Every term you need to know, from A to Z
Please select from the menu above
- Above the line
A current or ordinary expense in a financial statement. For taxes, an above-the-line deduction is subtracted from your total income to arrive at adjusted gross income (AGI) on your tax return. Above-the-line deductions are allowed whether or not a taxpayer itemizes his personal deductions or takes the standard deduction. See also below the line and adjusted gross income.
- Accelerated Depreciation
Depreciation is the system used to distribute the expense of an asset (property, plant, or equipment) over its estimated useful life. Accelerated depreciation is a method that deducts the cost of an asset faster than straight-line depreciation, which takes an equal deduction every year over the asset’s life.
- Account Receivable
A specified dollar amount due to you by another (typically customers), usually shown on a balance sheet as due within one year.
- Accountable Plan
Under tax rules, if an employee receives travel money from his or her employer under an accountable plan, the amount is excluded from the employee’s gross income and is not subject to payroll taxes. An accountable plan requires the employee to turn in receipts to his employer documenting how money advanced to him was spent. Any excess advance must be returned to the employer, or it is included in an employee’s taxable income.
- Accounting Method
The system used to determine income and expenses for financial statements and tax returns. The most common methods are the cash method and the accrual method.
- Accounting Period
The period of time represented in a profit and loss statement; for example, monthly, quarterly, or annual income statements. For income tax purposes, businesses must choose a “tax year,” the annual accounting period they use for reporting income and expenses on their tax return.
- Accounts Payable
An unpaid invoice for the purchase of merchandise, supplies, and services, usually shown on a balance sheet as due within one year.
- Accrual Method
An accounting method that records a sale when it is made rather than when the cash is actually received and that records an expense when it occurs rather than when it is actually paid. See also cash method.
- Accrued Expense
An expense and corresponding liability recorded on the books as it occurs, although the obligation will be paid at a later date. For example, recording December’s wages and bonuses on the December books when the payroll is actually paid in January.
- Accrued Income
Recording as an asset income earned this accounting period that will be received (hopefully in cash) at some later date. For example, an inventory item is sold on open account in the current accounting period, with the expectation that the money will be received at a later date.
- Accumulated Depreciation
Depreciation is the system used to distribute the expense of an asset (property, plant, or equipment) over its estimated useful life. Accumulated depreciation is an account in the asset section of the balance sheet that shows the total amount of depreciation that has been taken on a company’s combined assets as of the balance sheet date. For example, assume your company has only one building worth $60,000 on which you are taking a $2,000 per year depreciation expense. At the end of five years, the accumulated depreciation account will show $10,000. This balance is shown on the balance sheet immediately after the building account to show that the net book value, or adjusted basis, of the building is $50,000.
- Acid Test
This is a ratio of your ready-cash items (cash, accounts receivable, and marketable securities) to your current liabilities. A higher ratio of ready cash items over current debts usually indicates a healthier company, one more likely to meet its current obligations.
- Active Participant
A taxpayer who is covered by an employer-maintained qualified retirement plan or a qualified self-employed retirement plan. If you are an active participant for even a single day in the tax year, your traditional IRA contribution may not be tax-deductible or your deduction may be limited. See also qualified retirement plans.
Having to do with the mathematics, statistics, and risk in the pension or insurance business.
A person who calculates statistical risks, premiums, and life expectancy usually for insurance purposes.
- Adjustable Rate Mortgage (ARM)
A mortgage with an interest rate that changes with some predetermined index (such as the consumer price index), and at predetermined intervals.
- Adjusted Bases
Adjusted basis is used to compute the gain or loss on the sale of an asset for income tax purposes. It generally represents the cost of the asset plus the cost of any capital improvements, minus any deductions taken, such as depreciation. See also accumulated depreciation and cost basis.
- Adjusted Gross Income (AGI)
An income tax term meaning your gross income from all sources minus certain specified items. AGI is often used to determine other allowable tax credits and adjustments. See also above the line.
- Adjusting Journal Entries
A bookkeeping entry to correct an error or to record such items as accrued income, accrued expenses, depreciation, bad debts, etc.
- Adjustment to Income
An expense that may be deducted on a tax return even if a taxpayer does not itemize personal deductions. See also adjusted gross income and above the line.
Payments made by one spouse to a former spouse under a legal separation or divorce agreement. Alimony payments are taxable income to the recipient and tax deductible for the taxpayer making the payment.
- Alternative Minimum Tax (AMT)
The tax laws that are designed to make sure that certain high-income taxpayers paid at least a reasonable amount of income tax. Because the AMT computation is not indexed for inflation, many more middle-income taxpayers are getting caught by this tax every year. Think of the alternative minimum tax as a separate tax system that runs parallel to the regular tax system. The AMT requires you to adjust your taxable income to disallow certain deductions and credits allowed by the regular tax. If your AMT turns out to be higher than your regular tax computation, you pay the AMT.
- Amended Return
An amended income tax return allows taxpayers to correct the income, deductions, and credits reported in error or omitted on their original return. Generally, taxpayers have three years from the tax return due date, including extensions, to file an amended return. However, any period taxes that have not been paid are also eligible to be amended”.
A book entry to record the gradual reduction of an account value. It is most often used to describe the reduction in a debt. To amortize a debt is to make payments over a period of time. For tax purposes, certain expenses (such as loan fees) are required to be capitalized or deducted over a fixed period of time. Amortization refers to the expense deduction. Similar to depreciation but involving intangible assets rather than tangible ones.
- Amount Realized
The amount received by a taxpayer on the sale or exchange of property. It is the sum of cash, fair market value of property or services received, and the amount of debt assumed by the purchaser.
- Annual Percentage Rate (APR)
The Truth in Lending laws require lenders to show you the APR. This figure takes into account the interest rate shown on the contract as well as points, fees, interest on interest, and any other adjustments. It is designed to show the true cost of the loan. A 9% annual interest rate compounded monthly yields a 9.38% APR.
A person who receives a pension or annuity.
A series of payments. The right to receive a series of payments over a specified time such as monthly payments for a set number of years, or a lifetime annuity which runs until the death of the recipient. A joint and survivor annuity ends on the death of the last joint owner.
- Articles of Incorporation
Documents filed with the Secretary of State in the state where a corporation is being formed. The Articles give the name of the corporation, the incorporators, addresses, and the amount of capital stock authorized to be issued. (Your attorney would be glad to expand on this definition if you need more information.)
- Assessed Value
The value of your property for property tax purposes, usually determined by a county assessor who assigns a separate value for land and improvements.
Items you own, both tangible (real estate, vehicles, equipment, and other personal property) and intangible (patents, trademarks, etc.).
- At-Risk Rules
The at-risk rules limit your income tax loss from an activity to the amount you could actually lose. For example, if your total investment risk in a partnership is $20,000, you are limited to a total of $20,000 of tax losses from that partnership. The rules apply to individuals, partners in a partnership, and shareholders in S corporations.
In accounting, the examination of books and original documents to determine the completeness and fairness of information presented in financial reports with the intent of issuing audited financial statements. The fairness of accounting information is measured by generally accepted accounting principles (GAAP) published by the American Institute of Certified Public Accountants. In tax, an audit is an IRS or other tax jurisdiction examination of your tax return or other financial records, performed in an effort to verify whether a taxpayer is correctly reporting transactions that have tax consequences.
- Away-from-home Expenses
An income tax term used in determining the deductibility of certain travel expenses. Away from home in this sense does not normally mean away from your personal residence, but rather your principal place of employment. You must be away from home for a period longer than an ordinary working day for expenses to be deductible.
- Backup Withholding
Those who make payments to others of interest, dividends, rents, royalties, etc., must, under certain circumstances, withhold income tax from the payment. For example, if you fail to provide your bank with your taxpayer identification number, the bank is required to withhold income tax from the interest it pays you.
- Bad Debt
An noncollectable account receivable.
- Balance Sheet
A better name for a balance sheet might be “a list of assets and debts.” Your balance sheet shows what you own and what you owe, the difference being your equity or net worth. A balance sheet is like a still photograph taken at some single point in time. Balance sheets are as of a given date. An income statement on the other hand, is for a period of time, such as a month or year. It is the moving picture to show how your balance sheet got from one point in time to another. In business, the income statement shows how many sales were made and how many expenses were incurred to cause your balance sheet (net worth) to go up or down a certain amount. See also financial statement.
- Balloon Payment
A contract that usually calls for payments at regular intervals with any unpaid balance (balloon) due on a specified date.
- Bank Reconciliation
The process of systematically comparing the cash balance as reported by the bank with the cash balance on the company’s books and explaining any differences.
This is often referred to as cost basis. Normally, basis is the amount you paid for an item, plus the cost of any improvements and minus depreciation if applicable.
- Basket Purchase
The purchase of two or more assets acquired together at a single price.
- Bear Market
A bearish stock market is one in which the prices are in a downward trend. A bull market is just the opposite.
- Below the Line
These are extraordinary expenses in a business, ones which will not normally be repeated, such as expenses for disaster losses.
The person or organization who will be receiving the benefits from a trust, an inherited retirement account, or the proceeds from a life insurance policy.
According to Webster, bi can mean every two months or twice a month. And semi can also lead to misunderstanding. Perhaps it is better to state what you mean by simply stating either “every two months” or “twice each month.”
- Big Board
A popular term used to refer to the New York Stock Exchange.
- Bill of Sale
A written document showing the terms by which the ownership of personal property passed from one person to another, usually showing dates, dollar amount, and the description of the property.
- Blue Chip
These are stocks and bonds of well-established and proven companies. The companies are well-managed and have a long record of top performance.
- Board of Directors
Individuals elected by the stockholders to govern a corporation.
A contract between a borrower and a lender in which the borrower promises to pay a specified rate of interest for each period the bond is outstanding and repay the principal at the maturity date.
- Bond Carrying Value
The face value of bonds minus the unamortized discount or plus the unamortized premium.
- Bond Discount
The difference between the face value and the sales price when bonds are sold below their face value.
- Bond Indenture
A contract between a bond issuer and a bond purchaser that specifies the terms of a bond.
- Bond Maturity Date
The date at which a bond principal or face amount becomes payable.
- Bond Premium
The difference between the face value and the sales price when bonds are sold above their face value.
- Book of Original Entry
A book or journal in which financial transactions are recorded. The source of the data which goes into the journals is usually from sales slips, invoices, checks, etc.
- Book Value
The net amount shown in the accounts for an asset, liability, or owners’ equity item.
- Book Value per Share
A measure of net worth; computed by dividing stockholders’ equity for each class of stock by the number of shares outstanding for that class.
- Breakeven Point
The point at which the sales and expenses in a business are equal, creating neither a profit nor a loss. This is a very important figure to a business manager. It assists the manager in setting prices that will make the business competitive yet profitable.
- Bull Market
A condition of the stock market during which stock prices are going up and are expected to continue their upward trend. A bear market is just the opposite.
An organization operated with the objective of making a profit from the sale of goods or services.
- Business Documents
Records of transactions used as the basis for recording accounting entries; includes invoices, check stubs, receipts, and similar business papers.
- Business Expenses
Expenses that have been paid or incurred in the course of business and that are ordinary, necessary, and reasonable in amount.
- Business Trust
The essential attribute is that property is placed in the hands of trustees who manage and deal with it for use and benefit of beneficiaries.
- Buyer’s Market
A condition indicating an excess of supply over demand. This usually puts a buyer in a more favorable negotiating position. See also seller’s market.
- Bypass Trust
A trust is used in estate tax planning to insure that the estate tax exclusion allowed to both spouses is utilized. Assets placed in this trust will not be taxed when the second spouse dies; hence the name bypass trust. These are also known as credit shelter trusts.
- Cafeteria Plan
A tax term that refers to an employee benefit plan maintained by an employer. A cafeteria plan allows employees to take taxable cash or to select among certain nontaxable benefits such as dependent care, group-term life insurance, and health insurance. It is known by other names including a flexible spending plan, or simply as a flex plan.
- Calendar Year
An entity’s reporting year, covering 12 months and ending on December 31.
- Callable Bond
Paying off the bond before maturity.
The total amount of money or other resources owned or used to acquire future income or benefits.
- Capital Account
An account in which a proprietor’s or partner’s interest in a firm is recorded. It is increased by owner investments and net income and decreased by withdrawals and net losses.
- Capital Asset
An asset intended for long-term use or possession, as opposed to assets, such as inventory, that are intended for current sale.
- Capital Expenditure
An expenditure which benefits a future accounting period by adding assets to the company or extending the life or capacity of existing assets.
- Capital Gain (or Loss)
The profit or loss made when selling a non-inventory asset. In tax law you can have either a long-term capital gain (loss) or a short-term capital gain (loss) depending on how long you have owned the asset. Some taxpayers think that capital gains taxes are harsher than regular taxes. In fact, under our current system, if one must be taxed on a transaction, since it is lower than your normal tax bracket.
- Capital Lease
A leasing transaction that is recorded as a purchase by the lessee.
- Capital Stock
The portion of a corporation’s owners’ equity contributed by investors (owners) in exchange for shares of stock.
- Carryback (Carryover)
In tax law, this is the loss or unused tax credit for a tax year that may be carried back to prior years to offset previously taxed earnings to create a refund of taxes previously paid. Any carry-back amount not used in prior years is available as a carryover to future years.
- Cash Basis
Gross income is recognized when cash is received.
- Cash Disbursements Journal
A special journal in which all cash paid out for supplies, merchandise, salaries, and other items is recorded.
- Cash Dividend
A cash distribution of earnings to shareholders.
- Cash Equivalents
Short-term, highly liquid investments that can be converted easily into cash.
- Cash Flow
The process of money coming in from various sources (for example, from income or loans), and being spent for various purposes.
- Cash Flow Statement
A useful management report showing the source of cash received and disbursed for a given accounting period, such as the past month, quarter, or year. See also financial statement.
- Cash Inflows
Any current or expected revenues or savings directly associated with an investment.
- Cash Method
A method of accounting in contrast to the accrual method. Under the cash method, income is recorded only when the cash is actually received, without regard to when it was earned. Likewise, expenses are recorded only when actually paid, without regard to when they were actually incurred.
- Cash on Delivery (COD)
The buyer of a product parts with his or her money only when the product has been delivered to a specified location, normally the buyer’s home or business. If a business is a bad credit risk or is a new buyer, a vendor may require that merchandise be shipped COD unless it is paid for in advance of the shipping date.
- Cash Outflows
The initial cost and other expected outlays associated with an investment.
- Cash Over and Short
An account used to record overages and shortages in petty cash.
- Cash Receipts Journal
A special journal in which all cash received, from sales, interest, rent, or other sources, is recorded.
- Cash Surrender Value
The amount of money an insurance policy holder would receive if the policy were surrendered at a given date. You can generally borrow from your cash surrender value through policy loans.
- Cash-basis Accounting
A system of accounting in which transactions are recorded and revenues and expenses are recognized only when cash is received or paid.
- Cashier’s Check
A check drawn on a bank by itself. A cashier’s check is often requested in transactions where the receiving party wants to be assured that the check will actually clear the bank. The bank makes the check payable from the bank directly to the party that you want to pay.
- Casualty Loss
The tax law allows a tax deduction for the loss of property due to fire, storm, shipwreck, or other casualty. Items that are stolen also fall into this category. There are limitations on the amount you can deduct.
The maximum market amount at which inventory can be carried on the books; equal to net realizable value.
- Certificate of Deposit (CD)
A formal document issued by a bank showing indebtedness by the bank to the holder of the CD. Time certificates of deposit are payable at a future date and usually bear a specified rate of interest.
- Certified Check
A depositor’s check which the bank guarantees to pay. Usually the bank stamps the face of the check to indicate that it has been certified for payment. Less frequently used than the cashier’s check.
- Certified Financial Planner (CFP)
Certified financial planner. A designation given by the Certified Financial Planner Board of Standards to those who have completed a course of study, passed a comprehensive exam, and met experience requirements.
- Certified Management Account (CMA)
Certified management accountant. A designation given by the Institute of Management Accountants to those who meet the organization’s educational experience requirements.
- Certified Public Accountant (CPA)
A designation given to those who have passed a nationally uniform examination and who have served the necessary accounting internship. Even though the examination is nationally uniform, the licensing of CPA’s is done by the state in which the accountant provides services.
- Charitable Organizations
For tax purposes, these are nonprofit organizations which must meet certain criteria to qualify for the tax-exempt status under the Internal Revenue Code. They are also referred to by the Code section that applies to them Section 501(c)(3) organizations. A contribution to these organizations is generally tax-deductible.
- Chart of Accounts
A listing of account names and numbers used by a specific business for its accounting system. For example, under the Assets section of the chart of accounts you might see #101 Cash, #105 Accounts Receivable, #120 Inventory, #150 Equipment, etc. New accounts can be added as necessary to produce effective management reports. Grouping financial data into these accounts is done to produce reports that are useful to management. See financial statements.
- Child and Dependent Care Credit
A federal income tax credit is allowed for a portion of the child care expenses paid by a taxpayer so he or she can work or attend school. To qualify for the credit, the taxpayer must maintain a household for certain qualifying dependents, such as a child or disabled parent, and have wages or self-employment income.
- Child Tax Credit
Certain taxpayers who have children are entitled to a tax credit on their federal income tax return. The credit is granted for each qualifying child. The credit is phased out (not permitted) for upper income taxpayers.
Churning takes place when a broker initiates trades on an investor’s behalf that are excessive in size or frequency in relation to the investor’s portfolio and that are against the investor’s investment objectives as expressed to the broker. A disreputable broker “churns” for the purpose of generating commissions. Churning is a violation of the federal security laws.
- Classification of Stock
Arrangement of stocks into groups or categories on the basis of established criteria.
- Close the Books
At the end of an accounting year the books of a business are “closed.” This requires the zeroing out of all revenue and expense accounts and reflecting the net profit or loss in the retained earnings account. This is accomplished by using a closing journal entry.
- Clouded Title
A title to real estate that is not free and clear in the hands of the current holder. For example, perhaps a spouse had not signed a deed on a prior transfer. This missing signature causes an irregularity (a cloud) on the title and should be reason for concern for a prospective buyer.
COBRA is the acronym for the Consolidated Omnibus Budget Reconciliation Act of 1985. This law guarantees certain ex-employees and their families the right to purchase continuation health insurance for at least 18 months after they leave a company.
A written change to a will modifying, explaining, or altering the will.
- Coinsurance Clause
A clause in an insurance contract limiting the insurance company’s liability when property is under-insured.
Equity in property you own which you pledge as security for a loan.
- Common Stock
The class of stock of a corporation that owns the net asset value of the corporation after taking into consideration all debts and preferred stock.
- Community Property
Ownership of property by husband and wife in equal shares.
- Compiled Financial Statement
A compiled financial statement is prepared by an accountant from information furnished by the managers of a business. It is prepared without any verification as to the reasonableness of the information provided. See also reviewed financial statements.
- Compound Interest
Paying interest on both the principal and accumulated unpaid interest. In other words, paying interest on interest.
- Conduit Principle
The idea that all income earned by an entity must be passed through to the owners and reported on their individual tax returns; applicable to proprietorships, partnerships, and S corporations.
A vendor who sells merchandise owned by another party, known as the consignor, usually on a commission basis.
An arrangement whereby merchandise owned by one party (the consignor) is sold by another party (the consignee), usually on a commission basis.
The owner of merchandise to be sold by someone else, known as the consignee.
- Consolidated Financial Statements
Statements that report the combined operating results, financial position, and cash flows of two or more legally separate but affiliated companies as if they were one economic entity.
- Consumer Price Index (CPI)
The CPI is important to the financial markets, the business community, and to the general public because it represents the general increase or decrease in consumer prices. It is often used by businesses to establish new prices for products and services and to determine employee salary adjustments.
- Contingent Liability
An obligation that could occur at some time in the future caused by an event in the past. Does that get you? It is an incomplete event that needs to be identified in the financial statements of a company even though it may be difficult to quantify. An example of such a liability would be a pending lawsuit.
- Cooling-off Period
The purpose of the cooling-off law is to allow you a specified number of days after you make certain purchases to rescind the contract and get your money back. These laws were enacted to combat high-pressure tactics and deceptive salespeople. The laws tell you how much time you have and what steps you must take to cancel a contract. The federal cooling-off rule specifies certain minimum rights for everyone. State cooling-off laws vary from state to state. Some state laws are more liberal than the federal law and provide the buyer even more rights to cancel purchase agreements.
The legal right to literary property, granting the owner exclusive right to reproduce and sell copies of the property.
A legal entity granted permission to operate by a state government.
The principal balance of a trust as opposed to the income from the trust.
- Cost Basis
See both basis and adjusted basis.
- Cost of Sales
A category in the financial statements of a business that gives the cost of all items sold during the time period covered by the profit and loss statement. “Cost of Sales” is subtracted from “Sales” on the profit and loss statement (income statement) to arrive at “Gross Profit.”
- Coupon Bond
A bond with interest coupons attached. The coupons are clipped and submitted to the bond holder for payment as the interest comes due.
An entry on the right side of the account.
- Credit Card Draft
The part of the multiple-page credit form that is sent by the retailer to the credit card company for reimbursement of the stated amount.
- Credit Line (line of credit)
An agreement whereby a bank or business will supply a specified maximum amount of money or merchandise to a customer on credit. The customer often borrows and repays from time to time as needed, but is limited to the agreed-upon maximum amount.
- Credit Shelter Trust
These trusts are sometimes called credit equivalent bypass trusts. See also bypass trust.
- Current Asset
Cash or items on the balance sheet that will be turned into cash in a relatively short period, usually a year or less. Current assets include such items as cash, accounts receivable, inventory, short-term investments, and prepaid expenses.
- Current Liability
All short-term debt included on the balance sheet, including that portion of long-term debt which will be payable within one accounting period, usually one year. When current liabilities are greater than current assets, the current ratio will be less than “one” and this condition is termed “insolvent”.
- Current Ratio
This is the ratio of current assets to current liabilities. It is desirable to have more current assets than current liabilities to enable the company to meet all of its current obligations without difficulty.
- CUSIP Number
CUSIP stands for Committee on Uniform Security Identification Procedures. The nine digit number, found on most current stock certificates, was established to help in clearing the huge numbers of stocks traded on the U.S. and Canadian stock exchanges. The international numbering system is called the CINS numbering system.
- Custodial Account
An account opened on behalf of another person. Commonly used when a parent opens an account for a minor child.
- D&O Insurance
Directors and Officers applies to non-profits to protect D&O’s from liabilities derived from their roles in the non-profit.
- Date of Record
The date selected by a corporation’s board of directors on which the shareholders of record are identified as those who will receive dividends.
- Debentures (unsecured bonds)
Bonds for which no collateral has been pledged.
An entry on the left side of an account. In accounting, a debit increases the balance of an asset or expense account.
- Debt Financing
Acquiring funds by borrowing money from creditors in the form of long-term notes, mortgages, leases, or bonds.
- Debt Securities
Financial instruments issued by a company that carry with them a promise of interest payments and the repayment of principal.
- Debt-equity Management Ratio
A measurement of the relative utilization of debt and equity; computed by dividing average total assets by average stockholders’ equity.
- Declaration Date
The date on which a corporation’s board of directors formally decides to pay a dividend to shareholders.
- Declining-balance Depreciation Method
An accelerated depreciation method in which an asset’s book value is multiplied by a constant depreciation rate (such as double the straight-line percentage, in the case of double-declining-balance.)
Business expenses or losses that are subtracted from gross income in computing taxable income.
A legal document signifying ownership in real estate.
- Deed of Trust
A legal document that transfers property to a trustee to secure the payment of a loan. It serves much the same purpose as a mortgage. The title to real estate is placed in the hands of a trustee; it is transferred to the buyer of the property when the debt has been paid in full.
- Deferred Income Taxes
An account used to record the difference between income tax expense on the income statement and income taxes payable for the year to federal and state governments.
- Demand Deposit
Any bank deposit that can be taken out without notice or without having to wait until a specified date.
For income tax purposes, a dependent is someone who qualifies to be claimed as an exemption on your income tax return because of your financial support of that person. There are qualifying restrictions based on age, income, citizenship, and family relationship.
The process of cost allocation that assigns the original cost of a natural resource to the periods benefited.
- Depreciable Property
Assets such as buildings, furniture, fixtures, equipment, and machinery that have a limited useful life.
The process of cost allocation that assigns the original cost of plant and equipment to the periods benefited.
- Direct Cost (expense)
Also called variable costs. They vary with the level of sales as opposed to fixed costs which do not go up and down with sales. For example, if you delivery the products you sell, delivery expenses (variable costs) will go up as sales go up. Building rent and insurance (fixed costs) on the other hand, do not fluctuate with sales.
- Direct Method
A method of reporting net cash flow from operations that shows the major classes of cash receipts and payments for a period of time.
- Direct Write-off Method
The recording of actual losses from noncollectable accounts as expenses during the period in which accounts receivable are determined to be noncollectable.
- Disclaimer of Opinion
A disclaimer indicating the auditor was unable to satisfy himself or herself that the overall financial statements were fairly presented in accordance with GAAP.
The amount charged by a financial institution when a note receivable is discounted; calculated as maturity value times discount rate times discount period.
- Discount Period
The time between the date a note is sold to a financial institution and its maturity date.
- Discount Rate
The interest rate charged by a financial institution for buying a note receivable.
- Discounting a Note’s Receivable
The process of the payee’s selling notes to financial institution for less than the maturity value.
- Diversified Companies
Companies operating in more than one line of business.
- Dividend Payment Date
The date on which a corporation pays dividends to its shareholders.
- Dividend Payout Ratio
A measure of the percentage of earnings paid out in dividends; computed by dividing cash dividends by the net income available to each class of stock.
- Dividend Reinvestment Plan (DRIP)
This is a program used by some publicly traded companies to make it easy for stockholders to reinvest their dividends in more company stock. Instead of sending the investor a dividend check, the company buys more stock on behalf of the investor. Most dividend reinvestment plans do not charge fees or commissions on the transaction.
Distributions to owners (stockholders) of a corporation.
- Dividends Account
The account used to reflect periodic distributions of earnings to the owners (stockholders) of a corporation.
- Dividends in Arrears
Missed dividends for past years that preferred stockholders have a right to receive under the cumulative-dividend preference if and when dividends are declared.
- Domestic Corporation
In the case of a particular state, this refers to corporations created under the laws of that state. Foreign corporations would be those created outside that state. In the case of the federal tax law, a domestic corporation is one formed in the United States.
The one who receives a donation.
The one who makes a donation.
- Double-entry Accounting
A system of recording transactions in a way that maintains the equality of the accounting equation. For every debit there must be an equal credit.
Distribution to the owner(s) of a proprietorship or partnership; similar to dividends for a corporation.
- Drawings Account
The account used to reflect periodic withdrawals of earnings by the owner (proprietor) or owners (partners) of a proprietorship or partnership.
- Drop Shipment
A shipment of goods directly to the customer from the distributor. This avoids the delay and expense of shipping to the selling company and then having the seller deliver to the customer.
- Durable Power of Attorney (DPOA)
A power of attorney designed to remain effective even if you become mentally incapacitated. This legal document gives whoever you name the legal right to act on your behalf. The document generally defines the specific things your agent is authorized to do and under what circumstances the “power” takes effect. A document you would want your attorney to draft.
- Earnings per Share (EPS)
The amount of net income (earnings) related to each share of stock; computed by dividing net income by the number of shares of common stock outstanding during the period.
- Effective (yield or market) Rate of Interest
The actual interest rate earned or paid on a bond investment.
- Effective Tax Rate
A tax rate that reflects the percentage of the actual tax liability to the accounting income generated by the company, that is, net tax liability/financial (book) income before taxes.
- Effective-interest Amortization
A method of systematically writing off a bond premium or discount that takes into consideration the time value of money and results in an equal rate of amortization for each period.
- Electronic Data Processing (EDP)
A term referring to the use of computers in recording, classifying, manipulating, and summarizing data.
- End of Month (EOM)
A common phrase for end-of-period accounting activities.
- Enrolled Agent (EA)
Certain tax preparers can represent their clients before the IRS. Tax preparers who are not attorneys or CPA’s must have the enrolled agent (EA) designation to represent other taxpayers. To become an enrolled agent one must either take a tax examination given by the IRS or have a certain number of years experience working for the IRS. PBS has two enrolled agents on staff!
An organizational unit (a person, partnership, or corporation) for which accounting records are kept and about which accounting reports are prepared.
An abbreviation for “end of month.” A common phrase for end-of-period accounting activities.
- Equity Financing
Acquiring funds in the form of investments by owners (proprietor, partner, or stockholder).
- Equity Securities
Shares of ownership in a corporation that can change significantly in value and that provide for a return to investors in the form of dividends.
- Equity/Accounting for Investments in Stocks
Method used to account for an investments in the stock of another company when significant influence can be imposed (presumed to exist when 20 to 50 percent of the outstanding voting stock is owned).
The matching of a person to the workings of a machine in order to make for more efficient and safer working conditions.
- Errors and Omissions Insurance
E & O insurance is often part of a professional liability insurance policy. It is purchased by those professionals who offer services or who handle money or property for others. This insurance covers damages caused by mistakes (errors) made by the professional or damages caused by something the professional failed to do (omissions).
Money held in trust, often for the payment of taxes and insurance on property that is subject to a mortgage.
- Estate Tax
A tax imposed on an estate over a certain size. Proper planning can reduce the impact of estate taxes.
- Estimated Tax Payment
Quarterly tax payments made in lieu of having taxes withheld at the income source. Federal estimated taxes for individuals are paid with Form 1040-ES and are due on April 15, June 15, September 15 of the tax year involved and on January 15 of the following year.
When stock is sold ex-dividend, the seller has the right to a dividend that has been declared but is payable at a later date.
- Exchange Gain or Loss
The gain or loss incurred when the exchange rates are different on the purchase and payment dates or on the sale and receipt of payment dates.
- Exchange Rate
The value of one currency in terms of another.
Gross receipts that are not subject to tax and are not included in gross income, such as interest on state and local government bonds.
A person or company named in a will to ensure that all the assets and debts are accounted for and that all property is distributed as specified in the will. Also called a personal representative.
Costs incurred in the normal course of business to generate revenues.
- External Auditors
Independent CPAs who are retained by organizations to perform audits of financial statements.
- External Audits
Audits conducted by CPAs who are independent of the client company.
- Extraordinary Items
Non-operating gains and losses that are unusual in nature, infrequent in occurrence, and material in amount.
A qualified facilitator (also known as an intermediary or an independent third party) provides a method of transferring funds and property titles so that a taxpayer can qualify for a tax-deferred (Code Section 1031) exchange.
To sell accounts receivable at a discount before they are due.
- Fair Market Value
The current value of an asset, e.g., the amount at which an asset could be sold or purchased in an arm’s-length transaction.
- Fannie Mae (FNMA)
Federal National Mortgage Association. As with the Freddie Mac program, FNMA packages individual mortgages into loan packages attractive to investors. The sale of mortgage packages to investors makes more mortgage money available. As with Freddie Mac, earnings on Fannie Mae securities are fully taxable.
- FDIC (Federal Deposit Insurance Corporation)
Most banks are FDIC-insured. But even if your bank has FDIC insurance, all of your funds in that bank may not be insured. Unlike traditional deposit products, non-deposit investment products are not insured. Examples of uninsured investment products include stocks, bonds, annuities, mutual funds, government securities, and U.S. Treasury securities. Check with your bank to learn what is insured and what is not.
- Federal Employer Identification Number (FEIN & EIN)
Form SS-4: EINs are used to identify the federal tax accounts of businesses. You need to obtain an EIN if you have employees or operate your business as a partnership or corporation. An EIN is also needed if you have a Keogh retirement plan or file certain tax returns. Form SS-4, “Application for Employer Identification Number,” is used to request an EIN.
- Federal Land Bank
Part of the Federal Farm Credit System. The Federal Land Bank provides long-term loans to farmers and ranchers for agricultural purposes. They provide mortgage loans and lines of credit as well as loans for other business purposes, such as buying equipment.
- Federal Reserve
The Federal Reserve, the central bank of the United States, was founded by Congress in 1913. Their duties fall into four general areas: (1) conducting the nation’s monetary policy, (2) supervising and regulating banking institutions and protecting the credit rights of consumers, (3) maintaining the stability of the financial system, and (4) providing certain financial services to the U.S. government, the public, financial institutions, and foreign official institutions.
- Federal Trade Commission (FTC)
A federal agency established in 1914. It oversees unfair trade practices, such as false advertising and business practices that lead to monopoly and other unfair business competition.
- Fee Simple
A term describing the complete right to real estate. The owner can dispose of the property during his or her lifetime or at death.
- FICA (social security) Taxes
Federal Insurance Contributions Act taxes imposed on employee and employer; used mainly to provide retirement benefits.
- Fictitious Name
A name used in business or trade that the user has not registered as a trade name or is not entitled to register as a trade name. Registration of a Fictitious Name does not give the user any exclusive right to use the name.
- Fidelity Bond
An insurance policy purchased by a company to protect against losses from dishonest employees. It can cover the theft of money or other company assets.
- Fiduciary (Fiduciary Relationship)
A person or company entrusted with the custody or overseeing of the property of someone else. A trustee has a fiduciary relationship with the beneficiaries of that trust.
- FIFO (first-in, first-out)
An inventory cost flow whereby the first goods purchased are assumed to be the first goods sold so that the ending inventory consists of the most recently purchased goods.
- Financial Accounting
The area of accounting concerned with reporting financial information to interested external parties.
- Financial Accounting Standards Board (FASB)
The private organization responsible for establishing the standards for financial accounting and reporting in the United States.
- Financial Statements
Reports such as the balance sheet, income statement, and statement of cash flows, which summarize the financial status and results of operations of a business entity.
- Financing Activities
Transactions and events whereby resources are obtained from, or repaid to, owners (equity financing) and creditors (debt financing).
- Fiscal Year
An entity’s reporting year, covering a 12 month accounting period.
- Fixed Assets
Tangible assets such as furniture and fixtures, equipment, land, and buildings reflected on the books of a company at cost (cost less depreciation).
- Fixed-rate Mortgage
A mortgage on which the interest rate stays the same for the entire life of the loan despite what is happening to the going interest rate for new mortgages.
- Flat Tax
A flat tax system of taxing income means that all taxpayers would pay the same percentage of tax regardless of their level of income.
The time delay between when a check is written and when it clears the bank. Used by some to create an interest-free loan by writing a check now and making the deposit later to cover the amount of the check before it hits the bank.
The minimum market amount at which inventory can be carried on the books; equal to net realizable value minus a normal profit.
- FOB (free-on-board) Destination
A business term meaning that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer.
- FOB (free-on-board) Shipping Point
A business term meaning that the buyer of merchandise bears the shipping costs and acquires ownership at the point of shipment.
- Foreign Corporation
A corporation for profit or nonprofit formed under the laws of another state or country (outside of Ohio).
- Foreign Corrupt Policies Act (FCPA)
Legislation requiring any company that has publicly-traded stock to maintain records that accurately and fairly represent the company’s transactions; additionally, requires any publicly-traded company to have an adequate system of internal accounting controls.
- Form 1099
The IRS uses Form 1099 to track payments from a trade or business to others. If your trade or business pays certain amounts to others (other than wages reportable on Form W-2), you may be required to provide a Form 1099 to the recipient and a copy to the IRS. The IRS will use their copy to determine if the person who received the payments reported them on his or her income tax return. There are several forms in the 1099 series, each designated by a suffix, such as Form 1099-Misc for miscellaneous income , or Form 1099-R for retirement plan distributions, etc.
An entity that has been licensed to sell the product of a manufacturer or to offer a particular service in a given area.
An account used with the periodic inventory method for recording the costs of transporting into a firm all purchased merchandise intended for sale; added to purchases in calculating cost of goods sold.
- Functional Currency
The currency in which a subsidiary conducts most of its business; generally, but not always, the currency of the country where it does most of its spending and earning.
- General Expense
Expenses that have to do with the overall operation of a business and that generally do not vary with the sales volume. Examples: building rent, utilities, insurance, property tax, and office supplies.
- General Journal
A journal for recording transactions that are infrequent or unusual, such as depreciation and adjustments to accounts. Contrasted with frequent entries, such as sales, that are entered in a sales journal.
- General Ledger
The result of recording the summary of financial information from journals (books of original entry). The individual account balances from which financial statements are prepared. Examples of general ledger accounts: cash in bank, furniture and equipment, bank loan, and owner’s equity. Figures on financial statements can be traced to a ledger account and from there to a journal and finally to the original documents.
- General Obligation Bond
A municipal bond that is backed by the full faith and credit of the issuing authority, rather than by the revenue from a specific project.
- General Partner
One of two or more persons who associate to carry on business as co-owners for profit, and who are personally liable for all debts of the partnership; may also be the managing partner of a limited partnership who is responsible for operations of the partnership.
- General-purpose Financial Statements
The financial reports intended for use by a variety of external groups; they include the balance sheet, the income statement, and the statement of cash flows.
- Generally Accepted Accounting Principles (GAAP)
Authoritative guidelines that define accounting practice at a particular time.
- Generally Accepted Accounting Standards (GAAP)
Auditing standards developed by the AICPA.
- Generation Skipping Transfer Tax (GST)
This is the third tax in the “transfer” of assets. The gift tax and estate tax form the other two. The GST is intended to keep people from cutting gift and estate taxes by transferring assets to people who are two generations or more younger than they are (in other words, skipping a generation or more). The rules are very complex.
A transfer of money or property from one person to another without payment or exchange of other property. For income tax purposes, a gift to qualified charities creates a tax deduction. A gift to an individual is not tax-deductible by the one who makes it (donor), and a gift is not taxable income to the person who receives it (donee). Gifts to individuals above the annual exclusion limit may be subject to gift tax, which is a form of transfer tax.
- Gift Tax (exclusion)
Gifts to individuals may be subject to gift tax. However, the tax law allows for an exclusion of $11,000 (indexed annually for inflation) per year for gifts from one person to another person. This means that a married couple could each give a child $11,000. And, if the child is married, they could each give the child’s spouse $11,000 for a total annual gift to the couple of $44,000. In addition to the annual exclusion there is a once-in-a-lifetime exclusion for making even larger gifts.
To treat a gift made by one spouse as though it was made by both spouses. The object is to increase the amount that can be given to a third party without creating a gift tax.
- Ginnie Mae (GNMA)
Government National Mortgage Association. GNMA packages mortgages for resale to investors. The securities are backed by the U.S. government which makes them among the safest of investments.
- Going Concern
The idea that an accounting entity will have a continuing existence for the foreseeable future.
- Going-concern Value
The value of a business and its assets in an ongoing operation as opposed to the book value of the individual assets themselves. The value of a going business versus the value of one in liquidation.
An intangible asset that exists when a business is valued at more than the fair market value of its net assets, usually due to strategic location, reputation, good customer relations, or similar factors; equal to the excess of the purchase price over the fair market value of the net assets purchased.
- Gross Income
The taxable portion of a taxpayer’s gross receipts.
- Gross Margin
The excess of net sales revenue over the cost of goods sold.
- Gross Margin Method
A procedure for estimating the amount of ending inventory; the historical relationship of cost of goods sold to sales revenue is used in computing ending inventory.
- Gross Profit
Sales less the cost of the items sold. For example: if you purchase an item for $60 and sell it for $100, your gross profit is $40 (40% gross profit).
- Gross Sales
Total recorded sales before deducting any sales discounts or sales returns and allowances.
- Gross Tax Liability
The amount of tax computed by multiplying the tax base (taxable income) by the appropriate tax rates.
The one who agrees to perform (pay the debt) when the one who made the commitment (borrowed the money) fails to do so. A guarantor is often required by financial lenders when the borrower does not have adequate collateral or has a poor or unknown credit history.
- Head of Household
An income tax filing status more advantageous than filing as a single person. It can be used by those who are single or legally separated and who maintain a household that is the principal living place for at least one dependent.
- Health Savings Account
A tax-sheltered account that qualifying taxpayers can set up to accumulate funds to pay out-of-pocket medical expenses tax-free.
A buy or sell agreement for a future date that protects the holder against price fluctuations.
A person who receives property from the estate of a deceased person.
- Held-to-maturity Securities
Debt securities purchased by an investor with the intent of holding the securities until they mature.
- Historical Cost
The dollar amount originally exchanged in an arm’s-length transaction; an amount assumed to reflect the fair market value of an item at the transaction date.
- Historical Exchange Rate
The exchange rate that existed on the date of a transaction.
- Holding Company
A company that owns stock in and manages the activities of other companies. To gain tax advantages, the holding company must own 80% of the voting stock of the other company.
- Holding Period
For income tax purposes, this is the period of time you are considered to have owned an asset, usually from the date of purchase to the date of sale. In the case of property received as a gift, your holding period includes the holding period of the donor as well. Your holding period is used to determine whether you receive short-term, or the more favorable long-term, tax treatment when you sell an asset.
- Home Equity Loan
Credit made available by lenders to homeowners whose property is worth more than their current debt against it. For example, a home with a fair market value of $200,000 may have a mortgage against it for $120,000. Mortgage lenders in most states will be willing to make a second loan based on the $80,000 of equity. The amount of the loan will depend on good lending practices, regulations, and the homeowner’s ability to repay the loan.
- Horizontal Analysis of Financial Statements
A technique for analyzing the percentage change in individual income statement or balance sheet items from one year to the next.
- Imprest Petty Cash Fund
A petty cash fund in which all expenditures are documented by vouchers or vendors’ receipts or invoices, the total of the vouchers and cash in the fund should equal the established balance.
- Imputed Interest
The IRS has the authority to impute or assign interest in a contract when none is stated, or the stated interest is too low. This results in reducing the amount of favorable long-term gain and increasing the interest income that is taxed at the higher (ordinary) tax rate.
- Incentive Stock Options
Stock options granted to employees allowing them to buy stock in their employer’s company for a specified price and a specified period of time. Such options are generally subject to income tax when the stock is disposed of.
- Income Shifting
A term to describe moving income from one year to another. Also the shifting of income from one family member to another to take advantage of the other person’s lower tax bracket.
- Income Statement (statement of earnings)
The financial statement that summarizes the revenues generated and the expenses incurred by an entity during a period of time.
- Income Taxes Payable
The amount expected to be paid to the federal and state governments based on the income before taxes reported on t he income statement.
A person who signs the original articles of incorporation.
- Incremental Cost
The cost of one more item after the cost of an initial quantity has been established. For example, assume that 10,000 catalogs will cost you $20,000 dollars to produce and print ($2.00 each). If you increase the quantity to 12,000 and the price increases to $22,000, the additional 2,000 are costing you only $1.00 each (the incremental cost).
- Independent Accountant
An accountant that has no financial interest and holds no office or position in the company about which he or she is making a financial report.
- Independent Checks
Procedures for continual internal verification of other controls.
- Independent Contractor
A contractor sets their own work routines and usually use their own tools and equipment, which is in contrast to an employee an employee is one who is usually under the direction and control of the employer. This is an important distinction since employees are subject to payroll and income tax withholding, and independent contractors are responsible for their own taxes.
- Indirect Cost
Items of overhead that do not vary directly with the volume of activity in a business. Examples of indirect costs would be insurance, utilities, and building maintenance.
- Indirect Method
A method of reporting net cash flow from operations that involves converting accrual-basis net income to a cash basis.
- Individual Retirement Account
IRA’s provide special tax benefits for those who set up and contribute to such accounts. The type of IRA that is best for you (traditional or Roth) will depend on several factors, such as your earnings level, how long you have until retirement, and your estimated tax brackets before and after retirement.
An increase in the general price level of goods and services; alternatively, a decrease in the purchasing power of the dollar.
- Initial Public Offering (IPO)
The first sale of stock in a corporation to the general public. This is an area where the unsophisticated investor can pay a dear price to learn about investing in new companies. Have a long talk with your investment advisor before jumping into an IPO.
- Injured Spouse Relief
Injured spouse relief is different from innocent spouse relief. When a joint return is filed and the refund is used to pay one spouse’s past-due child and/or spousal support, a past-due federal debt, or past-due state income tax, the other spouse may be considered an injured spouse. The injured spouse can claim his or her share of the refund using Form 8379, Injured Spouse Claim and Allocation.
- Innocent Spouse Relief
A provision in the income tax law which protects one spouse from the tax liability of the other when there has been a gross understatement of the tax and the innocent spouse had no reason to know of the understatement by his or her spouse.
- Insider Trading
Insider trading refers to the buying and selling of stock by certain shareholders of a corporation. If a trade is based on material information about the company that is known only to shareholders and/or employees of the company and not the general public, the trades are forbidden by the Securities and Exchange Commission (SEC). Illegal insider trading also occurs when corporate insiders provide “tips” to family members, friends, or others, and those parties buy or sell the company’s stock based on that information.
All short-term debt included on the balance sheet, including that portion of long-term debt which will be payable within one accounting period, usually one year. When current liabilities are greater than current assets, this condition is termed “insolvent”.
- Installment Sale
A sale with a series of payments over a period of months or years. In other words, the seller carries the paper or finances the sale. The income tax on an installment sale generally can be paid as the money is received.
- Insurable Interest
A person’s interest in another person’s property is such that the destruction of the property would cause a financial loss to him or her. You are not allowed to insure people or property unless you have an insurable interest.
- Insurance Twister
An insurance twister is a dishonest salesperson who will use improper number comparisons and a deceptive sales presentation to entice you into canceling an insurance policy in favor of buying one that he or she is offering. You should get a second opinion if a salesperson is suggesting that you cancel a current insurance policy. Twisters like to put as little as possible in writing and they usually try to create a sense of urgency for changing the new policy.
- Intangible Assets
Long-lived assets without physical substance that are used in business, such as licenses, patents, franchises, and goodwill.
- Inter Vivos Trust
A trust that becomes effective during the lifetime of the one who establishes it (the settlor) as opposed to a testamentary trust that takes effect at the death of the settlor.
- Inter-company Transaction
A transaction between a parent company and a subsidiary company.
The payment (cost) for the use of money.
- Interest Rate
The cost of using money, expressed as an annual percentage.
- Internal Auditors
An independent group of experts in controls, accounting, and operations, who monitor operating results and financial records, evaluate internal controls, assist with increasing the efficiency and effectiveness of operations, and detect fraud.
- Internal Control Structure
Safeguards in the form of policies and procedures established to provide management with reasonable assurance that the objectives of an entity will be achieved.
- Internal Revenue Service (IRS)
The taxing authority of the United States.
- Intestacy Laws
The state law that determines what will happen to your assets if you die without a will.
One who dies without a valid will is said to have died intestate.
Goods held for resale.
- Inventory Cutoff
The determination of which items should be included in the year-end inventory balance.
- Inventory Turnover Ratio
A measure of the efficiency with which inventory is managed; computed by dividing cost of goods sold by average inventory for a period.
- Investing Activities
Transactions and events that involve the purchase and sale of securities (excluding cash equivalents), property, plant, equipment, and other assets not generally held for resale, and the making and collecting of loans.
- Involuntary Conversion
The destruction or loss of property through theft, casualty, or condemnation. For federal income tax purposes, any gain on such a conversion is not taxable if qualified replacement property is purchased within certain time limits.
- Irrevocable Trust
A trust that cannot be terminated (revoked) by the one who originates it.
- Issued Stock
Authorized stock originally issued to stockholders; it may or may not still be outstanding.
- Itemized Deduction
Amounts paid by an individual taxpayer for personal and quasi-business expenses that can be deducted in computing taxable income, such as medical expenses, property and income taxes, mortgage and investment interest, charitable contributions, moving expenses, casualty and theft losses, and certain miscellaneous expenses.
- JIT (just-in-time) Inventory
An inventory system that allows for the elimination of inventory stockpiles and inefficiency and waste; raw materials arrive “just in time” for production and finished goods “just in time” for sale.
- Joint and Several Liability
An obligation where the makers are both individually and jointly liable. This allows the creditor to sue one or all for payment of an obligation. On a joint income tax return, a husband and wife are usually jointly and severally liable. The IRS can collect any tax due from either or both spouses. See innocent spouse relief.
- Joint and Survivor Life Insurance
An insurance policy in which the benefits are only paid after the death of both of the insured parties.
- Joint Return
This is an income tax filing status for married couples. If your state of residence recognizes common-law marriages, the IRS will allow the use of a joint return. Your marital status on December 31st of a given year will govern your tax filing status for that year. If each spouse has separate income, a joint return can result in a marriage tax penalty (more tax than if they were two single taxpayers).
- Joint Tenancy with Right of Survivorship (JTROS)
A type of ownership of property where each owner has an undivided ownership. When one of the joint tenants dies, his or her interest passes to the surviving joint tenants. Before you decide to transfer property or to change the form of ownership of property you already own, consult with your attorney as to what form of ownership is best for you. See also tenants in common.
- Joint Venture
A joint venture is somewhat like a partnership, but is usually formed by two or more persons for a single purpose as opposed to most partnerships that are formed for ongoing business. For income tax purposes, it may be treated as either a corporation or a partnership.
The book where documents (checks, etc) are first recorded into the bookkeeping system. Computers have changed the method of bookkeeping but not the underlying concepts. There still must be a way to track figures from the financial statements back to original documents. An accounting record in which transactions are first entered; provides a chronological record of all business activities.
- Journal Entry
The process of recording in a journal the original documents, such as checks. Also the entry of adjustments to correct account balances at the end of an accounting period such as monthly, quarterly, or yearly. A recording of a transaction where debits equal credits; usually includes a date and an explanation of the transaction.
- Junk Bonds
Bonds issued by companies in weak financial condition with large amounts of debt already outstanding; these bonds yield high rates of return because of the high risk.
- Keogh Plan
Under tax law, a retirement plan available to self-employed people. Also referred to as H.R. 10 plans. As with all qualified retirement plans, there are very specific contribution and filing rules that change on a regular basis. Contributions to a Keogh are tax-deductible. The name “Keogh” derives from the man who sponsored the legislation.
- Key Man (person) Insurance
A life insurance policy that covers the life of a key employee of the company. It is payable to the company upon the death of the named employee. Losing a key employee can be costly to some companies in terms of training replacement personnel and in terms of customer and creditor confidence. The life insurance proceeds will help offset lost time, lost sales, and possibly lost lines of credit.
An unauthorized system of borrowing money by taking advantage of the float (the time it takes a check to clear the bank). Checks are drawn on a bank account that has insufficient funds. This account is then covered by a check on a second bank account that also has insufficient funds. By using several banks, the scheme can go on for some time before being detected.
A process for stealing money from a business by covering the payment by one customer with the payment from another. For example, when customer A pays his bill, the employee pockets the money. Before the theft can be detected, A’s account is shown as paid when B pays his bill. The scheme can go on for an extended period by lapping customer over customer. This theft will show up if the thief is absent from the business for more than just a day or two. This is why some businesses require employees to take their vacations as scheduled and remain off the premises for the entire vacation. A proper division of employee duties can help reduce opportunities for employee theft. See also internal control.
- Last in, First Out (LIFO)
An inventory pricing method that assumes the last item purchased is the first item sold. If the cost of merchandise is going up, the higher-cost, newer purchases are charged against sales and produce a lower net profit. The older, less expensive items are deemed to be on hand at the end of the year and create a lower inventory valuation. See also first in, first out (FIFO).
A contract that specifies the terms under which the owner of an asset (the lessor) agrees to transfer the right to use the asset to another party (the lessee).
The book of accounts into which the summary from the journals are entered. Also, a ledger account is an individual account that shows all the debits and credits and the ending balance at the end of an accounting period. For example, the ledger account for cash in bank will show a debit for the summary of all deposits from the cash receipts journal and a credit for all expenditures from the cash disbursements journal. The resulting balance in the cash in bank ledger account will be reconciled to the balance on the bank statement.
- Legal Capital
The amount of contributed capital not available for dividends; usually equal to the par or stated value of outstanding capital stock.
- Legal Entity
Any organization that can function with separate legal existence. An entity such as a corporation, partnership, trust, etc., that can sue or be sued.
One who rents (leases) property from another.
One who rents (leases) property to another. In the case of real estate leases, the lessor is also known as the landlord.
- Letter of Credit
An authorization by a bank that they will stand behind the performance of a buyer under specified conditions. This allows a seller to feel free to deliver goods or services to a buyer without concern for the buyer’s ability to pay.
There are several uses for the term levy. Of interest to most taxpayers would be the use to which the IRS puts a levy. This is a means by which the IRS can force collection of unpaid taxes. The levy can be applied against almost any asset you have. The most common and easiest to attach are your bank accounts and your wages. The IRS regulations require a pre-notification to the taxpayer before a levy can be put in force. If you stay in contact with the IRS and work out a payment schedule for delinquent taxes, you should be able to avoid having a levy against your assets.
Obligations measurable in monetary terms that represent amounts owed to creditors, governments, employees, and other parties.
London Inter-Bank Offer Rate. The interest rate that the banks charge each other for loans. This rate is applicable to the short-term international interbank market, and applies to very large loans borrowed for anywhere from one day to five years. This market allows banks with liquidity requirements to borrow quickly from other banks with surpluses, enabling banks to avoid holding excessively large amounts of their asset base as liquid assets. The LIBOR is officially fixed once a day by a small group of large London banks, but the rate changes throughout the day. Adjustable Rate Mortgage (ARMS) are often tied to the LIBOR.
The right to perform certain activities, generally granted by a governmental agency.
- Licensed Public Accountant (LPA)
A designation in some states for public accountants who have met certain licensing requirements. See also public accountant (PA) and certified public accountant (CPA).
A security interest that attaches to property. Should the property be sold, this gives the government or other claimant a right to the proceeds in an amount necessary to satisfy the lien. For example, a taxing authority may file a lien against the property for unpaid real estate taxes. See also mechanic’s lien.
- Life Annuity
An annuity (series of payments) that terminates when the beneficiary dies.
- Life Insurance Trust
An irrevocable trust established to keep life insurance out of a person’s taxable estate.
- Life Tenant
A person entitled to the use of real estate or the income from that real estate for the duration of his or her life. The ownership rights go to the remainder man on the death of the life tenant.
- Life-kind Exchange
See Section 1031 and tax-deferred exchange.
- Limited Liability
The legal protection given stockholders whereby they are responsible for the debts and obligations of a corporation only to the extent of their capital contributions.
- Limited Liability Company (LLC)
A legal entity that is a hybrid between a corporation and a partnership. The members (owners) enjoy limited liability as they would with a corporation, but the income of the LLC can be taxed to the members as if it were a partnership, corporation, or sole proprietorship.
- Limited Partner
A person who has been admitted to a limited partnership as a limited partner in accordance with the partnership agreement; a partner whose liability to third party creditors of the partnership is limited to the amount invested by such partner in the partnership.
- Limited Partnership
A partnership in which some, but not all, of the partners have limited liability from creditor claims. There must be at least one general partner in a limited partnership. The limited partners contribute capital and share in the profits and losses, but they do not take part in running the business.
The process of dissolving a business by selling the assets, paying the debts, and distributing the remaining equity to the owners.
- Liquidation Value
The net value of all the assets of a business that is being liquidated. Contrast this with going-concern value.
A company’s ability to meet current obligations with cash or other assets that can be quickly converted to cash.
- Living Trust
A trust created during the lifetime of the one who sets it up. See also testamentary trust.
- Living Will
Not to be confused with a living trust. A living will is a medical directive that spells out what you want to happen under circumstances when you are unable to speak for yourself, and your death is eminent due to an incurable medical condition.
- LLC Member
A person whose name appears on the records of the limited liability company as the owner of a membership interest in that company.
- Long-term Capital Gain
See capital gain.
- Long-term Investment
An expenditure to acquire a non-operating asset that is expected to increase in value or generate income for longer than 1 year.
- Long-term Liabilities
Debts or toner obligations that will not be paid within one year.
- Loss per Share
The amount of net loss related to each share of stock; computed by dividing net loss by a number of shares of common stock outstanding during the period.
Costs that provide no benefit to an organization.
- Lower Cost or Market (LCM)
A basis for valuing certain assets at the lower of original cost or current market value.
- Lump-sum Distribution
This is the payout of an individual’s entire interest in a pension plan. The income tax on the distribution is determined by several factors, including the age of the recipient, the reason for the distribution, and the amount and type of contributions to the plan by the individual. If you are facing a lump-sum distribution from your retirement plan, see us about the tax consequences.
A person (entity) who signs a note to borrow money and who assumes responsibility to pay the note at maturity.
- Management Accounting
The area of accounting concerned with providing internal financial reports to assist management in making decisions.
- Marital Deduction
Under federal estate and gift tax law, there is an unlimited marital deduction. This means that a person can transfer any amount of assets to his or her spouse either while alive or via an estate without concern for gift or estate taxes. (In the case of a non-citizen spouse there is a “limited” marital deduction.)
- Market-Adjustment Trading Securities Account
An account used to track the difference between the historical cost and the market value of a company’s portfolio of trading securities.
The amount added to the purchase price to arrive at the selling price, usually expressed as a percentage. A markup is usually expressed as a percentage of cost and a profit margin is compared to the selling price. Hence, a markup of 100% is a 50% profit margin.
- Matching Principle
The concept that all costs and expenses incurred in generating revenues must be recognized in the same reporting period as the related revenues.
This is usually a value judgment to determine if the dollar value of an item when included or excluded would affect the fairness of financial statements. A $10,000 item might be material in the financial statements of a locally owned business, but immaterial on the statements of a national corporation.
- Maturity Date
The date on which a note or other obligation becomes due.
- Maturity Value
The amount of an obligation to be collected or paid at maturity; equal to principal plus any interest.
- Mechanic’s Lien
A lien against property, created under state law, to protect the financial interests of those who provided material or labor to construct a building or facility.
- Median (middle)
This is the central number in a list of items. For example, 2, 4, 7, 8, and 9 have a median of 7.
The Medicare program funds the federal health program for people age 65 and over. It helps people at a time in their lives when they may have health problems but not a lot of money. Employers, employees, and self-employed individuals fund the system through payroll tax.
One having membership rights and privileges in a nonprofit corporation in accordance with its articles or regulations. Alternatively, an owner of an LLC.
The acquisition of one company by another company whereby the companies combine as one legal entity, with the acquired company going out of existence.
- Minority Interest
The interest owned in a subsidiary by stockholders other than those of the parent company; occurs when the acquiring company has less than a 100 percent ownership interest.
- Modified Accelerated Cost Recovery System (MACRS)
IRS regulations that allocate the cost of an asset according to predefined recovery periods and percentages.
- Mortality Table
A table used to estimate the life expectancy of men and women in a certain age groups.
It’s most common use is as a lien on real estate. When more than one mortgage is recorded against a piece of property, they are listed by order of recording and referred to as first mortgage, second mortgage, etc.
- Mortgage Amortization Schedule
A schedule that shows the breakdown between interest and principal for each payment over the life of a mortgage.
- Mortgage Payable
A written promise to pay a stated amount of money at one or more specified future dates; a mortgage is secured by the pledging of certain assets, usually real estate, as collateral.
The person or institution that is lending the money on the property.
The one who is borrowing the money that creates the mortgage.
- Moving Average
A perpetual inventory cost flow alternative whereby the cost of goods sold and the cost of ending inventory are determined by using a weighted-average cost of all merchandise on hand after each purchase.
- Multiple Support Agreement
An agreement signed by those providing support for a dependent to allow one of the group to claim the dependent exemption on his or her income tax return. For example, if you and your siblings collectively pay more than half the support for your parent or parents, any one of you who pays more than 10% can claim your parent(s) if the others sign a multiple support agreement.
- Mutual Agency
The right of all partners in a partnership to act as agents for the normal business operations of the partnership, with the authority to bind it to a business agreements.
National Association of Securities Dealers Automated Quotations system.
- Natural Resources
Assets that are physically consumed or waste away, such as oil, minerals, gravel, and timber.
- Negotiable (instrument)
This refers to the right to transfer by endorsement and delivery. A check made payable to you is a negotiable instrument; you can endorse and it transfer it to another.
- Net Assets (owner’s equity)
The ownership interest in the assets of an entity; equal total assets minus total liabilities.
- Net Income (or net loss)
A measure of the overall performance of a business entity; equal to revenues minus expenses for the period. This is most frequently stated for periods of operations such as “net income for the month ending (date)”; “net income for the quarter ending (date)”; or “net income for the year ending (date).” See also gross profit.
- Net Loss
This is the flip-side of net income. When the total expenses for a period of operations exceed the income, the result is a net loss.
- Net Operating Loss
A loss from operating a business. For income tax purposes, a net operating loss may be carried back five years to offset prior income and get a refund of taxes paid in those years. Any remaining unused loss may be carried forward to benefit future tax years. See also carryback.
- Net Proceeds
The difference between maturity value and discount when a note receivable is discounted.
- Net Tax Liability
The amount of tax computed by subtracting tax credits from the gross tax liability.
- No-par Stock
Stock that does not have a value printed on the face of the stock certificate.
- Nominal Accounts
Accounts that are closed to a zero balance at the end of each accounting period; temporary accounts generally appearing on the income statement.
- Non-cash Items
Items included in the determination of net income on an accrual basis that do not affect cash; examples are depreciation and amortization.
- Non-cash Transactions
Investing and financing activities that do not affect cash; if significant, they are disclosed below the statement of cash flows or in the notes to the financial statements.
- Non-operating Assets
Investment and other assets not used in a business but held to earn a return separate from operations.
- Non-operating Expense or Income
These are expenses and revenue derived from sources other than the normal business function of a company; for example, investment interest income generated by the installment sale of surplus real estate. Since lending money is not a normal part of the company’s business, the interest income is non-operating. See also operating expense.
- Non-probate Property
Property that passes to heirs outside of the probate court, such as property in trust, certain life insurance proceeds, or property held in joint tenancy with rights of survivorship. Property passing to heirs under your will is subject to probate and is referred to as probate property.
- Non-probate Property
Property that passes to heirs outside of the probate court, such as property in trust, certain life insurance proceeds, or property held in joint tenancy with rights of survivorship. Property passing to heirs under your will is subject to probate and is referred to as probate property.
- Nonprofit Corporation
An entity formed for charitable purposes, or any corporation where the shareholders do not share in the profits. Under the income tax laws, many of these entities are referred to as Section 501(c)(3) organizations. See also charitable organizations.
- Note Payable
A debt owed to a creditor, evidenced by an unconditional written promise to pay a certain sum of money on or before a specified future date.
- Note Receivable
A claim against a debtor, evidenced by an unconditional written promise to pay a certain sum of money on or before a specified future date.
- Notes to Financial Statements
Explanatory information, considered an integral part of the financial statements.
- NSF (not sufficient funds) Check
A check that is not honored by a bank because of insufficient cash in the customer’s account.
- Number of Days’ of Inventory on Hand
An alternative measure of how well inventory is being managed; computed by dividing 365 days by the inventory turnover ratio.
- Number of Days’ Sales in Receivables
A measure of the average number of days it takes to collect a credit sale; computed by dividing 365 days by the accounts receivable turnover.
- Number of Days’ Sales Invested in Working Capital
An alternative measure of the amount of working capital used in generating the sales of a period; computed by dividing 365 days by the working capital turnover.
The term for an asset’s becoming useless due to a change in technology, design, or legal requirements as opposed to uselessness caused by wear and tear.
- Open Line of Credit
An unsecured account allowing you to transact business under a company’s normal credit terms. A privilege given to those with a good credit rating.
- Open Transaction
A transaction that is not completed at the end of the accounting period; a purchase that has not yet been paid for or a sale where payment is yet to be collected when the accounting period ends.
- Opening Balance
In bookkeeping (accounting), the balance of each account at the beginning of an accounting period. For example, the balance in the bank account on January 1st of a new accounting year.
- Opening Entry
An accounting entry to reflect the assets, liabilities, and capital (equity) account balances of a new company. For example, a new business might be started by an owner depositing $10,000 in the business bank account. The opening entry would be a debit of $10,000 to cash in bank and a credit to capital (equity) for $10,000. If the $10,000 was borrowed, the credit would be to notes payable.
- Operating Activities
Transactions and events that enter into the determination of net income.
- Operating Assets
Long-term, or non-current, assets acquired for use in the business rather than for resale; includes property, plant, and equipment; intangible assets; and natural resources.
- Operating Expense (cost)
An expense that occurs in the course of the regular business activities of the company.
- Operating Lease
A simple rental agreement.
- Operating Leverage
The extent to which fixed costs are part of a company’s cost structure; the higher the proportion of fixed costs, the faster income increases or decreases with sales volumes.
- Operating Performance Ratio
An overall measure of the efficiency of operations during a period; computed by dividing net income by net sales.
- Operating Statement
See income statement.
In accounting, the written report by an auditor attesting to the fairness of the information in the company’s financial statements. A qualified opinion means that the auditor takes exception to specified items in the statements. An unqualified opinion means that the financial statements follow generally accepted accounting principles (GAAP).
An agreement, usually in writing, giving a person the right to buy or sell something for an agreed upon price on or before a certain date.
- Organizational Structure
Lines of authority and responsibility.
- Other Revenues and Expenses
Items incurred or earned from activities that are outside, or peripheral to, the normal operations of a firm.
- Out-of-pocket Expense
Incidental cash expenditures in business, often minor while traveling. Also a term used to describe expenses while doing charitable work. Out-of-pocket expenses for charitable purposes are tax deductible.
- Outstanding Stock
Issued stock that is still being held by investors.
- Over-the-counter (OTC)
Security transactions that do not take place with an established stock exchange; the sale of unlisted securities.
Expenses that are not directly related to the products or services sold. Also known as indirect costs since they do not vary directly with sales volume. Examples include such things as utilities and janitorial services.
- Owner’s Equity
See net assets and net worth.
- P/E (price earnings) Ratio
A measure of growth potential, earnings stability, and management capabilities; computed by dividing market price per share by earnings per share.
- Paid-in Capital
The total amount of cash or other consideration received by a corporation for issued stock.
- Paid-in Surplus
The amount received by a corporation for its stock in excess of the par or stated value.
- Par Value
The face or stated value of a share of stock or bond.
- Par Value of Stock
The face amount of a stock share of a corporation as stated in the corporate charter.
- Par-value Stock
Stock that has a nominal value assigned to it in the corporation’s charter and printed on the face of each share of stock.
- Parent Company
A company that owns or maintains control over other companies, known as subsidiaries, which are themselves separate legal entities; control generally refers to more than 50 percent ownership of the stock of another company.
An association of two or more individuals or organizations to carry on economic activity.
- Passive Activity
The income tax treatment for passive activity income and losses is very specific. The IRS states the following; “Generally, you are in a passive activity if 1) you have a trade or business activity in which you do not materially participate during the tax year, or 2) you have a rental activity, even if you do materially participate in it (unless you are a real estate professional).” We will gladly assist you with tax planning concerning your investment activities.
An exclusive right granted for 17 years by the federal government to manufacture and sell an invention.
- Patronage Dividend
These are not true dividends. They represent a refund of part of your purchase of items from a cooperative. If you purchased items for personal use, the dividends are not taxable. If you purchased business items from the cooperative, dividends are taxable income to the business.
The person (entity) to whom payment on a note is to be made.
- Pension Plan
A contract between a company and it employees whereby the company agrees to pay benefits to employees after their retirement.
- Periodic Inventory Method
A system of accounting for inventory in which cost of goods sold is determined and inventory is adjusted at the end of the accounting period, not when merchandise is purchased or sold.
- Perpetual Inventory Method
A system of accounting for inventory in which detailed records of the number of units and the cost of each purchase and sales transactions are prepared throughout the accounting period.
- Petty Cash Fund
A small amount of cash kept on hand for making miscellaneous payments.
- Physical Safeguards
Physical precautions used to protect assets and records, such as locks on doors, fireproof vaults, password verification, security guards.
- Post-closing Trial Balance
A listing of all real account balances after the closing process has been completed; provides a means of testing whether total debits equal total credits for all real accounts prior to beginning a new accounting cycle.
The process of transferring amounts from the journal to the ledger.
- Preemptive Right
The right of current stockholders to purchase additional shares of stock in order to maintain their same percentage of ownership if new shares are issued.
- Preferred Stock
A class of stock that usually provides dividend and liquidation preferences over common stock.
- Premium on Stock
The excess of the issuance (market) price of stock over its par or stated value.
- Prepaid Expenses
Payments made in advance for items normally charged to expense.
- Present Value of $1
The value today of $1 to be received or paid at some future date given a specified interest rate.
- Present Value of an Annuity
The value today of a series of equally spaced, equal-amount payments to be made or received in the future given a specified interest rate.
- Primary Financial Statements
The balance sheet, income statement, and statement of cash flows, used by external groups to assess a company’s economic standing.
- Prime Interest Rate
The interest rate that commercial banks charge their most credit-worthy customers for short-term, unsecured loans. This rate would generally be given to large corporations. The prime rate is used by many banks as the base from which they set rates for other loans.
- Principal (face value or maturity value)
The amount that will be paid on a bond at a maturity date.
- Principal on a Note
The face amount of a note; the amount (excluding interest) that the maker agrees to pay the payee.
- Prior-period Adjustments
Adjustments made directly to Retained Earnings in order to correct errors in the financial statements of prior periods.
- Private Mortgage Insurance (PMI)
Private mortgage insurance is a financial guaranty that protects lenders against loss in the event that a borrower defaults. It is the reason so many young families today can afford home-ownership without waiting half their lives to save the amount required for a down payment.
- Pro Rata
A term describing an allocation that is based on a proportionate distribution of the total.
A process whereby a court validates one’s will and oversees the distribution of the assets in accordance with the provisions of the will. Probate is a public event, and assets passing through probate are a matter of public record.
- Professional Association
An association organized under Title 17 of the Ohio Revised Code, for the sole purpose of rendering one of the professional services or a combination of professional services authorized by law (i.e. dentist, doctor, etc.).
- Professional Service
Any type of professional service, which may be performed only pursuant to a license, certificate, or other legal authorization as, provided by law (i.e. CPA firm).
- Profit Margin
Gross profit margin equals sales revenue minus cost of goods sold.
A company’s ability to generate revenues in excess of the costs incurred in producing those revenues.
- Proforma (projected) Statements
The traditional proforma statements were financial statements based on assumptions of future events in a business. In other words, the income statement and balance sheet would look like this or that if certain events happened. They were prepared by accountants and management to review the financial effects of proposed or estimated transactions.
- Progressive Tax
A tax system under which the percentage of tax paid increases as the level of income being taxed increases. For example, the tax rate on up to $20,000 of taxable income is 15%, but the tax rate on $20,000 to $50,000 is 28%. The U.S. tax system is a progressive system.
- Promissory Note
A written promise to pay a certain sum of money by a given date or to make payments at specific dates to another person or company. If the promissory note does not state a rate of interest, the Internal Revenue Service may impute (compute) an interest rate that creates interest income to the payee and an interest expense to the payer.
- Proof of Loss
The submission of adequate information to an insurance company to allow it to determine the amount of money to be paid to the insured for a loss.
- Proper Authorization
Policy regarding either a general class of transactions such as inventory or a specific transaction to achieve control objectives.
- Property Dividend
The distribution to shareholders of assets other than cash.
- Property, Plant, and Equipment
Tangible, long-lived assets acquired for use in business operations; includes land, buildings, machinery, equipment, and furniture.
A business owned by one person.
- Public Accountant (PA)
A designation used in some states for a person who is licensed to provide accounting services to the general public, but who is not a certified public accountant (CPA). In some states, PA is used to designate a Professional Association (Corporation), so you will see firm names such as “Jones and Smith CPAs, PA.”
- Public Companies
Entities whose stock is publicly traded.
- Public Offering
The sale of securities to the public as opposed to a private offering. Public offerings are regulated by state and federal securities laws. See also IPO.
- Purchase Discount
A reduction in the purchase price, allowed if payment is made within a specified period.
- Purchase Method
A method used to prepare consolidated financial statements when one company has acquired a controlling interest in another company with similar activities by exchanging cash or other assets for more than 50 percent of the acquired company’s outstanding voting stock.
- Purchase Returns and Allowances
A contra-purchase account used for recording the return of, or allowances for, previously purchased merchandise.
- Purchases Account
An account in which all inventory purchases are recorded; used with the periodic inventory method.
- Purchases Journal
A special journal in which credit purchases are recorded.
- Pyramid Scheme
Pyramid schemes, as currently defined by the Federal Trade Commission (FTC): “generally ignore the marketing and selling of products and services, and concentrate on the commissions you could earn just for recruiting new distributors.” Pyramid schemes may or may not involve the sale of products. Some multi-level marketing (MLM) programs fall under this category. The term “pyramid” refers to illegal schemes.
- Qualified Domestic Relations Order (QDRO)
A court order that meets certain IRS requirements and that assigns all or a portion of a participant’s qualified pension benefits to a spouse or ex-spouse to satisfy alimony and/or child support obligations.
- Qualified Opinion
In accounting, a qualified opinion means that the auditor takes exception to specified items in the statements.
- Qualified Retirement Plans
A retirement plan that qualifies for favorable income tax treatment, such as a 401(k) plan. If your employer has a retirement plan, contribute the maximum if you possibly can. This is the best way to help insure that you will have a properly funded retirement.
- Quitclaim Deed
A deed to convey any interest, apparent interest, or claim that an individual has in a piece of property. Often used to clean up a clouded title.
- Rate of Return
The annual return on an investment, stated as a percentage. For example, six dollars earned in one year on one hundred dollars gives a 6% rate of return. See also yield.
- Ready Cash Items
Cash, certificates of deposit, stocks, bonds, and other investments that have clear market value and can be turned into cash in very short order.
- Real Accounts
Accounts that are not closed to a zero balance at the end of each accounting period; permanent accounts appearing on the balance sheet.
- Real Estate Investment Trust (REIT)
A company that specializes in real estate investments. A REIT must meet strict ownership, investment, and income distribution tests to qualify for tax treatment as a REIT. REIT’s allow individual investors to diversify their real estate investments. REIT’s are like mutual funds except the underlying investments are in real estate rather than stocks and bonds.
- Realized Gains and Losses
Gains and losses resulting from the sale of securities in an arm’s length transaction.
A designation reserved for those who are affiliated with the National Association of Realtors.
A substantial restructuring of the stock and/or bonds of a corporation by amending the articles of incorporation or by merger with a parent or subsidiary.
Claims for money, goods, or services.
The right to seek payment on a discounted note from the payee if the maker defaults.
- Recovery Period
The time period designated by Congress for depreciating business assets.
- Redemption Value
The price, stated in the contract, to be paid by a company to repurchase preferred stock.
- Registered Bonds
Bonds for which the names and addresses of the bondholders are kept on file by the issuing company.
An agreement between two insurance companies to share the risk taken on by one company for insurance policies where the risk of loss is substantial.
- Related Taxpayers
The tax law does not allow tax losses between certain related taxpayers. The prohibited relationship can be that of family members, a shareholder and his or her corporation, or the cross ownership of two or more legal entities such as corporations and partnerships.
- Relative Fair Market Value Method
A way of allocating a lump-sum or “basket” purchase price to the individual assets acquired based on their respective market values.
The one entitled to an interest in property after the termination of a life estate. For example, a surviving spouse may have the use of real estate until her death, at which time the remainder interest passes to her child (the remainderman). See also life tenant.
- Residential Property
Residential property includes houses, condos, trailers, and boats if they have sleeping, eating, and bathroom facilities. If you have more than one residence, only one will quality for the preferred tax treatment as your principal residence. Your principal residence will be the place where you spent the greatest part of the year.
- Residual Income
The amount of net income an investment center is able to earn above a specified minimum rate of return on assets.
- Retail Inventory Method
A procedure for estimating the dollar amount of ending inventory; the ending inventory at retail prices is converted to a cost basis by using a ratio of the cost and the retail prices of goods available for sale.
- Retained Earnings
The portion of a corporation’s owners’ equity that has been earned from profitable operations and not distributed to stockholders.
- Return on Investment (ROI)
A measure of operating performance and efficiency in utilizing assets computed in its simplest form by dividing net income by average total assets.
- Return on Sales Revenue
A measure of operating performance; computed by dividing net income by total sales revenue.
- Return on Stockholder’s Equity
A measure of overall performance from a stockholder’s viewpoint; includes management of operations, uses of assets, and management of debt and equity, and is computed by dividing net income by average stockholder’s equity.
- Return on Total Assets
An overall measure of the return to both stockholders and creditors; includes operating performance and asset turnover.
- Revenue Recognition Principle
The idea that revenues should be recorded when (1) the earnings process has been substantially completed and (2) an exchange has taken place.
Increases in a company’s resources from the sale of goods or services.
- Reverse Mortgage
A source of funds for older people who have equity in their homes and need additional retirement money. The homeowner gets monthly payments that add to the mortgage balance. When the homeowner dies, sells the home, or moves out, the mortgage is paid off from the proceeds of the home sale. A reverse mortgage allows older people to remain in their homes while borrowing against the equity.
- Revocable Trust
A trust that can be altered or terminated by the grantor (the person who established it).
- Roth IRA
A Roth IRA is treated like a traditional IRA except for several important differences. Contributions to a Roth are never tax-deductible. Qualified withdrawals from a Roth are not taxable. There are income limits that determine who may set up and contribute to a Roth. Contact us for assistance in determining whether or not a Roth is better for you than a traditional IRA.
- S & P 500
The Standard and Poor’s 500 tracks the leading companies in various industries. Because of its broad representation, many investors and advisers consider it to be the best indication of stock market activity. It is used as the benchmark for performance by most portfolio managers.
- S Corporation
A domestic corporation that is recognized as a regular corporation under state law but is granted special status for federal income tax purposes.
- Sales Discount
A reduction in the selling price that is allowed if payment is received within a specified period.
- Sales Journal
A special journal in which credit sales are recorded.
- Sales Returns and Allowances
A contra-revenue account in which the return of, or allowance for, reduction in the price of merchandise previously sold is recorded.
- Sales Tax Payable
Money collected from customers for sales taxes, that must be remitted to local governments and other taxing authorities.
- Sallie Mae
Sallie Mae is the nation’s leading provider of education loans. It has been helping students primarily with federally guaranteed student loans originated under the Federal Family Education Loan Program (FFELP).
- Salvage, or Residual, Value
Estimated value or actual price of an asset at the conclusion of its useful life, net of disposal costs.
- Savings Incentive Match Plans for Employees (SIMPLE plans)
See SIMPLE plans.
- Schedule K-1
A Schedule K-1 is issued at year-end to each owner of a joint venture, such as an S corporation or a partnership. The K-1 identifies the owners share of the venture’s income, losses, credits, and other tax items which you are to report on the tax return. The IRS gets a copy that it compares to the amounts reported on your income tax return.
SCORE is a 501(c)(3) nonprofit organization that provides free business mentoring services to entrepreneurs in the United States. The organization also presents business workshops and seminars for a fee. Business mentoring services are provided by both active and retired business executives and entrepreneurs who donate their time and expertise as mentors to assist new and established small businesses. SCORE is a resource partner with the U.S. Small Business Administration. It is based in Herndon, Virginia.
- Second Mortgage
A mortgage on real estate that is subordinated to a first mortgage already recorded against the property. See also subordinated debt.
- Second-to-die Life Insurance
See joint and survivor life insurance.
- Section 1031
A provision in the tax law that you might want to keep in mind. No gain or loss is recognized (taxed) if business and or investment property is traded for qualified like-kind property that is also used in a business or held for investment. In short, if you arrange the proper kind of trade, you avoid income tax until the property you traded for is later disposed of. This is often referred to as a tax-deferred exchange, or less accurately as a tax-free exchange.
- Section 501(c)(3)
See charitable organization.
- Secured Bonds
Bonds for which assets have been pledged in order to guarantee repayment.
- Securities and Exchange Commission (SEC)
The government body responsible for regulating the financial reporting practices of most publicly owned corporations in connection with the buying and selling of stocks and bonds.
- Segregation of Duties
Strategy to provide an internal check on performance through separation of custody of assets from accounting personnel, separation of authorization of transactions from custody of related assets, separation of operational responsibilities from record keeping responsibilities.
- Self-employment Tax
This tax is computed on Schedule SE of Form 1040. Net income from self-employment in a business or farming is subject to self-employment tax in order to provide you with social security benefits in retirement. This tax must be added to your income tax for purposes of determining your quarterly tax estimates.
- Seller’s Market
The condition that exists when there is an excess of demand over supply for any product or service. This situation usually results in higher prices to the seller.
- Series EE Bonds
Series EE bonds are a type of United States Savings Bond offered by the Treasury Department. A bond can earn interest for up to 30 years. Interest earnings are payable upon redemption. Interest earnings on bonds are exempt from state and local income taxes, but they are subject to federal income tax. Certain bond interest is free from federal income tax if used for qualified higher education expenses.
- Service Mark
A mark used in the sale or advertising of services to identify the services of one person and distinguish them from the services of others.
The unit into which the proprietary interests in a corporation is divided (i.e. shares of stock).
- Shareholders (stockholders)
Individuals or organizations that own a portion (shares of stock) of a corporation.
- Short Sale
Selling shares of stock that you do not own. With a short sale, you borrow the shares from your broker with the agreement that you will replace them at a later date, hopefully when the price is lower. The transaction is not subject to income tax until the short sale is covered by the actual purchase and/or transfer of shares of stock.
- Short Sale Against the Box
A short sale, using borrowed stock, where one owns enough of the stock to cover the replacement at the agreed replacement date.
- Short-term Liability
The current liabilities shown on a company’s balance sheet including any current portion of the long-term debt. Liabilities that are normally payable within one accounting year.
- Significant Influences
Influence presumed if a company owns between 20% and 50% of another company.
- Simple Interest
Interest computed on a principal balance for a specified period. See also compound interest.
- SIMPLE Plans
A retirement plan for employees. Savings Incentive Match Plans for Employees (SIMPLE plans) can be established by employers with 100 or fewer employees. The plan allows employees to make contributions of limited amounts and requires the employers to contribute also.
- Simplified Employee Pension (SEP)
A SEP is a plan under which the employer makes contributions to individual IRAs for each eligible employee even though all are part of a group plan.
- Small Business Administration (SBA)
The SBA is a federal agency established to assist small businesses with financing and business management. Your local banker is a good source for current information about what the SBA has to offer.
- Social Security (FICA) Taxes
Federal Insurance Contributions Act taxes imposed on employee and employer; used mainly to provide retirement benefits.
- Sole Proprietorship
An unincorporated business owned entirely by one person. See also corporation.
A company’s long-run ability to meet all financial obligations. Technically, solvency exists when current assets are greater than current liabilities.
- Special Journal
A book of original entry for recording similar transactions that occur frequently.
- Special Order
An order that may be priced below the normal price in order to utilize excess capacity and thereby contribute to company profits.
- Standard Deduction
You are entitled to take a standard deduction on your income tax return, in lieu of your actual itemized deductions. You can compare the two methods and take the one most advantageous to you. And you can change methods every year. Why would the IRS allow this? The standard deduction has been increased as the years go by so that fewer and fewer people will itemize their deductions. This saves the IRS and the taxpayer lots of time in audits and in recordkeeping.
- Standard Identification
A method of valuing inventory and determining cost of goods sold whereby the actual costs of specific inventory items are assigned to them.
- Standard Unqualified Audit Report
Audit report indicating that all auditing conditions have been met, no significant misstatements have been discovered and remain uncorrected, and the auditors feel the financial statements are fairly stated in accordance with generally accepted accounting principles.
- Start-up Expenses
The expenses incurred in getting a new business up and running. The tax law allows you to write off these costs over a period of not less than 60 months. See also organizational cost.
- Stated Rate of Interest
The rate of interest printed on the bond.
- Stated Value
A nominal value assigned to no-par stock by the board of directors of a corporation.
- Stated Value
A nominal value assigned to no-par stock by the board of directors of a corporation.
- Statement of Cash Flows
The financial statement that shows an entity’s cash inflows (receipts) and outflows (payments) during a period of time.
- Statement of Earnings
The financial statement that summarizes the revenues generated and the expenses incurred by an entity during a period of time.
- Statement of Earnings (Income Statement)
The financial statement that summarizes the revenues generated and the expenses incurred by an entity during a period of time.
- Statement of Partners’ Capital
A partnership report showing the changes in the capital balances; similar to a statement of retained earnings for a corporation.
- Statement of Retained Earnings
A report that shows the changes in the Retained Earnings account during a period of time.
- Statement of Stockholders’ Equity
A financial statement that reports all changes in stockholders’ equity.
- Statute of Limitations
In taxes this is the period of time that the IRS and you have to make changes to your tax return. Generally, the statute of limitations is three years from the time your tax return is filed.
- Statutory Agent
A person to receive legal documents in litigation and other legal notices required or permitted by law to be served upon the corporation.
- Stepped-up Basis
This is the increase in tax cost (basis) in the hands of a new owner of property, such as stepped-up basis for property you inherit. For example, assume that your rich uncle died and left you Blackacre, property which he acquired for $100. If at the time of his death the property was worth $50,000, that is your new stepped-up basis. If you sell Blackacre for $50,000, you will have no taxable gain.
- Stock Certificate
A document issued by a corporation to stockholders evidencing ownership in the corporation.
- Stock Dividend
A pro rata distribution of additional shares of stock to shareholders.
- Stock Split
The replacement of outstanding shares of stock with a greater number of new shares that have a proportionately lower par or stated value.
- Straight-line Amortization
A method of systematically writing off a bond discount or premium in equal amounts each period until maturity.
- Straight-line Depreciation Method
The depreciation method in which the cost of an asset is allocated equally over the periods of an asset’s estimated useful life.
- Subsidiary Company
A company owned or controlled by another company, known as the parent company.
- Subsidiary Ledger
A grouping of individual accounts that in total equal the balance of a control account in the General Ledger.
- Sum-of-the-years’-digits (SYD) Depreciation Method
The accelerated depreciation method in which a constant balance (cost minus salvage value) is multiplied by a declining depreciation rate.
Materials used in a business that do not generally become part of the sales product and were not purchased to be resold to customers.
- Surrender Value
See cash surrender value.
- Suspense Account
A bookkeeping account used to temporarily enter amounts for which a final expense account has not yet been decided. This account would not normally show in a finalized financial statement.
A security issued by the U.S. Government with a maturity of one year or less. T-bills are sold at a discount from par,and therefore, do not bear a fixed interest rate. Treasury bonds mature in more than ten years from their issue date. Treasury notes mature in more than a year, but not more than ten years from their issue date.
- Tangible Asset
An asset that physically exists, such as land, buildings, equipment, etc. See also intangible asset.
- Tangible Personal Business Property
Depreciable operating assets of a business, other than real property, including machinery, furniture and fixtures, automobiles and trucks, and equipment.
- Tax Lien
A recorded claim by the government for taxes levied but not yet paid.
- Tax-deferred Exchange
Often referred to as a tax-free exchange, a tax-deferred exchange is permitted when qualified business and/or investment property is exchanged for other qualified business and/or investment property. The taxpayer must not have access to any of the funds. If you sell property and then purchase a replacement property, you will be subject to tax on any gain in the sale. If a proper exchange takes place, any potential income tax is deferred until the newly acquired property is later disposed of.
- Tax-deferred Exchange
See Section 1031.
- Tax-free Exchange (like-kind exchange)
See Section 1031.
- Tenant in Common
A form of holding title to property with others. If you own property as tenants in common with others, upon your death, your interest in the property is transferred by the terms of your will. Your interest does not go automatically to the other joint owners. See also joint tenancy.
- Term Bonds
Bonds that mature in one lump sum at a specified future date.
- Term Insurance
A form of life insurance having no cash surrender value and no investment component (no loan value). Term insurance provides insurance protection for a specified period of time and can often be purchased with a renewal provision.
- Testamentary Trust
A trust established by your will that goes into effect at the time of your death.
- Testator (Testatrix)
The person who makes a will, a testament.
- Time Period (or periodicity) Concept
The idea that the life of a business is divided into distinct and relatively short time periods so that accounting information can be timely.
- Times Interest Earned Ratio
Ratio that indicates the company’s margin above the fixed interest charged to be paid to creditors; calculated by dividing income before interest and income taxes by interest expense.
- Title Insurance
An insurance policy that protects the buyer and/or mortgage lender against loss caused by a defect in the title to real estate.
- Trading Securities
Debt and equity securities purchased with the intent of selling them should the need for cash arise or to realize short-term gains.
Exchange of goods or services between entities (whether individuals, businesses, or other organizations), as well as other events having an economic impact on a business.
- Transfer Agent
A company that issues the stock certificates for a corporation. They maintain the records of shareholders and may issue the dividend checks.
- Transportation Costs
Costs of transferring merchandise into or out of a firm.
- Treasury Bill, Bond, Note
A security issued by the U.S. Government with a maturity of one year or less. T-bills are sold at a discount from par, and therefore, do not bear a fixed interest rate. Treasury bonds mature in more than ten years from their issue date. Treasury notes mature in more than a year, but not more than ten years from their issue date.
- Treasury Stock
Issued stock that has subsequently been reacquired by the corporation.
- Trial Balance
A listing of all account balances; provides a means of testing whether total debits equal total credits for all accounts.
A legal entity set up by a person to hold assets generally for the benefit of another person or persons. A trust is administered by an appointed trustee.
- Trust Deed
A legal document that transfers property to a trustee to secure the payment of a loan. It serves much the same purpose as a mortgage. The title to real estate is placed in the hands of a trustee; it is transferred to the buyer of the property when the debt has been paid in full.
A person or institution that administers a trust according to the terms of the trust agreement.
- UCC Filing
The purpose of a UCC filing is to notify the public that you have a security interest in collateral given for a loan. It is a means available to a lender to protect his or her rights in a secured loan. You should consult with your attorney if you need more information about these filings.
- Uncollectible Accounts Expense
An account that represents the portion of the current period’s receivables that are estimated to become uncollectible.
In insurance, an underwriter is the company that issues the insurance policy and assumes the risk of loss. In capital stock sales, an underwriter is one who agrees to promote a new issue of stock and agrees to buy any shares not purchased by the public.
- Unearned Income
In tax, income from sources other than personal services, such as income from investments (interest, dividends, royalties, etc.)
- Unearned Revenues
Amounts received before they have been earned.
- Unified Tax Credit
This is an estate and gift tax term. It is the level of assets that can be transferred either during lifetime or at death without creating a gift or estate tax.
- Uniform CPA Exam
Even though each of the fifty states issue the license to practice as a certified public accountant (CPA), the exam given to prospective CPAs by each state is a nationally uniform examination.
- Units-of-production Depreciation Method
The depreciation method in which the cost of an asset is allocated to each period on the basis of the productive output or use of the asset during the period.
- Unlimited Liability
The lack of a ceiling on the amount of liability a proprietor or partner must assume; meaning that if business assets are not sufficient to settle creditor claims, the personal assets of the proprietor or partners may be used to settle the claims.
- Unqualified Opinion (audit)
An audit term. See also opinion.
- Unrealized Gains or Losses
Gains and losses resulting from changes in the value of securities that are still being held.
- Unrecorded Expenses
Expenses incurred during a period that have not been recorded by the end of that period.
- Unrecorded Revenues
Revenues earned during a period that have not been recorded by the end of that period unrelated business income: In tax law, the income of a charity that is not related to the exempt purposes of the charity and, therefore, subject to income tax.
- Unsecured Creditor
A creditor who has a claim which is not backed by collateral or a security agreement, sometimes referred to as a general creditor.
- Useful Life
The term used to describe the life over which an asset is expected to be useful to the company; cost is assigned to the periods benefited from using the asset.
- Variable Expenses
Operating expenses that vary with the volume of business. For example, shipping supplies increase as the volume of items sold increases. See also direct cost.
- Venture Capital
Venture capital is funding for new companies. By their very nature, new companies are high risk. The venture capitalist is looking for a high return and usually requires an ownership interest in the new company in return for his investment in the company.One of our affiliated companies, Edgar Allen Group, provides assistance with obtaining venture capital.
- Vertical Analysis of Financial Statements
A technique for analyzing the relationships between items on an income statement or balance sheet by expressing all items as percentages.
See Form W-2.
See Form W-4.
- Wasting Asset
An asset with a limited useful life; an asset that declines in value and is subject to depreciation or depletion charges.
A periodic inventory cost flow alternative whereby the cost of goods sold and the cost of ending inventory are determined by using a weighted-average cost of all merchandise available for sale during the period.
- Work Sheet
A columnar schedule used to summarize accounting data.
- Working Capital
The excess of all current assets over the total of all current liabilities. The greater the working capital, the easier it is for a company to meet its current (usually one year or less) obligations. Current assets minus current liabilities.
- Working Capital Turnover
A measure of the amount of working capital used in generating the sales of a period; computed by dividing net sales by average working capital.
- Working Papers
The schedules and documentation that an auditor prepares to support his or her report on financial statements of a business or other entity.
The actual return on an investment. A bond with a stated interest rate of 6%, for example, may be purchased at a discount so that the yield may be more like 7%.
- Zero Coupon Bond
A bond that is traded at a deep discount because it pays no interest. The profit is realized when the bond is redeemed at maturity for full face value.