Basic Concepts of Income, Savings and Investments

Income
Income is the money you earn. For a business, it comes from selling products or services. For an individual, it comes from salary, freelancing, or business profit.

Savings
Savings is the portion of income that is not spent. It is kept for future use or emergencies.

Formula: Savings = Income − Expenses

Investment
Investment means using saved money to generate more money over time. Examples include shares, real estate, business investment, or savings accounts.

Key difference:

• Savings keeps money safe
• Investment grows money but involves risk

Real World Example

Ali earns 50,000 rupees per month. He spends 35,000 on expenses and saves 15,000. Every month, he invests 10,000 in a mutual fund. After five years, his investment grows due to compound interest and market returns.

Exam Focus

• Income = money earned
• Savings = Income − Expenses
• Investment = money used to generate more money
• Investment has risk
• Savings is safe but low growth

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Basic Concepts of Assets, Liabilities and Equity

These are three key concepts in business finance.

Assets
Assets are everything a business owns that has value.

Examples:

• Cash
• Equipment
• Buildings
• Vehicles
• Inventory

Types:

• Current assets (short-term: cash, stock)
• Fixed assets (long-term: buildings, machinery)

Liabilities
Liabilities are everything a business owes to others.

Examples:

• Bank loans
• Unpaid bills
• Supplier credit
• Debts

Equity
Equity is what remains for the owner after all liabilities are paid. It is the owner’s share in the business.

Key Formula

Assets = Liabilities + Equity

Real World Example

Ahmed opens a bakery:

• Assets: Shop (500,000) + Equipment (200,000) = 700,000
• Liabilities: Bank loan = 300,000
• Equity: 700,000 − 300,000 = 400,000

Exam Focus

• Assets = what you own
• Liabilities = what you owe
• Equity = owner’s share
• Formula: Assets = Liabilities + Equity (must memorize)