Basic Accounting Terminology for Beginners
Accounting
The process of recording, classifying, and summarizing financial transactions to provide useful
information.
Example: Keeping records of sales and expenses in Tally Prime.
Asset
Resources owned by a business with economic value.
Types:
- Current Asset: Converted to cash within a year (e.g., cash, inventory).
- Fixed Asset (Non-Current): Used longer than a year (e.g., building, machinery).
- Tangible Asset: Physical assets (e.g., land, computers).
- Intangible Asset: Non-physical assets (e.g., patents, trademarks).
Example: Cash (current), office building (fixed), trademark (intangible).
Liability
Debts or obligations owed by a business.
Types:
- Current Liability: Payable within one year (e.g., accounts payable).
- Non-Current Liability: Payable after more than a year (e.g., long-term loan).
Example: Electricity bill (current), mortgage loan (non-current).
Capital
Money or assets invested by the owners into the business.
Types:
- Owner’s Capital: Investment by the owner.
- Borrowed Capital: Loans or credit from others.
Example: Owner invests ■1,00,000 as capital.
Purchase
Buying goods or services for business use or resale.
Types:
- Cash Purchase: Paid immediately.
- Credit Purchase: Payment deferred.
Example: Buying raw materials on credit.
Purchase Return
Returning goods previously purchased due to defects or excess quantity.
Example: Returning damaged goods to a supplier.
Sale
Selling goods or services.
Types:
- Cash Sale: Immediate payment received.
- Credit Sale: Payment received later.
Example: Selling stationery for cash or credit.
Sales Return
Receiving back goods sold due to damage or defects.
Example: Customer returning defective goods.
Expense
Cost incurred to earn income.
Types:
- Direct Expense: Directly related to production (e.g., raw materials).
- Indirect Expense: Not directly related to production (e.g., rent).
- Fixed Expense: Remains constant (e.g., rent).
- Variable Expense: Changes with business volume (e.g., packaging).
Example: Wood used in furniture (direct); office salary (indirect).
Revenue / Income
Money earned from selling goods or services.
Types:
- Operating Revenue: From main activities.
- Non-Operating Revenue: From other sources, e.g., interest.
Example: Sale of product; interest earned in bank.
Ledger
A record of all accounts and transactions.
Example: Cash ledger shows all cash transactions.
Balance Sheet
A financial statement showing assets, liabilities, and equity at a point in time.
Example: Shows business financial position on March 31.
Profit & Loss Account
A report summarizing revenues, expenses and profits or losses over a period.
Example: Reports net profit for a quarter.
Cash Flow
Movement of money into and out of a business.
Example: Cash received from customers minus cash spent on bills.
Stock (Goods)
Goods available for sale.
Example: Inventory of pens in a stationery shop.
Business
An organization selling goods or services to earn profit.
Example: Grocery shop selling food items.
