Basic Terms of Accounting
Joshua V. Azran, partner/owner of Azran Financial (www.azranfinancial.com) discusses the basic terms of accounting. Learn these accounting tips to financially better your business.
- Asset- resource that generates an economic benefit
- Liabilities- any type of financial obligation, debt or responsibility
- Income (revenue)- increases in economic benefits over time
- Expense- decrease in economic benefits over time
- Debit- an increase in asset or expense account or a decrease in liability income or equity account
- Credit- an increase in liabilities income or equity account or a decrease in assets & expense accounts
I think that people should have a functional working knowledge of a few different definitions that are key that most people will encounter when they’re either working with their outside CPA or first working with their – at first desktop accounting software.
Coupled one let’s just start off with one of the basic ones that hopefully everyone start off with this some assets. So assets very generally or any resource that generates an economic benefit, an asset we’re going to split up in to two basic categorize. The first category of assets were going to split in to is called, fixed assets, and these going to be any assets there held or use for one year or longer.
We’re going to do what’s called capitalize these assets which means we’re going to place them on the balance sheet recognizing their value and over time we’ll depreciate those assets therefore, recognizing the decrease and value of those assets over time.
The other type of major asset class that we’ll look at it is intangible assets. These aren’t necessarily physical assets but they do either have or convert some type of value. If we want to make the distinction between fixed assets we’ll think about our property plant and equipment.
Our intangible assets will be things like our patents, our rights, our trademarks, etc. Even things like the goodwill that the company has generator approaches. So where intangible assets are not physical just like a fixed asset they’re going converse some type of value to the company.
Along with assets often come liabilities, so we discuss liabilities as any type of financial obligations, sort of like a debt or a responsibility and we’ll split liabilities up in to two areas based upon the amount of time and the duration. So we’ll think about those liabilities and those obligations that are doing one year or less is what we call, current liabilities.
And these are both the liabilities that are due in one year or less and for financial statement purposes also that portion of the long-term liability that’s going to be doing the next 12 months.
The next part we’ll have is of course long-term liabilities and these don’t necessarily need to be paid for at least one year. Now, of course we’re going to take any portion of that long-term liability that does need to be paid within the next year and recognize as a current liability portion.
We’ll move on to income and expenses. Income, what many people think of and will use interchangeably here for simplicity revenue is going to be any increase in economic benefit over time. This is going to recognize the benefits of your sales and things like that you’ve made.
On the other side of income during the performance of your business, you’re going to incurring expenses and these expenses are going to be recognition of the decrease in economic benefits over time. Those things which actually cause you money and with expenses we’re going to see expenses breaking up in to two basic categorize.
One category is called cost of goods sold or COGS which many people may see. These are going to be the things which are directly related to the production of your goods or the sale of your sell of your service. The other major area is kind of everything else and that’s what we call operating expenses. These are all the other expenses that are incurred during the course of your business which aren’t directly related to the production or providing of your goods or service.
Two other definitions which are very common which people will run into are debits and credits and very importantly let me start off by saying that we shouldn’t confused the debits and credits that we see on our bank statements with the debit and credit that we see on our financial statements.
Very simply a debit is going to be an increase in either in asset or an expense account or a decrease in a liability, income, or equity account. Conversely a credit is going to be an increase in liabilities, income, or equity account and a decrease in your assets and expenses accounts. Both debits and credits are used through a process of making journal entries and booking items onto your financial statements.
Of course there are number of other items and a number of other definitions which you will encounter during performing accounting function or working with your outside accountant. However, these are some of the major ones which you’ll go through.
And of course just to recap we discussed assets, broken up between fixes and intangible. Liabilities, broken up between those with your current and on those which are long-term are income which we’re going to think of here as our revenues and of our expenses, those broken up in to cost of goods sold and operating.
And of course finally to record all of these items we’re going to use those things that we refer to is debits and credits.