Basic Accounting Terms To Study

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Basic Accounting Terms To Study

In accounting there are various terms that are widely used. Basic Accounting Equation which is Assets = Liabilities + Capital forms the crux of Accounting. This means that the total resources of the organization i.e Assets if formed from two components – 1. Liabilities which is financed by the outsiders known as the creditors 2. and the  Capital which is the owner’s own fund.

Assets are the things of value that are used for the business operations. For example in a boutique there are various sewing machines which is used that provides economic benefit to the enterprise. Assets can broadly be divided into two – Fixed Assets and Current Assets. Fixed are the ones that are used for long term and generally immovable. Land, building, machinery etc are the fixed assets. Current assets are the ones which are held for a short term that refers to one financial year. These assets are converted into cash in a short term. Current assets are like Debtors, Bills Receivables, Stock etc.

Liabilities are the obligations on the part of the organization which are to be paid off by way of cash or services. These can also be divided into two – Long Term Liabilities and Short Term Liabilities. Long Term Liabilities are the obligations that are to paid in a long term i.e after one year like Long term loans from Bank, Debentures etc. Short Term Liabilities are to be paid within one year like Creditors, bank overdraft etc.

Capital is the owner’s equity which is the investment that is made by the owner of the organization. Capital is equal to Assets minus the liability.

Drawings is the cash that is withdrawn by the proprietor from the cash or other assets for the personal use.

Sales are the cash earned or received in exchange of the goods sold. The sale can be either a Cash Sales (Cash received on exchange of goods) or a Credit Sales (Goods are given on credit, the cash is received after some time).

Revenues refers to the cash that is earned by selling the goods or rendering services of the organization.

Expenses are the the cost that is incurred during the and after the process of generation of revenue. These are the cost that is bared during the making of the products like rent, wages, salary, depreciation etc.

Profits are the excess of the revenue over the expenses.

Purchases are the goods bought for use for making the final product by way of cash or credit. It is used as raw material for making the finished goods.

Stock is the inventory in hand that is converted in cash in short term. This stock can be in the form of WIP or finished goods also.

Debtors are the current assets of the organization which are converted into cash in a short term. These are the account receivables who owe to pay the organization for the goods purchased by them on credit. And Creditors are the short term liabilities of the organization which are to be paid. The organization is bound to pay to the account payable for the goods purchased from them on credit.

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