Basic Accounting Terminology
Accounting is the method of tracking money transactions in business or for personal use. It monitors income, expenses and assets. An accountant can have a job as simple as a bookkeeper running a one-person office or as a cost and analysis accountant in a large corporation. Accounting has a language all its own, but there are basic terms everyone who uses accounting must know.
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Ledgers and Subledgers
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A ledger is the foundation of the financial records of a business. All money transactions recorded in a ledger are a permanent record. Subledgers are used for tracking items such as accounts payable, accounts receivables, credits and debits. Normally, when one entry is made to one subledger, another one is posted to a different ledger to create a balance. This is called balancing the ledger, just as you would a checkbook ledger. A ledger creates a paper trail for all financial transactions.
Debit and Credits
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Debits and credits are based on the accounting system that every transaction has two parts. The debit is what you received and is in the form of money, income or other assets. A credit is applied to where you got the item from. For example, you buy a new cell phone using your credit card. Since the cell phone is what you received, it results in a debit to your assets. The credit will be applied to your credit card for the same amount, increasing your liabilities or debt. Determining a credit or a debit is easy if you remember that a debit increases your assets and can be in the form of money, equipment or accounts receivables; and credit will increase liabilities and equity and decrease assets.
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Assets and Liabilities
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Assets are anything you own and include money, investments and items of value and can be anything from land to a car or building you own. Entries into a ledger for assets always post in dollars for its value. Liabilities are anything you own such as debts including a car payment or mortgage.
Income and Expenses
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Income and expenses in simple terms is money earned is income and money spent is an expense. Income can be money that you have earned but not received as well as money you have received. Expenses can be an expense that has not been paid but that you still owe or money you have paid.
Accounts Payable and Receivable
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Accounts payable and receivable are money you have earned and not yet received or money that has to be paid and that you have not paid yet. Accounts payable is the money you owe but have not yet paid. It can be for anything, such as mortgage payments, health insurance or for any other goods or service. Accounts Receivable is money that is owed to you and not yet received. It can be income, or money from an item you have sold or service that you have provided.
Equity
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Equity is the amount of ownership value that you have in a home, business or item, such as car or equipment. For example, if you own a home but have a mortgage, the equity is the value of the home, minus your loan amount.
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