Basic Accounting Terminology 101
Prior to actually beginning work as an accountant, there is generally exposure to accounting
terminology and concepts; whether in the form of classroom instruction or as an intern with on-
the-job training. However, rather than risk the possibility of an individual beginning work as a
bookkeeper, or an accounting intern, without the necessary understanding of basic terms and
concepts, we will provide a brief overview.
When you get past the automatic block that many individuals put up upon hearing the word
“accounting”, the basic concepts and terms are quite easily grasped. (I personally believe the
terms used in learning to calculate baseball statistics is more complicated than accounting
terminology).
Debits and Credits
Every single transaction recorded in the accounting process falls into one of two categories: it is
either a debit or a credit. We could use the official definitions here, but I prefer to keep
absorption levels (and interest) high, so we are going to use very simple definitions and
examples. A debit is a transaction of value “added” to an account. A credit is a transaction of
value “removed” from an account. Debit, value is added. Credit, value is removed. For
example, in your checking account, a deposit is a debit, a check is a credit. This is as simple as
the definition gets in practical application. How you apply those transactions, depends upon the
type of account you are working with.
Accounts
Okay, now you will need to know what we mean by >account. Accounts are simply established
to provide a record of individual business transactions as they apply to a certain area or item.
Your personal checking account is established in order to provide a record of individual personal
financial transactions you create when you write a check.
All of the accounts are listed in a general ledger. Today, the actual ledger book has long since
been replaced by accounting software that creates a general ledger on the computer. The concept
however has not been altered. The general ledger is the central location for maintaining all your
accounts. Journal entries refer to the posting or entering of the financial transactions to a
particular account.
Assets, Liabilities, Equity, Revenue and Expenses
These are all the different types of accounts the accounting system utilizes. Assets are accounts
that add value to your individual or business worth. Liabilities are accounts that remove value
from your individual or business worth. Equity is used to identify the individual contribution of
money, or other financial equivalent, invested in individual or business worth. The revenue
account is simply the account that tracks all income generated. Expense accounts are the
individual accounts setup to record the financial transactions that occur, as expenditure, in
generating that income.
An example of an asset would be your car. Your car has a dollar value attached to it. It adds
value to your individual worth. An example of a liability would be your car loan. The loan
removes value from your individual worth. The equity in your car would be any money you paid
down toward the purchase. If you use your car to operate a pizza delivery service, the income
generated from delivering pizzas would be known as revenue. Any expense for gas or car
repairs would be recorded in an expense account known as “automotive expense”.
Accounting System
The reason for establishing any accounting system is to track this information in order to provide
for a unified method of “accounting” for all financial transactions as they occur. Accounting
practices give us a way to keep a record, or to give an accounting for your financial transactions.
An accounting system offers a method for checking, balancing, and reconciling all those
transactions in order to produce accurate pictures of our financial health. Profit and Loss
Reports, Balance Sheets, and Cash Flow Statements are the end result of compiling all the
transactions into meaningful, usable information for individuals and business owners alike.
