​INTRODUCTION

To understand accounting, it is essential to know the basic terms and definitions. These terms form the vocabulary of accounting and are used consistently throughout accounting practice. Mastering these terminologies is crucial for proper record-keeping and financial reporting.

ASSETS

Definition: Assets are economic resources owned by a business that have monetary value and are expected to provide future benefits.

Characteristics: Tangible (physical) or intangible; acquired at a measurable cost; provide future economic benefits.

Examples: Cash, Inventory, Equipment, Land, Building, Accounts Receivable, Goodwill, Patents, Trademarks.

Classification: Current assets (convertible to cash within one year) and Fixed/Non-current assets (long-term use).

LIABILITIES

Definition: Liabilities are obligations or debts owed by a business to external parties (creditors).

Characteristics: Legal obligations; settled through payment of resources; result from past transactions.

Examples: Accounts Payable, Bank Loans, Salary Payable, Interest Payable, Bonds Payable.

Classification: Current liabilities (due within one year) and Long-term liabilities (due after one year).

EQUITY/CAPITAL

Definition: Equity represents the owner's stake in the business after deducting liabilities from assets. Formula: Equity = Assets - Liabilities.

Components: Capital contributed by owner, Retained Earnings, Profits or Losses.

Characteristics: Not a debt obligation; remains until owner decides to withdraw.

Importance: Indicates owner's investment and claim on business assets.

REVENUE/INCOME

Definition: Revenue is the income generated by the business from selling goods or providing services.

Characteristics: Increases business assets or decreases liabilities; earned through business activities.

Examples: Sales, Service Revenue, Commission, Rent Income, Interest Income.

Timing: Recognized when earned, not necessarily when cash is received.

EXPENSES

Definition: Expenses are costs incurred in operating the business to generate revenue.

Characteristics: Decrease business assets or increase liabilities; consumed during business operations.

Examples: Salary Expense, Rent Expense, Utilities, Depreciation, Insurance, Supplies Used.

Classification: Fixed expenses (constant) and Variable expenses (change with activity).

PROFIT/NET INCOME

Definition: Profit is the difference between revenue and expenses. Formula: Profit = Revenue - Expenses.

Significance: Indicates business profitability and efficiency.

Types: Gross Profit (Revenue - Cost of Goods Sold) and Net Profit (after all expenses).

DEBIT AND CREDIT

Definition: Debit refers to the left side of an account; Credit refers to the right side of an account.

Application: For assets and expenses, debit increases the balance. For liabilities and equity, credit increases the balance.

Purpose: Used to record increases and decreases in accounts systematically.

JOURNAL

Definition: A book of original entry where all transactions are first recorded chronologically.

Purpose: Provides detailed record of each transaction; supports financial statements.

Format: Contains transaction date, accounts affected, description, and amounts.

LEDGER

Definition: A collection of accounts showing the balance of each account and changes during the period.

Purpose: Summarizes transactions by account; shows cumulative effect of all transactions.

Relationship: Journal entries are posted (transferred) to ledger accounts.

TRIAL BALANCE

Definition: A list of all ledger account balances at a specific date to verify accuracy.

Purpose: Checks if total debits equal total credits (mathematical accuracy).

Timing: Prepared before preparing financial statements.

VOUCHER

Definition: A document that supports and authorizes a transaction before recording it in accounting records.

Examples: Invoices, Bills, Receipts, Cheque stubs, Purchase Orders.

Importance: Provides evidence of transaction occurrence and authenticity; ensures internal control; supports audit trail.