Basic Accounting Terms

Accounting uses many technical terms, therefore it is essential to know their meaning. Commonly used terms like business, transaction, asset, liability etc. are explained here.

Business

Any legal action done to earn money is business.

Business Transaction

It is a financial transaction or economic event entered into by two parties that initiates the account process of recording it into books of account.

It is the record you keep, when two person exchange money or money worth.

Account

Record of business transaction under a name is an account.

It shows the flow of money.

Capital

It refers to the amount invested by the owner in the business. It is also known as owner’s equity or net worth.

Drawing

It refers to the amount of cash or goods withdrawn by the owner for his/her personal use is called as Drawing. It reduces the Capital of the company.

Liabilities

If the business owes money from someone, then those are its liabilities. Liabilities are of two types —

  1. Current Liabilities / Long Term Liabilities
  2. Non-Current Liabilities / Short Term Liabilities

Those liabilities which are usually payable after a period of 1 year are current or long term liabilities. Ex – Long term loan.

Non-Current or Short Term Liabilities are those which are payable within one year. Ex РShort term loan.

Assets

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