The term ‘grading’ applies to an evaluation of a physical state of a coin or a banknote. The grading scale begins with the Poor designation which means totally destructed coin or a banknote, and ends with the Uncirculated designation which means a coin or a banknote without any defects. About 99,9% of coins and banknotes apply somewhere between this scale. 

Grade – namely the grade of a coin and banknote is a short description of their features. Many with help of adequate publications can learn a certain dose of accuracy in grading, however few is able to grade like an expert. The grade of a coin and banknote goes together with its money value, and hardly seen defect can change it dramatically.

Coins properly stored since they had been stuck earn ‘uncirculated’ or ‘mint state’ grade. The further positions of the scale are:

EXTREMELY FINE -- VERY FINE -- FINE -- VERY GOOD -- GOOD -- ABOUT GOOD -- FAIR POOR 
Sheldon's scale

The Sheldon's scale for banknotes looks slighlty different:
Sheldon's scale for banknotes