Key Financial Terms and Concepts for Businesses
**Social Capital**
Social capital refers to the subscribed capital in commercial companies. It represents the value of contributions made by partners. In corporations, social capital is divided into shares.
**Reserves**
Reserves are retained earnings within a company. There are different types, including legal reserves, voluntary reserves, and statutory reserves.
**Journal Entry**
A journal entry is a mandatory accounting record in which all operations related to the company’s activities are recorded daily or consolidated for periods not exceeding one month. These entries are known as journal entries.
**Ledger**
The ledger is a mandatory book that contains a set of individual accounts. It records all the variations affecting different capital elements from the journal or a concordant register. Its most common format is the T-account.
**Auditing**
Auditing is a technique that verifies planning, both in terms of accounting and resource profitability. There are two classifications: internal audits, conducted within the company, and external audits, performed by individuals outside the company. External audits include the examination of financial statements to analyze the company’s financial position.
**Capital Expansion**
Capital expansion involves increasing capital, either by issuing and selling new shares or using reserves. In capital increases, existing shareholders often have the right to make new contributions, exercising a right of first refusal if it exists.
**True Image**
A company presents a true image of its assets when it meets all the requirements, accounting principles, and criteria outlined in the general accounting plan.
**Working Capital**
Working capital, also known as operating capital, is the portion of current assets financed with long-term resources, such as equity or non-current liabilities. It measures the company’s financial stability. It should be positive; otherwise, the company may face difficulties meeting its immediate payment obligations.
**Average Maturation Period**
The average maturation period is the time it typically takes for a company to recover the money invested in the production process. It represents the number of days in which current assets complete an operating cycle.
**Direct Tax**
Direct taxes are levied directly on individuals or companies based on their profits or property ownership. They assess the income or wealth of individuals and companies, considering their economic and family circumstances (e.g., income tax, corporate tax).
**Indirect Tax**
Indirect taxes are levied on transactions like consumption and transfers, regardless of the identity or circumstances of the person involved. Everyone pays the same rate, regardless of their income level (e.g., VAT, property transfer tax).
**Investment**
In a business context, investment is the act of acquiring assets with the intention of generating income over time. Investment involves using capital in any business activity to increase its value.
**Loans**
Loans, as a form of corporate finance, involve the issuance of claims (bonds, promissory notes, etc.) by companies in exchange for interest. They are fixed-income securities.
**Bonds**
Bonds represent equal parts of a loan, issued under the same terms and conditions. They are acquired by many savers in exchange for interest and are considered fixed-income securities.
**Factoring**
Factoring is a corporate financing method where a company sells all its receivables to a factoring company. This provides immediate liquidity and eliminates the risk of unpaid debts, which the factoring company assumes. However, factoring typically involves high costs.
**Leasing**
Leasing is a rental agreement that includes an option for the tenant to purchase the leased property. This option can be exercised at the end of the contract for a predetermined price, known as the residual value, which must be included in the contract. Lease payments are deductible from income.