocation of the cost of a long-term asset (like equipment or buildings) over its useful life.
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Amortization: Similar to depreciation, but applied to intangible assets like patents or copyrights.
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Accruals: Recognition of revenues and expenses when they are earned or incurred, even if the cash transaction hasn’t taken place yet.
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Prepaid Expenses: Costs paid in advance but recorded as expenses over time, like prepaid insurance.
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Trial Balance: A list of all the general ledger accounts and their balances to ensure they’re in balance before financial statements are prepared.
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Debits and Credits: The foundational concept of double-entry bookkeeping, where debits and credits are used to record transactions in accounts.
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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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