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2018

Ten Common Accounting Terms That You Should Know

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It goes without saying that accounting is not just about juggling complex numbers and figures and other practices that is strictly restricted to accounting and tax professionals. In fact, knowing about the basic accounting concepts and principles helps you understand your business and finances better to make necessary decisions from a financial angle.
As for business owners and entrepreneurs who don multiple hats when it comes to running their business, learning about general accounting jargons and topics would do a great deal by enabling them to proactive to plan and manage business decisions as well as to effortlessly communicate and coordinate financial practices.


It’s time to begin the year with fresher perspectives on accounting by learning 10 most common accounting terms:
1. Assets: An asset refers to both physical and intangible elements that have a financial value and are owned by the business. Assets are of two types: tangible assets like land, property, machinery and those who have seen or felt, and intangible assets like intellectual property, goodwill, patent and trademarks.

2. Liabilities: Every business or an individual have liabilities and it refers to the long-term and short-term financial obligations and commitments that should be honoured, unconditionally.

3. Capital: The most crucial aspect of a business is its capital or the amount of money invested in the working and functioning of a firm. It includes fixed capital and working capital. Fixed capital are long-term, fixed assets like land, property and equipment that can be quickly converted to cash and working capital refers to the short-term assets that can pay up current debts and liabilities. Working capital is the difference between assets and liabilities.

4. Fiscal year: It refers to the calendar year during which a business or an individual notes down financial transactions, statements and reports. The books of accounts will closed at the end of each fiscal year to compute and file taxes and prepare profit and loss reports.

5. Balance Sheet: At the end of every year, each firm prepares a balance sheet that summarizes the overall assets and liabilities to determine its financial standing.

6. Revenue: Revenue is commonly mistaken as profit when in fact, it refers to the amount from the overall income earned before deducting expenses and payments.

7. Account Receivables and Account Payable Statements: Statements for account receivables are important to note how much money a person or a business is due from customers or individuals as a payment for the sale of products or service. Account payable refers to how much money the business owes to its customers, banks or creditors.

8. Equity: Equity means the sum of money contributed to the business by each of its owners or partners. It helps assign a financial value to the ownership of the company by dividing the investment money as stocks. This would make the owners shareholder of the company. During the dissolution of a firm, the equity money will be paid back to the owners with the earnings on capital or interests accrued over the years.

9. Gross and net profit or loss: Profit and loss implies the result of financial or business transaction where the income either earned exceeds the expenses (profit) or vice versa (loss). Gross profit or loss refers to the difference between the overall revenue and sales cost. Net profit or loss is the amount remaining after deducting general and administrative expenses from the gross revenue. A report or statement on gross or net profit or loss helps determine the true financial state after paying off expenses.

10. Trial Balance: Trial balance is a statement that is prepared at the end of the financial year and contains the entire list of annual debit and credit transactions recorded in the ledger accounts.

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