Part-1.
These terms are fundamental for
understanding accounting processes and
financial statements
Compiled by
P.Mani Sankar, Auditor.
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1. **Assets**
- Resources owned by a company that are expected to bring future economic benefits. They can be
classified as current (e.g., cash, inventory) or non-current (e.g., property, equipment).
2. **Liabilities**
- Obligations a company owes to outside parties. Liabilities can be current (due within a year, like
accounts payable) or long-term (due after a year, like long-term loans).
### 3. **Equity**
- Also known as shareholder's equity or owner's equity, it represents the residual interest in the assets
of a company after deducting liabilities. It includes capital contributed by owners and retained earnings.
4. **Revenue**
- The total income generated by a company from its normal business operations, usually from the sale
of goods or services.
### 5. **Expenses**
- Costs incurred by a business in its effort to generate revenue. These can include wages, rent, utilities,
and materials.
6. **Net Income**
- Also known as profit, net income is the difference between total revenue and total expenses. A
positive figure indicates profit, while a negative figure indicates a loss.
7. **Gross Profit**
- The difference between sales revenue and the cost of goods sold (COGS). It shows how efficiently a
company is producing or selling goods.
8. **Balance Sheet**
- A financial statement that shows a company's assets, liabilities, and equity at a specific point in time.
It follows the accounting equation:
**Assets = Liabilities + Equity**.
9. **Income Statement**
- Also known as the profit and loss (P&L) statement, it summarizes revenues, costs, and expenses over
a period of time, showing the company’s financial performance.
10. **Cash Flow Statement**
- A statement that shows how changes in the balance sheet and income statement affect cash and
cash equivalents. It breaks down cash flows from operating, investing, and financing activities.
11. **Depreciation**
- The process of allocating the cost of a tangible asset over its useful life. This represents how much of
an asset's value has been used up over time.
12. **Amortization**
- Similar to depreciation but applied to intangible assets (e.g., patents, trademarks). It represents the
gradual write-off of the asset's cost over its useful life.
13. **Accrual Basis Accounting**
- A method of accounting that recognizes revenues and expenses when they are earned or incurred,
regardless of when cash is received or paid.
14. **Accounts Receivable**
- Money owed to a company by customers for goods or services delivered but not yet paid for.
15. **Accounts Payable**
- Money a company owes to suppliers or vendors for goods and services received but not yet paid for.
16. **Inventory**
- Goods or materials a company holds for the purpose of resale or production.
17. **Cost of Goods Sold (COGS)**
- The direct costs attributable to the production of the goods sold by a company. This includes
materials and labor but excludes indirect expenses like marketing and shipping.
18. **Working Capital**
- A measure of a company's liquidity, operational efficiency, and short-term financial health. It's
calculated as:
**Working Capital = Current Assets - Current Liabilities**.
19. **Trial Balance**
- A report listing all the accounts in the general ledger and their balances at a given time. It is used to
ensure that debits and credits are balanced.
20. **General Ledger**
- The master set of accounts that summarize all transactions occurring within a business. Each account
has its own ledger.
21. **Journal Entry**
- A record of a business transaction in the accounting system, showing the accounts affected and
whether the amounts are debits or credits.
22. **Double-Entry Accounting**
- A system of accounting in which every transaction affects at least two accounts and maintains the
balance between debits and credits.
23. **Dividends**
- Payments made to shareholders from a company's profits. They are usually paid in cash but can also
be in the form of additional shares.
24. **Retained Earnings**
- The portion of net income that is retained in the business rather than distributed to shareholders as
dividends.
25. **Fixed Assets**
- Long-term tangible assets like property, plant, and equipment that a company uses in its operations
to generate income.
26. **Current Assets**
- Assets that are expected to be converted to cash or used up within one year, such as cash, accounts
receivable, and inventory.
27. **Liquidity**
- A measure of how quickly an asset can be converted into cash without significantly affecting its value.
28. **Capital Expenditure (CapEx)**
- Funds used by a company to acquire or upgrade physical assets such as buildings, machinery, or
technology.
29. **Return on Investment (ROI)**
- A performance measure used to evaluate the efficiency of an investment, calculated as:
**ROI = (Net Profit / Investment Cost) × 100**.
30. **Break-Even Point**
- The point at which total revenue equals total costs, meaning a company is not making a profit or loss.
