Financial Accounting Terminology

Financial Accounting Terminology: –

If you are starting the study of Financial Accounting then firstly you have to know about important/Basic Financial Accounting Terminology. Because these terminologies are basic of accounting language like Alphabets for the English Language. These are as the following: –

1. Business: –

An organization or economic system where goods and services are exchanged for one another or for money.
Business has a different identity in the eyes of law.

Like:- ABC ltd., HAPPSS Store, bharaj Hospital, S.D. College, or every type of shop, hotel, hospital, college, factory, offices.

2. Proprietor/Owner: –

Who runs an organization and invest their money in business. An owner has the right to take any decision for their business. He has a different identity for their business.

Like: – Amanpreet Kaur, Sarabjit Singh, etc.

3. Capital: –

Any invested by the owner into the business in cash or in kind(any item) is called Capital.

4. Drawing: –

Any withdrawal by the owner from the business in cash or in kind(any item) is called Drawing.

5. Business Transactions: –

Any type of dealing with goods or services between business to any other business or an Individual for cash or credit is called Business Transaction.

Like: Purchase of Assets, Getting work done from Workers and paid wages to them.

6. Accounts: –

A record of financial transactions for an Asset, Individual, Organization, Expense or Income.
A transaction is recorded with debit and credit entries.

Like: –

1. Asset – Plant and Machine A/c, Building A/c, Land A/c, Debtors A/c, Cash A/c.

2. Individual – Mr Sarb A/c, Mr Pawan A/c, Mr Balijit A/c, Mr Abhi A/c, Mrs Jasmeet A/c.

3. Organization – A&B Pvt. Ltd. A/c, HDFC Bank A/c, HAPPSS Store A/c, Jagdarshan A/c

4. Expense – Salary A/c, Wages A/c, Freight A/c, Commission A/c, Rent A/c,

5. Income – Rent Received A/c, Commission Received,

7. Debit: –

Meaning of Debit is adding an amount of cash or fund into the expenses or assets accounts and subtracting from the owner’s equity, liabilities or income accounts. ‘Debit’ word comes from the Latin word debate which means to owe. The word Debit is also abbreviated as “Dr.” It is always operated opposite to the Credit. It is always shown on the left side of the ledger accounts.

8. Credit: –

Meaning of Credit is adding an amount of cash or fund into the owner’s equity, liabilities or income accounts and subtracting from the expenses or assets accounts. The word Credit is also abbreviated as “Cr.” It is always operated opposite to the Debit. It is always shown on the Right side of the ledger accounts.

9. Goods: –

Those items which are purchased by Business only for sale (not for use or to consume.)And purchased to produce another item from it.

Like: –

1. A car painter to buy wood to make furniture or Fixture.
2. A Shop-Keeper buy products to sell it out to consumer (End User)

10. Purchase: –

When Business buy only goods is purchase.
When buying any other assets than it is not a purchase for business.

11. Sale: –

When Business sell only goods is Sale.
When selling any other assets than it is not a Sale.

12. Purchase Return / Return outwards: –

When Business received goods not according to sample than it will be returned to the vendor/supplier.

13. Sale Return / Return Inwards: –

When Customer/consumer returned goods to us is called sale return/return inwards.

14. Assets: –

Something valuable that a business owns, get benefits from it in future or has use of in generating income. As further explained in the following diagram.

15. Liabilities: –

Something valuable that a business owes(Loans) have to pay in future. As further explained in the following diagram.

16. Stocks/Inventories: –

Material or Items which are owns by business for manufacturing. In manufacturing Business, it has three types of following.

17. Trade Receivables: –

Amount receivable from the sale of goods only.

18. Trade Payables: –

The amount payable against the purchase of goods only.

19. Cost of Goods Sold (COGS): –

• In Manufacturing: –

It means that the value of the stock which business had paid to produce these products.

• In trading: –  

It means that the value of the stock which business had paid to purchase it, the cost of reach these products to store (Freight Inwards Etc.).

20. Expenditure: –

It is the amount which already spent or due but not spent (Liability) on goods and services. These are two types: –

1. Revenue Expenditure: –

It is the amount which already spent or due but not spent (Liability) on goods and services which are consumed within the current period. (It Means 1 Financial Year i.e. 01/04/__ to 31/03/__ ).

Like: – Paid Salary/Wages to Employer in C/Y, Rent of Office for C/Y, Commission on Sale For C/Y, all expenses have come under this.

2. Capital Expenditure: –

It is the amount which already spent or due but not spent (Liability) on goods and services which are/will be used and gets benefit from it in the current year and in Future years also.

Like: – Spent to purchase a new Land and Building. Purchase and Creation of All assets and Come under this.

21. Expenses: –

Expenses are that amount which is paid or due to paid for goods and services which are consumed in the current year. It is also called revenue expenditure.therse are two types as explained in the following diagram: –

22. Incomes: –

Incomes are that amount which received or due to receive for the sale of goods and services in the current year and also called revenue. This is two types as explained in the following diagram: – 

23. Revenues: –

Revenue is the income that a business has from its normal business activities, usually from the sale of goods and services to customers Means Direct Income.

24. Profit: –

It is in excess of incomes over expenses.

These are two types: –

1. Gross Profit: –

It is excess of Direct incomes over Direct expenses.

2. Net Profit: –

It is an excess of Total incomes over total expenses.

25. Loss: –

It is excess of Expenses over Incomes.

These are two types: –

1. Gross Loss: –

It is excess of Direct Expenses over direct Incomes.

2. Net Loss: –

It is an excess of Total Expenses over Total Incomes.

26. Gain:-

Business gets to profit from the sale of old assets it is called gain.

27. Discount: –

Business purchase or sell goods at a price less than the Actual Sale price. The difference between the actual and new sale price is called the discount. These are two types shown as following: –

1. Trade Discount: –

Discount giving or getting at the time of sale or purchase is called a trade discount. This will not be shown in books.

2. Cash Discount: –

Discount giving or getting at the time of payment is called a trade discount. This will be shown in books.

If you have any question about this topic please ask it in the comment section below.

Thanks