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To understand the basic accounting concept in 2023, you must be familiar with the fundamental accounting terms. You will learn nearly all of the fundamental definitions required when studying accounts from Academy Tax4wealth. Learn more!<br>For more info, visit us at:-<br>https://academy.tax4wealth.com/blog/basic-accounting-terms <br>t<br>
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Tounderstandthebasicaccountingtermsin2023,youmustbefamiliarwith thefundamentalaccountingterms.Youwilllearnnearlyallofthefundamental definitionsrequiredwhenstudyingaccountsfromAcademyTax4wealth. Doyouknowwhatfactorsinvestorsconsidermostimportantwhenmakinga companyinvestment?Theyarethe‘account”.Accountingprovidesinterested partieswithpertinentandnecessaryeconomicdata. Here,we’vecoveredkeyideasandfundamentalaccountingphrasesthatare necessarytofullycomprehendaccounting.Let’sbegindiscussingthedefinitionof accounting. Accounting: Identification,measurement,andcommunicationofeconomicdataareallaspects ofaccountingthathelpusersmakewisedecisions. Let'snowreviewsomefundamentalaccountingterms. AccountingPeriod: Theperiodcoveredbyanoperationorfinancialstatementisknownasan accountingperiod.Calendaryears,fiscalyears,andthree-monthcalendar quartersaretypicalaccountingtimescales. Somebusinessesalsoemploymonthly timeframes.Oneaccountingcycleiscoveredbyoneaccountingquarter.An accountingcycleisaneight-stepprocessusedbyaccountantstomonitor transactionsoveraspecificperiod. Assets: Assetsarethefinancialresourcesthatacompanypossessesormanages.Itcanbe dividedintotwocategoriesaccordingtoduration:currentassetsandfixedassets. Thecompany'sshort-termresourcesareitscurrentassets.Theyareexpectedto betransformedintocashorcashequivalents,accountreceivables,inventories, otherpre-paidexpenses,etc.withinoneyear.
Fixedassets,oftenknownasnon-currentassets,includethingslikemachinery, plants,land,buildings,etc. • 3.Liabilities: • Liabilitiesarethesumofacompany'sdebtstoothers.Liabilitiesincludethings likedebtinstruments(bonds),unreimbursedexpenses,loans,andcreditors.They canbeclassifiedascurrentornon-current,andarethenarrangedintobalance sheetsandotheraccountsbasedontheircategorization. • Asan illustration,apresentliabilitymustbesettledwithinayear. • A15-yearmortgageisanexample ofa non-currentliabilityforacompany. • AccountPayable: • RefertoAccountsPayablewhenabusinessacquiresproductsoncreditthatmust bepaidforquickly.Itfallsunderthehead'scurrentobligationsbecauseitisa liability.Ashort-termdebtpaymentcalledaccountspayablemustbemade tostayingoodstanding. • AccountReceivable: • Accountsreceivablereferstothefundsthatacompanywillreceivefrom customerswhoutilisedcredittopurchaseitsgoodsandservices(AR).In exceptionalcircumstances,theloanperiodisfrequentlyshort,lastingonlyafew daystomanymonthsorevenafullyear. • Capital: • Capitalisthesumthatthebusinessownerhascontributedtoitincash,kind,or anyotherasset.Anothernameforitisownerequity.Whenownersinvestinor withdrawmoneyorotherassetsfromthecompany,aswellaswhenthecompany makesmoneyfromproductiveoperationsorlosesmoneyfromunprofitableones, thereisachangeincapital,alsoknownasowners'equity.
BalanceSheet: Abalancesheetisatypeoffinancialstatementthatshowstheassetsand liabilitiesofafirmasofaspecificdate.Itresemblesasnapshotofacompany's liabilitiesandassets,alongwithanyloansorequitythecompanymighthave. Differentbalancesheetformats,suchasclassified,commonsize,comparative, andverticalbalancesheets,areavailabletoaccountants.Eachformatpresents dataasalistoflineitemsthat,whenaddedtogether,showthefinancialhealthof theorganization. Debit(Dr): Adebitisanaccountingentrythatshowseitherariseinassetsorafallin liabilitiesonacompany'sbalancesheetorinotheraccounts. Credit(Cr): Anaccountingentrythatcouldchangethebalancesheetofthecorporationby increasingliabilitiesandequityordecreasingassets,dependingonthe transaction. WorkingCapital: Themoneyyouhaveonhandtomeetyoururgent,short-termneedsisknownas workingcapital.Ifyouwanttomakesureyourworkingcapitalisworkingforyou, figureoutyourcurrentlevels,forecastyourfutureneeds,andconsidertechniques toalwayshaveenoughcashonhand. CurrentAssets-CurrentLiabilities=WorkingCapital. Retainedincome Retainedearningsareacompany'sprofitsthatremainafterallofitscostsfora certainaccountingperiodhavebeenpaid(orsurplusearnings).Itincludesall
out-of-pocketexpenses,bothdirectandindirect,suchastaxesowed,dividends paid,andsolditems.Whenretainedearnings(RE)arepositive,thecompany's equityincreases.Toencouragepotentialfuturegrowth,thecorporationmight reinvesttheseshares. Accruals/Receipts: Revenuesandexpensesthatabusinessrecognizesbutstillneedstoreportinits financialaccountsareknownasaccruals(ACCR).Throughdefinition,accruals happenbeforethetransactioniscompletedbycurrencyexchange. Imaginethatacompanyhiredaconsultantfromoutsidethecompanyandadded thefeetoitsaccruals.Whetherorwhethertheconsultantsentaninvoicetothe business,theywouldstillrecordthischarge.Acoupleofinstancesofaccrualtypes areaccountspayableandreceivable.Othersconsistofaccruedandaccrued expenses,whichareincurredforacertainaccountingperiodbutnotyetpaid. IncomeStatement: Theincomestatement,alsoknownastheincomeandexpenditureorprofitand lossaccount,showsthecompany'srevenues,costs,andprofitforaspecific accountingyear.Itprovidesadetailedoverviewofabusiness'sprofitability throughoutthatparticularaccountingyear. Revenueminusexpensesequal profitorloss. Costof GoodsSold: Thephrase"costofgoodssold"(COGS)referstoalloutlaysacompanyincurs whencreatingaproductorprovidingaservice.Thethreecosttypesassociated withproductsarematerials,labor,andoverhead.Servicescomewithapricetag thatincludesemployeecompensationaswellasequipmentandsupplies. Accountantsoccasionallyusethealternativeterm"costofsales."Thebasic
formula usedbyaccountantstocalculateCOGSthroughoutacertainaccounting periodisasfollows:Purchasesplusinitialinventorylessendinginventory. • Generally Accepted AccountingPrinciples(GAAP): • AGAAPisasetofrulesandrecommendationsdevelopedbytheaccounting industryforcompaniestofollowwhenreportingfinancialdata.Allcompanies withpubliclytradedstockarerequiredtofollowtheserules. • Depreciation: • Depreciationisthegraduallossinvalueofacompany'sequipmentandother assetsovertimeasaresultof useorobsolescence. • InIndia,therearetypicallythreedepreciationmethodsused. • Straight-lineapproach • Thediminishingvalueapproaches • Productionunitmethod • IncomeStatement(ProfitandLoss): • Theincomestatementisatypeoffinancialstatementthatshowstherevenues, expenses,andearningsforaparticularperiod(sometimesknownasaprofitand lossorP&L).Therevenuecollectedisshownatthetopofthereport,andvarious expensesaresubtractedfromit untilallcostsareincluded;theresultisnet income. • CashFlowStatement: • Theentryandoutflowofcashwithinacompanyarereferredtoas"cashflow."By deductingtheBeginningCashBalancefromtheEndingCashBalance,onecan determinetheNetCashFlowforagivenperiod.Apositivenumberindicatesthat moremoneyenteredthebusinessthanleftit,whilstanegativenumberindicates theopposite.
DualAspectConcept: Everytransactionoroccurrence,accordingtothis,hastwosides.Atransaction hassuchaneffectthattheaccountingequation: AssetsalwaysequalLiabilitiesplusOwners'Capital. EntityConcept: Asaconcept,itseparatesthecommercialaffairsoftheownersfromtheirpersonal affairs.Itspecifiesthatthecompanyanditsowneraretwodistinctentities. Conclusiontax Tounderstandbasicaccountingtermsin2023,youmustbefamiliarwithbasic accountingterminology.Wehavecoveredpracticallyeverybasicdefinitionand meaningthatabeginnerinterestedinaccountingshouldbeawareof.Forjob guaranteedcoursesinaccountingyoucanalsovisittheAcademyTax4wealth website.
