Inflow: The money that comes in for various reasons, most commonly defined as income or revenue.
Outflow: The money that goes out for various reasons, most commonly defined as expenses.
Income (Revenue):
For individuals, income refers to money received in exchange for work (e.g., salary or fees for professional services). It can also come from returns (e.g., rent from property or interest on loans or investments). For businesses, the term "revenue" is used, which essentially means the same as income but applies to companies. Appreciation in value of assets (such as property or vehicles) is also considered income, even if it doesn’t involve cash inflow—this value is recognized as income when the asset is sold.
Expenses:
Money spent (but not invested) in exchange for benefits (e.g., food, rent, fuel), obligations (e.g., taxes), or penalties (e.g., fines). Depreciation of assets (such as property or vehicles) is also an expense, as it reduces the asset’s value.
Cash or Accrual-Based Accounting:
A key concept when analyzing income and expenses to understand the net result for a specific period. Cash-based accounting considers when cash is received or paid, regardless of the date the transaction was committed. For example, if a cable bill for January 2015 is due on February 5th but paid on February 10th, cash-based accounting records the payment date (February 10th). In contrast, accrual-based accounting considers the reference date of the bill (January 2015).
Result (Profit and Loss):
The result is evaluated over a specific period (usually monthly or yearly). While most businesses use profit and loss (P&L) statements, these can also be applied to personal finance. Profit occurs when income exceeds expenses, while a loss happens when expenses are greater than income.
Asset:
Assets are possessions that can be converted into cash or rights. These include cash, accounts (checking or savings), receivables (loans given), property (homes, land, art), vehicles, investments, and other valuable items.
Investment:
Cash or rights converted into assets for future benefits (e.g., interest or appreciation). Investments typically carry a certain level of risk. A house is an asset by definition, but a second house bought for renting purposes is considered an investment, as it aims for future appreciation and generates income through rent.
Savings:
Money set aside for emergencies, not typically considered an investment. While savings might yield some return (e.g., interest), the primary purpose is security. Retirement accounts are generally categorized as savings.
Liability:
Financial obligations owed to others, such as debts (e.g., loans or credit). These obligations are acquired in exchange for goods or services (e.g., a car loan, mortgage, or borrowed money).
Net Worth (Balance Sheet):
Net worth is the difference between total assets and total liabilities. A positive net worth means assets exceed liabilities. The Balance Sheet, often used by companies, is a financial report showing assets, liabilities, and net worth.
Chart of Accounts:
A chart of accounts is a list of predefined accounts where income, expenses, assets, and liabilities are tracked and categorized.
Budget:
A financial plan for a set period (e.g., monthly or annually) that forecasts income and expenses. Stay tuned for more on Garnize.com for a full guide on budgeting.
Cash Flow:
A report showing the balance of an account (usually assets or liabilities) over time, helping to track financial movements. More on Cash Flow.
Coming soon - A sample of a personal P&L and Net Worth reports.
