Key terms in accounting

Some of the terms used in accounting may be unfamiliar. In this step, we’ll look at some definitions.

Defining key terms

Assets are regarded as being something that will result in a future economic benefit as a result of a past event (Collings and Loughran 2013). For example, the purchase of a plant and machinery will provide a benefit over many years and will generate income.

Entity is a term used by accountants to describe any type of organisation, eg a person running his or her own business or a company.

Financial performance is usually judged by matching incomes received with expenditure incurred over a period of time, usually one year (Knight and Bertoneche 2000).

Information traditionally collected by accountants is restricted to what can be quantified and translated into monetary terms (O’Regan 2015).

Liability in accounting is defined as an obligation arising from a past event (Collings and Loughran 2013). For example, you may have bought some furniture but you don’t have to start paying for it until next year. So, for the time being, what you owe is a debt or an obligation – ie a liability.

Service can be defined as various types of labour performed by an employee for customers/clients. Examples of services include consulting, legal advice, maintenance services, medical assistance and transport services.

Equity is also shorthand for stock market investments (O’Regan 2015). This is what a person, company or account has to its name if all debts were liquidated.

Equity is stock or any other security representing an ownership interest. Equity can be reported on a company’s balance sheet, the amount of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses). It can also referred to as shareholders’ equity.


References

Collings, S., and Loughran, M. (2013) Financial Accounting For Dummies UK. New York: John Wiley & Sons

Knight, R., and Bertoneche, M. (2000) Financial Performance. Oxford: Elsevier

O’Regan, P. (2015) Financial Information Analysis: The Role of Accounting Information in Modern Society. Routledge

Share this article:

This article is from the free online course:

An Introduction to Financial Management in Construction

Coventry University