Essential Finance and Accounting Terms for Business

Posted on Nov 3, 2025 in Accounting and Finance

Business Structures and Key Roles

Sole Proprietorship: A business owned by a single individual who has no partners or shareholders.
Partnership: A company owned by two or more persons who are personally responsible for all business liabilities and debts.
Corporation (Sociedad Anónima): A company owned by shareholders, who have limited liability for the company’s debts.
Agency Problem: A conflict of interest between a company’s owners (shareholders) and its managers.
Stakeholder: Anyone with a financial interest in the company, including shareholders, employees, customers, and creditors.
Treasurer: The director responsible for financing, cash management, and relationships with financial markets and institutions.
Controller: The executive responsible for preparing the budget, accounting, and auditing.
Chief Financial Officer (CFO): The senior executive who oversees the treasurer and the controller and sets the company’s overall financial strategy.

Real Assets: Tangible and intangible assets used to produce goods and services.
Financial Assets: Claims on the income generated by real assets. Also known as securities.
Financial Markets: The markets in which financial assets are traded for cash.
Primary Market: The market for the sale of new securities issued by a company.
Secondary Market: The market where previously issued securities are traded among investors.
Capital Budgeting Decision: The decision regarding which real assets the company should acquire.
Financing Decision: The decision on how to raise the money to pay for the company’s investments in real assets.
Capital Structure: The mix of a company’s long-term financing, such as debt and equity.
Capital Markets: Markets for long-term financing.

Generally Accepted Accounting Principles (GAAP): A common set of accounting standards and procedures for preparing financial statements.
Balance Sheet: A financial statement that shows the value of a company’s assets, liabilities, and shareholders’ equity at a specific point in time.
Book Value: The net worth of a company according to its balance sheet.
Current Assets: Assets that are expected to be converted to cash or used up within one year.
Current Liabilities: Debts that are expected to be paid within one year.
The Accounting Equation: Assets = Liabilities + Shareholders’ Equity.
Income Statement: A financial statement that shows the income, expenses, and net profit of a company over a period of time.
Cash Flow Statement: A financial statement that shows the cash received and cash paid by a company over a period of time.
Marginal Tax Rate: The additional tax due for each dollar of additional income.
Average Tax Rate: The total tax due divided by the total income.

Limited Liability: A legal structure where the owners of a corporation are not personally responsible for its obligations, protecting their personal assets.
Opportunity Cost of Capital: The expected rate of return foregone by investing in a project rather than in comparable financial securities.
Net Present Value (NPV): The present value of a project’s cash flows minus the initial investment.
Present Value (PV): The value today of a future cash flow.
Future Value (FV): The amount to which an investment will grow after earning interest.
Discount Rate: The interest rate used to calculate the present value of future cash flows.
Discount Factor: The present value of a future payment of $1.
Compound Interest: Interest earned on both the initial principal and the accumulated interest from previous periods.
Simple Interest: Interest earned only on the initial investment; interest does not earn interest.
Effective Annual Interest Rate (EAR): The interest rate that is annualized using compound interest.
Nominal Interest Rate: The interest rate annualized using simple interest, often quoted as the Annual Percentage Rate (APR).
Perpetuity: A stream of equal cash flow payments that continues indefinitely.
Annuity: A series of constant cash flows occurring at regular intervals for a fixed period.
Annuity Factor: The present value of an annuity of $1 per period.