Glossary of Finance Terms

Glossary of Finance Terms (Basics)
The property of the business entity such as land, building, stocks etc.
Asset Usually split into current assets, i.e., working capital assets and long-
term assets, i.e., fixed assets
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
Balance Sheet
prepared at the end of one year. However it can be prepared as at the
end of every month also.
Normally means permanent or long-term funds of the business –

introduced by the owners of the enterprise and/or borrowed in the
Capital 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.
This usually means a statement showing all cash inflow, i.e., cash
receipts and cash outflow, i.e., cash expenditure. The statement is
Cash flow
prepared at least for a period of one month with the objective of
monitoring cash flows in the business and managing liquidity.
Persons to whom the business enterprise owes money due to goods or

Creditors
services supplied by them or for expenses.
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 asset 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.
Debt of the business enterprise which is to be settled within a period
Current liability of 12 months. They are also called short-term liabilities or working
capital liabilities, like creditors, accrued expenses etc.
Money owed to external agencies, like loans, creditors etc. This is

classified into short-term, medium-term/long-term etc. depending
Debt 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.
The money that is owned by the business and owed to it by the

Debtors customers to whom it has sold goods or supplied services on credit
basis.
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
Depreciation
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.
Return to a shareholder in a limited company on its equity investment

Dividend paid by the company out of its taxed profits every year and is often
referred to as profit distributed to share holders.
Money brought in by the owners in the case of a limited company. It

Equity is permanent investment in the company and is paid back to the
owners only upon liquidation of the company.
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
Fixed assets 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.
Same as leverage. A measure of external debt in relation to the

Gearing capital of the owners of the enterprise. The higher the gearing, the
greater the risk and vice-versa.
Comprises materials like raw materials, consumables/ machinery

spares and packing material, work-in-progress and finished goods.
Inventory
Together with bills receivables, form bulk of current or working
capital assets.
A business enterprise is considered insolvent when it is not able to

Insolvent
pay its liabilities in full from the proceeds of its assets.
Amount owed by the business enterprise to outside agencies, which

have provided resources either in the form of money, as in the case of
Liability
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.

Difference between current assets and current liabilities. This is
Net current Asset
called as Net working capital.
Gross fixed assets (purchase price) as diminished by depreciation

Net Fixed assets
(cumulative).
A credit facility by which a customer of the bank can draw up to a pre

Overdraft determined limit against some tangible security like inventory or
receivables or mortgage.
Also known as bills payables or money owed by the enterprise to

Payables
various creditors.
Profit An excess of sales revenue over expenditure.
A detailed and consolidated statement of all income and expenditure

prepared at the end of a specific period, like month, quarter, half-year
Profit and loss Statement and year. However, the revenue authorities are insistent on yearly
statements and the other statements are meant for management
purposes.
Also known as sundry debtors or bills receivables or book debts.

Receivables
Represent money owed to the enterprise by debtors.
Reserves or Retained Accumulated profits retained in business over a period of time.

Earnings This is net of profit distributed in the form of dividend.
Either purchase returns or sales returns representing goods returned
on purchases or sales due to defects which stand adjusted either in the
Returns 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.
Means that the business enterprise is able to meet its liabilities with all
Solvent
its assets.
Working capital Gross working capital = Total current assets
Net working capital = Total current assets (-) total current liabilities.

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Glossary of Finance Terms (Basics)

Normally means permanent or long-term funds of the business –

Persons to whom the business enterprise owes money due to goods or

Working capital assets which enable a business enterprise to achieve

Money owed to external agencies, like loans, creditors etc. This is

The money that is owned by the business and owed to it by the

A charge against business income to enable a business enterprise to

Return to a shareholder in a limited company on its equity investment

Money brought in by the owners in the case of a limited company. It

Same as leverage. A measure of external debt in relation to the

Comprises materials like raw materials, consumables/ machinery

A business enterprise is considered insolvent when it is not able to

Amount owed by the business enterprise to outside agencies, which

Loss Excess of expenditure over income in a particular accounting period.

Gross fixed assets (purchase price) as diminished by depreciation

A credit facility by which a customer of the bank can draw up to a pre

Also known as bills payables or money owed by the enterprise to

Profit An excess of sales revenue over expenditure.

A detailed and consolidated statement of all income and expenditure

Also known as sundry debtors or bills receivables or book debts.

Reserves or Retained Accumulated profits retained in business over a period of time.

Shareholders’ Share capital plus all kinds of reserves representing profit

Funds retained in business over a period of time.

Working capital Gross working capital = Total current assets

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