BASIC TERMS OF ACCPOUNTING

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 BASIC TERMS OF ACCPOUNTING


1. Asset: An asset is something that belongs to a business and has economic value. It represents future economic benefit which the organization can, at some point in time, convert into cash. There are two basic kinds of assets:

2. Current Assets: These are assets that can be easily converted to cash within one year. Examples include cash, accounts receivable-this is money customers owe a business-inventory, and short-term investments.
3. Non-Current Assets: These are assets not expected to realize cash within one year; they are used for the long-term operation of a business. Examples include property, buildings, equipment, vehicles, and intangible assets like patents or trademarks.


4. Liability: A liability is an obligation of the business to some other entity. It is a future outlay of resources, usually cash, which the company is bound to pay. Liabilities can also be classified into categories like what happens in the case of assets:

5. Current Liabilities: These are obligations to be discharged or paid off within one year. Examples include accounts payable, salaries payable, and accrued expenses.

6. Non-Current Liabilities: Long-term liabilities are not due within one year. Examples include mortgages and long-term loans and bonds.

7. Equity: Equity, commonly known as owner's equity, is essentially an ownership interest in the assets of the business. It could be simply titled the net worth of the business—Assets less Liabilities.  Equity is representative of a owner's investment in the company and the profits retained over time.

8. Revenue:  Revenue refers to the business income received from sales of products or providing services. It is always situated at the top portion of an income statement and portrays the total amount of cash earned within a certain period of time. Revenue can be categorically classified in many ways, for instance, by product line, customer segment, and geographical basis.

9. Expense: An expense refers to what it costs a business to operate. It is what the business uses up or gives up to generate its revenue. The expenses are subtracted from the revenue on the income statement to arrive at net income, profit, or net loss. Examples of common expenses include, among others, salaries, rent, utilities, advertising, supplies, and depreciation.

10. Balance Sheet: This is a basic financial statement that gives the financial position of an organization as of some particular point in time. It follows the basic equation in accounting: Assets = Liabilities + Equity. A balance sheet presents what a business owns, what it owes, and the owner's investment—all in one read.

11. Income Statement: This is a statement summarizing the profit and loss of a firm over some period, usually a month, quarter, or year. It states all revenues which a business has incurred and expenses it has incurred, net income, and net loss. One should be able to go through the income statement to understand how efficiently a business generates profits.

12. Accounts Payable (AP): Accounts payable is a current liability account that represents money a business owes to various suppliers for obtaining goods or services on credit.  At the time of purchasing goods or services on credit, a business records the purchased amount in the accounts payable account. Afterwards, it will be obligatory to pay the amount by the firm to the supplier within the agreed terms of payment.

13. Accounts Receivable: It is a form of current asset account that keeps the money that customers owe to the firm for goods or services bought on credit. In other words, it is money owed by customers who do not pay. It may mean doom for a company's cash flow if the accounts receivable balance is on the high side, meaning collection is slow.

14. Debits & Credits: Debits and credits are the lifeblood of double-entry accounting. A financial transaction will always affect two accounts, and the total of the debits must equal the total of the credits in order for books to balance.

  • Debit: A Debit Exchange increases asset accounts and expense accounts. It decreases liability accounts and equity accounts. Think about "debiting" an account like adding to that account, in the case of assets and expenses, or taking away from that account, in the case of liabilities and equity.
  • Credit: A credit increases liability and equity accounts but reduces asset and expense accounts. Think of "crediting" an account as adding to it—in the case of liabilities and equity—while subtracting from it in the case of assets and expenses.

15. Debtor: The debtor is the party who receives money or goods from another party (creditor) with the promise to repay it later, often with interest. In simpler terms, the debtor borrows money or buys something on credit and owes money to the creditor. Examples of debtors include individuals who take out loans, businesses that purchase goods from suppliers on credit, or governments that issue bonds.
16.Creditor: The creditor is the party who provides money or goods to another party (debtor) on credit, expecting repayment in the future, often with interest earned. The creditor is essentially lending money or selling goods on credit. Examples of creditors include banks, suppliers, and individuals who loan money.

17. Discount:

A discount can have different meanings depending on the context of the debtor-creditor relationship. Here are two common ways discounts are used:

  • Cash Discount: A cash discount is a financial incentive offered by a creditor to a debtor to encourage prompt payment of an outstanding invoice. It's essentially a reduction in the amount owed if the debtor pays within a specific timeframe, often shortly after the purchase (e.g., "2% discount if paid within 10 days"). This motivates debtors to settle their bills quickly, improving the creditor's cash flow.

  • Settlement Discount: A settlement discount is a reduction in the total amount owed by a debtor to a creditor, usually in situations where there's a dispute or the debtor is unable to repay the full amount. This could happen if a customer is unhappy with a product and negotiates a discount, or if a business is struggling financially and needs to restructure debt with creditors

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