The beauty of finance and accounting is not only in figures but the understanding of terms which carry the figures or to which the figures are attached. My first lecture in CFA class was full of mystery. I had to separate layman definition of the financial terms from what they really are. Below are the definition of some financial terms.
• Liability: Liability is simply defined as an amount which quantify what an entity or company is owing. This can be benefits enjoyed in form of goods, services or money that are yet to be paid for. Liabilities are classified into two, for corporate reporting – Non-current and Current. While Non-current Liabilities heads owing that are enjoyable for more than a year or settleable after a year, current liabilities heads owing that should be settled within a year. Usually, liabilities, without respect to classification, appear as loan, debentures, accrued expenses, accrued salaries, among others.
• Owners Equity: This is the amount that the owner of the company (the business and its shareholders) can claim as its own. It is usually made up of ordinary shares, premium paid on share acquisition and retained profit or loss of the business. Also, it can be referred to as the net of the business asset net of its liabilities.
• Assets: This can be defined as economic resources controlled by a company as a result of efforts or activities made in the past. Popularly, assets are referred to as physical property that a company make use of in order to carry out its operational activities however, it’s beyond that and thus include other intangible things such as copyright, licenses, patent right, goodwill etc. that contribute to successful operational activities. Mathematically, Assets = Liability + Owners Equity
• Revenue: This is the amount of income generated from selling the goods or services of a business. This is also the total amount of money recuperated by the company over a period of time on sales of goods or services related to its core business.
• Expense: An expense is a cost incurred by a business in fulfilling its obligations towards its customers. It is cost incurred to enable successful operational activities.
• Investment: Investment can be referred to as assets acquired or a project initiated to generate income over a period of time.
• Profit: This is an amount that reflect a positive performance of a business in a particular period. It’s the revenue of a business plus other income less all its expenses.
• Loss: Loss is an amount that reflect the negative performance of a business in a period and it’s arrived at when the expenses of a business outweigh its revenue plus other income.
• Income: Income is an inflow generated by a business from an unusual or infrequent transaction like sales of non-current asset, commission received, among others.
• Distributions to Owners: This is the part of the profit that is shared to the owners of the business, sometimes called dividend – an interest paid on their investment.
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