Bookkeeping basics - PART 2
An introduction to bookkeeping terminology...
The bookkeeping, accounting, and finance industry has it's own jargon and technical language. This includes works like 'asset', 'equity', 'capital', 'depreciation', and 'balance sheet'.
By the end of this free online bookkeeping course, you will know and understand all of the most commonly used accounting terms... So prepare to level up your financial mind!
By the end of this free online bookkeeping course, you will know and understand all of the most commonly used accounting terms... So prepare to level up your financial mind!
lesson 1 - capital explained
Capital is the amount of funds or cash a business owner invests in his or her own business. Let's look into this in more detail...
Let's say, Mrs. Sauce has started a business. The business hasn't yet got any customers, so there is currently no sales. The business has a number of costs (expenses), though, such as start up costs and marketing costs. To pay for these expenses, the business needs cash. The cash the business needs is usually supplied in two ways...
1. A bank loan
2. The owner investing his or her own funds
Any cash put into the company by the business owner is called capital. It is the owners investment and is owed back to the owner when cash flow and funds allow.
Because the owner introduces the cash to the business, capital can also be called 'capital introduced'.
Let's say, Mrs. Sauce has started a business. The business hasn't yet got any customers, so there is currently no sales. The business has a number of costs (expenses), though, such as start up costs and marketing costs. To pay for these expenses, the business needs cash. The cash the business needs is usually supplied in two ways...
1. A bank loan
2. The owner investing his or her own funds
Any cash put into the company by the business owner is called capital. It is the owners investment and is owed back to the owner when cash flow and funds allow.
Because the owner introduces the cash to the business, capital can also be called 'capital introduced'.
Lesson 2 - assets explained
An asset is something of value that a business owns.
Common assets are things like motor vehicles, office equipment, office furniture, cash, and stock. All of these items are assets.
In financial reports, assets are generally categorised as fixed assets or current assets - or in other words - long-term assets and short-term assets.
Fixed assets (long-term assets) are assets that don't regularly fluctuate in value. This could be assets such as office equipment, machinery, and property. These items generally only change in value when depreciated or revalued (more about this later).
To make things more confusing, fixed assets can be categorised as tangible assets or intangible assets...
Physical assets (items you can touch) are often referred to as tangible assets. Sometimes, these physical/tangible assets are referred to as Property, Plant, and Equipment - or in short - PPE.
Common tangible assets are items like computers, computer equipment, office furniture, motor vehicles, and property.
Non-physical assets (items you cannot touch) are intangible assets.
Common intangible assets are assets like websites, patents, and software.
Current assets are assets that regularly fluctuate in value, such as stock and cash. These items can change value on a regular basis i.e. stock can be purchased, used, and sold, on a daily basis - the value of stock can be different from day to day.
Confused? Perhaps the infographic below will help... (don't forget that there is a video below, which will help to clarify things)
Common assets are things like motor vehicles, office equipment, office furniture, cash, and stock. All of these items are assets.
In financial reports, assets are generally categorised as fixed assets or current assets - or in other words - long-term assets and short-term assets.
Fixed assets (long-term assets) are assets that don't regularly fluctuate in value. This could be assets such as office equipment, machinery, and property. These items generally only change in value when depreciated or revalued (more about this later).
To make things more confusing, fixed assets can be categorised as tangible assets or intangible assets...
Physical assets (items you can touch) are often referred to as tangible assets. Sometimes, these physical/tangible assets are referred to as Property, Plant, and Equipment - or in short - PPE.
Common tangible assets are items like computers, computer equipment, office furniture, motor vehicles, and property.
Non-physical assets (items you cannot touch) are intangible assets.
Common intangible assets are assets like websites, patents, and software.
Current assets are assets that regularly fluctuate in value, such as stock and cash. These items can change value on a regular basis i.e. stock can be purchased, used, and sold, on a daily basis - the value of stock can be different from day to day.
Confused? Perhaps the infographic below will help... (don't forget that there is a video below, which will help to clarify things)
Lesson 3 - liabilities explained
A liability is something that the business owes.
In a sense, liabilities are the opposite to asset - they are what an entity owes rather than owns.
Just like assets, liabilities are usually categorised as long-term liabilities and short-term (current) liabilities.
Long-term liabilities are liabilities like long-term bank loans and mortgages.
Current liabilities are liabilities like short-term loans (usually due within 1 year), credit cards, and money owed to suppliers (creditors).
In a sense, liabilities are the opposite to asset - they are what an entity owes rather than owns.
Just like assets, liabilities are usually categorised as long-term liabilities and short-term (current) liabilities.
Long-term liabilities are liabilities like long-term bank loans and mortgages.
Current liabilities are liabilities like short-term loans (usually due within 1 year), credit cards, and money owed to suppliers (creditors).
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