Your First Step to Financial Literacy: 21 Must-Know Business Concepts

Financial literacy today is as important as reading and writing. Understanding basic financial concepts gives you a clearer view of how money moves within a company and helps you interpret financial information with confidence. In this article, I've selected the 21 most important company-related concepts (with examples) to help you take your first step toward financial literacy. Since the field is broad, we'll focus on practical terms used in company finance and accounting, so when someone mentions any of these concepts, you'll immediately understand what they mean.

1. Assets

Resources owned by a company that are expected to provide future economic benefits.

Example: A company owns $20,000 in cash, $50,000 worth of inventory ready to sell, and machinery valued at $100,000 used in production. Total assets = $170,000.

2. Non-Current (Fixed) Assets

Long-term tangible or intangible assets used in operations.

Example: A manufacturing company's fixed assets include its production building, assembly machines, company vehicles, and software licenses used to run operations. These assets stay in the business for several years and support daily production activities.

3. Liabilities

Obligations the company must settle in the future.

Example: Bank loans, supplier invoices, and taxes payable, which must be paid at a future date.

4. Current Liabilities

Obligations the company must settle within one year.

Example: A company owes $10,000 to suppliers (accounts payable), has a $5,000 short-term bank loan, and $2,000 in unpaid employee salaries. Total current liabilities = $17,000.

5. Equity

The ownership value in a company, representing what remains for the owners after all liabilities have been paid. It shows the shareholders' stake in the business.

Example: A company has total assets of $200,000 and owes $120,000 in liabilities. The remaining $80,000 belongs to the owners as equity. This can include share capital and accumulated profits (retained earnings).

6. Net Profit (Earnings)

The actual profit a company keeps after paying all expenses, including interest and taxes.

Example: A company has an EBIT (Earnings Before Interest & Taxes) of $50,000, pays $5,000 in interest on a loan, and $10,000 in taxes. Net Profit = $50,000 - $5,000 - $10,000 = $35,000.

7. Retained Earnings

Cumulative portion of net income that the company keeps instead of distributing as dividends; part of shareholders' equity.

Example: Beginning retained earnings $50,000 + Net income $20,000 - Dividends $5,000 = Ending retained earnings $65,000.

8. Revenue (Sales)

Total income earned from selling goods or services.

Example: A software company sells 500 annual subscriptions at $200 each. The revenue for that month is 500 x $200 = $100,000.

9. Inventory

Goods held for sale or used in production (raw materials, WIP (Work In Progress), finished goods).

Example: A furniture company has 50 tables in production (WIP), 100 finished chairs ready to sell, and 200 kg of wood as raw materials. All together make up the company's inventory.

10. Cost of Goods Sold (COGS)

The direct costs a company incurs to produce the products it sells.

Example: A furniture company sells 50 tables in a month. It spends $5,000 on wood, screws, and other materials, and $2,000 on labor to make the tables. The COGS for the month is $7,000.

11. Operating Expenses

Costs a company incurs to run its daily business operations, excluding costs of goods sold.

Example: A small retail company spends $3,000 on salaries, $2,000 on rent, $1,500 on utilities, and $500 on marketing. Total Operating Expenses = $3,000 + $2,000 + $1,500 + $500 = $7,000.

12. Accrued Expenses

Costs a company has incurred for goods or services it has received, but has not yet paid. These are recorded as liabilities until payment is made.

Example: A company receives electricity and water services in November but will pay the bills in December. The unpaid utility bills for November are recorded as accrued expenses.

13. Gross Profit

The profit a company makes after subtracting the direct costs of producing its goods (COGS) from its revenue.

Example: A company sells 100 laptops this month for $1,000 each, so Revenue = $100,000. The cost to produce these laptops (COGS) is $70,000. Gross Profit = $100,000 - $70,000 = $30,000.

14. Operating Profit / EBIT (Earnings Before Interest and Taxes)

Profit after operating expenses, before interest and taxes.

Example: A company has Revenue = $50,000 and COGS = $30,000, so Gross Profit = $20,000. Its Operating Expenses = $8,000 (salaries, rent, utilities, marketing). Operating Profit / EBIT = $20,000 - $8,000 = $12,000.

15. Depreciation & Amortization

Spreading the cost of a long-term asset over its useful life.

Example: A company buys a delivery van for $25,000. The van is expected to be used for 5 years. Each year, the company records: Depreciation Expense = $25,000 / 5 = $5,000 per year. This $5,000 reduces the company's profit each year but reflects the van's usage and wear over time.

16. Accounts Payable

Money the company owes suppliers for goods or services received.

Example: A company buys $8,000 of office supplies on credit and must pay the supplier within 30 days.

17. Accounts Receivable

Money customers owe the company for products or services sold on credit.

Example: A company delivers $15,000 worth of products to clients on 30-day credit terms. The clients have not paid yet, so $15,000 is recorded as accounts receivable.

18. Cash Flow (Operating Cash Flow)

Cash generated from a company's core business operations.

Example: A company receives $50,000 from customer payments and pays $30,000 for salaries, rent, and materials. Operating cash flow = $50,000 - $30,000 = $20,000.

19. Working Capital

Short-term financial health measure; calculated as Current Assets - Current Liabilities.

Example: A company has $60,000 in current assets (cash, accounts receivable, inventory) and $35,000 in current liabilities (accounts payable, short-term loans). Working capital = $60,000 - $35,000 = $25,000.

20. Balance Sheet

Statement showing a company's assets, liabilities, and equity at a specific date.

Example: As of December 31, 2025, a company has $50,000 in cash, $30,000 in inventory, and $120,000 in equipment (total assets = $200,000); owes $20,000 to suppliers, $50,000 in short-term loans, and $50,000 in long-term loans (total liabilities = $120,000); and has $60,000 in share capital plus $20,000 in retained earnings (total equity = $80,000).

21. Income Statement

Statement summarizing a company's revenues and expenses over a specific period (month, quarter, or year) to show profit or loss.

Example: For the quarter ending September 30, 2025, a company earns $200,000 from product sales (revenue), spends $50,000 on cost of goods sold, $70,000 on salaries and rent, and $10,000 on taxes. Net profit = $200,000 - ($50,000 + $70,000 + $10,000) = $70,000.

That's it for this set of concepts. If I missed something or got something wrong, I'd genuinely like to know - reach me at naifsaleem20@gmail.com.

Source: The topic is inspired and completely adapted from the concepts mentioned in https://www.youtube.com/watch?v=WEDIj9JBTC8&t=2290s