Capital terminologies

Capital

Refers to the financial resources or assets a business uses to fund its operations and investments. It can take different forms, such as money, machinery, buildings, and other assets.

Types of capital include:

1. Fixed Capital: Used for long-term investments in assets like machinery and land.
2. Working Capital: Used for day-to-day business operations, calculated as current assets minus current liabilities.

Sales

Refers to the total revenue generated by a business from selling goods or services during a specific period.

1. Gross Sales: The total value of all sales before deducting returns, discounts, or allowances.
2. Net Sales: Gross sales minus returns, discounts, and allowances.

Profit

The financial gain a business makes after deducting all costs and expenses from its total revenue.

Types of profit:

1. Gross Profit: Revenue from sales minus the cost of goods sold (COGS).
2. Net Profit: Gross profit minus operating expenses, taxes, and other deductions.

Profit is crucial for reinvesting into the business and paying dividends to shareholders.

Revenue

The total income earned by a business from its primary operations, such as sales of goods or services.

Includes income from core activities (e.g., product sales) and non-core activities (e.g., rent income, interest earned).

Expenses

Costs incurred by a business to generate revenue. These can include salaries, rent, utilities, and raw materials.

Types of expenses:

1. Fixed Expenses: Costs that do not change with production levels, such as rent.
2. Variable Expenses: Costs that vary with production, such as raw material costs.

Assets

Resources owned by a business that have monetary value and can be used to generate income.

Types of assets:

1. Fixed Assets: Long-term assets like machinery, land, and buildings.
2. Current Assets: Short-term assets like cash, inventory, and accounts receivable.

Liabilities

Financial obligations or debts a business owes to external parties.

Types of liabilities:

1. Current Liabilities: Short-term obligations like accounts payable or short-term loans.
2. Long-Term Liabilities: Obligations due after more than a year, like bonds or long-term loans.

Equity

The owner's stake in the business, representing the residual value of assets after deducting liabilities.

Owner's Equity = Total Assets - Total Liabilities.

Turnover

Refers to the total revenue generated by a business during a specific period. In some contexts, it can also refer to the rate at which inventory is sold or replaced.

Capital structure

The mix of equity and debt a business uses to finance its operations and growth.

A business's capital structure determines its financial stability and risk.

Dividends

The portion of a company's profits distributed to its shareholders as a return on their investment.

Reserves

Profits set aside by a business for specific future purposes, such as expansion, debt repayment, or unforeseen expenses.

Break-even point

The point at which total revenue equals total expenses, meaning the business is neither making a profit nor incurring a loss.

Investment

The act of committing capital to an asset or project with the expectation of generating a return or profit.

Depreciation

The gradual reduction in the value of fixed assets due to wear and tear, age, or obsolescence.