Glossary of Finance Terms (Basics)

Asset	The property of the business entity such as land, building, stocks etc.  Usually split into current assets, i.e., working capital assets and long-term assets, i.e., fixed assets
Balance Sheet	A summary picture of what the business owns, i.e., assets and what it owes, i.e., liabilities as on a particular date.  Usually balance sheet is prepared at the end of one year.  However it can be prepared as at the end of every month also.
Capital	Normally means permanent or long-term funds of the business – introduced by the owners of the enterprise and/or borrowed in the form of long-term loans from banks and financial institutions.  In the case of a limited company, the owners’ capital is called share capital.  The borrowings are called debt capital.
Cash flow	This usually means a statement showing all cash inflow, i.e., cash receipts and cash outflow, i.e., cash expenditure.  The statement is prepared at least for a period of one month with the objective of monitoring cash flows in the business and managing liquidity.
Creditors	Persons to whom the business enterprise owes money due to goods or services supplied by them or for expenses.
Current asset	Working capital assets which enable a business enterprise to achieve what is known as sales revenue by the process of turn-over of the current assets.  Current assets constantly change form from cash back to cash through the activity of the firm, i.e., trading or manufacturing or service.
Current liability	Debt of the business enterprise which is to be settled within a period of 12 months.  They are also called short-term liabilities or working capital liabilities, like creditors, accrued expenses etc.
Debt	Money owed to external agencies, like loans, creditors etc.  This is classified into short-term, medium-term/long-term etc. depending upon the period of repayment as well as the purpose for which it has been incurred.  If it is for fixed asset, it is medium to long-term and if it is for working capital, it is short-term.
Debtors	The money that is owned by the business and owed to it by the customers to whom it has sold goods or supplied services on credit basis.
Depreciation	A charge against business income to enable a business enterprise to keep a certain % of the value of a fixed asset every year with a view to replace it at the required time.  It is a book or non-cash expense but is recognised as a business expense by the revenue authorities.
Dividend	Return to a shareholder in a limited company on its equity investment paid by the company out of its taxed profits every year and is often referred to as profit distributed to share holders.
Equity	Money brought in by the owners in the case of a limited company.  It is permanent investment in the company and is paid back to the owners only upon liquidation of the company.
Fixed assets	Long-term business assets, like land, building, machinery, vehicles etc. which act as catalysts in the activity of the enterprise but do not form a part of the finished goods of the manufacturing company or stocks in trade in the case of a trading enterprise.  They are subject to wear and tear and hence require replacement after some time.  Hence, the business enterprise claims depreciation on these assets and charges the amount to its revenue income.
Gearing	Same as leverage.  A measure of external debt in relation to the capital of the owners of the enterprise.  The higher the gearing, the greater the risk and vice-versa.
Inventory	Comprises materials like raw materials, consumables/ machinery spares and packing material, work-in-progress and finished goods.  Together with bills receivables, form bulk of current or working capital assets.
Insolvent	A business enterprise is considered insolvent when it is not able to pay its liabilities in full from the proceeds of its assets.
Liability	Amount owed by the business enterprise to outside agencies, which have provided resources either in the form of money, as in the case of bank over draft or goods as in case of creditors or services as in the case of accrued expenses.
Loss	Excess of expenditure over income in a particular accounting period.
Net current Asset	Difference between current assets and current liabilities.  This is called as Net working capital.
Net Fixed assets	Gross fixed assets (purchase price) as diminished by depreciation (cumulative).
Overdraft	A credit facility by which a customer of the bank can draw up to a pre determined limit against some tangible security like inventory or receivables or mortgage.
Payables	Also known as bills payables or money owed by the enterprise to various creditors.
Profit	An excess of sales revenue over expenditure.
Profit and loss Statement	A detailed and consolidated statement of all income and expenditure prepared at the end of a specific period, like month, quarter, half-year and year.  However, the revenue authorities are insistent on yearly statements and the other statements are meant for management purposes.
Receivables	Also known as sundry debtors or bills receivables or book debts.  Represent money owed to the enterprise by debtors.
Reserves or  Retained Earnings	Accumulated profits retained in business over a period of time. This is net of profit distributed in the form of dividend.
Returns	Either purchase returns or sales returns representing goods returned on purchases or sales due to defects which stand adjusted either in the amounts due from us or due to us or by replenishment of stocks with quality goods.  Purchase return is also called return outward and sales return is also called return inward.
Shareholders’	Share capital plus all kinds of reserves representing profit
Funds	retained in business over a period of time.
Solvent	Means that the business enterprise is able to meet its liabilities with all its assets.
Working capital	Gross working capital = Total current assets
Net working capital =	Total current assets (-) total current liabilities.