Accounting Terms
Accounting is the systematic process of recording, classifying, summarizing, analyzing, and interpreting financial transactions of a business.
In simple words:
Accounting tells us where the money comes from, where it goes, what the business owns, what it owes, and whether it is making a profit or loss.
For learning accounting, it is useful to understand the main terms first.
1. Business Transaction
A business transaction is any financial activity that can be measured in money and affects the business.
Examples:
- Started business with ₹1,00,000 cash
- Purchased furniture for ₹20,000
- Sold goods for ₹30,000
- Paid rent ₹10,000
- Received ₹15,000 from a customer
Transactions are the starting point of accounting.
2. Account
An account is a record used to track transactions related to a particular person, asset, expense, income, or other item.
Examples:
- Cash Account
- Bank Account
- Sales Account
- Rent Account
- Rahul’s Account
- Furniture Account
Accounts help us organize financial information.
3. Capital
Capital is the money or other resources invested by the owner into the business.
Example
Rahul starts a business by investing ₹5,00,000.
Capital = ₹5,00,000
Capital represents the owner’s financial interest in the business.
Formula
Capital = Assets − Liabilities
4. Drawings
Drawings are cash, goods, or other assets withdrawn by the owner from the business for personal use.
Example
The owner takes ₹10,000 from the business for personal expenses.
Drawings = ₹10,000
Drawings reduce the owner’s capital.
5. Assets
Assets are resources owned or controlled by a business that have economic value.
They can provide benefits to the business in the future.
Examples
- Cash
- Bank balance
- Furniture
- Machinery
- Building
- Land
- Vehicles
- Inventory
- Accounts receivable
Types of Assets
Current Assets
Assets expected to be converted into cash or used within a relatively short period.
Examples:
- Cash
- Bank
- Inventory
- Accounts receivable
Non-current Assets
Assets used by the business for a longer period.
Examples:
- Building
- Machinery
- Furniture
- Vehicles
- Land
6. Liabilities
Liabilities are amounts that a business owes to outsiders.
In simple words, liabilities are the debts or obligations of the business.
Examples
- Bank loan
- Creditors
- Outstanding expenses
- Bills payable
Example
A business takes a bank loan of ₹2,00,000.
Liability = ₹2,00,000
The business has an obligation to repay the bank.
7. Equity
Equity represents the owner’s claim or interest in the assets of the business after deducting liabilities.
Formula
Equity = Assets − Liabilities
For a sole proprietorship, owner’s equity is closely related to capital, adjusted for profit/loss and drawings.
Example
Assets = ₹8,00,000
Liabilities = ₹3,00,000
Therefore:
Equity = ₹8,00,000 − ₹3,00,000 = ₹5,00,000
8. Revenue / Income
Revenue is the income earned by a business from its normal business activities.
Examples
For a trading business:
- Sales of goods
For a service business:
- Consulting fees
- Tuition fees
- Service charges
Example
A computer training center earns ₹50,000 from students.
Revenue = ₹50,000
9. Expense
An expense is a cost incurred by a business to earn revenue or operate the business.
Examples
- Rent
- Salary
- Electricity
- Internet
- Advertising
- Transportation
- Insurance
Example
A business pays ₹15,000 for office rent.
Rent Expense = ₹15,000
Expenses generally reduce profit.
10. Profit
Profit is the amount remaining when total expenses are deducted from total revenue.
Formula
Profit = Revenue − Expenses
Example
Revenue = ₹1,00,000
Expenses = ₹70,000
Profit = ₹30,000
A business makes a profit when its revenue is greater than its expenses.
11. Loss
A loss occurs when total expenses are greater than total revenue.
Formula
Loss = Expenses − Revenue
Example
Revenue = ₹80,000
Expenses = ₹1,00,000
Loss = ₹20,000
12. Purchases
Purchases are goods bought by a business for resale.
Example
A clothing shop buys shirts worth ₹50,000 from a supplier for resale.
Purchases = ₹50,000
Important: buying a computer, furniture, or vehicle for business use is normally not treated as a purchase of goods for resale. Such items are generally recorded as assets.
13. Sales
Sales are goods sold by a business to customers.
Example
A shop sells goods worth ₹25,000.
Sales = ₹25,000
Sales generate revenue for a trading business.
14. Stock / Inventory
Inventory is the goods a business holds for sale or, depending on the business, materials used in producing goods.
Example
A shop has unsold goods worth ₹1,50,000 at the end of the year.
Closing Inventory = ₹1,50,000
Inventory is generally classified as a current asset.
15. Debtor / Accounts Receivable
A debtor is a customer who owes money to the business because goods or services were provided on credit.
Example
ABC Ltd. sells goods worth ₹40,000 to Rahul on credit.
Rahul owes ₹40,000.
Therefore:
Rahul = Debtor / Accounts Receivable
16. Creditor / Accounts Payable
A creditor is a person or business to whom the business owes money, usually because goods or services were purchased on credit.
Example
A business purchases goods worth ₹60,000 from XYZ Ltd. on credit.
The business owes XYZ Ltd. ₹60,000.
Therefore:
XYZ Ltd. = Creditor / Accounts Payable
17. Cash
Cash means physical money held by the business.
Examples
- Notes
- Coins
- Cash kept in the office or cash counter
Cash is a current asset.
18. Bank
The Bank Account records money deposited into or withdrawn from the business bank account.
Example
Business deposits ₹50,000 into its bank account.
The bank balance increases by ₹50,000.
19. Voucher
A voucher is a document that provides evidence or support for an accounting transaction.
Examples
- Cash receipt
- Payment voucher
- Purchase invoice
- Sales invoice
- Bank payment record
Vouchers help provide an audit trail for transactions.
20. Invoice
An invoice is a document issued by a seller to a buyer showing details of goods or services supplied and the amount payable.
Example
A seller provides:
- 10 keyboards × ₹1,000 = ₹10,000
- GST, if applicable
- Total amount payable
The invoice records the details of the transaction.
21. Journal
A journal is a book or record where business transactions are initially recorded in chronological order.
It is often called the book of original entry.
Example
Business purchases furniture for ₹20,000 in cash:
Furniture A/c Dr. ₹20,000
To Cash A/c ₹20,000
22. Ledger
A ledger contains individual accounts where transactions are classified account-wise.
For example, transactions relating to:
- Cash → Cash Account
- Sales → Sales Account
- Rent → Rent Account
- Rahul → Rahul’s Account
The ledger helps determine the balance of each account.
23. Debit (Dr.)
Debit is one side of an accounting entry, represented as Dr.
In modern accounting, whether something is debited depends on the type of account and the accounting rules being applied.
For example:
When a business receives cash from a customer, the Cash Account is debited because cash increases.
24. Credit (Cr.)
Credit is the other side of an accounting entry, represented as Cr.
For example:
If the owner invests ₹1,00,000 cash into the business:
Cash A/c Dr. ₹1,00,000
To Capital A/c ₹1,00,000
Cash increases → Debit
Capital increases → Credit
25. Golden Rules of Accounting
The traditional approach classifies accounts into three categories:
Personal Account
Debit the receiver, Credit the giver
Example: Paid ₹10,000 to Rahul.
Rahul receives money → Debit Rahul’s Account
Real Account
Debit what comes in, Credit what goes out
Example: Purchased furniture for cash.
Furniture comes into the business → Debit Furniture
Cash goes out → Credit Cash
Nominal Account
Debit all expenses and losses, Credit all incomes and gains
Example: Paid rent ₹5,000.
Rent is an expense → Debit Rent
26. Trial Balance
A trial balance is a statement containing the balances of ledger accounts, prepared to check whether total debits equal total credits.
Basic rule
Total Debit = Total Credit
However, a balanced trial balance does not guarantee that there are no accounting errors.
27. Balance Sheet
A balance sheet shows the financial position of a business at a particular date.
It generally presents:
Assets = Liabilities + Equity
Example
| Particulars | Amount |
|---|---|
| Assets | ₹10,00,000 |
| Liabilities | ₹4,00,000 |
| Equity | ₹6,00,000 |
So:
₹10,00,000 = ₹4,00,000 + ₹6,00,000
28. Income Statement / Profit & Loss Account
The income statement shows the business’s financial performance over a period.
It summarizes:
Revenue − Expenses = Profit/Loss
Example
Revenue = ₹5,00,000
Expenses = ₹3,50,000
Net Profit = ₹1,50,000
29. Cash Flow
Cash flow refers to the movement of cash and cash equivalents into and out of a business.
It is commonly divided into:
- Operating activities — cash generated or used by normal business operations
- Investing activities — buying or selling long-term assets/investments
- Financing activities — borrowing, repaying loans, or transactions involving owner’s/shareholders’ capital
A profitable business can still face cash-flow problems if cash is not available when needed.
30. Accounting Equation
The accounting equation is the foundation of double-entry accounting.
Formula
Assets = Liabilities + Equity
Example
Owner invests ₹5,00,000:
Assets = ₹5,00,000
Liabilities = ₹0
Equity = ₹5,00,000
Therefore:
₹5,00,000 = ₹0 + ₹5,00,000
Every properly recorded transaction keeps the accounting equation balanced.
31. Double-Entry System
The double-entry system means that every financial transaction affects at least two accounts, with equal total debits and credits.
Example
Purchased furniture for ₹20,000 cash.
Two accounts are affected:
- Furniture increases → Debit ₹20,000
- Cash decreases → Credit ₹20,000
Therefore:
Total Debit = ₹20,000
Total Credit = ₹20,000
32. Outstanding Expense
An outstanding expense is an expense that has been incurred but has not yet been paid.
Example
Salary for March = ₹30,000
Paid = ₹25,000
Remaining ₹5,000 is:
Outstanding Salary = ₹5,000
It is generally recorded as a liability until paid.
33. Prepaid Expense
A prepaid expense is an expense paid in advance for a future period.
Example
A business pays ₹60,000 insurance for 12 months.
If ₹10,000 relates to a future period, that ₹10,000 is treated as:
Prepaid Insurance = ₹10,000
It is generally an asset until the related expense is recognized.
34. Accrued Income
Accrued income is income that has been earned but has not yet been received.
Example
A business has earned ₹10,000 interest but has not received the money yet.
Accrued Interest Income = ₹10,000
It is generally recorded as an asset/receivable.
35. Depreciation
Depreciation is the systematic allocation of the depreciable amount of a tangible long-term asset over its useful life.
Example
A machine costs ₹1,00,000 and is expected to be used for 5 years.
Under a simple straight-line assumption with no residual value:
Annual depreciation = ₹1,00,000 ÷ 5 = ₹20,000
Depreciation is an expense in the income statement and reduces the carrying amount of the asset.
36. Bad Debts
Bad debts are amounts owed by customers that the business determines are not recoverable.
Example
A customer owes ₹20,000, but the business determines that the amount cannot be collected.
That ₹20,000 may be recognized as a bad debt expense, subject to the applicable accounting rules.
37. Accounting Period
An accounting period is the period for which financial information is prepared.
Examples:
- Monthly
- Quarterly
- Half-yearly
- Annually
For example, a business may prepare financial statements for the year 1 April to 31 March.
38. Fiscal / Financial Year
A financial year is a 12-month period used by an organization for accounting and financial reporting.
In India, the commonly used financial year is:
1 April to 31 March
For example:
FY 2026–27 = 1 April 2026 to 31 March 2027
39. Accounting Standards
Accounting standards are rules and principles that guide how financial transactions and financial statements should be recognized, measured, presented, and disclosed.
They help make financial information more consistent and comparable.
Examples include Ind AS in India and IFRS internationally.
40. Bookkeeping vs Accounting
These terms are related but not identical.
| Bookkeeping | Accounting |
|---|---|
| Records transactions | Interprets and analyzes financial information |
| Mainly focuses on recording | Includes recording, classification, analysis and reporting |
| Creates accounting records | Uses records to prepare financial information |
| More routine | More analytical |
Simple way to remember:
Bookkeeping = Recording
Accounting = Recording + Classifying + Summarizing + Analyzing + Interpreting + Reporting
⭐ The Most Important Accounting Terms to Learn First
If you’re creating an accounting learning section on myitschool.in, I would recommend teaching these first:
- Transaction
- Account
- Capital
- Drawings
- Assets
- Liabilities
- Equity
- Revenue/Income
- Expenses
- Profit & Loss
- Purchases
- Sales
- Inventory/Stock
- Debtor / Accounts Receivable
- Creditor / Accounts Payable
- Debit & Credit
- Journal
- Ledger
- Trial Balance
- Balance Sheet
- Profit & Loss Account
- Cash Flow
- Accounting Equation
- Double-Entry System
- Depreciation
A good learning sequence
Accounting Basics → Accounting Terms → Accounting Equation → Types of Accounts → Golden Rules → Debit & Credit → Journal Entries → Ledger → Trial Balance → Adjustments → Trading/P&L → Balance Sheet → Cash Flow
This sequence will make the accounting section much easier for beginners to follow.