Basic accounting terminologies

1.Business Entity

The entity is anything that has a definite individual existence. A business entity is a recognized enterprise controlled by people ar agencies. For example, Walmart, big Bazar, ITC Limited, etc.


2. Transaction

It’s a significant business event that has a monetary impact on an entity's financial statement, and it is recorded as an entry in its accounting records. For example, paying a supplier for services or goods delivered and paying a seller some cash, purchase of goods, receipt of money, incurring expenses, etc.


3. Assets

An asset is a resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide a future benefit.  For example, Machinery, plants, a fleet of trucks. These items will be shown on the asset side of the balance sheet. Different types of assets are 

1. Fixed Assets are assets that are held on a long-term basis (more than 1 year period) such as land, buildings, machinery, plant, furniture, and fixtures. In general, these are capital assets used for the normal operations of the business

2. Current Assets are assets held on a short-term basis(less than 1 year period) such as debtors (accounts receivable), bills receivable (notes receivable), stock (inventory), temporary marketable securities, cash, and bank balances.

3. Tangible Assets are physically present for example, car, furniture, building, etc.

4. Intangible Assets are those with no physical existence, but they count to a company, for example, goodwill, patents, trademark, etc.

5. Liquid Assets- A readily available and easily convertible or already converted asset into cash. Liquid cash or equivalent is regarded as liquid assets.

6. Fictitious Assets- these are created by an accounting entry to include them under the assets column in a balance sheet. They don’t carry a tangible existence but represents actual cash expenditure. It is healthy if the fictitious assets are written off as soon as possible against the firm's earnings.


4. Liabilities

Liability is an obligation or debt that an organization must pay either in the near future or in the long-term. Since it necessary to borrow money at some point in time to expand the business, purchase goods and services on credit, liability is a common affaIr in any company.For example, for a real estate company, 10 tons of steel have been purchased on Aril 1st at the rate of 50 rupees then the total credit needs to be entered in the credit Colum at 5,00000 Rupees. Liabilities are classified as long-term liabilities and short-term liabilities. When any obligations are payable after a period of one year then these are called long-term liabilities. If the liabilities or obligations that are payable within a period of one year then these are short-term liabilities. For example, creditors, bills payable, bank overdraft.


5. Capital

An initial investment, funding for an enterprise by the owner is known as capital. It may be in the form of cash or assets by the owner. It is shown as capital on the liabilities side of the balance sheet as it is not an earning but its an expense from his own pocket.


6. Sales

Sales are the total revenues from goods or services sold or provided to customers. Sales may be cash sales or credit sales.


7. Revenues

Revenue is the term used to express the sales figure but not the actual income. The business-related earnings by selling its products or services to customers are called sales revenue. Other items of revenue are used when the earning takes place due to commission, interest, dividends, royalties, rent received, etc.


8. Expenses

These are costs incurred by a business in the process of earning revenue and achieve sales. The expenses can be depreciation, transportation, sales costs, rent, wages, salaries, telephone, etc.



Spending money in expectation to earn future income or earning an income at present is an expenditure. These can be rent, salary, purchase of goods, purchase of machinery, purchase of furniture, etc.


10. Profit

It is usually calculated every quarter. Profit is when there are excess of revenues of a period over its related expenses of that period (month, quarter, year)


11. Gain

A profit that arises from events or transactions which are incidental to the business. Some of the profits can come from other than the primary operations, for example, selling a fixed asset, winning a court case might give an appreciation in the value of an asset and such profits are called incidental. 


12.  Loss

The excess of expenses of a period over its related revenues is termed as a loss. It decreases the owner’s overall equity. It also refers to the loss of money or money’s worth  (or cost incurred) without receiving any benefit in return, e.g., cash or goods lost by theft or a fire accident, etc. 


13. Discount

A discount can be a cash discount or a trade discount. When discount is given by the seller to the buyer as a deduction in the listed price of the commodity then it is called trade discount, for example, selling a unit at 20 rupees instead of 30 rupees (original price). A deduction made on the amount of invoice allowed by the seller in return for immediate payment is cash discount.


14.  Voucher

Its evidence (electronic or paper) in support of a transaction is known as a voucher. For example, cash memos,   and invoices.


15.  Goods

What a company is producing for the purpose of selling.It won’t include the items that are purchased for use in the business. For example,  a furniture dealer purchases the chairs and tables to make a business then it is termed as goods, while for the common man who doesn't intend to sell it for profit then it is furniture.


16.  Drawings

Withdrawal of funds or goods by the owner from the business account for his/her personal use is known as drawings. Drawings reduces the investment of the owners.


17. Purchases

Amount of goods procured by a business on credit or on cash for the purpose of use or sale. Purchase can be for trading or manufacturing purpose. For trading purposes, purchases are made for resealing. For manufacturing, raw materials are purchased, processed further into finished goods and then sold. Purchases may be cash purchases or credit purchases.


18. Stock or inventory

Stock (inventory) is a measure of something on hand-goods, spares and other items in a business. It is called Stock in hand.


19. Debtors

A person, country, or organization that owes money expecting a rate of interest from the borrower after a period of time.


20. Creditors

Creditors are persons or organizations that need to be paid by another enterprise an amount for providing the enterprise goods and services on credit. The total amount standing to the favour of such persons and/or entities on the closing date are shown in the Balance Sheet as sundry creditors on the liabilities side.