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
- Entity: The business whose accounts are being prepared, considered separately from the owner's personal spending.
- Transaction: A financial activity recorded in the books, such as buying goods on credit.
- Asset: A resource controlled by the business that is expected to provide future economic benefits.
- Liability: A present obligation from past events that the business expects to settle using resources.
- Equity: The residual interest in assets after liabilities are deducted; it is not simply available cash.
- Capital contribution: Resources the owner puts into the business as ownership funding rather than sales.
- Drawings: Money or other assets a proprietor withdraws for personal purposes, reducing the owner's interest.
- Working capital: Commonly, current assets less current liabilities; examine the components as well as the total.
- Current asset: An asset classified by the relevant operating-cycle, trading, realisation or cash criteria under the applicable framework.
- Non-current asset: An asset outside the current classification, often equipment or another longer-term resource.
Sales, spending and results
- Revenue: Income from ordinary business activities, recognised according to the relevant requirements rather than merely when cash arrives.
- Expense: A cost or reduction in economic benefits recognised in measuring the period's result.
- Cost of goods sold: The cost attributed to the inventory sold during the reporting period.
- Gross profit: Revenue less the corresponding cost of goods sold or services, using the report's stated classification.
- Net profit: The residual result after the expenses included in the report have been deducted.
- Gross margin: Gross profit expressed as a percentage of revenue; specify the revenue and cost basis.
- Markup: The increase over cost used to set a selling price; its percentage denominator differs from margin.
- Discount: A reduction in price or amount payable, whose treatment depends on the arrangement.
- Sales return: Goods returned by a customer, requiring the sale and related inventory effects to be considered.
- Credit note: A document reducing an earlier invoiced amount or recognising another agreed adjustment.
Money owed and money received
- Trade receivable: An amount due from a customer for goods sold or services supplied in ordinary business.
- Trade payable: An amount owed to a supplier for ordinary purchases of goods or services.
- Advance: Payment before the related supply or settlement; identify whether the business paid or received it.
- Deposit: Money held under an agreement, often refundable subject to specified conditions.
- Cash flow: Movement of cash and cash equivalents during a period, distinct from accounting profit.
- Liquidity: The business's ability to meet near-term cash commitments using accessible resources.
- Loan principal: The borrowed amount outstanding, excluding separately recognised interest and charges.
- Interest: The financing cost or return associated with lending or borrowing money.
- Ageing report: A schedule grouping unpaid balances by age or overdue period using a stated date basis.
- Bad debt: A receivable assessed as uncollectible and written off under the relevant accounting treatment.
Timing and measurement
- Accrual: Recognition of earned income or incurred expense before the related cash settlement when appropriate.
- Prepayment: An amount paid for benefits relating to a future period, released as those benefits are consumed.
- Depreciation: Systematic allocation of a tangible asset's depreciable amount over its useful life.
- Amortisation: Systematic allocation commonly associated with a finite-life intangible asset's depreciable amount.
- Impairment: Reduction where an asset's carrying amount exceeds the recoverable amount determined under the applicable requirements.
- Carrying amount: The amount at which an asset or liability appears in the books after relevant adjustments.
- Historical cost: A measurement basis rooted in the original transaction amount, subject to subsequent accounting adjustments.
- Fair value: A specified valuation basis; its precise definition and permitted use depend on the applicable standard.
- Provision: A liability involving substantial estimation, recognised only when the relevant conditions are satisfied.
- Materiality: The significance of information to users' decisions, assessed by amount, nature and circumstances.
Records and reports
- Source document: Evidence supporting an entry, such as an invoice, agreement or approved calculation.
- Journal: The chronological record of entries, including the accounts and amounts affected.
- Ledger: A record collecting movements and balances for an individual account.
- Chart of accounts: The organised list of account categories used to record and report transactions.
- Debit: The left side of an account; whether it increases a balance depends on account type.
- Credit: The right side of an account; it does not automatically mean income or cash received.
- Trial balance: A list of ledger balances used to check debit and credit equality.
- Reconciliation: A comparison of records that explains differences and identifies corrections required.
- Balance sheet: A statement of financial position at a particular date.
- 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.