Unlocking Financial Accounting: Essential Terminology for Students
Financial accounting is the language of business. To succeed, students need to familiarize themselves with its key terms and concepts. Here’s another fresh set of terms to enrich your understanding and boost your confidence in accounting:
1. Trial Balance Adjustment Entries
These are entries made at the end of an accounting period to ensure all accounts are correctly balanced before preparing financial statements.
Example: Adjusting entries for accrued expenses or unearned revenue.
2. Opening Balance
The opening balance refers to the amount in an account at the beginning of an accounting period.
Example: The cash balance at the start of the financial year is the opening balance.
3. General Ledger
The general ledger is a comprehensive record of all financial transactions categorized by accounts.
Example: It includes accounts like cash, sales, and inventory.
4. Petty Cash
Petty cash is a small amount of cash kept on hand for minor expenses.
Example: Money used to buy office supplies or refreshments for a meeting.
5. Deferred Tax
Deferred tax arises due to differences between taxable income and accounting income, which are reconciled in future periods.
Example: Depreciation calculated differently for tax and accounting purposes.
6. Cost of Sales
Also known as the cost of revenue, this represents the direct costs associated with producing goods or delivering services.
Example: The cost of raw materials and labor for manufacturing a product.
7. Reserve
A reserve is an appropriation of profits set aside for specific purposes, like expansion or contingency.
Example: A general reserve for unforeseen circumstances.
8. Drawings
Drawings refer to money or assets withdrawn by the owner for personal use.
Example: A sole proprietor taking ₹10,000 from business funds for personal expenses.
9. Markup
Markup is the percentage added to the cost of a product to determine its selling price.
Example: If a product costs ₹100 to make and is sold for ₹150, the markup is ₹50.
10. Break-Even Point
The break-even point is where total revenues equal total costs, and the business neither makes a profit nor incurs a loss.
Formula:
Break-Even Point = Fixed Costs ÷ (Selling Price per Unit – Variable Cost per Unit)
11. Bad Debt
Bad debt refers to the amount owed by customers that is unlikely to be recovered.
Example: Writing off an unpaid customer invoice as bad debt.
12. Contingent Liability
A contingent liability is a potential liability that depends on a future event’s outcome.
Example: A company being sued records a contingent liability if the lawsuit might result in payment.
13. Working Capital Ratio
The working capital ratio measures a company’s ability to pay off short-term obligations with short-term assets.
Formula:
Working Capital Ratio = Current Assets ÷ Current Liabilities
14. Double Entry System
This accounting system requires every transaction to be recorded in at least two accounts, ensuring that total debits equal total credits.
Example: Buying machinery for cash involves a debit to the machinery account and a credit to the cash account.
15. Accumulated Profits
Accumulated profits are earnings retained in the business rather than distributed as dividends.
Example: Profits reinvested in business operations instead of being paid out to shareholders.
Why Learn These Terms?
These terms will not only strengthen your understanding of accounting principles but also prepare you for real-world financial management. A solid grasp of terminology will make navigating financial statements, reports, and business decisions more effective.
To dive deeper into financial accounting, join our Tally Financial Accounting Program or explore other tailored courses designed for students and professionals.
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