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Essential Accounting Terms

Balance sheet, book value, books of account, debit and credit, depreciation, entry, insolvent, solvent, proprietor, and financial statements.

Notes

Essential Accounting Terms

Class 11 Accountancy — Accounting Terminology

Balance Sheet, Book Value, and Books of Account

Balance Sheet
A statement of balances of assets and liabilities.

The Balance Sheet is a statement that presents the financial position of an individual or enterprise at a specific date. It displays its assets, liabilities, capital, reserves, and other account balances at their respective book values.

Book Value
Value of asset as existing in the books of account.

Book Value refers to the amount at which an item exists in the books of account. For assets, it typically means the Cost less depreciation.

Books of Account
Books in which transactions are recorded or transferred (posted).

These are the records or books in which the financial transactions of an entity are initially recorded and subsequently transferred (posted). They commonly include the Journal and the Ledger.

Debit and Credit

Debit
Credit

Traditionally, left side of an account

When an account is to be debited, the entry is posted to its debit side

Traditionally, right side of an account

When an account is to be credited, the entry is posted to its credit side

Depreciation

Depreciation
Decrease in book value of an asset due to its use or efflux of time or obsolescence.
Depreciation is the fall in the book value of an asset. This decrease can occur due to usage, the passage of time, obsolescence, or an accident. It represents the systematic allocation of the cost of a fixed asset over its estimated useful life across each accounting year.

Entry, Insolvent, Solvent, Proprietor

Entry

Recording business transaction in the books of account.

Insolvent

A person or entity unable to pay his/its debts.

Solvent

A person or entity who is in a position to pay his/its debts.

Proprietor

A person who owns the business. The person who invests capital in a business and bears all the risks.

Financial Statements

Financial Statements / Final Accounts
Statements prepared at the end of the accounting period to determine financial performance and financial position.

These are the statements prepared at the end of the accounting process to assess the financial performance and financial position of an entity.

1

Trading Account

2

Profit & Loss Account (or Statement of Profit & Loss for Companies)

3

Balance Sheet

Key Takeaways

  • Financial Statements = Trading Account + P&L Account + Balance Sheet
  • Prepared at the end of the accounting period
  • Determine both financial performance (Trading + P&L) and financial position (Balance Sheet)