Key Concepts in Business Finance and Accounting

Journal (Daybook)

Companies are mandated to keep records in a Journal (or Daybook), documenting daily operations and their monetary value.

Ledger

The Ledger is a principal book used to concentrate accounts. While often considered a "major book," its fundamental role remains crucial for financial record-keeping. Typically, each account occupies a double folio, with the debit entries on the left side and the credit entries on the right. Entries from the Journal are posted to the Ledger.

Auditing

Auditing involves the review of annual accounts and reports by independent auditors. Their role is to certify a true and fair view of the company's assets and financial position. Auditors prepare a report on the reliability of these accounts and their compliance with legal and accounting standards. Generally, limited liability companies, limited partnerships, and companies limited by shares are required to have their accounts audited, with some exceptions based on size or other criteria, following the normal pattern of annual accounts.

Bonds (Debentures)

A Bond (or Debenture) is a type of long-term loan divided into equal shares. It is issued by a company (the borrower) and purchased by individuals, companies, or institutions (the lenders). Bondholders receive regular interest payments and have their principal investment returned at the bond's maturity. This instrument allows companies to secure long-term financing.

Obligations (Corporate Bonds)

Obligations are securities that represent loans issued by private companies, often synonymous with corporate bonds or debentures.

Factoring

Factoring is a financial agreement where a company sells its accounts receivable (invoices) to a third-party financial institution, known as a factor. The factor provides immediate liquidity by paying an advance on these receivables, taking over the responsibility for collection. This service comes with a financial cost (fees and interest) and is typically considered a short-term financial instrument.

Leasing

Leasing is a contractual agreement where a lessor (owner) grants a lessee (user) the right to use an asset for a specified period in exchange for periodic lease payments. At the end of the lease term, the lessee typically has the option to purchase the asset, renew the lease, or return the asset.

Payback Period

The Payback Period is a static investment appraisal criterion used to calculate the time it takes for a company to recover the initial outlay of an investment from its expected cash inflows.

Net Present Value (NPV)

Net Present Value (NPV) is a dynamic investment appraisal criterion. It calculates the present value of all expected future net cash flows from an investment, minus the initial investment cost. If the NPV is greater than 0, it indicates that the investment is expected to generate a return exceeding the required rate, making it a potentially profitable investment.

Internal Rate of Return (IRR)

The Internal Rate of Return (IRR) is defined as the discount rate at which the Net Present Value (NPV) of all cash flows from a particular project or investment equals zero. It represents the effective annual return of an investment.

Business Concentration

Business Concentration refers to the grouping of companies.

Horizontal Concentration

This involves the grouping of companies that belong to the same sector or perform similar processing and manufacturing activities.

Vertical Concentration

This involves the grouping of companies whose activities complete all stages in a production process, and sometimes also their distribution channels.

Multinational Company

A Multinational Company (MNC) is an enterprise comprising a parent company that controls a number of subsidiaries operating in different countries worldwide.

Small and Medium-sized Enterprises (SMEs)

Small and Medium-sized Enterprises (SMEs) typically constitute the majority of the economic fabric in the developed world. This significant presence underscores their immense economic and social importance, contributing substantially to employment, innovation, and GDP.