Time value of money — Accounting glossary

Money available now can be invested or used to meet an obligation, so a future cash amount is normally worth less today when the relevant discount rate is positive. Compounding moves present value forward through time; discounting calculates the equivalent present value of a future amount. Rates and periods must match, and the appropriate rate depends on currency, risk and the purpose of the valuation. Inflation affects purchasing power but is not the only reason cash timing matters. A negative rate can reverse the usual direction, so state the assumptions.

Worked example

At 10% per year, $100 today grows to $110 in one year. Conversely, $110 due in one year has present value $100 at that rate, assuming the cash flow and rate are comparable.

Common mistake

Adding cash flows from different dates without considering timing, or assuming the same discount rate is appropriate for every risk and currency.

Where it appears in your exams

Qualification	Exam	Relationship	Period
ACCA	AFM	Supporting	September 2026–June 2027
ACCA	FM	Direct	September 2026–June 2027