Accounting Terms

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Few accounting principles:

Assets: Corporate economic resources. They can be divided into the following two types:

• Non-current assets: Non-convertible assets in cash within 12 months. They are also known as                                      durable goods. They are of the following two types:

                Tangible non-current assets: These assets have a physical form.

                Intangible non-current assets: These assets do not have a physical form.

• Current assets: Assets that can be converted into cash and cash equivalents within 12 months or                            one working cycle.

Liability: Economic services a company that owes money to others. They can be divided into the following two types:

• Non-current liabilities: Liabilities that are due and repaid after one financial year or operating cycle, that is, more than 12 months.

• Current liabilities: Debts to be repaid and repaid within one financial year or operating cycle, that is, within 12 months.

Equity: The amount invested by the developers or owners of the company. It also includes stored business benefits.

Revenue: Refers to the total amount of revenue received after the sale of goods or services.

Expenses: Expenses incurred while conducting business operations. It can be divided into the following types:

• Direct costs: Direct costs incurred in producing goods or providing services. They are equal to the volume of the product being produced.

• Indirect costs: Indirect costs of producing goods or providing services.

Gains and losses: Recurring transactions due to differences in proceeds from the sale of assets and the amount recorded in the ledger.

        Profits and losses = Profit by sale - Amount in account books

Cash basis of accounting: Expenses and Revenue are recorded when cash is received or paid.

Accrued basis of accounting: Revenue is recorded when received (that is, when a product is delivered / service is delivered). Similarly, costs are recorded when they are made.

Example:

Suppose you bought equipment worth Rs 20,000 in October for cash. According to both accrual and cash basis of accounting, these expenses will be recorded in October itself.

Now, suppose you bought a credit card worth Rs 50,000 in October. The actual cost of these supplies needs to be paid in December. On a cash basis of accounting, the transaction will be recorded in December when the actual cash outflows occur. However, on an accrual basis of accounting, this transaction will be recorded in October itself.

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