The document defines key terms used in finance, including financial statements, balance sheets, assets, liabilities, equity, and profit and loss statements. It explains that financial statements provide information on a firm's financial activities and position, while balance sheets indicate its financial position by listing assets, liabilities, and equity. It also defines current and fixed assets, current and long-term liabilities, equity, capital employed, and key elements of profit and loss statements such as revenue, expenses, depreciation, and different types of profit.

1. KEY TERMS IN FINANCE
By Pramodkumar Jha

2. Financial Statements
Provide information regarding the financial activities and
position of a firm
Balance Sheets
Indicate the financial Position of the firm at a specific point
of time. It contains information about the firm’s Asset,
Liabilities and Equity
Assets
Assets are the economic resources or properties owned by
firm. They may be current or of a fixed nature
Current Assets
Current Asset are those which are convertible into cash
within a year in the normal course of business.
• Cash and Bank balance
• Debtors
• Inventory
• Advance to Supplier
• Prepaid Expenses

3. Fixed Assets
Fixed Assets are long-term assets, and they help in
generating a firm’s revenues. Fixed Asset are Classified into
Tangible Asset and Intangible Assets
• Tangible Fixed Assets are Physical Asset like Plant and
machinery
• Intangible Fixed Assets represent the firm’s Right and
claim such as Patents, Copyrights etc.
Gross Block
Represent all tangible fixed assets at acquisition cost
(Original Cost)
Net Block
When total depreciation is deducted form gross block it is
called Net Block

4. Liabilities
Is a firm’s obligation to pay cash or provide goods or
services in the future. There are two types of liabilities:
Current liabilities and Long-term Liabilities
Current Liabilities: are payable within a year in the normal
course of business.
Investment
In Balance sheet of firm include financial assets such as
Shares, Debentures, Bonds etc. of other companies
• Creditors
• Outstanding Expenses
• Advance from customers
• Provision for Tax and Dividend
Long-term Liabilities: are Payable after a year.
• Borrowing from Financial Institute or,
• Borrowing from Public in forms of Bond and
Debenture

5. Share Capital
Share capital is the capital contributed by owners through
the purchase of firm’s shares. Owner’s of the firm shares
are called shareholders.
Reserve and Surplus
Reserve and Surplus is also called as Retained Earnings,
represent the undistributed profits of a firm. They belong to
shareholders.
Net Worth or Equity
Net worth or Equity is the sum of Share Capital and Reserve
and Surplus it represent the shareholder’s funds
Capital Employed
Sum of Net worth and Borrowing
Net working capital or net current asset
Difference of Current Asset and Current Liabilities

6. Net Assets
Net Asset equal the net fixed asset plus net current assets.
Net assets also equal to capital employed
Profit and Loss statement
P & L provides information about a firm’s revenues
expenses and profit or loss. P & L are also called as income
statement
Revenue
Revenue is the amount received or receivable within the
accounting Period from the sale of firm’s goods or services.
Revenue consist of Operating Revenue and Non-Operating
Revenue
Operating Revenue: Revenue from the main activities of
the firm
Non-Operating Revenue: Incidental or Non-Recurring
Revenue

7. Expense
Is the amount paid or payable within the accounting period
for generating revenue.
• Salary and Wages
• Power and Fuel
• Repairs and Maintenance
• Rent
• Selling Expenses
• Administrative Expenses
• Depreciation etc.
Depreciation
Depreciation is charge for use of fixed asset. It is non-cash
item in the profit and loss statement. Expenditure in Asset
is called Capital Expenditure. Depreciation is an expense or
Revenue Expenditure

8. Profit
It is the difference between revenues and expenses, Four
important Variations of Profit are:
• Gross Profit
• Profit Before Interest and Tax
• Profit Before Tax (PBT)
• Profit After Tax (PAT) or Net Profit
Gross Profit
Gross Profit is the difference between sales and the Cost of
goods sold.
Cost of good sold
COGS is the sum of raw material consumed and
Manufacturing expenses of the good sold

9. Profit Before Interest and Tax (PBIT)
PBIT is revenue minus all expenses except Interest and Tax
Profit Before Tax (PBT)
PBT is revenue minus all expenses except Tax
Profit After Tax (PAT)
PAT is revenue minus all expenses including Interest and
Tax