Simplified Accounting Terms And Terminologies

Accounting is the process of recording, summarizing, analyzing, and reporting financial transactions of a business or organization. It involves maintaining systematic records of financial activities, preparing financial statements, and ensuring the accuracy and compliance of financial information with relevant laws and regulations.

The primary goals of accounting are to provide useful financial information to stakeholders, such as investors, creditors, management, and regulatory agencies, to support decision-making and ensure the efficient operation of the organization.

In this post, we have various Accounting terms and terminologies, otherwise referred to as “Accounting jargons”. They include:

1. Credit and Debit: Debit means receives and it is on the ‘left hand side of ‘T’ Account and Credit means gives, it is on the right hand side of ‘T’ Account.

2. Prepayment and Accruals: Prepayment is either income received in advance, liabilities or expenses paid in advance. Accrual is amount in arrears, if it is income, it is an asset. But if it is expenses, it is liabilities.

3. Discount: Trade or Cash Discount. Discount received or allowed discount is benefit for prompt payment of debts. When given out to customers by firm, it is discount allowed; but when received from creditors or suppliers, it is discount received.

4. Depreciation: Amount set aside as provisions for the wear and tear of fixed assets. It is expenses in profit and loss account.

5. Return Inward And Return Outward: Return inward: faulty sales returned by customers to firm to be deducted from sales.
Return outward: faulty purchases returned by firm to suppliers to be deducted from purchases.

6. Goodwill: The reputation build up by firm overtime and quantifiable monetarily.

7. Capital: Amount introduced by initial investor for the take-off of the business.

8. Purchase Of Goods: Purchases refer to the purchases of goods with the prime aim for resale and not goods purchased for further production. E.g. asset acquired by firm for further production.

9. Sales of Goods: Sales means, sales of goods on which the firms normally deals with. Bought with prime aim for resale not applicable to one of the article sold. E.g. proceeds from sales of assets.

10. Carriage Inward Or Carriage Outward: Carriage inward is expenses on purchase; added to purchase in trading account. Carriage outward is expenses on sales debited to profit and loss account.

11. Bad Debts And Bad Debit Provision: Bad debts is ascertainable debts that is not recoverable. It is expenses in the profit and loss account. Bad debts provisions unascertained debts provisions.

12. Trial Balance: This is the enlisting of balances from different ledgers after balancing them. I tis used to check the arithmetical accuracy of the entries.

13. Liabilities: Amount owned by the firm. We credit liabilities when it increases and debit liabilities when it decreases.

14. Creditor and Debtor: Creditor refers to someone owed by the firm: it is a liability. Debtor, on the other hand, is someone owing the firm. It is an asset to the firm.

15. Credit Sales/Credit Purchase: Cash sales – goods sold on credit to customers without cash been exchanged is credit sales. ‘Debit customers, credit sales’.
Goods brought from suppliers without cash been exchanged. ‘Credit suppliers, Debit purchase’.

16. Cash Sales/Cash Purchase: Cash sales means goods sold on cash – credit sales, debit cash, sales gives, cash receives. Cash purchase – goods bought on cash. Credit cash, debit purchase, cash gives, purchase receives.

17. Assets: These are the properties of the firm. It is of three types viz: fixed asset, current asset and fictitious assets.

Fixed Assets are company properties that can be used for further production more than one financial year. Examples are plant and machinery, furniture and fittings, motor van etc.

Current Assets are company properties used as raw materials for the production of firm’s finished goods. Used up within one financial year. E.g. debtor, stock of raw materials etc.
Fictitious Assets are company properties, in the form of fixed assets but are not physically in existence like fixed assets. E.g. Goodwill patent right etc.

18. Partnership: refers to two or more people coming together to carry on a business of permanent nature and banded by partnership deed or agreement.

19. Joint Venture: Is when two or more people come together to carry on a business that is temporary in nature. It is carried out for specific period of time, or to carry out a specified business.

20. Drawing: We have drawing when part of the company’s initial capital is withdrawn by owners of the business. It could be cash or goods. It is deducted from balance sheet at year end.

21. Gross Profit: means profit arrived at after deducting cost of goods sold from sales. It is profit in Trading Account.

22. Net Profit: Is the profit arrived at after deducting all expenses (distribution, administration and selling expenses) from gross profit. It is found in profit and loss account.

In summary, the above explained terms and terminologies form the basis or foundation upon which Accounting is based and students in the Accounting profession must know them all.