Introduction to finance - Handout no.

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Section 1 Glossary of Finance terms
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.

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.

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
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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.

Dividend

Return to a shareholder in a company on its equity investment paid by the company out of its profits every year and is often referred to as profit distributed to share holders.

Equity

Money brought in by the owners. It is permanent investment in the company.

Fixed assetsLong-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.

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.

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.
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Loss

Excess of expenditure over income in a particular accounting period.

Profit

An excess of sales revenue over expenditure.

Reserves or Earnings Retained: 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.
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Insolvent

A business enterprise is considered insolvent when it is not able to pay its liabilities in full from the proceeds of its assets.

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.

Financial Statement generally refers to one of the primary accounting reports:BalanceSheet,

Income Statement and Cash Flow Statement

Financial Year- The year commencing from 1st april till 31st march is known as a financial year or an
accounting year .

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.

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.

Expenses expenses

Period costs other than the cost of goods sold usually called

Fixed Expense Costs that do not change greatly over the short term and are not directly related to manufacturing or sales volume; such as rent, office expense, utilities and insurance

Income The money received from the sale of products or performance of a service Other Income Revenue that is not part of normal income, such as interest or sale of an asset Variable Expenses Expenses or costs directly related to sales or manufacturing volume . annual report: The write-ups and financial statements given every year to investors and inquiring members of the public concerning a corporation's business common stock: Shares in a company that represent part ownership of that company

Shareholders Funds- Share capital plus all kinds of reserves representing profit retained in business over a period of time

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