Understanding Accounting Terms

This assignment explores fundamental accounting concepts. It delves into six crucial terms associated with both balance sheets and income statements, providing clear definitions and explanations. The document emphasizes the importance of these terms in understanding a company's financial health and profitability.

Running head: FUNDAMENTALS OF ACCOUNTING
Fundamentals of Accounting
Name of the Student
Name of the University
Author’s Note

1FUNDAMENTALS OF ACCOUNTING
Table of Contents
Answer to Question 1......................................................................................................................2
Answer to Question 2......................................................................................................................3
References........................................................................................................................................4

2FUNDAMENTALS OF ACCOUNTING
Answer to Question 1
Six terms associated with balance sheet liabilities and equity is discussed below:
Current Liabilities: It refers to all short-term debts and bills that the companies are planning to
pay within net 12 months.
Long-term Liabilities: These are the debts that the companies own to their lenders and the
companies are planning to pay them over a period more than 12 months (Higgins, 2012).
Retained Earnings: This refers to the amount of earnings of the companies reinvested in the
business operations after deducting the necessary distribution to the shareholders like payment of
dividends and others.
Reserves: It refers to the extra amount money the shareholders of the companies pay apart from
the par value of shares (Higgins, 2012).
Issued Capital: This refers to the face value of the shares issued to the shareholders by the
companies and it represents the total amount invested by the shareholders.
Goodwill: It is an intangible assets and it can be derived from the difference between the price of
a company as going concern and the fair market value of that company.
The Balance Sheet provides the summary of a company’s assets, liabilities and equity for
a specific point of time; and the investors, lenders and creditors use this for judging the overall
financial health of the organization. Thus, the above discussed items helps in depicting the
overall financial position like liquidity and other position of the companies (Healy & Palepu,
2012). For this reason, they should be included in the balance sheet of the companies.

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4FUNDAMENTALS OF ACCOUNTING
Answer to Question 2
Six terms associated with income statement are discussed below:
Revenue: It refers to the amount of income companies earn from their principal activities; like
the proceeds from manufacturing products by a manufacturing company.
Cost of Sales: It refers to the cost of goods sold during the accounting period. It represents the
sum of inventory in the beginning of the year and purchase minus the closing stock.
Other Income: It refers to the amount of income companies earn not from the principal
activities of them; like gain or sale of fixed assets and others (Petty et al., 2015).
Administrative Expenses: These are the expenses having relation with the management and
support function of the companies, not with direct production process.
Income Tax: It refers to the income tax expenses of the companies like estimated tax charge of
current period, tax adjustment of prior period and deferred tax expenses.
Finance Charges: It mainly represents the interest expenses of the companies on loans and
debentures.
Income Statements provides the record of a company’s revenues and expenses for a
specific period of time and thus, it is a major profitability measuring tool for the investors,
lenders and creditors. In addition, income statement helps the investors, lenders and creditors
judging the financial achievements of the organizations. The above discussed terms helps in
showing the income and expenses of the companies for a specific time. Moreover, they are

5FUNDAMENTALS OF ACCOUNTING
helpful in deriving the profit of the companies (Brigham & Ehrhardt, 2013). For these reasons,
they should be included in the income statements of the companies.
References
Brigham, E. F., & Ehrhardt, M. C. (2013). Financial management: Theory & practice. Cengage
Learning.
Healy, P. M., & Palepu, K. G. (2012). Business analysis valuation: Using financial statements.
Cengage Learning.
Higgins, R. C. (2012). Analysis for financial management. McGraw-Hill/Irwin.
Petty, J. W., Titman, S., Keown, A. J., Martin, P., Martin, J. D., & Burrow, M. (2015). Financial
management: Principles and applications. Pearson Higher Education AU.