Accounting Language — Words You Must Know

On Day 4, Meera arrived at the office to find Sharma Sir arranging a set of printed cards on his desk. Each card had one word written on it in big bold letters: ASSETS, LIABILITIES, CAPITAL, REVENUE, EXPENSES. "Today," he said, "we learn the vocabulary. Every profession has its own language. Doctors say 'fracture,' not 'broken bone.' Lawyers say 'plaintiff,' not 'the person who complained.' And accountants have their words too. After today, you will speak like an accountant."

Why Learn These Words?

Meera looked at the cards and felt a small knot of worry. "Sharma Sir, these sound complicated."

"They sound complicated," he agreed. "But they are not. Each word describes something you already know from everyday life. I'm just going to give you the professional name for it."

"Think of it like this. You know what dhaniya is, right?"

"Coriander," Meera said.

"Right. In English, it's coriander. In Latin, it's Coriandrum sativum. Three names for the same thing. Accounting words are the same — they're just professional names for things you already understand."

"Let's start. And we'll use Rawat Aunty's shop for every example, so everything feels real."

Assets — What You OWN

Sharma Sir held up the first card: ASSETS.

"An asset is anything valuable that the business owns or controls."

Asset = Something the business owns that has value. It helps the business earn money now or in the future.

"Let's walk through Rawat Aunty's shop and point to the assets."

He took out a photo of the shop interior (Negi Bhaiya had clicked it on his phone during their visit).

What are Rawat Aunty's Assets?

"Every single one of these is an asset," Sharma Sir said. "They all have value. They all help the business."

Meera raised her hand. "What about the udhar amounts? That's not cash. How is it an asset?"

"Excellent question! When a customer owes you money, that money is still yours — the customer just hasn't paid yet. It's called a receivable. It IS an asset because you expect to receive it. Of course, there's a risk the customer might not pay, but we treat it as an asset until we have reason to think otherwise."

Types of Assets

Sharma Sir drew a quick table:

"Current assets keep changing — stock gets sold, cash comes and goes. Fixed assets stay for a long time."

Liabilities — What You OWE

Sharma Sir held up the second card: LIABILITIES.

"A liability is the opposite of an asset. It's something you owe to someone else."

Liability = An amount the business owes to others. A debt or obligation.

"Back to Rawat Aunty's shop. What does she owe?"

"Liabilities are like promises," Sharma Sir said. "You promised to pay the supplier on Saturday. That promise is a liability. You promised to repay the bank loan over three years. That promise is a liability."

Types of Liabilities

Meera nodded. "So assets are what you have, and liabilities are what you owe."

"Exactly. Now here's the interesting part."

Capital — The Owner's Own Money

Sharma Sir held up the third card: CAPITAL.

"When Rawat Aunty started her shop years ago, she put in her own savings. Maybe ₹2,00,000 from her personal money. That money — her own money that she invested in the business — is called capital."

Capital = The owner's own money invested in the business. Also called Owner's Equity.

"Think about it this way. The business has assets. Some of those assets were bought with borrowed money (liabilities). The rest were bought with the owner's own money (capital)."

This leads to the most important equation in all of accounting:

Assets = Liabilities + Capital

"Everything the business owns (assets) was funded by either borrowing (liabilities) or the owner's own investment (capital). Always. Without exception."

Let's test it with Rawat Aunty's shop:

"See? Assets (₹2,12,000) = Liabilities (₹82,000) + Capital (₹1,30,000). It balances. It ALWAYS balances. This is called the Accounting Equation."

Meera stared at the numbers. "So if I know any two, I can calculate the third?"

"Yes! If you know Assets and Liabilities, you can calculate Capital. If you know Assets and Capital, you can calculate Liabilities. This equation is the backbone of accounting."

What About Drawings?

"One more thing about capital," Negi Bhaiya added. "Sometimes the owner takes money OUT of the business for personal use. Rawat Aunty might take ₹2,000 from the shop's cash box to pay for her son's school fees. This is called drawings."

Drawings = Money or goods the owner takes out of the business for personal use.

"Drawings reduce capital. If the owner puts money in (capital goes up) and takes money out (drawings reduce capital), the net capital at any time is:"

Net Capital = Capital Invested + Profits - Drawings

Revenue — Money Earned

Sharma Sir held up the fourth card: REVENUE.

"Revenue is the money the business earns from its main activity."

Revenue (also called Income or Sales) = Money earned by the business from selling goods or providing services.

"For Rawat Aunty, revenue is the money she earns from selling goods in her shop. If she sells ₹5,000 worth of goods in a day, her revenue for that day is ₹5,000."

"Note: revenue is NOT the same as profit. Revenue is the total money earned from sales. From this, you still have to subtract all your costs. What's left after subtracting costs is profit."

Types of Revenue

"For most small shops, almost all revenue comes from sales."

Expenses — Money Spent to Run the Business

Sharma Sir held up the fifth and final card: EXPENSES.

"Expenses are the costs of running the business."

Expense = Money spent to run the business and earn revenue. The cost of doing business.

"Rawat Aunty earns revenue by selling goods. But to earn that revenue, she has to spend money too."

The Profit Formula

"Now, Meera, you know what revenue is and what expenses are. The formula for profit is beautifully simple."

Profit = Revenue - Expenses

"If Rawat Aunty earns ₹1,50,000 in revenue in a month and her total expenses are ₹1,20,000, her profit is ₹30,000."

"If her expenses are MORE than her revenue — say revenue is ₹1,00,000 but expenses are ₹1,10,000 — then she has a loss of ₹10,000."

"This is why accounting matters. Without it, Rawat Aunty cannot tell if she is having a good month, a bad month, or breaking even."

More Important Words

"We've covered the Big Five," Sharma Sir said. "Now let me teach you a few more words that come up every single day."

Debtor — Someone Who Owes You Money

Debtor = A person or business that owes money TO your business. Usually a customer who bought on credit.

"Remember the woman who took goods worth ₹380 on udhar? She is Rawat Aunty's debtor. She owes Rawat Aunty money."

"In Rawat Aunty's books, the total amount that all customers owe her is called Sundry Debtors or Accounts Receivable."

"A debtor is an ASSET — because it's money that should come in."

Creditor — Someone You Owe Money To

Creditor = A person or business to whom YOUR business owes money. Usually a supplier who gave you goods on credit.

"The supplier who delivered ₹4,200 of goods and is waiting for payment on Saturday — he is Rawat Aunty's creditor."

"In Rawat Aunty's books, the total amount she owes to all suppliers is called Sundry Creditors or Accounts Payable."

"A creditor is a LIABILITY — because it's money you have to pay."

"An easy way to remember: Debtor — they are in your debt. Creditor — they gave you credit."

Stock / Inventory — Goods You Have for Selling

Stock (or Inventory) = The goods a business currently has available for sale.

"Everything on Rawat Aunty's shelves right now — every bag of rice, every bottle of oil, every packet of biscuits — is her stock. When she sells something, stock goes down. When she buys new goods from a supplier, stock goes up."

"Stock is an asset. It sits on the shelves waiting to be converted into cash through sales."

"At the end of every month or year, the shop owner counts all the goods physically. This is called a stock count or physical inventory. It's important because the actual stock on the shelf might be different from what the books say — due to theft, damage, or recording errors."

Goodwill — The Invisible Value

"Meera, one more interesting term. Suppose Rawat Aunty decides to sell her shop. The furniture is worth ₹40,000. The stock is worth ₹1,20,000. But a buyer might pay ₹2,00,000 for the whole business. Why?"

"Because... the shop has regular customers? People know it and trust it?" Meera guessed.

"Exactly! The shop has a reputation. Customers come to it out of habit and trust. That invisible value — the name, the reputation, the customer loyalty — is called goodwill."

Goodwill = The value of a business's reputation, customer relationships, and brand name. It's real value, but you can't touch it or see it.

"Goodwill is an asset, but a special kind. You can't weigh it or put it on a shelf. It only shows up in the books when a business is bought or sold."

"In Uttarakhand, many old shops have been running for two or three generations. People go there because their grandparents went there. That loyalty is goodwill. It has real value."

Putting It All Together — Rawat Aunty's Shop Map

Sharma Sir drew a large diagram on the whiteboard. "Let me map Rawat Aunty's entire shop to our accounting words."

The Five Categories — One More Look

Sharma Sir wanted to make sure Meera could classify anything into the right category. He gave her a rapid-fire quiz.

"I'll say something from Rawat Aunty's shop. You tell me: Asset, Liability, Capital, Revenue, or Expense."

"14 out of 14!" Negi Bhaiya clapped.

Meera grinned. She was starting to think in accounting language.

How These Words Connect to Double-Entry

"One last thing, Meera," Sharma Sir said. "Remember the double-entry system from yesterday? Let me show you how today's vocabulary connects to it."

"Every account in accounting falls into one of these five categories: Asset, Liability, Capital, Revenue, or Expense."

"And there are rules for how each category behaves with Debit and Credit."

"What does 'Normal Balance' mean? It means the side where you usually find the balance. Cash is an asset — its balance is usually on the Debit side. A bank loan is a liability — its balance is usually on the Credit side."

"You don't need to memorize this table right now. As you practice more transactions, it will become natural. But keep this page bookmarked. You'll come back to it many times."

The Story So Far

Meera closed her notebook and looked at the four days of notes she had taken.

• Day 1: She learned WHAT accounting is and WHY it matters.
• Day 2: She learned what a TRANSACTION is — the building block.
• Day 3: She learned that every transaction has TWO sides — double-entry.
• Day 4: She learned the LANGUAGE — Assets, Liabilities, Capital, Revenue, Expenses.

"Sharma Sir," she said, "I feel like I've just learned the alphabet. I know the letters. But I haven't written a sentence yet."

Sharma Sir smiled widely. "That's the perfect way to put it. In Part 2, you'll start writing sentences — recording transactions in journals, posting them to ledgers, and preparing financial statements. The real work begins."

"But remember: without the alphabet, you cannot write sentences. These four days gave you the foundation. Everything else is built on this."

Quick Recap — Chapter 4

Assets = What the business owns (cash, stock, furniture, debtors). Assets HELP the business.

Liabilities = What the business owes (supplier bills, bank loans). Liabilities are OBLIGATIONS.

Capital = The owner's own money invested in the business.

Revenue = Money earned from selling goods or services.

Expenses = Money spent to run the business.

The Accounting Equation: Assets = Liabilities + Capital. Always.

Other key terms:

• Debtor — a customer who owes you money (Asset)
• Creditor — a supplier you owe money to (Liability)
• Stock/Inventory — goods available for sale (Asset)
• Drawings — owner takes money out for personal use (reduces Capital)
• Goodwill — the invisible value of reputation and trust (Asset)

Practice Exercise — Try This Yourself

Exercise 1: Think of a real shop or business in your town. List at least 5 assets, 3 liabilities, and identify what the capital might be. Use the table format:

Does your equation balance? (Assets = Liabilities + Capital)

Exercise 2: Classify each item as Asset, Liability, Capital, Revenue, or Expense:

Exercise 3: Rawat Aunty's shop has the following at the end of the month. Calculate her Capital using the Accounting Equation.

Exercise 4: From the debtor/creditor section, answer these:

1. Ram bought goods worth ₹500 on credit from your shop. Is Ram a debtor or creditor?
2. You bought goods worth ₹3,000 on credit from Gupta Wholesale. Is Gupta Wholesale a debtor or creditor?
3. You are a debtor of whom? You are a creditor of whom?

Fun Fact — Accounting Runs the World

Every business in the world — from a tiny chai stall in Munsiyari to Apple Inc. in California — uses the same five categories: Assets, Liabilities, Capital, Revenue, Expenses. And they all follow the same Accounting Equation.

When you watch the news and hear "Reliance reported a profit of ₹15,000 crore," that number came from the same system you are learning. When the government announces its budget, the Finance Minister is essentially presenting a giant set of accounts for the entire country.

And here is something to motivate you: India has about 7 crore small businesses (MSMEs). Most of them need someone who understands accounting. Not all of them can afford a CA. Many of them need a trained bookkeeper — someone who can keep their books clean, file their GST, and help them understand their own numbers.

That person could be you. Four chapters in, and you already know the foundation. The language is yours. Now it is time to start using it.

In Part 2, Meera picks up her pen and starts recording transactions in a proper journal. The real bookkeeping begins.