Basic Terms used in Accounting

Financial Statements

There are two basic financial statements which are prepared by an enterprise:

  1. Profit & Loss Statement, and
  2. Balance Sheet.

Accounting Equation

The three components of a balance sheet can be stated in the form of following basic accounting equation

Assets = Liabilities + Capital (owners equity)
eg: Rs.50,000=Rs. 10,000+Rs.40,000

This equation tells at a glance that the resources of this enterprise total Rs. 50,000 and these assets are financed by two sources — Rs. 10,000 by the creditors(liabilities), also known as outsiders claims, and Rs.40,000 by the owner (capital), also known as owner equity.

Business Transactions

It is an economic event that relates to a business entity. It can be a purchase of goods, collection of money, payment to creditors for goods and expenses. An event to be a transaction must possess the quality of economic substance, relate to business and affect the economic results. In other words, an event must be capable of being measured in monetary terms and related to business enterprise in terms of economic consequence.


These are economic resources of an enterprise that can be usefully expressed in monetary terms. Assets are things of value used by the business in its operations.

For example, Departmental Store owns a fleet of trucks, which is used by it for delivering food stuff; the trucks, thus, provides economic benefits to the enterprise. This item will be shown of the asset side of the balance sheet of Departmental Store. Assets can be broadly classified into two types: Fixed Assets and Current Assets.

  • Fixed Assets are assets held on a long term basis, such as land, buildings, machinery, plant, furniture and fixtures. These assets are used for doing business and not for re-sale in normal course of operation.
  • Current Assets are assets held on a short term basis such as debtors (account receivable), bills receivable (notes receivable), stock (inventory), temporary investment in securities, cash and bank balances. Normally the short term refers to an accounting year.


These are the obligations or debts that the enterprise must pay in money or services at sometime in the future.

Therefore, represent creditors, claims against assets of the firms. Both small and big businesses find it necessary to borrow money at some time or the other, and to purchase goods on credit.

For example, super bazaar, purchases goods for Rs. 10,000 on credit for a month from Fast Foods Products Company on 25 December 2001. If the balance sheet of Departmental stores is prepared as at 31 December 2001, Fast Food Products Company will be shown as creditors (accounts payable) on the liabilities side of the balance sheet. If the departmental store also takes a loan for a period of three years from ABC Bank Ltd., this will be shown as a liability in the balance sheet of the Departmental Stores.

  • Long term liabilities are those that are usually payable after a period of one year, for example, a term loan from financial institution or debentures (bonds) issued by the company.
  • Short term liabilities are obligations that are payable within a period of one year, for example, creditors (accounts payable), bills payable (notes payable), cash credit overdraft from a bank for a short period.


Investment by the owners for the use in the firm is known as capital. From the accounting equation given earlier, it can easily be found that the capital is Rs.40,000. Owner’s equity is the ownership claim on total assets. It is equal to total assets minus total external liabilities: E=A-L this is also called residual interest. Owner's equity is equal to capital.


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


These are the amounts the business earns by selling it products or providing services to customers. These are called 'sales revenues'. Other items and sources of revenues common to many businesses are: sales, fees, commission, interest, dividends, royalties, rent received, etc.


These are costs incurred by a business in the process of earning revenues. Generally, expenses are measured by the cost of assets consumed or services used during an accounting period.

The usual items of expenses are: depreciation, rent, wages, salary, interest, costs of heat, light and water, telephone, etc.


Expenditure is the amount of resources consumed. Usually, it is of long term in nature. Therefore, its benefit is to be derived in future. For example: capital expenditure.


Loss is the gross decreases in the assets or gross increases in the liabilities. It is the excess of expenses over revenues. It represents reduction in owners' equity due to inability of the firm to recover the assets used in the business.

For example, a firm spends Rs. 70,000 and generates revenue of Rs. 60,000, there is a loss of Rs. 10,000 which represents non-recovery of assets consumed in doing business.


Income is the increase in the net worth of the organization either from business activity or other activities. Income is a comprehensive term, which includes profit also. In accounting income is the positive change in the wealth of the firm over a period of time.


Profit is the excess of revenues over expenses during an accounting year. It increases the owner’s equity.


Gain is the change in the equity (net worth) arising from change in the form and place of goods and holding of assets over a period of time whether realized or unrealized. It may either be of capital nature or revenue nature or both.


It is the amount of cash or other assets withdrawn by the owner for his personal use.


Purchases are total amounts of goods procured by a business on credit and for cash, for use or sale. In a trading concern, purchases are made of merchandise for resale with or without processing. In a manufacturing concern, raw materials are purchased, processed further into finished goods and then sold. Purchases may be cash purchases or credit purchases.


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

In a trading concern, the stock on hand is the amount of goods which have not been sold on the date on which the balance sheet is prepared. This is also called closing stock (ending inventory). In a manufacturing company, closing stock comprises raw materials, semi-finished goods and finished goods on hand on the closing date.

Similarly, opening stock (beginning inventory) is the amount of stock at the beginning of the accounting year.

Debtors/Accounts Receivable

Debtors (accounts receivable) are persons and/or other entities who owe to an enterprise an amount for receiving goods and services on the credit. The total amount due from such persons and/or entities on the closing date is shown in the balance sheet as the sundry debtors (account receivables) on the asset side.

Creditors/Accounts Payable

Creditors (accounts payable) are persons and/or other entities who have to be paid by an enterprise an amount for providing the enterprise goods and/ or services on credit. The total amount standing due to such persons and/or entities on the closing date is shown on the balance sheet as sundry creditors (accounts payable) on the liability side.

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Comments 39 comments

akki 5 years ago

it helps to make a good command in account....i m thankful to provide the basic terminology

cheerfulnuts profile image

cheerfulnuts 5 years ago from Manila, Philippines

Well-written hub. Easy to understand for laymen like me. =D

forlan profile image

forlan 5 years ago

What is drawings?

dilipchandra12 profile image

dilipchandra12 5 years ago from India Author

@ forlan

While preparing financial statements, entity/company is treated as a person. The owner of the entity too, treated as an outsider.

Amount of cash or other assets withdrawn from the entity/ company by the owner for his personal use are considered as drawings.

Kamdar Sonali 5 years ago

Nice one............perfect for students to understand it thoroughly

bloch 4 years ago

these terms provide an essential knowledge to a student but a beginner who doesn't know anything abot accounting this vocabulary is somewhat difficult and some basic terminologies are also missing like discount, drawings etc. It's my suggestion. Plz think about it. but i'm satisfied

kamal rajput 4 years ago

what is finance

dilipchandra12 profile image

dilipchandra12 4 years ago from India Author

@ kamal rajput, Finance is the management of large amounts of money, esp. by governments or large companies. Also, it is provide funding for a person or enterprise.

reji 4 years ago

what is dividend?

Shatabdi Das 4 years ago

thanks for the guidance.

mandeep kaur 4 years ago

hey its a can i download these terms

saidy 4 years ago

helpful for all us

ChocoRag 4 years ago

What is a Issued debit note, and Issued credit note? Explain about received too. Thanks.

tazeem moazam 4 years ago

how share holders are debtors of company

tajamul 4 years ago

i am doing right now i would have love to learn it before five years this is such a great platform for freshers. thanks

sam 4 years ago

..hey its great!!!

kate 4 years ago

this explanation was understandable :P

Pankaj 4 years ago

What is bank Reconciliation

Jayshree Patil 4 years ago

It is very useful

B. MalReddy 4 years ago

we need simple definition for all accounting terms and concepts, Pls send the soft copy to my mail sir, Mail ID:

laksh 3 years ago

what is firm under writing or what is importance for firm underwriters!!!!

dilipchandra12 profile image

dilipchandra12 3 years ago from India Author

An underwriting firm is also called a house of issue. They are hired by the issuer (Company issuing new shares) to place a new issue with investors.

Their importance: Underwriters guarantee the price for a certain number of shares of the new issue. Underwriters often increases the chance that the placement will be successful with their experience on placing securities with investors.

rakesh 3 years ago

thank u guys.............

Rajeeb Chakrabarty 3 years ago

directly come over the topic

Shir-lene 3 years ago

Can anyone tell me which of these is owner equity accounts receivable cash at bank drawings and land

Rak... 3 years ago

owner equity is capital.. it comes under liability and accounts receivable, cash at bank it all comes under current asset

mankatha madhan 3 years ago

its really usefull..................................

bose 3 years ago


charu 3 years ago

what is event

SONU KUMAR JHA 3 years ago

Any or all activities in which we are doing in our day to day life.

E.g., Singing, Eating , Buying, Selling, Sleeping etc.

happa 3 years ago


grenp 3 years ago

Is there any terminology for mid term capital investment? For example: Owners/investors investing their personal money into the company accounts to meet expenses during period of loss?

dilipchandra12 profile image

dilipchandra12 3 years ago from India Author

@ grenp - The term is Capital infusion.

grenp 3 years ago

Thanks @dilipchandra12

csmiravite-blogs profile image

csmiravite-blogs 2 years ago from Philippines

Nice hub about accounting terms and terminologies. It comes as easy reading for non-accountants! Nice hub!

manju s k 2 years ago

Its good and understandable

fulmati hessa 2 years ago

I have learnd many terminologies from this..Its good and useful..

hawa 21 months ago

What is error of account

amar singh 21 months ago


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