As a beginner in the field of finance, it is very important to understand some of the basic terms that are used daily by everyone, whether working in an MNC or not. These financial terms for beginners will be a guide for those who are new to investing or new to the accounts department of any company.
This finance glossary will help you understand all the basic terms and also know what these terms define, along with their variations.
List of 20 Financial Terms Every Beginner Should Know
- Amortization: Amortization is a term that is used when a company spreads an intangible asset’s cost over the course of its useful life. Intangible assets are explained as the non-physical assets that are very important for the company, such as a trademark, a patent, a copyright or a franchise agreement.
Example: Amortization
A company purchases a patent for INR 50,000.
The useful life of the patent is 5 years.
Formula:
Amortization = Cost of Intangible Asset ÷ Useful Life
Annual Amortization = 50,000 ÷ 5 = INR 10,000
- Assets: Assets are a term that is commonly used in the field of investments and other financial environments. It is an item that is purchased by the company for various uses. Assets also include the items or properties owned by the owner of the business to provide future benefits, such as cash, inventory, real estate, office equipment, or accounts receivable, which are payments due to a company by its customers. There are different types of assets, which are:
- Current Assets: These are the types of assets that can be converted into cash within a year or when needed.
- Fixed Assets: These are the types of assets that cannot be converted into cash immediately or in the short term. However, it is a product or item that is used by the companies to generate long-term income from things owned by the company.
To make the understanding clearer and easier, here is an example.
Below is a table which mentions the assets of ABC Farm.
| Current Assets | Amount (₹) | Fixed Assets | Amount (₹) |
| Cash in Hand | 2,00,000 | Land | 15,00,000 |
| Cash at Bank | 5,50,000 | Building | 25,00,000 |
| Accounts Receivable (Debtors) | 4,25,000 | Plant & Machinery | 18,50,000 |
| Inventory (Stock) | 6,75,000 | Furniture & Fixtures | 3,25,000 |
| Short-Term Investments | 3,00,000 | Computers & Office Equipment | 4,00,000 |
| Prepaid Expenses | 50,000 | Vehicles | 6,75,000 |
| Total Current Assets | 22,00,000 | Total Fixed Assets | 72,50,000 |
Through this table, it can be seen that ABC Farm has INR 22 lakhs in current assets, and the total fixed assets are INR 72 lakhs 50 thousand. The current assets of the company can be converted into cash anytime.
- Asset Allocation: Asset Allocation is a term that is used when an individual looks to put their money into action in various investment types, also known as asset classes. There are three types of investment where you can put your money:
- Bonds: Bonds are explained as terms where an individual gets into a form of borrowing money. This typically means that an individual buys a bond from the government or a corporation, and they are lending the money to them. Now, on return of the money lent, the individual will receive a periodic interest payment and also get back the loaned amount at the time of the bond’s maturity.
- Stocks: Stocks is a share of the ownership in a public or private company. An individual puts his money into various companies and becomes a shareholder of that company. They also receive dividends, the company’s profit share when distributed by the company.
- Cash and Cash Equivalents: This is a term that is used to refer to any asset in the form of cash, or that can also be converted to cash easily in the event when necessary.
For a better understanding of the above theory. Here is a table that will explain the above theories:
| Asset Class | Allocation (%) |
| Equity | 60% |
| Debt | 25% |
| Gold | 10% |
| Cash | 5% |
| Total | 100% |
This table shows how a person should invest their money for better stability and growth in financial terms.
- Balance Sheet: A balance sheet is a very important financial statement that every organisation, whether government offices or private companies maintain as this document shows the organisation’s book value, or let’s say the monetary worth of the company. The balance sheet includes information about the company’s assets, liabilities and shareholders’ equity for a given reporting period.
The Balance Sheet Equation: Balance Sheets are arranged according to the following equation:
Assets= Liabilities + Owner’s Equity
| Liabilities | Amount (₹) | Assets | Amount (₹) |
| Share Capital | 10,00,000 | Fixed Assets | 12,00,000 |
| Reserves & Surplus | 3,00,000 | Current Assets | 6,00,000 |
| Long-term Loans | 4,00,000 | Cash & Bank | 3,00,000 |
| Current Liabilities | 4,00,000 | ||
| Total | 21,00,000 | Total | 21,00,000 |
- Capital Gain: A capital gain is a term used when an individual puts their money into buying an asset or investment above the price they initially paid for it. If they sell their investment or asset for less than the original price they have purchased in, then it is called a capital loss.
E.g., There is Mr A who has invested this money in stocks of the ABC company and has purchased 50 units of shares in this company for INR 40/- per share. This makes the total investment of Mr A to INR 2000/-. Now, after a certain time period, he wants to sell off these shares and sees that the price has increased from INR 2000 to INR 5000. The increase of INR 3000 is the capital gain. Similarly, if he is selling those shares, and sees a drop in actual price, let’s say from INR 2000, the price has become INR 800/-, then the difference in amount 2000-800= INR 1200 is the capital loss.
- Capital Market: This is a term that is used for a market where the buyers and sellers are involved in the trade of financial assets, which include stocks and bonds. The capital market features several participants, including:
- Companies: The private or public entities that sell their stocks or bonds to investors.
- Institutional Investors: These are those investors who buy the stocks or bonds from the companies on behalf of a large capital base.
- Mutual Funds: Mutual Funds are a type of investment which handles the investment of numerous people and puts the money in different investments for stability.
- Hedge Funds: A hedge fund is another type of investor that controls huge risks through hedging. Hedging is a process where an individual buys one stock and then invests money in a similar type of stock to make money from the difference in their relative performance.
Through this example, you will be able to understand the theory mentioned above:
| Participant | Example in the Capital Market |
| Company | ABC Ltd. issues shares and bonds to raise money for business expansion |
| Institutional Investor | An insurance company buys large quantities of ABC Ltd.’s shares |
| Mutual Fund | A mutual fund collects money from many investors and invests in ABC Ltd. shares |
| Hedge Fund | A hedge fund invests in ABC Ltd. while taking a position in a similar company to manage risk. |
- Cash Flow Statement: A cash flow statement is a term used when companies prepare their financial statement to provide a detailed analysis of the expenses and investments made during a financial year with the help of the company’s cash. In simple terms, the document shows how the businesses have generated and spent cash by including an overview of cash flows from operating, investing and financing activities during the reporting period.
Example: Cash Flow Statement of ABC Ltd. (for the year ended 31 March 2025)
| Activities | Cash Flow (₹) |
| Operating Activities | +4,00,000 |
| Investing Activities | −2,00,000 |
| Financing Activities | +1,00,000 |
| Net Increase in Cash | +3,00,000 |
| Opening Cash Balance | 2,00,000 |
| Closing Cash Balance | 5,00,000 |
- Cash Flow: The cash flow is a term that is used in the financial glossary to refer to the net balance of the cash moving in and out of the business over a certain time period. The cash flow is very commonly broken into three categories, this includes:
- Operating Cash Flow: Operating cash flow refers to the cash being generated from the normal business operations.
- Investing Cash Flow: Investing cash flow refers to the action of generating money through activities such as securities investments and the purchase or sale of assets.
- Financing Cash Flow: Financing Cash Flow is a term that is used when the net cash is generated by financing a business, which also includes the debt payments, shareholders’ equity and dividend payments.
The Cash Flow statements are shown in the following way:
| Activity | Cash Flow (₹) |
| Operating Activities | +3,00,000 |
| Investing Activities | −1,50,000 |
| Financing Activities | +50,000 |
| Net Cash Flow | +2,00,000 |
- Compound Interest: Compound Interest is a term that is used when the interest on the money invested is calculated as the base price for the calculation of the next year. So whether you are investing or saving, compound interest is earned on the amount you deposited, plus any interest you have accumulated over time.
Example of how compound interest works:
Example: Compound Interest
A sum of INR 10,000 is invested at 10% per annum for 2 years.
Formula:
A = P (1 + r/100)ⁿ
A = 10,000 (1 + 10/100)² = INR 12,100
Compound Interest = Amount − Principal
= 12,100 − 10,000 = INR 2,100
- Depreciation: Depreciation is a finance glossary used when it represents the decrease in an asset’s value every year. It is a very common term that is used in accounting and shows how much of an asset’s value a business has used over a period of time.
Example: Depreciation
A machine is purchased for INR 1,00,000.
Its useful life is 5 years.
Formula (Straight Line Method):
Depreciation = Cost of Asset ÷ Useful Life
Annual Depreciation = 1,00,000 ÷ 5 = INR 20,000
- EBITDA: EBITDA is the short form of the finance glossary, which is Equity Before Interest, Taxes, Depreciation and Amortisation. EBITDA is a very commonly used term and measure of a company’s ability to generate cash flow. To get EBITDA, you would also add net profit, interest, taxes, depreciation and amortisation together.
Example: EBITDA
A company has:
- Revenue: INR 10,00,000
- Operating Expenses: INR 6,00,000
(Interest, tax, depreciation, and amortisation are ignored)
EBITDA = Revenue − Operating Expenses
EBITDA = 10,00,000 − 6,00,000 = INR 4,00,000
- Equity: Equity is a term common to the finance glossary that is used in almost every scenario of a company’s investment infrastructure. Equity is often called the shareholders’ equity or owners’ equity on a balance sheet of the company. It is used to showcase the owner’s money in the company by subtracting the total liabilities from the total assets.
Example: EBITDA
A company has:
- Revenue: INR 10,00,000
- Operating Expenses: INR 6,00,000
(Interest, tax, depreciation, and amortization are ignored)
EBITDA = Revenue − Operating Expenses
EBITDA = 10,00,000 − 6,00,000 = INR 4,00,000
- Income Statements: The income statement is another document and term used in the field of finance and the corporate sector. It is another important financial document after the balance sheet. An income statement shows the business’s income and expenses that occurred during a given period of time. This same document is also very commonly known as a Profit and Loss Statement (P&L).
Below is an example of how the income statement is shown:
| Particulars | Amount (₹) |
| Revenue (Sales) | 8,00,000 |
| Expenses | 6,00,000 |
| Net Profit | 2,00,000 |
- Liabilities: In the whole finance glossary, this word is very commonly used in cases involving individuals as well as the company. Liabilities are just the opposite of what assets are. It is the amount that you owe to the other parties, such as the bank debt, wages and money due to suppliers, also known as accounts payable. Liabilities itself has different types, they are:
- Current Liabilities: The current liabilities are very commonly known as the short-term liabilities, which can be cleared off in the next year.
- Long-term Liabilities: Long-term liabilities refer to the dues that cannot be paid immediately or in a year’s time. It will take time to pay off the debt.
Example of Liabilities:
| Type of Liability | Example | Amount (₹) |
| Current Liabilities | Creditors, Bills Payable | 3,00,000 |
| Long-Term Liabilities | Bank Loan | 7,00,000 |
| Total Liabilities | 10,00,000 |
- Liquidity: Liquidity is a very common term in the finance glossary that is used to see how quickly the company’s assets can be converted into cash. Due to this particular reason, cash is considered the most liquid asset. However, some assets are not considered the most liquid assets because they take time to sell. They are real estate or land.
Example: Liquidity
A company has:
- Current Assets: INR 4,00,000
- Current Liabilities: INR 2,00,000
Liquidity Ratio (Current Ratio) = Current Assets ÷ Current Liabilities
Liquidity = 4,00,000 ÷ 2,00,000 = 2 : 1
- Net Worth: Net worth in the finance glossary is used to measure the profitability of a company or a public figure. You can measure the net worth by subtracting what you own, your assets, from what you owe, your liabilities. The remaining number can also help you determine the overall state of your financial health.
Example: Net Worth
A business has:
- Total Assets: INR 15,00,000
- Total Liabilities: INR 9,00,000
Formula:
Net Worth = Total Assets − Total Liabilities
Net Worth = 15,00,000 − 9,00,000 = INR 6,00,000
- Profit Margin: Profit Margin is a measure of profitability that is calculated by dividing the net income by revenue or the net profit by sales. It is calculated by dividing the net income by revenue or the net profit by sales. The companies often analyse two types of profit margins:
- Gross Profit Margin: Gross Profit Margin is typically applied to a specific product or line item rather than an entire business.
- Net Profit Margin: This typically represents the profitability of an entire company.
Example: Profit Margin
A company has sales of INR 5,00,000 and a profit of INR 1,00,000.
Formula:
Profit Margin = (Profit ÷ Sales) × 100
Profit Margin = (1,00,000 ÷ 5,00,000) × 100 = 20%
- Return on Investment (ROI): ROI is the simple calculation that is used to determine the expected return of a project or activity in comparison to the cost of the investment, typically shown as a percentage. ROI is calculated using the following equation:
ROI= [(Income- Cost)/ Cost]* 100
Example: ROI
A business invests INR 1,00,000 in a project and earns a profit of INR 20,000.
Formula:
ROI = (Profit ÷ Investment) × 100
ROI = (20,000 ÷ 1,00,000) × 100 = 20%
- Valuation: The term “valuation” is the process of determining the current worth of an asset, company or liability. There are a variety of ways you can value a business, but the process can also be repeated regularly, which is helpful because you are then ready to face the opportunity to merge or sell your company.
Example: Valuation of a Company
ABC Ltd. has 10,000 shares in the market.
The market price per share is INR 50.
Company Valuation = Number of Shares × Market Price
Valuation = 10,000 × 50 = INR 5,00,000
- Working Capital: Working Capital is very commonly known as the net working capital in the finance glossary, because it is the difference between a company’s current assets and current liabilities. Working capital is the money available for daily operations that can help analyse an organisation’s operational efficiency and short-term financial health.
Example of Working capital in a company:
| Particulars | Amount (₹) |
| Current Assets | 8,00,000 |
| Current Liabilities | 5,00,000 |
| Working Capital | 3,00,000 |
Conclusion
These are some of the 20 common financial terms for beginners that they should know about, as they will help them in their professional as well as in their personal lives. These finance glossary terms are very commonly used by companies, stock markets and even by investors. If you are a beginner who is just entering the field of finance, then you should definitely refer to the above list and know its meaning and application.
