A Guide to Understanding Common Accounting Terms

Accounting is a complex field that requires a deep understanding of the language used to describe financial transactions. Without a basic understanding of the terms used in accounting, it can be difficult to make sense of financial statements and other documents. This guide provides an overview of some of the most common accounting terms and their definitions.

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Accounts Payable

Accounts payable is the amount of money a company owes to its suppliers and creditors. This amount is usually recorded in the company’s balance sheet and is typically due within a certain period of time. Accounts payable is also referred to as “trade payables” or “trade creditors.”

Accounts Receivable

Accounts receivable is the amount of money a company is owed by its customers. This amount is usually recorded in the company’s balance sheet and is typically due within a certain period of time. Accounts receivable is also referred to as “trade receivables” or “trade debtors.”

Accrual Basis of Accounting

The accrual basis of accounting is a method of accounting that records transactions when they occur, rather than when cash is exchanged. This method is used to ensure that all transactions are recorded in the correct period.

Asset

An asset is an item of value owned by a company. Assets can include cash, inventory, buildings, equipment, and investments. Assets are recorded on the company’s balance sheet and are used to generate income.

Balance Sheet

A balance sheet is a financial statement that shows a company’s assets, liabilities, and equity at a specific point in time. The balance sheet is used to assess the financial health of a company.

Cash Flow

Cash flow is the movement of money into and out of a company. Cash flow can be positive or negative, depending on the amount of money coming in and going out. Positive cash flow indicates that a company is generating more money than it is spending.

Debit

A debit is an accounting entry that increases an asset or expense account and decreases a liability or equity account. Debits are recorded on the left side of a ledger.

Credit

A credit is an accounting entry that increases a liability or equity account and decreases an asset or expense account. Credits are recorded on the right side of a ledger.

Depreciation

Depreciation is an accounting method used to spread the cost of an asset over its useful life. Depreciation is used to reduce the value of an asset on the company’s balance sheet.

Equity

Equity is the amount of money that a company has after subtracting its liabilities from its assets. Equity is also referred to as “owner’s equity” or “shareholder’s equity.”

Income Statement

An income statement is a financial statement that shows a company’s revenues, expenses, and net income over a period of time. The income statement is used to assess the financial performance of a company.

Liability

A liability is an amount of money that a company owes to its creditors. Liabilities are recorded on the company’s balance sheet and are typically due within a certain period of time.

Revenue

Revenue is the amount of money a company earns from its operations. Revenue is recorded on the company’s income statement and is used to calculate the company’s net income.

FAQs

What is the difference between accounts payable and accounts receivable?

Accounts payable is the amount of money a company owes to its suppliers and creditors. Accounts receivable is the amount of money a company is owed by its customers.

What is the accrual basis of accounting?

The accrual basis of accounting is a method of accounting that records transactions when they occur, rather than when cash is exchanged. This method is used to ensure that all transactions are recorded in the correct period.

What is an asset?

An asset is an item of value owned by a company. Assets can include cash, inventory, buildings, equipment, and investments. Assets are recorded on the company’s balance sheet and are used to generate income.

What is a balance sheet?

A balance sheet is a financial statement that shows a company’s assets, liabilities, and equity at a specific point in time. The balance sheet is used to assess the financial health of a company.
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