BUSSINESS ECONOMY TERMS

Accounting period:

The period of time covered by business, financial and management accounts. Financial accounts are generally prepared once or twice in twelve calendar months, but the interval of management accounts must be much shorter in order to ensure adequate management control over the regular operations.

Annual Depreciation:

The reduction in book value of an asset at a certain percentage rate per annum.

Appreciation:

An increase in the value of an asset over its purchase price or book value.

Asset:

Any business resource both tangible and intangible acquired at monetary cost and which is expected to be of benefit to the business for a period of time, such as buildings, machinery, etc. Intangibles include goodwill etc. Any resource of a deceased or insolvent person from which claims may be met.

Bad Debt:

A debt which is irrecoverable and is therefore written off as a loss in the accounts of a company/bank etc.

Balance sheet:

Statement of the financial position of a company on a particular date, showing the nature and amount of a company's assets and liabilities on a particular date, usually the end of the accounting year. The assets include fixed assets, investment, current assets (which include Inventories, sundry debtors, cash and bank balances) and loans and advances. The liabilities include shareholders' fund (equity capital plus reserves). Loan funds (secured and unsecured loans) and current liabilities and provisions. The assets and liabilities must balance.

Blank cheque:

A cheque which has been signed and dated but in which the amount payable has not been filled in. This is left for the payee to insert.

Break Even Point:

That level of activity of a business at which neither profit nor loss is incurred, total costs equating with total revenue. Also called break-even performance.

Brokerage:

The payment charged by brokers for their services in arranging a contract. It is usually expressed as a percentage of the monetary value of the contract.

Bullion:

Gold and silver, usually in bar form, which is regarded as a commercial commodity at recognised degrees of purity.

Capital:

All resources which have been produced by mankind and which themselves are used in the process of production. Capital is thus different from land, since this is a natural rather than a man made resource. The total resources of a person or business. The sum of money subscribed by the members of a company, by partners or by an individual when starting a company.

Central Bank:

A bank, usually state owned whose operations are directed by the government as an instrument of financial policy. Typical functions of a central bank include acting as banker to the state and the commercial banks, controlling the note issue and managing the state's currency and credit policies. The German Bundesbank and the American Federal Reserve are the most autonomous of all central banks in the world. RBI will surely count amongst the least autonomous ones. Autonomy of the central bank reduces government extravagancea and minimises political interference.

Cheque:

A written order to banker authorising him to pay a specified sum of money to a person named in the order, to his order or to bearer from funds deposited with the banker.

Consumer Durables:

Solid items bought by the general public for use in the house. These may include washing machines, cookers and refrigerators, which are likely to be in use for several years.

Consumer Goods:

Commodities or services consumed directly to satisfy a want rather than one used to produce something else. For Example: Soft drinks etc. Capital goods (like machineries), on the other hand, are used to generate some other goods.

Credit Rating:

The amount which is credit agency states a borrower is capable of repaying. Credit Rating can be done for stocks, bonds or nations themselves. Some global credit rating agencies are Standard and Poor's (S & P), Moody's etc. CRISIL is the Indian agency rating bonds etc.

CRISIL or Credit Rating Information Services of India Limited:

Jointly sponsored by the UTI and the Industrial Credit and Investment Corporation of India (ICICI), CRISIL has been functioning since January 1988. It rates the safety and timely payment of interest on debt securities like debentures and fixed deposits of public and private sector companies. The rating, subjected to periodic review, is given in alphabetical symbols preceded by d for Debentures and F for Fixed Safety, an adequate safety, B inadequate safety, C high risk, D default.

Debentures:

An instrument of debt, called bond in the US. A debenture holder is a creditor to the company who loans funds for a period of 7-10 years against a fixed rate of interest. After the stipulated loan period the debentures are redeemed, i.e., the loan is paid back, sometimes with a very small premium. Debentures are generally secured against the company's assets. Convertible debentures can be either fully or partly converted into a certain number of shares, usually at a premium, after a stated period of time. Convertible debentures may carry a lower rate of interest than non convertible debentures investment; there is little risk but also little prospect of appreciation.

Debt-Equity Ratio:

Also called financial Leverage ratio in the US. There are three methods of calculating this ratio, the last being more common:
1. The total liabilities of a company divided by the shareholders' equity
2. The total long term debt divided by shareholders' equity
3. The total long term debt plus the par value of preference shares divided by the par value of equity shares. All the three ratios measure a company's solvency.

Depreciation:

1. The reduction in the value of an asset through wear and tear, obsolescence, etc. 2. An accounting device by means of which the value of an asset is converted into an expense for each of the accounting periods during which the asset is expected to contribute value.

Disinflation:

The process or policy of removing pressures on the economy which are forcing prices upwards and the real value of the monetary unit downwards. Pressure may be removed by curtailing expenditure through credit restrictions and a dear money policy, and by taxation.

Deficit:

An excess of liabilities over assets or of expenditure over revenue.

Disinvestment:

Especially in the Indian context, it refers to the process of offloading of shares in a firm by a party. The government of India has partially disinvested its holding in several Public Sector undertaking (PSUs) with the ultimate aim of privatising them to increase accountability and productivity.

Elasticity of Demand:

A measurement of economics of the degree of response of a change in one factor to a change in a related factor, expressed in a price demand, price supply or demand income relationships.

Floating Capital:

Funds available for carrying on a business, including funds employed in marketable investments.

Foreign Exchange:

The process of trading one currency for another. This takes place on the international exchange markets where trading sets the exchange rates of currencies. Foreign currency is required by individuals, business and governments to finance the purchase of goods and services and to make loans to other countries.

Free Market Economy:

An economic system where the government does not interfere in any way in business activity.

Golden Handshake:

Compensation paid to an executive of a company on his displacement and especially on his retirement.

Gross Domestic Product:

The value of goods and services produced in an economy. The value may be measured by aggregating market values of goods and services or by aggregating incomes from employment, profits, dividends, etc. (i.e., factor cost, which is equivalent to market values less purchase tax plus subsidies). It is equivalent to gross national product less the value of net property abroad.

Gross National Product:

The total monetary value of all the goods and services produced by a country in a year, expressed either at factor cost or at market prices.

Inflation:

The rate at which prices grow in an economy. Thus, reduced rate of inflation would mean that the rate at which prices will rise has slowed down, but not that the prices will fall.

Liquid Assets:

Assets that can be converted into cash comparatively quickly. They are widely regarded as comprising shares, short term bills of exchange, bank deposits and cash itself.

Lay off:

The temporary dismissal of a worker because there is no work to be done.

Merchandise:

Goods which are offered for sale.

National Income:

The sum of the value of goods and services available to an economy through its economic activity in a given time period. The income many be evaluated:
1. by adding the incomes generated by economic activity, e.g., wages, salaries, dividends, profits and net income from abroad;
2. by adding the prices of goods and services, less indirect taxes plus subsidies, together with government expenditure. Both methods produce similar total and the movement in the total is indicative of economic progress over time, once allowance is made for price inflation, population growth, etc. Growth of national income need not be synonymous with improvement in living standards

Real Interest Rate:

Current interest rate less the rate of inflation; of relevance in decision regarding long term fixed interest securities. Since most current interest is taxed, the post tax interest is likely to fall below double digit inflation rates, which means a steady erosion of capital.

Redemption:

Buying back a loan instrument by paying off the lender. In the case of debentures or preference shares redemption means paying back the investor, either in cash, or through equity shares.

Sensex:

it is the sensitive index of the Bombay Stock Exchange. It reflects the weighted average price of 30 most volatile A Group shares on the BSE. Widely criticised to be an unrepresentative but highly influential index.

Yield:

The actual rate of return received or obtainable from an investment, generally as the annual income calculated as a percentage of the purchase price of the investment. The rate of return for a capital investment project which equates the net capital expenditure with the discounted value of futures net cash inflows. The output of a process.