1. Accounting
Accounting is the structured process of recording, organizing, summarizing, and reporting the financial transactions of a business. It provides accurate financial information, helping stakeholders make informed decisions, assess performance, manage resources, and ensure compliance with legal and regulatory requirements.
2. Account
Account is a record used in accounting to track all financial transactions related to a specific item, such as cash, sales, or rent. It helps organize and summarize transactions, allowing businesses to monitor balances, prepare financial statements, and ensure accurate reporting of assets, liabilities, income, and expenses.
3. Asset
An asset is a resource owned or controlled by a business that is expected to provide future economic benefits. It can be tangible, like cash, buildings, and equipment, or intangible, like goodwill or software. Assets help generate revenue and are recorded on the balance sheet.
4. Liability
A liability is a financial obligation that a business owes to another party due to past transactions. It requires future payment in cash, goods, or services. Liabilities are shown on the balance sheet and may be current or long-term. Examples include loans, creditors, taxes payable, and outstanding expenses.
5. Equity
Equity represents the owner’s residual interest in the business after deducting all liabilities from total assets. It reflects the company’s net worth and the owner’s stake in its assets. Equity increases with profits and additional investment, and decreases with losses or drawings.
6. Capital
Capital is the amount of money or assets invested by the owner into a business to start and operate it. It represents the owner’s stake in the company and is recorded under equity in the balance sheet. Capital increases with additional investment and profits, and decreases with losses or drawings.
7. Revenue
Revenue is the income earned by a business from its primary operating activities, such as selling goods or providing services to customers. It is recorded in the income statement for a specific period. Revenue increases profit and owner’s equity. Examples include sales revenue, service income, commission income, and fees earned.
8. Expense
An expense is the cost incurred by a business in order to generate revenue and operate effectively. Expenses reduce profit and are recorded in the income statement during the period they occur. Common examples include salaries, rent, electricity, advertising, transportation, and office supplies used for business operations.
9. Profit
Profit is the financial gain earned when total revenue exceeds total expenses during a specific accounting period. It indicates the success and performance of a business. Profit increases owner’s equity and can be reinvested or distributed. It is determined by subtracting expenses from revenue on the income statement.
10. Loss
A loss arises when a business’s total expenses surpass its total revenue within a given accounting period. It indicates poor financial performance for that period. Loss reduces owner’s equity and may affect business sustainability. It is calculated when expenses are greater than income in the income statement.
11. Balance Sheet
A Balance Sheet is a financial statement that presents the financial position of a business at a specific point in time. It shows assets, liabilities, and equity. The statement follows the accounting equation: Assets equal Liabilities plus Equity, ensuring the books remain balanced and accurate.
12. Income Statement (Profit & Loss Statement)
An Income Statement is a financial report that shows a company’s performance over a specific accounting period. It summarizes revenues, expenses, gains, and losses to determine net profit or net loss. This statement helps assess profitability, operational efficiency, and overall financial performance of the business.
13. Cash Flow Statement
A Cash Flow Statement is a financial statement that shows the movement of cash and cash equivalents during a specific period. It breaks down cash flows into operating, investing, and financing activities. This statement helps evaluate liquidity, cash management efficiency, and the company’s ability to meet short-term obligations.
14. Trial Balance
A Trial Balance is a statement that lists all ledger account balances at a particular date to verify the arithmetic accuracy of bookkeeping. It ensures total debits equal total credits under the double-entry system. However, it does not guarantee absence of errors, only numerical correctness.
15. Ledger
A Ledger is a principal accounting record where all journal entries are systematically posted into individual accounts. It organizes transactions by account, such as cash, sales, or expenses, showing their debit and credit balances. The ledger helps prepare the trial balance and financial statements accurately.
16. Journal
A Journal is the book of original entry where all financial transactions are recorded first in chronological order. Each entry shows the date, accounts debited and credited, amounts, and a brief description. Journal entries follow the double-entry system and are later posted to the ledger.
17. General Ledger (GL)
A General Ledger (GL) is the central accounting record that contains all financial accounts of a business, including assets, liabilities, equity, revenue, and expenses. It summarizes transactions posted from journals and provides account balances. The GL is used to prepare the trial balance and financial statements accurately.
18. Gross Profit
Gross Profit is the profit a business earns after deducting the Cost of Goods Sold (COGS) from total sales revenue. It evaluates how efficiently a company manufactures or acquires its goods. Gross profit does not include operating expenses, taxes, or interest. It is shown in the income statement.
19. Net Profit
Net Profit is the final amount of earnings remaining after deducting all operating expenses, interest, taxes, and other costs from total revenue. It represents the actual profitability of a business during a specific period. Net profit increases retained earnings and reflects the company’s overall financial performance and efficiency.
20. Working Capital
Working capital indicates the net amount of a company’s current assets after covering current liabilities. It measures the business’s short-term financial strength and ability to meet daily operational expenses. Positive working capital indicates good liquidity, while negative working capital signals financial risk.
Formula:
Working Capital = Current Assets – Current Liabilities
21. Debit (Dr)
Debit (Dr) is the left side of an accounting entry under the double-entry system. It increases assets and expenses while decreasing liabilities, equity, and revenue. At least one debit entry is needed for every transaction. Debits must always equal credits to maintain proper accounting balance and financial accuracy.
22. Credit (Cr)
Credit (Cr) is the right side of an accounting entry in the double-entry system. It causes an increase in liabilities, equity, and revenue, and a decrease in assets and expenses. Every transaction includes at least one credit entry. Total credits must always equal total debits to maintain accurate and balanced accounting records.
23. Double Entry System
The Double Entry System is a fundamental accounting principle where every financial transaction affects at least two accounts, with one account debited and another credited. This method keeps the accounting equation properly balanced. Total debits must always equal total credits, helping maintain accuracy and prevent errors.
24. Voucher
A voucher is a written document that provides evidence and authorization for a financial transaction recorded in the accounting system. It supports entries made in books of accounts and ensures accuracy and transparency. Examples include purchase bills, payment receipts, salary slips, and debit or credit notes
25. Credit Note
A Credit Note is a document issued by a seller to a buyer to reduce the amount payable on a previously issued invoice. It is commonly issued when goods are returned, damaged, or overcharged. A credit note decreases the customer’s outstanding balance in the accounting records.
26. Debit Note
A debit note is a document issued by a buyer to a seller to inform them that the buyer’s account has been debited. It is commonly used when goods are returned, overcharged, damaged, or when a price adjustment is required, reducing the amount payable to the seller.
27. Contra Entry
A contra entry is an accounting transaction that affects both the cash account and the bank account simultaneously. It takes place when cash is either deposited in or withdrawn from the bank for business purposes. Since both accounts belong to the same business, it does not affect overall assets.
28. Accrual
Accrual is an accounting principle where income and expenses are recorded when they are earned or incurred, rather than when cash is received or paid. It follows the accrual basis of accounting and ensures that financial statements reflect the true financial position of a business during a period.
29. Prepaid Expense
Prepaid expense is an amount paid in advance for goods or services that will be received in future periods. It is recorded as a current asset at the time of payment and gradually charged as an expense over time as the benefit is used.
30. Current Assets
Current Assets are short-term assets that are expected to be converted into cash, sold, or used up within one year or one operating cycle of a business. Examples include cash, bank balance, accounts receivable, inventory, and short-term investments. They help in meeting day-to-day business expenses and obligations.
31. Fixed Assets (Non-Current Assets)
Fixed Assets (Non-Current Assets) are long-term tangible or intangible assets used in business operations to generate income and not intended for resale. They provide benefits for more than one accounting year. Examples include land, buildings, machinery, vehicles, furniture, and equipment used in daily business activities.
32. Intangible Assets
Intangible Assets are non-physical assets that have no physical form but provide long-term economic benefits to a business. They help generate revenue and support operations. Examples include goodwill, trademarks, patents, copyrights, brand value, and software.
33. Depreciation
It represents the gradual reduction in the asset’s value due to usage, wear and tear, or obsolescence. Depreciation is charged as an expense in the profit and loss account each year.
34. Accumulated Depreciation
Accumulated Depreciation is the total amount of depreciation charged on a fixed asset from the date of purchase up to a specific point in time. This contra asset account is deducted from an asset’s cost to determine its book value on the balance sheet.
35. Accounts Receivable (Debtors)
Accounts Receivable (Debtors) is the amount owed to a business by its customers for goods or services sold on credit. It is recorded as a current asset in the balance sheet because it is expected to be collected within one year, improving the company’s working capital position.
36. Accounts Payable (Creditors)
Accounts Payable (Creditors) is the amount a business owes to its suppliers for goods or services purchased on credit. It is recorded as a current liability in the balance sheet because the payment is usually due within one year or the operating cycle.
37. Provision
Provision is an amount set aside in the accounts to cover an expected future expense, loss, or liability whose exact amount or timing is uncertain. It follows the prudence principle and is recorded to ensure financial statements present a true and fair view of the business position.
38. Contingent Liability
Contingent Liability is a possible obligation that may arise in the future depending on the outcome of an uncertain event. It is not recorded in the accounts but disclosed in the financial statements, as it becomes payable only if a specific future event occurs.
39. Bad Debts
Bad Debts are amounts owed by customers that become uncollectible and cannot be recovered. They arise when a customer fails to pay due to insolvency or other reasons. Bad debts are treated as an expense in the profit and loss account and reduce the accounts receivable balance.
40. Cost of Goods Sold (COGS)
Cost of Goods Sold (COGS) represents the direct costs of producing or purchasing goods sold during an accounting period. It includes opening inventory and purchases, minus closing inventory. COGS is deducted from net sales to determine gross profit and reflects the cost directly related to revenue generation.
Formula:
COGS = Opening Inventory + Purchases – Closing Inventory
41. Inventory
Inventory refers to goods held by a business for sale in the ordinary course of operations or raw materials used in the production process. It is classified as a current asset and includes raw materials, work-in-progress, and finished goods ready for sale.
42. Capital Expenditure (CapEx)
Capital Expenditure (CapEx) refers to money spent by a business to acquire, upgrade, or improve long-term assets such as buildings, machinery, or equipment. These expenditures provide benefits for more than one accounting period and are capitalized on the balance sheet instead of being fully expensed immediately.
43. Revenue Expenditure
Revenue Expenditure is the spending on a business’s daily operations that provides benefits only within the current accounting period. Examples include salaries, rent, utilities, and minor repairs. Unlike capital expenditure, it is fully charged as an expense in the profit and loss account and does not create long-term assets.
44. Amortization
Amortization is the gradual reduction of an intangible asset’s cost over its useful life. It reduces the asset’s book value in the accounts to reflect the consumption of benefits over time. Examples include patents, trademarks, and goodwill, ensuring the financial statements show a true and fair view of asset value.
45. Impairment
Impairment occurs when an asset’s carrying value exceeds its recoverable amount, meaning the asset is overvalued on the balance sheet. The loss in value is recognized as an expense, ensuring the financial statements reflect the asset’s true economic worth. It commonly applies to both tangible and intangible assets.
46. Reconciliation
Reconciliation is the process of comparing and matching two sets of financial records, such as bank statements and accounting books, to ensure they are accurate and consistent. It helps identify discrepancies, errors, or omissions, ensuring the reliability of financial information and maintaining proper internal control.
47. Working Capital Financing
Working Capital Financing refers to short-term funding provided to a business to cover its day-to-day operational needs, such as paying suppliers, salaries, and other expenses. It ensures smooth business operations, maintains liquidity, and helps manage cash flow gaps between receivables and payables, supporting uninterrupted business activities.
48. Minority Interest (Non-controlling Interest)
Minority Interest (Non-controlling Interest) is the portion of a subsidiary’s equity that is not owned by the parent company. It represents the ownership stake of other shareholders in the subsidiary and is shown separately in the consolidated balance sheet, reflecting their share of profits, losses, and net assets.
49. Imprest System
Imprest System is a cash management system where a fixed amount of cash is maintained for minor or routine business expenses. The fund is periodically replenished to its original balance after payments. It ensures controlled, efficient, and transparent handling of small cash transactions within an organization.
50. Deferred Revenue
Deferred Revenue is the income a business receives in advance for goods or services that have not yet been delivered or performed. It is recorded as a liability on the balance sheet until the revenue is earned, ensuring that financial statements accurately reflect earned income over time.
faq’s
What are Accrued Expenses?
Accrued Expenses are costs that a business has incurred but has not yet paid or recorded in the accounts. They represent liabilities for obligations owed within the current accounting period.
What is Accrued Revenue?
Accrued Revenue is income that a business has earned for goods or services provided but has not yet received payment for or recorded in the accounts. It is recognized as a current asset.
What is a Capital Reserve?
This is a reserve formed out of capital profits, not from regular revenue. Not distributable as dividends.
What is a Revenue Reserve?
A reserve created from retained earnings or profits. Can be used for reinvestment or dividends.
What is a Provision for Doubtful Debts?
Provision for Doubtful Debts is an estimated amount set aside for accounts receivable that are expected to be uncollectible. It reduces the net receivables on the balance sheet, reflecting a realistic collectible value.
What is a Revaluation Reserve?
Revaluation Reserve is a reserve created when the value of an asset is increased above its original book value during revaluation. It reflects unrealized gains and is shown under shareholders’ equity in the balance sheet.
What is Goodwill?
Revaluation Reserve is a reserve created when the value of an asset is increased above its original book value during revaluation. It reflects unrealized gains and is shown under shareholders’ equity in the balance sheet.