Accounting Terms, Principles, and Concepts
Prior to actually beginning work as an accountant, there is generally exposure to accounting terminology and concepts; whether in the form of classroom instruction or as an intern with on-the-job training. However, rather than risk the possibility of an individual beginning work as a bookkeeper, or an accounting intern, without the necessary understanding of basic terms and concepts, we will provide a brief overview.
When you get past the automatic block that many individuals put up upon hearing the word “accounting”, the basic concepts and terms are quite easily grasped. (I personally believe the terms used in learning to calculate baseball statistics is more complicated than accounting terminology).
Debits and Credits
Every single transaction recorded in the accounting process falls into one of two categories: it is either a debit or a credit. We could use the official definitions here, but I prefer to keep absorption levels (and interest) high, so we are going to use very simple definitions and examples. A debit is a transaction of value “added” to an account. A credit is a transaction of value “removed” from an account. Debit, value is added. Credit, value is removed. For example, in your checking account, a deposit is a debit, a check is a credit. This is as simple as the definition gets in practical application. How you apply those transactions, depends upon the type of account you are working with.
Okay, now you will need to know what we mean by account. Accounts are simply established to provide a record of individual business transactions as they apply to a certain area or item. Your personal checking account is established in order to provide a record of individual personal financial transactions you create when you write a check.
All of the accounts are listed in a general ledger. Today, the actual ledger book has long since been replaced by accounting software that creates a general ledger on the computer. The concept however has not been altered. The general ledger is the central location for maintaining all your accounts. Journal entries refer to the posting or entering of the financial transactions to a particular account.
Assets, Liabilities, Equity, Revenue and Expenses
These are all the different types of accounts the accounting system utilizes. Assets are accounts that add value to your individual or business worth. Liabilities are accounts that remove value from your individual or business worth. Equity is used to identify the individual contribution of money, or other financial equivalent, invested in individual or business worth. The revenue account is simply the account that tracks all income generated. Expense accounts are the individual accounts setup to record the financial transactions that occur, as expenditure, in generating that income.
An example of an asset would be your car. Your car has a dollar value attached to it. It adds value to your individual worth. An example of a liability would be your car loan. The loan removes value from your individual worth. The equity in your car would be any money you paid down toward the purchase. If you use your car to operate a pizza delivery service, the income generated from delivering pizzas would be known as revenue. Any expense for gas or car repairs would be recorded in an expense account known as “automotive expense”.
The reason for establishing any accounting system is to track this information in order to provide for a unified method of “accounting” for all financial transactions as they occur. Accounting practices give us a way to keep a record, or to give an accounting for your financial transactions.
An accounting system offers a method for checking, balancing, and reconciling all those transactions in order to produce accurate pictures of our financial health. Profit and Loss Reports, Balance Sheets, and Cash Flow Statements are the end result of compiling all the transactions into meaningful, usable information for individuals and business owners alike.
2 thoughts on “Basic Accounting Terminology 101”
You did a great job of explaining how accountants monitor financial transactions and expenses. I’d imagine that some businesses are trying to find ways to save money. It might be a good idea to hire a general accounting service to look at the company’s spending habits so they can offer money-saving suggestions.
Can you kindly explain in depth the meaning of these balance sheet terms:
Trade and Other receivables
Cash and Cash equivalents
Defered tax liabilities
Impairement Losses/Fair Value Gains