Clarification of the most important basic accounting terms and how to distinguish between debit and credit accounts, and explanation of the differences between assets, notifications, and financial statements. At Qoyod, we have compiled the most important accounting terms that are commonly used in accounting and are important for any entrepreneur without an accounting background.
Debit Account and Credit Account:
In accounting, all accounts fall under two types: either a credit account or a debit account.
Accounts with a debit nature are assets and expenses.
And accounts with a credit nature are liabilities, revenues, and equity.
We may place accounts with a debit nature in the place of credit accounts in accounting entries, for the purpose of clarifying the deficit that occurred in the account, as well as for credit accounts.
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Credit: is the one who paid or gave an amount of money, goods, or services.
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Debit: is the one who received or took an amount of money, goods, or services.
One of the fundamentals of debit and credit accounts is the famous equation:
Assets = Liabilities + Equity. For this reason, it is necessary to understand debit excellently to identify it correctly from the beginning, and errors are eliminated starting from daily entries through financial statements, whether the balance sheet or income statement.
Credit Notice:
It is the document sent to the customer that makes him a creditor of the entity. It is proof from the entity that the customer has a right that must be paid to him, such as sales returns. “Retrieval of goods from the customer”
Debit Notice:
It is the document sent to the supplier that makes him a debtor of the entity. It is proof from the entity that it has a right that must be taken from the supplier, such as purchase returns. “Return of goods to the supplier”
Assets:
The term assets refers to the economic resources owned by the entity such as machinery, land, cash, and others. Assets can also be intangible, such as a trademark.
Current Assets:
These are assets that are expected to be converted into cash, and cash itself is considered a current asset, or sold or used within the financial year.
Fixed Assets / Non-Current Assets:
Assets that an entity acquires for the purpose of using them in the production process and not for the purpose of resale.
Liabilities:
These are obligations on the entity toward third parties in return for obtaining products, services, or loans.
Equity:
It is what the owners of the entity own in terms of money in the entity.
Revenue:
It is everything that the entity or the state achieves in terms of cash, goods, or service income as a result of providing a product or service.
Expenses:
It is everything that the entity spends in return for completing work. For example: employee salaries are an expense, rent is an expense… etc.
Purchase Orders:
It is your approval of the purchase before the purchases arrive at your entity.
Accounting Entry:
It is a method of recording the financial transaction in a way that clarifies both the date of the transaction, the value of the transaction, and the value of each party with a brief explanation describing this transaction.
Financial Statements:
These are the financial data of the entity that are in the form of reports that show the financial condition of the entity during a certain period or at a certain time. The financial statements are represented by the income statement and the balance sheet, cash flow statement, and other types of statements.
General Ledger:
It is shaped like the letter T. It shows the movement of accounts and their balances from the general journal. Each account has one or two pages, and the transfer to it from the general journal is done by recording the debit entries of the entry on the debit side of the account for each account and the credit side on the credit side of the account. This account serves as a control account for sub-accounts.
The accounting cycle begins with recording financial transactions in the journal, followed by posting to the general ledger, preparing a trial balance and financial statements, and performing adjusting entries, and closing accounts.
Closing Entries:
It is the process by which the balances of all nominal accounts (revenues and expenses) are reduced to zero and the net profit or loss is determined.
Market Value:
Market value is the value of the share in the market, and it is the result of the trading of the share affected by the factors of supply and demand.
Book Value:
It is the net value of the share according to the historical value of the assets and liabilities of the company after deducting accumulated depreciation.
Depreciation:
Depreciation refers to the gradual decrease in the historical cost of an asset. As for the methods of calculating it, there are many, but the most famous is that the book value of the asset decreases at the end of each period due to the physical depreciation that occurs to the asset as a result of use or the emergence of new inventions and innovations. Depreciation is for fixed assets (non-current) and not for current assets.
Historical Cost:
It is the best basis for evaluating the assets of the entity. The cost includes all expenses that the entity has incurred in acquiring the asset until it became ready for use in its designated place in the entity, and for the purpose for which it was owned.
Income Statement:
The income statement or profit and loss account is one of the financial statements of the company and shows the company’s revenues and expenses during a certain period. It indicates how revenues are converted into net profit. Types of income statement:
Single-step (abbreviated) income statement:
It is characterized by its simplicity and ease of understanding its content, where the income statement is divided into two sections: one section for revenues and another for expenses.
Multi-step income statement:
This is characterized by providing more detailed information, showing gross income, operating income, and net income.
