Must Know Basic Accounting Terms

Must Know Basic Accounting Terms

6 mins read329 Views Comment
Chanchal Aggarwal
Senior Executive Content
Updated on Jan 4, 2024 15:21 IST

Basic accounting terms include "Assets," representing resources owned by a business; "Liabilities," which are the company's debts and obligations; "Equity," indicating the owner's interest in the business; "Revenue," the income generated from business activities; and "Expenses," the costs incurred in generating revenue. Understanding these terms is fundamental to grasping a company's financial health and operations. Let's understand!


Do you know which are the first things investors look for when investing in a business? It is their “accounts.” Accounting provides stakeholders with the relevant and required economic information. 

Here we have covered significant concepts and basic accounting terms required to understand accounting completely. Let’s start our discussion with the accounting definition.

Check out- Free Cost Accounting Courses Online


Accounting involves identifying, measuring, and communicating economic information so users can make informed decisions.

Accounting Equation: Components, Importance and Calculation
Accounting Equation: Components, Importance and Calculation
The Accounting Equation is the foundational formula in accounting, ensuring that a company's financial statements are balanced. It reflects that all assets a company owns are financed either through more

Provision Accounting: A Guide to Understanding this Key Financial Concept
Provision Accounting: A Guide to Understanding this Key Financial Concept
Provision accounting involves setting aside a specific amount of money for anticipated future liabilities or losses, ensuring financial preparedness. This practice enhances financial accuracy and integrity by recognizing potential more

Now let’s learn some basic accounting terms.

1. Accounting Period

An accounting period defines the time covered by an operation or financial statement. Common accounting periods include calendar years, fiscal years, and three-month calendar quarters. Some companies also use monthly periods. An accounting period encompasses one entire accounting cycle. An accounting cycle is an eight-step system accountants utilise to track transactions during a particular period.

Explore- Accounting Online Courses & Certifications

2. Assets

Assets are economic resources controlled that a business owns or controls. It can be categorized based on duration, i.e., Current Assets and Fixed Assets.

Current assets are short-term resources of the company. Within a tenure of one year, they are anticipated to be converted into cash or cash and equivalent, account receivables, inventory, other prepaid expenses, etc.

Fixed assets or non-current assets are for the long term, such as machinery, plants, land, buildings, etc.

The Difference Between Assets and Liabilities
The Difference Between Assets and Liabilities
Assets are resources owned by a company or individual that are expected to provide future economic benefits, including generating income or holding value. In contrast, liabilities represent financial obligations more

What are the Different Types of Assets?
What are the Different Types of Assets?
Each type of asset comes with its unique characteristics, risks, and potential rewards. Whether you're a seasoned investor or just beginning your journey towards financial success, this comprehensive guide more

3. Liabilities 

Liabilities refer to the debts owed by businesses to third parties. Debentures (bonds), unpaid expenses, loans, and creditors, are examples of liabilities. They can be current or non-current, and as per their classification, they are grouped into balance sheets and other accounts. 

  • For example- A current liability must be paid back within a year,
  • An organization might take out a 15-year mortgage as an example of a non-current liability.

What are the Different Types of Liabilities?
What are the Different Types of Liabilities?
Liabilities are the types of financial obligations or debts that an individual, organization, or entity owes to another party. They represent claims on an entity's resources and involve future more

Current Liabilities – Definition, Formula, Example, Management
Current Liabilities – Definition, Formula, Example, Management
The article discusses current liabilities, the formula to calculate them, their importance, and management.

4. Account Payable

When a company purchases goods on credit that need to be paid in a short period, refers to Accounts Payable. It is a liability and comes under the head’s current liabilities. Accounts Payable is a short-term debt payment that needs to be paid to avoid default.

Account Payable vs Receivable: Understand the Differences
Account Payable vs Receivable: Understand the Differences
Accounts payable represents the amount a company owes to its suppliers or creditors for goods or services received, whereas accounts receivable refers to the money that is owed to more

Difference between Provision and Contingent Liabilities
Difference between Provision and Contingent Liabilities
Provisions and contingent liabilities are both accounting terms that refer to potential future obligations of a company. However, there are some key differences between the two. A provision is more

5. Account Receivable

The money the business will receive from clients who have used credit to buy its goods and services is known as Accounts Receivable (AR). In rare situations, the credit term is often brief, ranging from a few days to several months or even an entire year.

6. Capital

Capital is the amount invested in the business by the owner in cash, kind, or any other asset. It is also known as owner equity. Change in capital or owners’ equity occurs when: (i) owners either invest in or withdraw cash or other assets from the business and (ii) the business either earns income from a profitable operation or incurs losses from unprofitable operations.

All About Capital Structure Theories
All About Capital Structure Theories
Capital structure theories are a fundamental aspect of corporate finance, offering insights into how firms finance their operations and growth. These theories explore the mix of debt and equity more

What is Equity: Calculation, Types, and Importance
What is Equity: Calculation, Types, and Importance
The term equity refers to the amount of money that the company owns from its shareholders. The company is liable to return its shareholders under certain conditions. The equity more

7. Balance Sheet

A balance sheet is a financial statement that lists the company’s assets and liabilities as of a particular date. It resembles a snapshot of a firm’s debts and assets, including any loans or equity it may have. Accountants can create balance sheets in various formats, including classified, common size, comparative, and vertical balance sheets. Each format displays data as a series of line items that, when combined, reveal the company’s financial situation.

Difference Between Balance Sheet and Financial Statement
Difference Between Balance Sheet and Financial Statement
A balance sheet offers a snapshot of a company’s financial position at a specific moment, detailing assets, liabilities, and equity. On the other hand, financial statements comprise a broader more

Difference Between Balance Sheet and Trial Balance
Difference Between Balance Sheet and Trial Balance
Companies prepare financial statements at the end of the Fiscal year or a defined accounting period to understand improvement in revenues and profits, and management of the company’s assets, liabilities, more

8. Debit (Dr)

A debit is an accounting entry in a company’s balance sheet or other accounts that records either an increase in assets or a decrease in liabilities.

Difference Between Debit and Credit
Difference Between Debit and Credit
The main difference between debit and credit lies in their accounting context. Debit refers to an entry on the left side of an account, representing an increase in assets more


9. Credit (Cr)

An accounting entry that, depending on the transaction, could either raise liabilities and equity or decrease assets on the company’s balance sheet. 

10. Working Capital

Working capital is the funding you have to take care of your immediate, short-term requirements. Calculate your present levels, predict your future needs, and think about ways to make sure you always have sufficient cash on hand if you want to ensure your working capital is working for you.

Working Capital = Current Assets- Current Liabilities

11. Retained earnings

After a company has covered all of its expenses for a specific accounting period, the profits are known as retained earnings (or surplus earnings ). It comprises all direct and indirect costs, including tax obligations, dividend payments, and goods sold. Retained earnings (RE), when they are positive, boost the company’s equity. This stock could be invested back into the company to support future expansion.

12. Accruals

Accruals are revenues and expenses that a company recognizes but still needs to record in its financial statements (ACCR). By definition, accruals take place before a currency exchange completes the transaction.

Imagine a business engaged a third-party consultant and recorded the fee in its accruals. The consultant would record this expense regardless of whether it sent an invoice to the company.Accounts payable and receivable are examples of accrual types. Others include accrued and accrued expenses, which are incurred but not yet paid for a specific accounting period.

Difference Between Cost Accounting and Management Accounting
Difference Between Cost Accounting and Management Accounting
Cost accounting is a type of accounting associated with the cost structure of a company. It is the process of assigning costs to various business operations and activities of more
Difference Between Cost Accounting and Financial Accounting
Difference Between Cost Accounting and Financial Accounting
Cost accounting and financial accounting are two of the main accounting methods that are widely used by accountants the world. While cost accounting calculates the total cost, financial accounting more
Difference Between Financial Accounting and Management Accounting
Difference Between Financial Accounting and Management Accounting
Accounting has three main types including cost accounting, financial accounting and management accounting. All three types serve different purposes and functions. In this article, we will discuss the difference more

13. Income Statement:

The company’s revenues, costs, and profit for a given accounting year are displayed on the income statement, also known as the income and expenditure or profit and loss accounts. It thoroughly describes a company’s profitability during that specific accounting year.

Profit or Loss = Revenue – Expenses

14. Cost of Goods Sold

The term “cost of goods sold” (COGS) refers to all expenses a business has to pay when producing an item or to offer a service. Materials, labor, and overhead are the three cost types involved with products. Costs associated with services include equipment, supplies, and staff remuneration. “Cost of sales” is an alternate term occasionally used by accountants. Accountants use the following fundamental formula to determine COGS throughout a specific accounting period: Ending inventory minus initial inventory plus purchases.

15. Generally Accepted Accounting Principles (GAAP)

 GAAP is an accounting principle that has a collection of regulations and best practices created by the accounting profession for businesses to adhere to when reporting financial data. All publicly traded organizations need to abide by these regulations.

Explore Free GAAP Courses

Explore more related courses: 

Certificate Program in US GAAP by Ernst & Young Interpreting Non-GAAP Reports
Accounting Course Bundle (39 Courses, includes IFRS & US GAAP) IFRS – International Financial Reporting Standards

Check out- IFRS vs. GAAP: Which Is Best-Suited for You?

16. Depreciation

Depriciation is the decline in the value of business assets such as plant and machinery over time due to use or obsolescence.

Usually, there are three methods of depreciation that are followed in India.

  • Straight line method
  • Diminishing value method
  • Unit of production method

17. Income Statement (Profit and Loss)

The financial statement that displays the revenues, costs, and profits for a specific period is the income statement (sometimes known as a profit and loss or P&L). The top of the report displays the revenue collected, and various expenditures (expenses) are deducted from it until all costs are included; the outcome is net income.

18. Cash Flow Statement

The word “cash flow” refers to the inflow and outflow of cash in a firm. One can calculate the Net Cash Flow for a certain period by subtracting the Beginning Cash Balance and subtracting the Ending Cash Balance. A positive figure shows that more money flowed into the company than leaving it, while a negative number shows the opposite.

19. Dual Aspect Concept

It states that every transaction or event has two aspects. The impact of a transaction is such that the accounting equation:

Assets= Liabilities + Owners’ Capital always holds.

20. Entity Concept

As a concept, it separates the business affairs of the owners from their personal affairs. It states that the business and owner of the business are two separate entities.  

Check out- Accounting Interview Questions


You must know the basic accounting terms to understand accounts. Here we have covered almost every basic definition and meaning that a novice interested in accounting must know. 

About the Author
Chanchal Aggarwal
Senior Executive Content

Chanchal is a creative and enthusiastic content creator who enjoys writing research-driven, audience-specific and engaging content. Her curiosity for learning and exploring makes her a suitable writer for a variety ... Read Full Bio