Finance is a vast field of study involving several concepts and techniques for preparing financial statements and ascertaining the financial position of an organization. If you have just signed up to pursue your higher studies in Finance planning assignment, the terminologies and concepts might throw you off.
On that note, here are eight important terms that you will come across in your financial accounting assignments.
Assets can be defined as the economic resources that a business has. In a more broad context, assets include everything owned by a company that has monetary value. There are six different types of assets – current (cash), fixed (land and machinery), tangible (real estate), intangible (patents and copyright), operating (bank balance and inventory) and non-operating assets (brand value and franchise agreement).
Liabilities are financial obligations that a company is responsible for by law. Most common forms of liabilities are amounts owed to vendors and suppliers, bank loans, credit card debts, etc. The two types of liabilities are current liabilities and non-current liabilities. Current liabilities include accounts payable, short term debt, etc. Non-current liabilities include long term loans and leases.
3. Balance Sheet
A company’s balance sheet subtracts the total liabilities it owes from the total assets owned by a company to arrive at its net worth. A balance sheet includes the assets, liabilities, equity capital, total debt, etc., of a company at a particular point in time. It is the financial statement that shows a company’s financial situation at a given moment.
Business expenses involve ordinary yet the necessary costs that are required to run a business. Usually, these are the expenses that a company has to incur every month to operate, like rent, utilities, employee salaries, legal costs, marketing and advertising costs. To protect its financial standing, a company must take every step to keep the expenses as low as possible.
Income is the amount of money (or something of equivalent value) that a company receives by selling products or providing a service to its clients. Business income also refers to the remaining revenue after a company pays all expenses and taxes. Net income is arrived at after deducting relevant taxes in a fiscal quarter or a calendar year from the gross income.
6. Cash Flow
A company’s cash flow monitors the overall movement of funds (income earned and the expenses incurred) while conducting a business every month. When someone purchases goods or services from a company, it indicates cash inflow. Again, a collection of debts also means an inflow of cash. When a business pays rent, taxes or for other utilities, cash flows out of business.
7. Cash Flow Statement
A cash flow statement is used to track general cash flow and determine the ability of a company to pay its bills and ascertain long-term solvency. The purpose of drawing a cash flow statement is to have a comprehensive look at how money has entered and exited during a specific period. If the money going out is more than what is coming in, the position is considered insolvent.
8. Profit and Loss Account
A company must generate more revenue by selling products or services that the cost of manufacturing it. A profit and loss statement summarises the revenues earned and the expenses incurred during a period. The P&L statement indicates how a company transforms its revenues into net profit. In case of non-profit, the account also shows how to generate profit by increasing revenue and reducing costs.
As far as the significance of the terms is concerned, certain terms supersede others and have been discussed below.
9 Compound Interest
- It is the interest on the amount of money you have borrowed or deposited.
- It is charged on the original amount you were loaned (when you are borrowing), plus the interest charges that are added to the outstanding balance.
- It is earned on the amount you deposited (when you are saving or investing), and the interest accumulated over time.
10 FICO Store
- Acronym for Fair Isaac Corp., the company responsible for introducing credit scores method.
- The score is based on payment history, length of credit history, the total amount owed.
- The higher the score, the better the terms you may receive on the next credit card or loan.
11 Asset Allocation
- It is the process by which you choose what portfolio proportions you’d like to dedicate to various assets.
- It is based on the goals, time horizon and personal risk tolerance.
- The three major types of asset classes are cash or cash equivalents, stocks and bonds.
12 Capital Gains
- Capital gains are the difference between the present worth of an object or item versus the purchase cost.
- The gain is only on pen and paper until the investment is sold.
- One has to pay tax on both short-term capital gains and long-term capital gains.
- It is the standard practice in any portfolio. It is the procedure of bringing the bonds and stocks to the desired percentage.
- In order to rebalance a portfolio, you have to sell stocks and reinvest the money in bonds.
14 Term Life Insurance
- If you want coverage for a set period of time, from five to 30 years, you have to avail term life insurance.
- In case of demise, your beneficiaries receive a payout. If you survive, then the policy expires with no value.
- The policy has the option of renewing the coverage after the term is over and can cancel it at any time without penalty.
15 Stock Options
- Stock options are offered by companies as management incentives.
- When one buys a stock, they become a company shareholder, giving you claim on part of that company’s assets and earnings.
- If you hold common stock, you are allowed to vote at shareholder’s meetings and receive dividends.
- Bonds are fixed-income securities, and they act as debt investments.
- When you purchase a bond, you lend money to an entity, a corporation or a government, for a fixed interest rate or time.
- You receive periodic interests over time, and get back the bond’s maturity date.
- Escrow is a type of an account which is held by an impartial third party on behalf of two parties in a transaction.
- The money involved in the escrow account is used to pay a homeowner’s property taxes and insurance.
- The buyer deposits a specified amount in the account, which the seller cannot touch until the contract is over (home-buying process).
- It is the payment that you have to hand over to the insurance company in return for the protection from financial losses.
- One can pay the premium quarterly, monthly, semiannually or annually.
- An instance of the premium is monthly car insurance payment, or home insurance.
In addition to this, one has to keep on following the change in trends and the upgradation of the policies.
Moreover, you also have to keep track of the statistics, like 29% of the Americans are saving more than a year ago.
Henry Howkins is a finance expert, and he has been associated with four reputed companies in the past ten years. He is highly experienced, which is why clients rely on his expertise. At present, he is a part of the MyAssignmenthelp.com team, where he supervises financial assignment help provided by the experts.