Terminology | Principles of Finance

1. Cash budget
A cash budget is the estimation of cash inflows and outflows of a company over a
specific period of time. Itcan be for weekly, monthly, quarterly or annually. Ithelps
to determine whether company has sufficientcash for operating its business over
the given time frame.
Simple interest
Simple interest is interest calculated on the principal portion of a loan or original
savings. Simpleinterest does not compound, meaning that an account holder will
only gain interest on the principal.
S.I. =Principal × Rate × Time=Prn
Compound interest
Compound interest is the interest of a loan or depositcalculated based on both the
initial principal and the accumulated interest from previous periods.
A = P(1+r/n)(nt)
A = Amountof future value of the investment including interest
P = principal investment amount
r = rate of interest (decimal)
n = number of compounding times per yr
t = number of yrs the money is invested for
Amortization
Amortization refers to the process of paying off a debt through scheduled. Itis pre-
determined installments that include principal and interest.
An annuity
An annuity is a series of payments made at equal intervals such as weekly, monthly
or yearly. An annuity is designed to accept and grow funds of a company.
Ordinary Annuity
An ordinary annuity is a series of equal payments made at equal intervals
(weekly/monthly/yearly) atthe end of each periods (lastday) over a fixed length of
time. i.e DPS account, home mortgagepayments, monthly insurancepayments and
pensi on payments.
Annuity Due
The opposite of an ordinary annuity is an annuity due, in which payments are made
at the beginning of each period i.e home rent, insurancepremium, saving fix
deposit.