Basic accounting terms
There are many accounting terms used by accountants in the world of accountancy, business and finance. Some of these accounting terms may seem alien and nonsensical to those new to accountancy however these accounting terms are soon picked up and become second nature.
Double entry is the most famous and well known of the accounting terms and it is easy to see why. The double entry concept is the underpinning foundation of accountancy and without it the world of accountancy would be very different to what it is today. The Double entry concept states that for every transaction there is an equal and opposite. So, for every debit there is a corresponding credit as there must be balance. When following the double entry concept it is impossible to have a one sided transaction.
Debits and credits are two accounting terms that go hand in hand with the double entry concept. If a debit is recorded in the profit and loss account it is an expense. If a debit is recorded on the balance sheet is an asset. If a credit is recorded in the profit and loss account it is income. If a credit is recorded in the balance sheet it is a liability. When you are learning accounting terms you need to remember how debits and credits work in the different financial statements and how to deal with them. Debits and credits are fundamental accounting terms and you must ensure you get them the right way around.
In addition to the double entry concept and understanding debits and credits there are other essential accounting terms every accountant must quickly get to grips with. These accounting terms are income, expenses, gains and losses. These four accounting terms are the underpinning items that make up the balance sheet and the profit and loss account.
Prudence is one of the accounting terms that is still used, but is gradually becoming less important. The prudence concept states that accountants should take a pessimistic view when putting together the financial statements. Under the prudence concept all costs and losses should be recognised in the financial statements as soon as they are identified. You should not, however, recognise income and gains until the likelihood of receiving them is almost certain.
Substance over form is one of the more interesting accounting terms used in accounting. The substance over form concept states that accountants should look at who has the risks and rewards of a particular fixed asset and not who legally owns the fixed asset. It is possible the owner of the fixed asset does not necessarily use the fixed asset and if this is the case the financial statements must reflect this. Substance over form is one of the most important accounting terms to consider when dealing with, and accounting for, leased fixed assets.
Revenue recognition is one of the accounting terms that has received a lot of attention over recent years. Revenue recognition is the timing the business records the sale, and this will vary from business to business. Every business must have a revenue recognition policy in its financial statements clearly stating when sales are recorded in the accounting records.
Accruals and accrual accounting are two accounting terms based on the same principle, which is the matching concept. The accruals or matching concept states that all costs should be recorded in the accounting period to which they relate, not when the cost is paid. The accruals concept is best explained using an example. So, let’s say a business has an accounting period that ends on the 31 December. The business incurs an expense during the period ended the 31 December but the invoice isn’t received until the 20 January, which is after the period end. The accruals concept states the invoice should be brought back in to the accounts for the period ended 31 December, and this is achieved via a period end journal adjustment. Similarly, prepayments are another one of the matching concept accounting terms that needs to be adjusted for in the period end accounts.
Depreciation is one of the accounting terms that many people find difficult to understand and it is easy to see why. Depreciation is the reduction in value of a fixed asset as it is ‘used up’ in the day to day running of the business. Depreciation is a non-monetary business expense, i.e. there is no cash outflow, although it is not a tax allowable deduction. amortization is like depreciation, and as such it is another one of the accounting terms that many people struggle to get to grips with.
Depreciation deals with the reduction in value of a tangible fixed asset, i.e. one that can be seen and touched. On the other hand, amortization deals with the reduction value of an intangible fixed asset, i.e. one that has no physical substance, such as goodwill, patents and licences.
Accountancy is a career based around many different accounting terms and all accountants have to learn what the different accounting terms are, learn how to use the accounting terms and learn when to use the accounting terms.
Learning all the accounting terms may seem daunting at first, however most of them are not that difficult to learn and the remaining accounting terms will come with time, experience, studying and sitting accountancy examinations. With a bit of hard work, dedication and effort you will become knowledgeable about accounting terms in no time.