Throughout our secondary education it is rare for students to learn about important concepts in the financial world. And when you pursue an undergraduate degree, you are unlikely to learn about the realm of finance unless you take on a major which is in the business realm.
With this in mind I want to provide basic and easy to explain financial knowledge in a way that ANYONE can understand. On this post I will cover financial statements:
What is a Financial Statement?
A financial statement summarizes a person’s or organization’s financial situation, showing income, expenses, assets, and liabilities. Definitions of these terms will be provided below.
Primary Financial Statements:
Income Statement: The income statement presents your net income for a period. When you hear people talk about an income statement, they are usually referring to their annual income statement. The statement breaks down in detail your Revenue, Expenses, Interest, and Tax.
- Income: Money received from various sources, like work, investments, or rentals.
- Revenue: The total money earned from business activities or work.
- Expenses: Costs incurred for living or running a business.
- Net Income: Net Income is the amount of Amount of Revenue left over after subtracting expenses, interest, and tax.
- Realized Gain: A realized gain occurs when an asset, such as a stock or investment, is sold for a price higher than its original purchase price. This results in a profit for the investor or entity.
- Realized Loss: A realized loss is the opposite of a realized gain. It occurs when an asset is sold for a price lower than its original purchase price, resulting in a financial loss.
Balance Sheet: A balance sheet is a financial statement that provides an overview of a company’s financial condition at a specific point in time. It consists of two main sections: assets and liabilities. The balance sheet equation is: Assets = Liabilities + Equity.
- Assets: Assets represent everything of value that a company or individual owns. This includes cash, investments, property, equipment, and more.
- Liabilities: Liabilities represent debts and obligations that a company or individual owes to others. This includes loans, accounts payable, and other financial obligations.
- Unrealized Gain: An unrealized gain is the increase in the value of an asset that an investor or entity holds but has not yet sold. It is considered a paper gain because it hasn’t been realized through an actual sale.
- Equity: Equity represents the ownership interest in a company. It is calculated as the difference between a company’s assets and liabilities. In the context of personal finance, equity can also refer to the value of assets, like a home, minus any outstanding mortgage or debt.
- Capital: In a business context, capital often refers to the initial investment or money contributed by the owners (shareholders) of the company.