Finance Terms

Updated on April 3, 2024

Finance Terms Definition

Finance terms refer to terminologies used in the financial world. The glossary of finance terms is vast and never-ending, but at the same time, it is important to know the most basic finance terms to achieve financial fluency and to deal with business functions.

FinanceFinanceFinance is a broad term that essentially refers to money management or channeling money for various purposes.read more comprises diverse areas like corporate finance, personal finance, public finance, etc. Every field has its vernacular. There are financial product terms, terms used for financial services, etc. therefore, it is quintessential to know and understand the most used finance terminologies when dealing with diverse finance fields.

Top 10 Finance Terms Explained

Let’s explain in brief ten basic finance terms:

Finance terms

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Source: Finance Terms (wallstreetmojo.com)

#1 – Assets

Asset refers to the resource with financial value owned by an entity. In business, assets are used to produce economic value or future benefits. The values of assets owned by an entity are listed on its balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more (statement of financial position), and it is divided into current and non-current assets. Examples are cash, accounts receivablesAccounts ReceivablesAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. read more, and PPE.

#2 – Liabilities

LiabilitiesLiabilitiesLiability is a financial obligation as a result of any past event which is a legal binding. Settling of a liability requires an outflow of an economic resource mostly money, and these are shown in the balance of the company.read more refer to the obligations in monetary values owed by an entity to other entities. Based on the time fixed for its settlement, they are differentiated into current and non-current liabilitiesNon-current LiabilitiesThe most common examples of Non-Current Liabilities are debentures, bond payables, deferred tax liabilities etc. Non-Current Liabilities are the payables or obligations of an entity which might not be settled within twelve months of accounting such transactions. read more on the balance sheet. The liabilities of an entity are easily analyzed from its balance sheet. Examples of liabilities are accounts payables, taxes payable, and accrued expenses.

#3 – Net Income

Net incomeNet IncomeNet income for individuals and businesses refers to the amount of money left after subtracting direct and indirect expenses, taxes, and other deductions from their gross income. The income statement typically mentions it as the last line item, reflecting the profits made by an entity.read more is also known as net earnings, net profit bottom line, etc. In simple words, it is the difference between total income and total expenses. From the profit and loss account, it is calculated as the income or sales minus the cost of goods soldCost Of Goods SoldThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. read more, all expenses, depreciation and amortization, interest, and taxes. The net profit from the profit and loss statement flows to the balance sheet and cash flow statement.

#4 – Net Worth

Net worthNet WorthThe company's net worth can be calculated using two methods: the first is to subtract total liabilities from total assets, and the second is to add the company's share capital (both equity and preference) as well as reserves and surplus.read more is the difference between total assets and total liabilities. This finance term points to the degree of the financial soundness of an entity. A positive net worth indicates the condition of wealthWealthWealth refers to the overall value of assets, including tangible, intangible, and financial, accumulated by an individual, business, organization, or nation.read more outweighing the debtsDebtsDebt is the practice of borrowing a tangible item, primarily money by an individual, business, or government, from another person, financial institution, or state.read more; the entity is in a favorable state. Conversely, a negative net worth discloses an alarming state of debts outweighing the assets. The net worth is equivalent to the shareholder’s equity value on a firm’s balance sheet.

#5 – Asset Allocation

Another important finance term is asset allocationAsset AllocationAsset Allocation is the process of investing your money in various asset classes such as debt, equity, mutual funds, and real estate, depending on your return expectations and risk tolerance. This makes it easier to achieve your long-term financial goals.read more. It refers to an investment strategy that tries to balance the risk and reward by designing the investment portfolio to include a mix of assets in line with various factors like risk toleranceRisk ToleranceRisk tolerance is the investors' potential and willingness to bear the uncertainties associated with their investment portfolios. It is influenced by multiple individual constraints like the investor's age, income, investment objective, responsibilities and financial condition.read more and the investor’s goals. It is one of the most important terminologies in finance because it not only provides a blueprint and planning for investments, but also the reasonable practice of it can help an entity to smart spread their investment in such a way that no crash, downfall, or bad news can bring a complete loss.

#6 – EPS

EPSEPSEarnings Per Share (EPS) is a key financial metric that investors use to assess a company's performance and profitability before investing. It is calculated by dividing total earnings or total net income by the total number of outstanding shares. The higher the earnings per share (EPS), the more profitable the company is.read more stands for earnings per share. In simple terms, it is total earning or net income divided by outstanding common shares. Specifically, it is calculated by dividing “Net income-Preferred dividends” by the weighted average common shares outstanding. A high EPS value points to the business’s profitability; hence high EPS is attractive to investors.

#7 – EBITDA

EBITDAEBITDAEBITDA refers to earnings of the business before deducting interest expense, tax expense, depreciation and amortization expenses, and is used to see the actual business earnings and performance-based only from the core operations of the business, as well as to compare the business's performance with that of its competitors.read more is the acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s a measure of profitability. It can be easily calculated using the company’s balance sheet and income statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more details. For example, one of the methods of calculating EBITDA is adding taxes, interest expense, depreciation, and amortization to the net income.

#8 – Capital Gain

The finance term capital gainCapital GainCapital gain refers to the profit resulting from selling a capital asset or investment at a price higher than its purchase price.read more refers to the gain realized when a capital asset is sold because of an increase in its value compared to its purchase price. Capital gains remain on paper and are only realized when an asset is sold. For example, if a person buys a house today at $100,000, and after five years, the house’s market value goes to $250,000. The person plays smartly and ends up selling the home for $260,000. The total $160,000 is the capital gains that the person earns from selling the property. The opposite is a capital loss when there is a decrease in the asset’s value.

#9 – Compound Interest

Compound interestCompound InterestCompound interest is the interest charged on the sum of the principal amount and the total interest amassed on it so far. It plays a crucial role in generating higher rewards from an investment.read more occurs when the interest is earned against the deposits and the accumulated interest. The interest is not solely derived from the principal but from the already earned interest also and increasing the total balance. For instance, for a $100 account balance in the savings account with 2% interest per annum, the account holder will have $2 ($100*2%) as interest incomeInterest IncomeInterest Income is the amount of revenue generated by interest-yielding investments like certificates of deposit, savings accounts, or other investments & it is reported in the Company’s income statement. read more and $102 as account balance in the first year. The second-year interest income will be $2.04, and the account balance will be $104.04.

#10 – FICO Score

A FICO (Fair Isaac Corporation) score is a type of credit score presented in three digits (ranging from 300 to 850) which informs creditors about the possibility of a client returning the borrowed money based on their credit history. Hence, it helps creditors in credit approval or decline decisions.

This is a Guide to Basic Finance Terms. We explain the top 10 glossaries of terms to know from the finance dictionary focusing on business terms. You can learn more about accounting from the following articles –

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