Basic Accounting terms used in Financial Statements
One of the teething problems that most of the business owner has to deal with is to know the basic knowledge of accounting – and you should be acquainted with some basic accounting terms whether you hope to hire professionals for managing your books of accounts or by yourself.
Let us throw some light on some of the basic Accounting terms used in Financial Statements:
A financial year is a period of 12 months for which a business prepares its books of accounts.
As per section 2(41) of Companies Act, 2013 financial year means the period ending on the 31st day of March every year in relation to any company or body corporate and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year.
In simpler words the financial year starts from 1st April and ends on 31 March. For example, 1st April 2018 to 31st March 2019. But when the company is incorporated on or after 1st January then in such case the financial year will end up in the next year. For instance, 1st January 2018 to 31st March 2019.
Assets are anything having a value which can provide future economic benefits. They are generally of three type’s Current and Non Current.
- Current Assets are those assets which are short-term resources and expected to be converted into cash within a year such as cash, cash equivalent, inventory, account receivables and other prepaid expenses etc.
- Non-current Assets are those assets that are not current assets, in a broader sense, which are long term resources such as land, building, plants and machinery etc.
Liabilities are financial obligations or debts of a business which will result in outflow of resources. Liabilities can be current or non-current and in order of their classification, they are grouped in balance sheets.
- Current liabilities are those liabilities that have to be paid within a year such as a trade payables.
- Non-current liabilities are those liabilities whose payment period is longer such as mortgage taken by a company for 15 years.
Accounts Receivable (AR) is the amount due for goods or services sold or rendered but not yet paid by customers or clients. In other words, AR is the amount that is owed by customers to company for goods/services sold or rendered by such company on credit to such clients.
Intangible assets are those assets which have no physical presence such as goodwill, trademark, copyright, patents of a company.
Revenue is that amount which a company receives or accrues during a specific period in the normal course of business. The amount can be earned from any normal or abnormal business activities.
An expense is an economic cost a business incurs in order to earn revenue during its operation. Expenses are of two type’s direct and indirect expenses.
Capital is the amount investment in the business by the owner in the form of cash, kind or any other asset
Working capital or net working capital is the difference between all the current assets and current liabilities of the company.
Working Capital = Current Assets- Current Liabilities
Bad debts are that amount which incurs when customers/clients/Accounts receivable do not pay amounts that are owned by them. They are treated as an expense in Profit & Loss account.
Depreciation is the decline in the value of business assets such as plant and machinery over time due to use or obsolescence.
Normally, there are three methods of depreciation that are followed in India
- Straight line method
- Diminishing value method
- Unit of production method
A balance sheet is a financial statement that reports assets and liabilities of the company at a specific point of time. It is like a snapshot of what a company owes in the form of loans or equity and owns in the form of assets.
The Income Statement also known as Income and expenditure or Profit and Loss accounts shows revenues, expenses, and profit of company during an accounting year. It provides a complete picture of whether a business is profitable in that particular accounting year.
Profit or Loss = Revenue – Expenses
Cash Flow Statement:
The Cash Flow Statement is a part of the financial statement which shows the company’s inflow and outflow of the cash or cash equivalents during a given period. Most businesses fail to survive in the market due to less inflow and more outflow of cash.
A general ledger shows financial data of the company with credit and debit account records verified by a trial balance. The general ledger provides records of all financial transaction that has been carried out by a company during its existence.