EACC506 - U01L04 - Accounting Terminology
LPU Online Distance Education・2 minutes read
Understanding accounting terms is crucial for comprehending financial reports, with business entities having separate legal identities based on registered acts and transactions involving economic activities. Financial statements include balance sheets, income statements, and cash flow statements, with capital calculated by deducting liabilities from assets and owners claiming profits while bearing risks associated with the business.
Insights
- Understanding accounting terms is essential for interpreting financial reports, which encompass balance sheets, income statements, and cash flow statements containing crucial information about a business's financial health.
- The distinction between assets, liabilities, and net worth is fundamental, with assets representing resources used for operations, liabilities indicating financial obligations, and net worth reflecting the excess of assets over liabilities, crucial for determining the amount available for distribution among owners after settling debts.
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Recent questions
What are financial statements?
Financial statements include balance sheets, income statements, and cash flow statements.
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Summary
00:00
Essential Accounting Concepts for Financial Understanding
- Understanding accounting terms is crucial for comprehending financial reports.
- Business entities have separate legal identities and are registered under appropriate acts.
- Transactions involve economic activities with at least two parties exchanging value.
- Financial statements include balance sheets, income statements, and cash flow statements.
- Capital is the money invested by the owner in the business and is calculated by deducting liabilities from assets.
- Owners bear all risks associated with the business and claim profits.
- Drawings refer to funds withdrawn by the owner from the business, reducing capital.
- Assets are resources used by the business for operations, categorized as tangible or intangible based on physical existence.
- Fixed assets are used for more than one year, while current assets can be converted into cash within a year.
- Liabilities are financial obligations towards outsiders, categorized as non-current or current based on duration of repayment.
16:30
Understanding Financial Terms and Concepts in Business
- Short term liabilities are obligations that a company must pay within 12 months or the current operating cycle, such as trade creditors and outstanding expenses.
- Current liabilities must be paid within a year, as shown on the balance sheet of HUL as of 31st March 2020.
- Non-current liabilities are long-term obligations, while current liabilities include trade payables for payments within one operating cycle.
- Net worth is the excess of assets over liabilities, also known as owner's capital, representing the amount available for distribution among owners after paying creditors.
- Mr. Gautam Adani surpassed Mukesh Ambani in high net worth, growing his net worth by 449 crores daily, making him the 40th richest person globally.
- Income refers to money earned by a company from activities like selling goods or receiving commissions or rent.
- Expenses are the money spent by a business to earn income, including costs like purchasing goods, paying bills, salaries, and advertising.
- Profit and loss are calculated by comparing income and expenses, with a positive difference indicating profit and a negative one indicating loss.
