Basic Accounting Terms Every Beginner Must Know

Basic Accounting Terms Every Beginner Must Know: Your Complete Guide with Real Examples

A story-driven explanation based on a real small business in Lahore. Learn assets, liabilities, equity, revenue, expenses, profit, and how the core financial statements fit together.

Accounting Basics Small Business ERP & AI

I was sitting in my office last Tuesday when my phone rang. It was Aftab — the guy who opened that electronics shop near Liberty Market in Lahore. He sounded panicked: “Bhai, main samajh nahi aa raha. Sales toh achi chal rahi hain, lekin paisa khatam ho raha hai!”

Sound familiar? Most new business owners hit this exact wall. A few years ago, I did too. Here’s what I wish someone had told me sooner: accounting isn’t rocket science; it’s just stories about money. Once you know how to read those stories, everything clicks.

So let’s walk through Aftab’s first month — the wins, the mistakes, the “aha!” moments — and learn the basic terms that every beginner must know. These fundamentals matter even more today as ERP and AI-powered tools become common in small businesses.

Assets — Everything You Can Actually Touch (or Sell)

Assets are anything the business owns that has value and could be turned into cash. Accountants split them into two big buckets:

Current Assets

Cash and bank balance
Inventory you plan to sell
Accounts receivable (customers who owe you)
Prepaid items (like insurance)

Fixed Assets

Land and buildings
Equipment, machinery, computers
Furniture and vehicles

Aftab’s Assets on Jan 31:

Current Assets
Bank balance	$3,500
Cash in register	$500
Accounts receivable	$2,800
Phone inventory	$8,200
Accessories inventory	$1,500
Total	$16,500

Fixed Assets
Display cases & furniture	$4,000
Billing computer	$1,200
Air conditioner	$800
Total	$6,000

Total assets: $22,500. Most of it is in quick-to-cash items — healthy for retail.

Liabilities — Everyone You Owe

Liabilities are debts. They’re grouped by when you must pay them.

Current Liabilities
Supplier invoices	$4,200
Wages payable	$800
Utilities payable	$300
Total	$5,300

Long‑term Liabilities
Bank loan	$8,000
Total	$8,000

Total liabilities: $13,300 — manageable relative to current assets.

Equity — What’s Truly Yours

Equity = Assets − Liabilities. For Aftab: $22,500 − $13,300 = $9,200.

Revenue — Money Earned (When Earned)

Revenue is recorded when you earn it, not when cash arrives.

Cash phone sales: $12,000
Credit phone sales: $3,500
Accessories: $2,800
Repairs: $1,200

Total January revenue: $19,500.

Expenses — Money Out

Cost of phones sold: $11,700
Cost of accessories: $1,400
Rent: $1,500
Salary: $800
Utilities: $400
Marketing: $300
Insurance: $250

Total January expenses: $16,350.

Profit — The Bottom Line

Gross profit = Revenue − COGS = $19,500 − $13,100 = $6,400

Net profit = Revenue − All expenses = $19,500 − $16,350 = $3,150

Balance Sheet — One‑Moment Snapshot

Rule: Assets = Liabilities + Equity

Assets (Jan 31, 2025)
Cash in bank	$3,500
Cash on hand	$500
Accounts receivable	$2,800
Phone inventory	$8,200
Accessories inventory	$1,500
Furniture & display cases	$4,000
Computer equipment	$1,200
Air conditioner	$800
Total Assets	$22,500

Liabilities & Equity (Jan 31, 2025)
Accounts payable	$4,200
Wages payable	$800
Utilities payable	$300
Bank loan	$8,000
Owner’s investment	$15,000
Retained earnings (Jan profit)	$3,150
Owner withdrawals	$(8,950)
Total Liabilities	$13,300
Total Equity	$9,200

Check: $22,500 = $13,300 + $9,200 ✓

Income Statement — Profit for the Period

Income Statement (Jan 2025)	Amount
Revenue
Mobile phone sales	$15,500
Accessories sales	$2,800
Repair services	$1,200
Total Revenue	$19,500
Cost of Goods Sold
Phones	$11,700
Accessories	$1,400
Total COGS	$13,100
Gross Profit	$6,400
Operating Expenses
Rent	$1,500
Salary	$800
Utilities	$400
Marketing	$300
Insurance	$250
Total Operating Expenses	$3,250
Net Profit	$3,150

Cash Flow Statement — Actual Money Movement

Cash Flow (Jan 2025)	Amount
Operating Activities
Cash received from customers	$16,700
Cash paid for inventory	$(14,500)
Rent	$(1,500)
Utilities	$(100)
Marketing	$(300)
Insurance	$(250)
Net Cash from Operations	$50
Investing Activities
Furniture	$(4,000)
Computer	$(1,200)
AC	$(800)
Net Cash from Investing	$(6,000)
Financing Activities
Owner investment	$15,000
Bank loan received	$8,000
Owner withdrawals	$(8,950)
Loan payment	$(4,100)
Net Cash from Financing	$9,950
Net Increase in Cash	$4,000

Debits & Credits — The Balancing Language

Debits increase Assets and Expenses.
Credits increase Liabilities, Equity, and Revenue.

Examples:

Sold phones for $500 cash → Debit Cash $500, Credit Sales $500
Bought $1,000 inventory on credit → Debit Inventory $1,000, Credit Accounts Payable $1,000

Journal Entries — Recording What Happened

Jan 1 — Start business: Debit Cash $15,000; Credit Owner’s Equity $15,000
Jan 2 — Buy furniture: Debit Furniture $4,000; Credit Cash $4,000
Jan 5 — Buy inventory: Debit Inventory $5,000; Credit Accounts Payable $5,000
Jan 10 — Sales day ($2,000 revenue; $1,500 cost): Debit Cash $2,000; Credit Sales $2,000; Debit COGS $1,500; Credit Inventory $1,500

General Ledger — The Master Record

Cash Account (January)

Date	Description	Money In	Money Out	Balance
Jan 1	Owner investment	$15,000		$15,000
Jan 2	Buy furniture		$4,000	$11,000
Jan 3	Buy computer		$1,200	$9,800
Jan 5	Cash sales	$800		$10,600
Jan 8	Pay rent		$1,500	$9,100
Jan 10	Cash sales	$1,200		$10,300
Jan 15	Owner withdrawal		$3,000	$7,300

Sales Revenue (January)

Date	Description	Amount	Running Total
Jan 5	Cash sales	$800	$800
Jan 8	Credit sales	$1,500	$2,300
Jan 10	Cash sales	$1,200	$3,500
Jan 12	Cash sales	$900	$4,400
Jan 15	Credit sales	$2,000	$6,400

Trial Balance — Math Check

Account	Debit	Credit
Cash	$4,000
Accounts Receivable	$2,800
Inventory	$9,700
Furniture & Fixtures	$4,000
Computer Equipment	$1,200
Air Conditioner	$800
Accounts Payable		$4,200
Wages Payable		$800
Utilities Payable		$300
Bank Loan		$8,000
Owner’s Equity		$15,000
Owner Drawings	$8,950
Sales Revenue		$19,500
Cost of Goods Sold	$13,100
Rent Expense	$1,500
Salary Expense	$800
Utilities Expense	$400
Marketing Expense	$300
Insurance Expense	$250
Totals	$47,800	$47,800

Perfect balance — debits equal credits.

Working Capital — Financial Breathing Room

Working Capital = Current Assets − Current Liabilities = $16,500 − $5,300 = $11,200. Positive and comfortable.

Inventory & COGS — What Your Products Cost

COGS (Jan): Phones $11,700 + Accessories $1,400 = $13,100
Ending inventory (Jan 31): Phones $8,200; Accessories $1,500 → $9,700

Depreciation Example

Computer cost $1,200; useful life 5 years → $240/year or $20/month recorded as depreciation expense.

Cash vs Accrual Accounting — Timing Matters

Jan 25 sale of $800 to a corporate client (paid in Feb):

Cash method: record revenue in February (when cash arrives).
Accrual method: record revenue in January (when earned). Aftab uses accrual for accuracy.

Budget, Forecast & ROI — Plan vs Probability

Budget (goal): Sales $22,000; Expenses $18,000; Profit $4,000
Forecast (trend-based): Sales $24,000; Expenses $19,500; Profit $4,500
ROI (Jan): $3,150 ÷ $15,000 × 100 = 21%

FAQs

What’s the difference between revenue and profit?

Revenue is total money earned ($19,500). Profit is what remains after all expenses ($3,150).

Why don’t profit and cash flow match?

Credit sales, inventory purchases, and unpaid expenses create timing differences. Aftab’s operating cash flow is $50 despite $3,150 profit.

How to improve working capital?

Collect receivables faster, negotiate longer supplier terms, manage inventory tightly, and maintain cash buffers.

Should small businesses adopt ERP?

Yes — ERP automates inventory, invoicing, and reporting while keeping these same fundamentals intact.

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