Important finance and accounting terminologies - simplified.

Managing your finances can prove to be a technical feat if you are not well versed with common terminologies. So, first, you need to know about important finance and accounting terms and then you can chart a financial plan and handle your accounts easily.

Even though finance and accounting is a big topic to cover, you can start your education with the knowledge of common terminologies that are used frequently with accounting and financial planning. So, here’s a look into the most common, yet important financial term.

Net income

The income that you earn from your business, profession or employment is called the gross income. Net income, on the other hand, is the income after deducting taxes and expenses from your gross income.

The net income is also called the disposable income that you can save towards your financial goals.

Net worth

You must have heard about celebrities and the uber-rich being hailed by their net worth. But what exactly does it mean?

Net worth is the estimate of your economic position. It is calculated by deducting all the liabilities that you have from the assets that you own.

For example, if you have worth Rs.50 lakhs and assets and you owe Rs.20 lakhs in liabilities, your net worth would be Rs.30 lakhs.

Asset Allocation

Asset allocation means dividing your investments across different types of assets. So, if you have to invest Rs.10 lakhs and you choose to invest Rs.2 lakhs each in five different avenues, this process of segregating your investments into different avenues is called asset allocation.?

Asset allocation helps you diversify your portfolio so that you can reduce the investment risks and maximize the return generating potential of the portfolio.

EPS

Earnings per Share denotes the profit earned by the company against per unit of the share issued by it. For example, if a company has issued 1000 shares and it has earned a profit of Rs.5000, the EPS would be Rs.5/share.

EPS helps you pick the right company to invest in. If a company has a high EPS, it means that it offers high profits to investors. Such a company, therefore, is popular among investors for the higher profits that they yield.

Capital Gain

If you sell a capital asset and incur a profit on such a sale, it is called capital gain. Capital assets are those that are owned for investment or ownership purposes. For example, land, property, jewelry, artwork, shares, mutual funds, etc. are called capital assets. If you buy such assets and then sell them at a higher value, the profit that you would earn would be called a capital gain.

Balance Sheet

The balance sheet is a statement that shows your assets and liabilities. It can help you check the value of your assets and liabilities and ensure that the assets are sufficient to pay off liabilities.?

These terms are simple to understand if you know their meaning. So, know these terms so that the next time you sit down to manage your finances you don’t get bowled over by difficult terminologies.?