A Basic Finance Vocabulary

The language used in financial discussions can be overwhelming and intimidating.  This is especially true for pastors and congregational volunteers who often come to their jobs without having received any formal financial education.  

The area of FINANCE can be broadly described as being founded upon money, time, available alternatives, and liquidity.  While these four areas are each distinct, they are also deeply intertwined with each other.  Also, like any language, the general description of a word can take-on different meanings under different circumstances. 

Some key terms in Finance and Accounting are:

• Accounting years—The timeframe for all accounting procedures is a 12 month time frame.  If that time frame coincides with the calendar year (January through December) it is called a calendar year. Any other one-year time frame is called a fiscal year (for example, an accounting year which begins on July 1st and ends on June 30^th of the next year).

• Cash Basis Accounting—Income is recorded when it is received and expenses when they are paid.  Think of it like an old-time cash register.

• Accrual Basis Accounting—Income is recorded when it is earned and expenses when they are incurred.  You will know you have an accrual basis system when you see these words on the financial statements:  accounts receivable or accounts payable.

• Capital—The funds that are used or available for use by an organization.  Note that while there is financial capital, there is also knowledge capital (both people and intellectual property), and organizational capital (the capacity of the organization to use its resources to achieve results).

• Idle or excess cash—Funds which the organization has under its control but which are not expected to be used in the next six months to one year, or longer.

• Liquidity—Refers to the capacity of an organization to have sufficient cash to meet its operating costs and make principal and interest payments on its debts.  It also refers to the ability to turn an asset into cash quickly.

• Current assets and liabilities—The term “current” indicates a that the asset or liability will be used up or become due within the accounting year of the organization.  Thus, current assets are those that will be available during the accounting year (think payments received on church pledges).  Likewise, current liabilities are those payments due in that same accounting year (think mortgage payments due during the year).

• Long-term assets and liabilities—These are assets or liabilities that will be used or due at time periods greater than one year.

• Equity—This is a mathematical calculation in which total organizational liabilities (debts) are subtracted from total organizational assets (money+property).  In some ways this represent the financial “cushion” which the organization has when faced by financial hardships (think savings accounts, investments, and equity in church property).

  • A slight confusion occurs with this term when it is used in the plural (equities).  In that sense it generally means an investment in a stock or security of a company (that is the investment is in the ownership of the company).

• Deferred incomes or expenses—The are amounts of money that we may have in our hands now, but which need to be held for a future event.  For example, a payment received this year for next year’s church pledge would not be recorded on the church’s books as current year income.  Instead the income would be deferred until the next.

• Accrued incomes or expenses—The opposite of deferred financial items.  These are incomes or expenses which are accruing (or building-up) now with a due date in the future.

• Deferred Liabilities—A liability which we know about now but which is not due until the next accounting year.

• Stocks or securities—The stock of a company (the certificates which indicate company ownership) are also called securities.  Both indicate an investment in company ownership the value of which can change due to many factors.

• Bonds—Companies will offer to sell bonds for a variety of reasons (refinancing current debt, investing in new facilities or products, etc.).  Bonds are a company’s IOU promising to pay the bond holder a fixed interest rate each year on the amount of money invested by the bond holder to purchase the bonds.  At the maturity date (the date at which the bond “loan” ends) the company will repay to the bondholder their original investment.  Purchasing bonds requires some expertise as the market value of the bonds (what you can receive if you sell the bonds before their maturity date) fluctuates with the changes in interest rates.

• Underwater—A financial slang term which indicates that the value of some asset is less than the amount of money owed on it or what it was originally worth.

• Internal rate of return—a mathematical calculation which determines the effective interest rate of an investment based upon its initial costs, inflows or outflows of cash during the investment holding period, and the expected value of the investment at the end of the holding period.  Most smart calculators provide a function to make this calculation.

I hope you find these key definitions helpful as you navigate the arcane world of finance and investments.  As always, contact me if I can be of assistance to you.

Bill Wiles, Treasurer, Synod of the Sun (918 697-2309 or bwiles@chooseGod.org)