50 Accounting Terms Every First-Time Business Owner Should Know

Accounting conversations become easier when you can identify what a term describes: a resource, an obligation, a period's performance or the process used to prepare the numbers. The following 50 terms provide a working vocabulary for a first-time Indian business owner. These are introductory explanations, so a contract or applicable reporting standard may require a more specific treatment.

Use the list while reading actual reports. Memorising a definition is less useful than finding the corresponding balance in your own business and understanding the evidence behind it.

The business and its financial position

1. Entity: The business whose accounts are being prepared, considered separately from the owner's personal spending.
2. Transaction: A financial activity recorded in the books, such as buying goods on credit.
3. Asset: A resource controlled by the business that is expected to provide future economic benefits.
4. Liability: A present obligation from past events that the business expects to settle using resources.
5. Equity: The residual interest in assets after liabilities are deducted; it is not simply available cash.
6. Capital contribution: Resources the owner puts into the business as ownership funding rather than sales.
7. Drawings: Money or other assets a proprietor withdraws for personal purposes, reducing the owner's interest.
8. Working capital: Commonly, current assets less current liabilities; examine the components as well as the total.
9. Current asset: An asset classified by the relevant operating-cycle, trading, realisation or cash criteria under the applicable framework.
10. Non-current asset: An asset outside the current classification, often equipment or another longer-term resource.

Sales, spending and results

1. Revenue: Income from ordinary business activities, recognised according to the relevant requirements rather than merely when cash arrives.
2. Expense: A cost or reduction in economic benefits recognised in measuring the period's result.
3. Cost of goods sold: The cost attributed to the inventory sold during the reporting period.
4. Gross profit: Revenue less the corresponding cost of goods sold or services, using the report's stated classification.
5. Net profit: The residual result after the expenses included in the report have been deducted.
6. Gross margin: Gross profit expressed as a percentage of revenue; specify the revenue and cost basis.
7. Markup: The increase over cost used to set a selling price; its percentage denominator differs from margin.
8. Discount: A reduction in price or amount payable, whose treatment depends on the arrangement.
9. Sales return: Goods returned by a customer, requiring the sale and related inventory effects to be considered.
10. Credit note: A document reducing an earlier invoiced amount or recognising another agreed adjustment.

Money owed and money received

1. Trade receivable: An amount due from a customer for goods sold or services supplied in ordinary business.
2. Trade payable: An amount owed to a supplier for ordinary purchases of goods or services.
3. Advance: Payment before the related supply or settlement; identify whether the business paid or received it.
4. Deposit: Money held under an agreement, often refundable subject to specified conditions.
5. Cash flow: Movement of cash and cash equivalents during a period, distinct from accounting profit.
6. Liquidity: The business's ability to meet near-term cash commitments using accessible resources.
7. Loan principal: The borrowed amount outstanding, excluding separately recognised interest and charges.
8. Interest: The financing cost or return associated with lending or borrowing money.
9. Ageing report: A schedule grouping unpaid balances by age or overdue period using a stated date basis.
10. Bad debt: A receivable assessed as uncollectible and written off under the relevant accounting treatment.

Timing and measurement

1. Accrual: Recognition of earned income or incurred expense before the related cash settlement when appropriate.
2. Prepayment: An amount paid for benefits relating to a future period, released as those benefits are consumed.
3. Depreciation: Systematic allocation of a tangible asset's depreciable amount over its useful life.
4. Amortisation: Systematic allocation commonly associated with a finite-life intangible asset's depreciable amount.
5. Impairment: Reduction where an asset's carrying amount exceeds the recoverable amount determined under the applicable requirements.
6. Carrying amount: The amount at which an asset or liability appears in the books after relevant adjustments.
7. Historical cost: A measurement basis rooted in the original transaction amount, subject to subsequent accounting adjustments.
8. Fair value: A specified valuation basis; its precise definition and permitted use depend on the applicable standard.
9. Provision: A liability involving substantial estimation, recognised only when the relevant conditions are satisfied.
10. Materiality: The significance of information to users' decisions, assessed by amount, nature and circumstances.

Records and reports

1. Source document: Evidence supporting an entry, such as an invoice, agreement or approved calculation.
2. Journal: The chronological record of entries, including the accounts and amounts affected.
3. Ledger: A record collecting movements and balances for an individual account.
4. Chart of accounts: The organised list of account categories used to record and report transactions.
5. Debit: The left side of an account; whether it increases a balance depends on account type.
6. Credit: The right side of an account; it does not automatically mean income or cash received.
7. Trial balance: A list of ledger balances used to check debit and credit equality.
8. Reconciliation: A comparison of records that explains differences and identifies corrections required.
9. Balance sheet: A statement of financial position at a particular date.
10. Profit and loss statement: A report of recognised income and expenses over a stated period.

Put the terms together

For an illustrative retailer, goods costing ₹800 sell for ₹1,000 on credit. Gross profit is ₹200, gross margin is 20%, and markup on cost is 25%. A trade receivable arises before collection. Receiving ₹1,000 later increases cash and clears that receivable; it does not create a second sale.

When a report contains unfamiliar language, ask for the account, period and calculation behind it. Keep company-specific definitions beside this introductory glossary. Shared vocabulary becomes useful when the sales team, bookkeeper and owner use the same words for the same financial events.