Basic Accounting Terms

Accounting terms are most frequently asked in Bank exam interviews. In the series of providing study material for IBPS exam, this time I come up with basic accounting terms. I made every effort to included every term and tried to write it in easiest form. If you think I missed some important term then please post a comment in the comment form.



Read my previous lists :-

List of Basic Accounting Terms

A

Accounting - process of recording, analysis and reporting monetary transactions

Accounting Concepts - Basic principles upon which accounting is based

Accounts payable - Amount payable by business entity to various parties from whom good or services have been purchased.

Account receivable - Amount due to business entity to whom goods or services have been sol

Accrual basis - An accounting system which explains that expenses and incomes should be recognized at the time when they are actually realized.

Amortization - It is the splitting off a loan or intangible assets over a future period

Annual report - Report issued by a company at the end of year containing all important financial statements and preview of management's goals.

Authorized share capital - Maximum share capital a company is authorized to issue

B

Bad debts - Noncollectable receivables

Balance sheet - Statement that summarizes assets and liabilities of a business entity

Bankruptcy - A state in which an individual or legal entity is unable to pay off his debts so he surrenders his assets to the court.

Bill of exchange - A promise to certain amount of money to holder at a specified date

Bill of lading : A document which represents ownership of goods in transit i.e. goods during shipping from one place to another.

Bills Payable : A bill which shows that a firm has to pay money to the person or firm whose name is mentioned in the bill.

Bills receivable : A bill which shows that money is to be paid to firm from those whose names are mentioned in the bill.

Bonus shares : Shares which are issued to the existing shareholder w

Bookkeeping : This process includes analyzing, classifying and recording from various sets of books in a very systematic way.

Book value : Historical cost less accumulated depreciation. Generally, it is accounting value.

Brought down : Written as b/d. It represents the opening balance of an account.

Brought forward : Written as b/f. This term is generally used to open an account for the current year by posting the closing balance of previous year.

C

Capital expenditure : Cost incurred to acquire fixed assets which spreads benefits in future.

Capital work-in-progress : Cost incurred in those assets which are not ready yet for use.

Carried down : Written as c/d. This term a synonym for the term carried forward and used to balance an account.

Carried forward : Written as c/f. Term used to transfer the balance from one period to the another.

Carriage inwards : These are the expenses incurred for transporting the goods purchased by the firm.

Carriage outwards : Expenses incurred for transporting goods sold by the firm.

Cash : It broadly covers currency and generally accepted equivalents of cash, like cheques, drafts and demand deposits in bank.

Cash at bank : Deposit with bank.

Cash Book : A book of all transactions or entries for cash payments and receipts.

Cash on hand : Cash available and undeposited.

Closing stock/ Closing inventory : Goods remaining at the end of an accounting period.

Conservatism principle : Accounting concept that states that all expected losses should be recorded but not expected gains.


D

Depreciation : Decrease in value of assets or the cost of an asset is allocated to that period during which asset is used.

Discount : A deduction from cost of something , offered by seller.

Dividend: A share of profit which is to be distributed to the shareholders.

Dividend Yield: Ratio of current dividend to the current market price of a share.

Double-entry: Transaction entered in both sides debit as well as credit i.e. every transaction has to entered twice.

Doubtful debts : A collection of that debt which is doubtful.

Drawings : Withdrawing cash or goods from business for personal use.

Dual Aspect Principle : Also known as Duality Principle. This fundamental principle of accounting
states that every transaction has a dual effect and should be recorded at two places.

Du-Pont System : The System merges the income statement and balance sheet into two measures of profitability: Return on Assets (ROA) and Return on Equity (ROE).

EBIT : Earnings before interest and tax.

Entity Principle : The business firm is treated as a separate entity for the purpose of accounting.

Equity : A stock or any other security representing an ownership interest.

Exchange Rate : The rate at which one currency can be converted into another.

Expenses : the cost i.e. material or services used in an operation during a specified period.

F

Face Value : Commonly referred to the amount paid to a bondholder at the maturity date, given that the issuer doesn't default.

Financial Asset : An intangible asset that derives value. Stocks, bonds, bank deposits etc are all examples of financial asset.

Financial Ratio : Ratio based on firm's financial statement which reflects firm's financial condition and performance.

Financial Statement : A formal record of the financial activities of a business, person or other entity.
Financial data is presented in a structured manner.

Fixed Assets : It includes premises, plant and machinery, furniture, land and buildings etc.

Fixed Charge : A required payment under a contract.

Freehold Premises : Premises which are not subject to any charge.

Funds Flow Statement : A statement which shows inflow and outflow of funds.

G

Gross Profit Margin : Ratio of Gross profit to net sales i.e. gross profit as a percentage of net sales.

H

Holding Company : A parent company which holds enough stock in another company to hold its board of directors.

Human Resource Accounting (HRA) : Measuring the cost and value of employees and managers in the organisation. It includes the measurement of the cost incurred to recruit, hire, train and develop employees and managers.

HRA Report : After measuring the cost and value of its people, the organisation prepares a report which is known as HRA Report.

I

Imprest : Maintained cash to meet the sundry expenses.

Income Due but not received : Receivable income but not yet received.

Income Received but not due : Income received during current accounting period which is supposed to be received at some future date.

Income statement : Profit and loss statement that measures the firm's operations.

Insolvency : Inability of debtors to meet their debt obligations i.e. lack of liquidity.

Intangible assets : Assets like patents, copyrights, goodwill etc which are valuable but are not physical in nature.

Interest earned ratio : Ratio which measures firm's ability to meet its interest payments out of its annual earnings i.e. EBIT / Interest expense.

Interest rate risk : Uncertainty in expected returns of securities due to changes in interest rates.

Inventory : Stock of goods or articles.

J

Journal : A daily record of transactions in which each transaction is based on double entry bookkeeping i.e. for all transactions both debits and credits are to be entered.

L

Ledger : A record of all individual accounts of a business or firm.

Liability : A financial obligation which arises due to some past events or transactions in business.

M

Marketable securities : Securities which can easily be converted into cash.

Market value : Mutually accepted price of an asset between buyers and sellers. It is price at which an asset would trade in market.

Matching Principle : States that expenses should be recorded during that period when it is incurred, regardless the period of transfer of cash.

Miscellaneous expenditure : Lower monetary value costs are misc expenditure like various meals, ticket prices etc.

Mortgage : A temporary pledge of property to the creditor as a security for an obligation or the debt repayment.

N

Net block : Net block is what asset are worth to the company. Generally, it is gross block less accumulated depreciation.

Net current assets : Current assets less current liabilities.

Net income : Total earnings of company. It represents firm's total profit or loss, calculated by taking all revenues and deducting all the costs of the business.

Net profit margin : Net profit or income as a percent of sales i.e. net Income/ Sales.

O

Operating profit margin : Operating income / Revenue.

Outstanding expenses : Unpaid expenses.

Overdraft : When money is withdrawn from bank account and account balance is below zero.

P

Paid up capital : The amount of company's capital which has been funded by shareholders.

Patent : The sole right to make and sell the product for set period of time.

Petty cash book : Record of entries for small amount payments.

Prepaid expenses : Expenses which have been paid but benefits of which is yet to be received.

Profit and loss account : A statement which shows all revenues and expenses of firm for a given time period. Subtracting expenses from revenues gives net income of the firm for that time period, that's why known as profit and loss account.

Proposed dividend : Company's board of directors declare an amount of dividend every year and this amount is noted as a liability in balance sheet. The rate of proposed dividend can be changed by shareholders in annual general meeting.

Provision for doubtful debts : Keeping aside an amount out of the firm's profit to meet the losses due to doubtful debts.

Provision for tax : Keeping aside an amount to meet future tax liability.

R

Realization principle : It states that recognize the revenue only when it is earned.

Redeemable Preference Shares : Preference shares which are redeemed by issuing company at an agreed price on a specified date.

Reserves and surplus : Accumulated profits of the firm.

Retained earnings : A portion of net income of company which is not distributed in shareholders and reinvested in core business.

Return on equity : Equity earnings / Net worth.

S

Sales book : A complete record of sales which are made on credit.

Sales Returns Book : A record of entries of those goods which are returned by customers and earlier sold on credit.

Secured loans : Loan backed by an asset belongs to the borrower, just to reduce the risk for the lender.

Sinking fund : Fund created by keeping aside some money annually for gradual repayment of debt.

Sundry expenses : Miscellaneous expenses.

T

Total asset turnover ratio : Net sales/ Total assets.

U

Unsecured loans : Loans which are not backed by any security.

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