Here’s an HTML formatted explanation of key finance terms:

Key Finance Terms Explained

Navigating the world of finance can feel overwhelming with its own specific vocabulary. Here’s a breakdown of some key terms to help you understand the basics:

Assets & Liabilities

Assets are resources owned by an individual or company that have future economic value. Examples include cash, accounts receivable (money owed to you), inventory, and property. Liabilities are obligations to others – what you or your company owes. This includes loans, accounts payable (money you owe to others), and salaries payable.

Equity

Equity represents the owner’s stake in a company or asset. For a company, it’s calculated as Assets – Liabilities. Think of it as the net worth. For a homeowner, equity is the value of the home minus the outstanding mortgage balance.

Revenue & Expenses

Revenue is the income generated from a company’s normal business operations. It’s the top line on an income statement. Expenses are the costs incurred to generate revenue, such as salaries, rent, and utilities. Understanding these two provides insight into a company’s profitability.

Profit & Loss (Income Statement)

The Income Statement, also known as a Profit and Loss (P&L) statement, summarizes a company’s financial performance over a specific period. It shows revenue, expenses, and ultimately, net profit or net loss (revenue minus expenses).

Balance Sheet

The Balance Sheet provides a snapshot of a company’s assets, liabilities, and equity at a specific point in time. The fundamental accounting equation is Assets = Liabilities + Equity. This shows the financial position of the business.

Cash Flow Statement

The Cash Flow Statement tracks the movement of cash both into and out of a company. It categorizes cash flows into three activities: operating activities (day-to-day business), investing activities (purchase or sale of long-term assets), and financing activities (raising capital or repaying debt).

Budget

A Budget is a financial plan that estimates future income and expenses for a specific period. It’s a critical tool for managing finances, setting goals, and tracking progress.

Interest Rate

An Interest Rate is the cost of borrowing money, expressed as a percentage of the principal amount. It is the return paid to a lender for the use of their money, or paid to an investor for taking risks.

Return on Investment (ROI)

Return on Investment (ROI) measures the profitability of an investment. It’s calculated as (Net Profit / Cost of Investment) x 100. A higher ROI indicates a more profitable investment.

Depreciation

Depreciation is the decrease in the value of an asset over time due to wear and tear or obsolescence. It is an expense recorded on the income statement to reflect the asset’s declining value.

Understanding these terms is a foundational step toward financial literacy and making informed decisions, whether you’re managing your personal finances or analyzing a company’s performance.