Accounting acronyms Glossary

accounting terminology concepts and accounting terminology dictionary
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Published Date:11-07-2017
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Glossary oF Accounting, Finance and Economic Terms    Accounting – pages 1‐7  and 8  Finance – page 7  Economics – page 7    ACCOUNTING:   Account ‐‐ a record of financial transactions; usually refers to a specific category or type, such  as travel expense account or purchase account.   Accountant ‐‐ a person who trained to prepare and maintain financial records.  Accounting ‐‐ a system for keeping score in business, using dollars.  Accounting period ‐‐ the period of time over which profits are calculated. Normal accounting  periods are months, quarters, and years (fiscal or calendar).  Accounts payable ‐‐ amounts owed by the company for the goods or services it has  purchased from outside suppliers.  Accounts receivable ‐‐ amounts owed to the company by its customers.  Accrual basis, system, or method ‐‐ an accounting system that records revenues and  expenses at the time the transaction occurs, not at the time cash changes hands. If you buy a  coat and charge it, the store records or accrues the sale when you walk out with the coat, not  when you pay your bill. Cash basis accounting is used by individuals. Accrual basis accounting  is used by most businesses.  Accrued expenses, accruals ‐‐ an expense which has been incurred but not yet paid for.  Salaries are a good example. Employees earn or accrue salaries each hour they work. The  salaries continue to accrue until payday when the accrued expense of the salaries is  eliminated.  Aging ‐‐ a process where accounts receivable are sorted out by age (typically current, 30 to  60 days old, 60 to 120 days old, and so on.) Aging permits collection efforts to focus on  accounts that are long overdue.   1 Amortize ‐‐ to charge a regular portion of an expenditure over a fixed period of time. For  example if something cost 100 and is to be amortized over ten years, the financial reports  will show an expense of 10 per year for ten years. If the cost were not amortized, the entire  100 would show up on the financial report as an expense in the year the expenditure was  made. (See entries on Expenditure and Expense.)  Appreciation ‐‐ an increase in value. If a machine cost 1,000 last year and is now worth  1,200, it has appreciated in value by 200. (The opposite of depreciation.)  Assets ‐‐ things of value owned by a business. An asset may be a physical property such as a  building, or an object such as a stock certificate, or it may be a right, such as the right to use a  patented process.  Current Assets are those assets that can be expected to turn into cash within a year or less.  Current assets include cash, marketable securities, accounts receivable, and inventory.  Fixed Assets cannot be quickly turned into cash without interfering with business operations.  Fixed assets include land, buildings, machinery, equipment, furniture, and long‐term  investments.  Intangible Assets are items such as patents, copyrights, trademarks, licenses, franchises, and  other kinds of rights or things of value to a company, which are not physical objects. These  assets may be the most important ones a company owns. Often they do not appear on  financial reports.  Audit ‐‐ a careful review of financial records to verify their accuracy.  Bad debts ‐‐ amounts owed to a company that are not going to be paid. An account  receivable becomes a bad debt when it is recognized that it won't be paid. Sometimes, bad  debts are written off when recognized. This is an expense. Sometimes, a reserve is set up to  provide for possible bad debts. Creating or adding to a reserve is also an expense.  Balance sheet ‐‐ a statement of the financial position of a company at a single specific time  (often at the close of business on the last day of the month, quarter, or year.) The balance  sheet normally lists all assets on the left side or top while liabilities and capital are listed on  the right side or bottom. The total of all numbers on the left side or top must equal or  balance the total of all numbers on the right side or bottom. A balance sheet balances  according to this equation: Assets = Liabilities + Capital.  Bond ‐‐ a written record of a debt payable more than a year in the future. The bond shows  amount of the debt, due date, and interest rate.  Book value ‐‐ total assets minus total liabilities. (See also net worth.) Book value also means  the value of an asset as recorded on the company's books or financial reports. Book value is  often different than true value. It may be more or less.  Breakeven point ‐‐ the amount of revenue from sales which exactly equals the amount of  expense. Breakeven point is often expressed as the number of units that must be sold to  produce revenues exactly equal to expenses. Sales above the breakeven point produce a  profit; below produces a loss.  2 Capital ‐‐ money invested in a business by its owners. (See equity.) On the bottom or right  side of a balance sheet. Capital also refers to buildings, machinery, and other fixed assets in a  business. A capital investment is an investment in a fixed asset with a long‐term use.  Capitalize ‐‐ to capitalize means to record an expenditure on the balance sheet as an asset,  to be amortized over the future. The opposite is to expense. For example, research  expenditures can be capitalized or expensed. If expensed, they are charged against income  when the expenditure occurs. If capitalized, the expenditure is charged against income over a  period of time usually related to the life of the products or services created by the research.  Cash ‐‐ money available to spend now. Usually in a checking account.  Cash flow ‐‐ the amount of actual cash generated by business operations, which usually  differs from profits shown.  Chart of accounts ‐‐ a listing of all the accounts or categories into which business  transactions will be classified and recorded. Each account usually has a number. Transactions  are coded by this number for manipulation on computers.  Contingent liabilities ‐‐ liabilities not recorded on a company's financial reports, but which  might become due. If a company is being sued, it has a contingent liability that will become a  real liability if the company loses the suit.  Cost of sales, cost of goods sold ‐‐ the expense or cost of all items sold during an accounting  period. Each unit sold has a cost of sales or cost of the goods sold. In businesses with a great  many items flowing through, the cost of sales or cost of goods sold is often computed by this  formula: Cost of Sales = Beginning Inventory + Purchases During the Period ‐ Ending  Inventory.   Credit ‐‐ an accounting entry on the right or bottom of a balance sheet. Usually an increase in  liabilities or capital, or a reduction in assets. The opposite of credit is debit. Each credit in a  balance sheet has a balancing debit. Credit has other usages, as in "You have to pay cash,  your credit is no good." Or "we will credit your account with the refund."  Debit ‐‐ an accounting entry on the left or top of a balance sheet. Usually an increase in  assets or a reduction in liabilities. Every debit has a balancing credit.  Deferred charges ‐‐ see prepaid expenses.  Deferred income ‐‐ a liability that arises when a company is paid in advance for goods or  services that will be provided later. For example, when a magazine subscription is paid in  advance, the magazine publisher is liable to provide magazines for the life of the  subscription. The amount in deferred income is reduced as the magazines are delivered.  Depreciation ‐‐ an expense that is supposed to reflect the loss in value of a fixed asset. For  example, if a machine will completely wear out after ten year's use, the cost of the machine  is charged as an expense over the ten‐year life rather than all at once, when the machine is  purchased. Straight line depreciation charges the same amount to expense each year.  Accelerated depreciation charges more to expense in early years, less in later years.  Depreciation is an accounting expense. In real life, the fixed asset may grow in value or it may  become worthless long before the depreciation period ends.  3 Discounted cash flow ‐‐ a system for evaluating investment opportunities that discounts or  reduces the value of future cash flow. (See present value.)  Dividend ‐‐ a portion of the after‐tax profits paid out to the owners of a business as a return  on their investment.  Double entry ‐‐ a system of accounting in which every transaction is recorded twice ‐‐ as a  debit and as a credit.  Earnings per share ‐‐ a company's net profit after taxes for an accounting period, divided by  the average number of shares of stock outstanding during the period.  80 ‐ 20 rule ‐‐ a general rule of thumb in business that says that 20% of the items produce  80% of the action ‐‐ 20% of the product line produces 80% of the sales, 20 percent of the  customers generate 80% of the complaints, and so on. In evaluating any business situation,  look for the small group which produces the major portion of the transactions you are  concerned with. This rule is not exactly accurate, but it reflects a general truth, nothing is  evenly distributed.  Equity ‐‐ the owners' share of a business.  Expenditure ‐‐ an expenditure occurs when something is acquired for a business ‐‐ an asset is  purchased, salaries are paid, and so on. An expenditure affects the balance sheet when it  occurs. However, an expenditure will not necessarily show up on the income statement or  affect profits at the time the expenditure is made. All expenditures eventually show up as  expenses, which do affect the income statement and profits. While most expenditures  involve the exchange of cash for something, expenses need not involve cash. (See expense  below.)  Expense ‐‐ an expenditure which is chargeable against revenue during an accounting period.  An expense results in the reduction of an asset. All expenditures are not expenses. For  example, a company buys a truck. It trades one asset ‐ cash ‐ to acquire another asset. An  expenditure has occurred but no expense is recorded. Only as the truck is depreciated will an  expense be recorded. The concept of expense as different from an expenditure is one reason  financial reports do not show numbers that represent spendable cash. The distinction  between an expenditure and an expense is important in understanding how accounting  works and what financial reports mean. (To expense is a verb. It means to charge an  expenditure against income when the expenditure occurs. The opposite is to capitalize.)  Fiscal year ‐‐ an accounting year than begins on a date other than January 1.  Fixed asset ‐‐ see asset.  Fixed cost ‐‐ a cost that does not change as sales volume changes (in the short run.) Fixed  costs normally include such items as rent, depreciation, interest, and any salaries unaffected  by ups and downs in sales.  Goodwill ‐‐ in accounting, the difference between what a company pays when it buys the  assets of another company and the book value of those assets. Sometimes, real goodwill is  involved ‐ a company's good reputation, the loyalty of its customers, and so on. Sometimes,  goodwill is an overpayment.  4 Income ‐‐ see profit.  Interest ‐‐ a charge made for the use of money.  Inventory ‐‐ the supply or stock of goods and products that a company has for sale. A  manufacturer may have three kinds of inventory: raw materials waiting to be converted into  goods, work in process, and finished goods ready for sale.  Inventory obsolescence ‐‐ inventory no longer salable. Perhaps there is too much on hand,  perhaps it is out of fashion. The true value of the inventory is seldom exactly what is shown  on the balance sheet. Often, there is unrecognized obsolescence.   Inventory shrinkage ‐‐ a reduction in the amount of inventory that is not easily explainable.  The most common cause of shrinkage is probably theft.  Inventory turnover ‐‐ a ratio that indicates the amount of inventory a company uses to  support a given level of sales. The formula is: Inventory Turnover = Cost of Sales ¸ Average  Inventory. Different businesses have different general turnover levels. The ratio is significant  in comparison with the ratio for previous periods or the ratio for similar businesses.  Invested capital ‐‐ the total of a company's long‐term debt and equity.  Journal ‐‐ a chronological record of business transactions.  Ledger ‐‐ a record of business transactions kept by type or account. Journal entries are  usually transferred to ledgers.  Liabilities ‐‐ amounts owed by a company to others. Current liabilities are those amounts due  within one year or less and usually include accounts payable, accruals, loans due to be paid  within a year, taxes due within a year, and so on. Long‐term liabilities normally include the  amounts of mortgages, bonds, and long‐term loans that are due more than a year in the  future.  Liquid ‐‐ having lots of cash or assets easily converted to cash.  Marginal cost, marginal revenue ‐‐ marginal cost is the additional cost incurred by adding  one more item. Marginal revenue is the revenue from selling one more item. Economic  theory says that maximum profit comes at a point where marginal revenue exactly equals  marginal cost.  Net worth ‐‐ total assets minus total liabilities. Net worth is seldom the true value of a  company.  Opportunity cost ‐‐ a useful concept in evaluating alternate opportunities. If you choose  alternative A, you cannot choose B, C, or D. What is the cost or loss of profit of not choosing  B, C, or D? This cost or loss of profit is the opportunity cost of alternative A. In personal life  you may buy a car instead of taking a European vacation. The opportunity cost of buying the  car is the loss of the enjoyment of the vacation.  5 Overhead ‐‐ a cost that does not vary with the level of production or sales, and usually a cost  not directly involved with production or sales. The chief executive's salary and rent are  typically overhead.  Post ‐‐ to enter a business transaction into a journal or ledger or other financial record.  Prepaid expenses, deferred charges ‐‐ assets already paid for, that are being used up or will  expire. Insurance paid for in advance is a common example. The insurance protection is an  asset. It is paid for in advance, it lasts for a period of time, and expires on a fixed date.  Present value ‐‐ a concept that compares the value of money available in the future with the  value of money in hand today. For example, 78.35 invested today in a 5% savings account  will grow to 100 in five years. Thus the present value of 100 received in five years is  78.35. The concept of present value is used to analyze investment opportunities that have a  future payoff.   Price‐earnings (p/e) ratio ‐‐ the market price of a share of stock divided by the earnings  (profit) per share. P/e ratios can vary from sky high to dismally low, but often do not reflect  the true value of a company.  Profit ‐‐ the amount left over when expenses are subtracted revenues. Gross profit is the  profit left when cost of sales is subtracted from sales, before any operating expenses are  subtracted. Operating profit is the profit from the primary operations of a business and is  sales minus cost of sales minus operating expenses. Net profit before taxes is operating profit  minus non‐operating expenses and plus non‐operating income. Net profit after taxes is the  bottom line, after everything has been subtracted. Also called income, net income, earnings.  Not the same as cash flow and does not represent spendable dollars.  Retained earnings ‐‐ profits not distributed to shareholders as dividends, the accumulation of  a company's profits less any dividends paid out. Retained earnings are not spendable cash.  Return on investment (ROI) ‐‐ a measure of the effectiveness and efficiency with which  managers use the resources available to them, expressed as a percentage. Return on equity is  usually net profit after taxes divided by the shareholders' equity. Return on invested capital is  usually net profit after taxes plus interest paid on long‐term debt divided by the equity plus  the long‐term debt. Return on assets used is usually the operating profit divided by the assets  used to produce the profit. Typically used to evaluate divisions or subsidiaries. ROI is very  useful but can only be used to compare consistent entities ‐‐ similar companies in the same  industry or the same company over a period of time. Different companies and different  industries have different ROIs.  Revenue ‐‐ the amounts received by or due a company for goods or services it provides to  customers. Receipts are cash revenues. Revenues can also be represented by accounts  receivable.  Risk ‐‐ the possibility of loss; inherent in all business activities. High risk requires high return.  All business decisions must consider the amount of risk involved.  Sales ‐‐ amounts received or due for goods or services sold to customers. Gross sales are  total sales before any returns or adjustments. Net sales are after accounting for returns and  adjustments.  6 Stock ‐‐ a certificate (or electronic or other record) that indicates ownership of a portion of a  corporation; a share of stock. Preferred stock promises its owner a dividend that is usually  fixed in amount or percent. Preferred shareholders get paid first out of any profits. They have  preference. Common stock has no preference and no fixed rate of return. Treasury stock was  originally issued to shareholders but has been subsequently acquired by the corporation .  Authorized by unissued stock is stock which official corporate action has authorized but has  not sold or issued. (Stock also means the stock of goods, the stock on hand, the inventory of  a company.)  Sunk costs ‐‐ money already spent and gone, which will not be recovered no matter what  course of action is taken. Bad decisions are made when managers attempt to recoup sunk  costs.  Trial balance ‐‐ at the close of an accounting period, the transactions posted in the ledger are  added up. A test or trial balance sheet is prepared with assets on one side and liabilities and  capital on the other. The two sides should balance. If they don't, the accountants must  search through the transactions to find out why. They keep making trial balances until the  balance sheet balances.  Variable cost ‐‐ a cost that changes as sales or production change. If a business is producing  nothing and selling nothing, the variable cost should be zero. However, there will probably be  fixed costs.  Working capital ‐‐ current assets minus current liabilities. In most businesses the major  components of working capital are cash, accounts receivable, and inventory minus accounts  payable. As a business grows it will have larger accounts receivable and more inventory. Thus  the need for working capital will increase.   Write‐down ‐‐ the partial reduction in the value of an asset, recognizing obsolescence or  other losses in value.  Write‐off ‐‐ the total reduction in the value of an asset, recognizing that it no longer has any  value. Write‐downs and write‐offs are non‐cash expenses that affect profits.     See also the NY State CPA society glossary of accounting terms at:       FINANCE  For finance terms, please see:   7   ECONOMICS      Economic Glossary of Terms The Economist: Other economic glossary sites: omics_Dictionary.htm   Additional accounting term definitions  A Misstatement is Inconsequential - If a reasonable person would conclude after considering the possibility of further undetected misstatements that the misstatement either individually or when aggregated with other misstatements would clearly be immaterial to the financial statements. If a reasonable person could not reach such a conclusion regarding a particular misstatement, that misstatement is more than inconsequential. Abatement - complete removal of an amount due, (usually referring to a tax abatement a penalty abatement or an interest abatement within a governing agency.) Accelerated Depreciation - Method that records greater DEPRECIATION than STRAIGHT-LINE DEPRECIATION in the early years and less depreciation than straight-line in the later years of an ASSET'S holding period. (See STRAIGHT-LINE DEPRECIATION.) Account - Formal record that represents, in words, money or other unit of measurement, certain resources, claims to such resources, transactions or other events that result in changes to those resources and claims. Account Payable - Amount owed to a CREDITOR for delivered goods or completed services. Account Receivable - Claim against a DEBTOR for an uncollected amount, generally from a completed transaction of sales or services rendered. 8 Accountable Plan - An accountable plan is any reimbursement or other expense allowance arrangement of an employer that meets all of the following requirements (therefore excluding it from gross w-2 earned income and tax): (1) it provides reimbursements advances or allowances including per diem and meals, to employees for any job related deductible business expense; (2) employees must be able to substantiate expenses covered in the plan; (3) employee must return any excess advances or payments. Accountant - Person skilled in the recording and reporting of financial transactions. (See CERTIFIED PUBLIC ACCOUNTANT.) Accountants' Report - Formal document that communicates an independent accountant's: (1) expression of limited assurance on FINANCIAL STATEMENTS as a result of performing inquiry and analytic procedures (Review Report); (2) results of procedures performed (Agreed-Upon Procedures Report); (3) non-expression of opinion or any form of assurance on a presentation in the form of financial statements information that is the representation of management (Compilation Report); or (4) an opinion on an assertion made by management in accordance with the Statements on Standards for Attestation Engagements (Attestation Report). An accountants' report does not result from the performance of an AUDIT. (See AUDITORS' REPORT) Accounting - Recording and reporting of financial transactions, including the origination of the transaction, its recognition, processing, and summarization in the FINANCIAL STATEMENTS. Accounting Change - Change in (1) an accounting principle; (2) an accounting estimate; or (3) the reporting entity that necessitates DISCLOSURE and explanation in published financial reports. Accounting Principles Board (APB) - Senior technical committee of the AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA) which issued pronouncements on accounting principles from 1959-1973. The APB was replaced by the FINANCIAL ACCOUNTING STANDARDS BOARD (FASB). Accrual Basis - Method of ACCOUNTING that recognizes REVENUE when earned, rather than when collected. Expenses are recognized when incurred rather than when paid. Accumulated Depreciation - Total DEPRECIATION pertaining to an ASSET or group of assets from the time the assets were placed in services until the date of the FINANCIAL STATEMENT or tax return. This total is the CONTRA ACCOUNT to the related asset account. Additional Paid in Capital - Amounts paid for stock in excess of its PAR VALUE or STATED VALUE. Also, other amounts paid by stockholders and charged to EQUITY ACCOUNTS other than CAPITAL STOCK. Adjusted Basis - After a taxpayer's basis in property is determined, it must be adjusted upward to include any additions of capital to the property and reduced by any returns of capital to the taxpayer. Additions might include improvements to the property and subtractions may include depreciation or depletion. A taxpayer's adjusted basis in property is deducted from the amount realized to find the gain or loss on sale or disposition. Adjusted Gross Income - Gross income reduced by business and other specified expenses of individual taxpayers. The amount of adjusted gross income affects the extent to which medical expenses, non business casualty and theft losses and charitable contributions may be deductible. It is also an important figure in the basis of many other individual planning issues as well as a key line item on the IRS form 1040 and required state forms. 9 Adjusting Journal Entry - An accounting entry made into a subsidiary ledger called the General journal to account for a periods changes, omissions or other financial data required to be reported "in the books" but not usually posted to the journals used for typical period transactions (the cash receipts journal, cash disbursements journal, the payroll journal, sales journal and so on) the entry is posted to the general ledger accounts directly and usually will be numbered itself, dated and have an explanation. Example: AJE 1 12-31-2003, debit Cash in bank 1,000. Credit interest income 1,000, to record interest income on business bank account at year end, not recorded in cash receipts journal but credited by the bank. (Cross-reference bank reconciliation and account where it was found) Adverse Opinion - Expression of an opinion in an AUDITORS' REPORT which states that FINANCIAL STATEMENTS do not fairly present the financial position, results of operations and cash flows in conformity with GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP). The auditor will issue an adverse opinion when there is an existence of a material weakness on the effectiveness of internal control over financial reporting. Affiliated Company - Company, or other organization related through common ownership, common control of management or owners, or through some other control mechanism, such as a long-term LEASE. Agency Fund - Fund consisting of ASSETS where the holder agrees to remit the assets, income from the assets, or both, to a specified beneficiary in due course or at a specified time. Agreed-Upon Procedures Report - See ACCOUNTANTS' REPORT. AICPA - See AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS. Alternative Dispute Resolution - An alternative to formal litigation which includes techniques such as arbitration, mediation, and a non-binding summary jury trial. Alternative Minimum Tax (AMT) - Tax imposed to back up the regular income tax imposed on CORPORATION and individuals to assure that taxpayers with economically measured income exceeding certain thresholds pay at least some income tax. American Depository Receipts (ADRs) - Receipts for shares of foreign company stock maintained by an intermediary indicating ownership. American Institute of Certified Public Accountants (AICPA) - National professional membership organization that represents practicing CERTIFIED PUBLIC ACCOUNTANTS (CPAs). The AICPA establishes ethical and auditing standards as well as standards for other services performed by its members. Through committees, it develops guidance for specialized industries. It participates with the FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) and the GOVERNMENT ACCOUNTING STANDARDS BOARD (GASB) in establishing accounting principles. Amortization - Gradual and periodic reduction of any amount, such as the periodic writedown of a BOND premium, the cost of an intangible ASSET or periodic payment Of MORTGAGES or other DEBT. Analytical Procedures - Substantive tests of financial information which examine relationships among data as a means of obtaining evidence. Such procedures include: (1) comparison of financial information with information of comparable prior periods; (2) comparison of financial information with anticipated results (e.g., forecasts); (3) study of relationships between elements 10 of financial information that should conform to predictable patterns based on the entity's experience; (4) comparison of financial information with industry norms. Annual Report - Report to the stockholders of a company which includes the company's annual, audited BALANCE SHEET and related statements of earnings, stockholders' or owners' equity and cash flows, as well as other financial and business information. Annuity - Series of payments, usually payable at specified time intervals. Anti-dilution - Condition that may increase the computation of EARNINGS PER SHARE (EPS) or decrease loss per share solely because of the inclusion of COMMON STOCK equivalents, such as STOCK OPTIONS, WARRANTS, convertible DEBT or convertible PREFERRED STOCK, nomination or selection of the independent AUDITORs. Assembly of Financial Statements - The providing of various accounting or data-processing services by an accountant, the output of which is in the form of financial statements ostensibly to be used solely for internal management purposes. Assertion - Explicit or implicit representations by an entity's management that are embodied in financial statement components and for which the AUDITOR obtains and evaluates evidential matter when forming his or her opinion on the entity's financial statements. Asset - An economic resource that is expected to be of benefit in the future. Probable future economic benefits obtained as a result of past transactions or events. Anything of value to which the firm has a legal claim. Any owned tangible or intangible object having economic value useful to the owner. Audit Documentation - The written record of the basis for the AUDITOR's conclusions that provides the support for the auditor's representations, whether those representations are contained in the auditor's report or otherwise. (May be referred to as work papers or working papers) Audit Engagement - Agreement between a CPA firm and its client to perform an AUDIT. Audit Risk - The risk that the AUDITOR may unknowingly fail to modify appropriately his or her opinion on financial statements that are materially misstated. Audit Sampling - Application of an AUDIT procedure to less than 100% of the items within an account BALANCE or class of transactions for the purpose of evaluating some characteristic of the balance or class. Auditing Standards - Guidelines to which an AUDITOR adheres. Auditing standards encompass the auditor's professional qualities, as well as his or her judgment in performing an AUDIT and in preparing the AUDITORS' REPORT. Audits conducted by independent CERTIFIED PUBLIC ACCOUNTANT (CPA) usually in accordance with GENERALLY ACCEPTED AUDITING STANDARDS (GAAS), which consist of standards approved and adopted by the membership of the AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA). Auditor - Person who AUDITS financial accounts and records kept by others. Includes both public accounting firms registered with the PCAOB and associated persons thereof. Auditors' Report - Written communication issued by an independent CERTIFIED PUBLIC ACCOUNTANT (CPA) describing the character of his or her work and the degree of responsibility 11 taken. An auditors' report includes a statement that the AUDIT was conducted in accordance with GENERALLY ACCEPTED AUDITING STANDARDS (GAAS), which require that the AUDITOR plan and perform the audit to obtain reasonable assurance about whether the FINANCIAL STATEMENTS are free of material misstatement, as well as a statement that the auditor believes the audit provides a reasonable basis for his or her opinion. (See ACCOUNTANTS' REPORT.) Top of Page B Backup Withholding - Payors of interest, dividends and other reportable payments must withhold income tax equal at a rate equal to the fourth lowest rate applicable to single filers if they fail to supply a federal id or if they fail to certify that they are not subject to it. Bad Debt - All or portion of an ACCOUNT, loan, or note receivable considered to be uncollectible. Balance - Sum of DEBIT entries minus the SUM of CREDIT entries in an ACCOUNT. If positive, the difference is called a DEBIT BALANCE; if negative, a CREDIT BALANCE. Balance Sheet - Basic FINANCIAL STATEMENT, usually accompanied by appropriate DISCLOSURES that describe the basis of ACCOUNTING used in its preparation and presentation of a specified date the entity's ASSETS, LIABILITIES and the EQUITY of its owners. Also known as a STATEMENT OF FINANCIAL CONDITION. Bankruptcy - Legal process, governed by federal statute, whereby the DEBTS of an insolvent person are liquidated after being satisfied to the greatest extent possible by the DEBTOR'S ASSETS. During bankruptcy, the debtor's assets are held and managed by a court appointed TRUSTEE. Bequest - A gift by will of personal property. If the bequest is money to the extent it is paid out of income from property it is taxable to the recipient. Generally bequest value is fair market at the date of the decedent's death. Blue Sky Laws - State laws that regulate the ISSUANCE of SECURITIES. These laws are coordinated with federal acts. Board of Directors - Individuals responsible for overseeing the affairs of an entity, including the election of its officers. The board of a CORPORATION that issues stock is elected by stockholders. (See AUDIT COMMITTEE.) Bond - One type of long-term PROMISSORY NOTE, frequently issued to the public as a SECURITY regulated under federal securities laws or state BLUE SKY LAWS. Bonds can either be registered in the owner's name or are issued as bearer instruments. Book Value - Amount, net or CONTRA ACCOUNT balances, that an ASSET or LIABILITY shows on the BALANCE SHEET of a company. Also known as CARRYING VALUE. Boot - The no technical term used by some to describe any cash or other property that is received in exchange of property that would be otherwise nontaxable. Budget - Financial plan that serves as an estimate of future cost, REVENUES or both. 12 Business Combinations - Combining of two entities. Under the PURCHASE METHOD OF ACCOUNTING, one entity is deemed to acquire another and there is a new basis of accounting for the ASSETS and LIABILITIES of the acquired company. In a POOLING OF INTERESTS, two entities merge through an exchange of COMMON STOCK and there is no change in the CARRYING VALUE of the assets or liabilities. Business Segment - Any division of an organization authorized to operate, within prescribed or otherwise established limitations, under substantial control by its own management. Bylaws - Collection of formal, written rules governing the conduct of a CORPORATION'S affairs (such as what officers it will have, what their responsibilities are, and how they are to be chosen). Bylaws are approved by a corporation's stockholders, if a stock corporation, or other owners, if a non-stock corporation. (See GOVERNING DOCUMENTS.) Top of Page C Cafeteria Plan - A benefit plan maintained by an employer for the benefit of the employees under which each participant has the opportunity to select the benefits they desire. Certain minimum choices and nondiscriminatory rules apply. Call Loan - Loan repayable on demand. Also known as DEMAND LOAN. Callable Instrument - BOND which accords an issuer the right to redemption before it is due. Cap - To limit. Capital - ASSETS intended to further production. The amount invested in a PROPRIETORSHIP, PARTNERSHIP, or CORPORATION by its owners. Capital Gain - Portion of the total GAIN recognized on the sale or exchange of a noninventory asset which is not taxed as ORDINARY INCOME. Capital gains have historically been taxed at a lower rate than ordinary income. Capital Stock - Ownership shares of a CORPORATION authorized by its ARTICLES OF INCORPORATION. The money value assigned to a corporation's issued shares. The BALANCE SHEET account with the aggregate amount of the PAR VALUE or STATED VALUE of all stock issued by a corporation. Capitalized Cost - Expenditure identified with goods or services acquired and measured by the amount of cash paid or the market value of other property, CAPITAL STOCK, or services surrendered. Expenditures that are written off during two or more accounting periods. Capitalized Interest - INTEREST cost incurred during the time necessary to bring an ASSET to the condition and location for its intended use and included as part of the HISTORICAL COST of acquiring the asset. Capitalized Lease - LEASE recorded as an ASSET acquisition accompanied by a corresponding LIABILITY by the LESSEE. Capital Projects Funds - Funds used by a not-for-profit organization to account for all resources used for the development of a land improvement or building addition or renovation. Carrying Value - Amount, net or CONTRA ACCOUNT balances, that an ASSET or LIABILITY shows on the BALANCE SHEET of a company. Also known as BOOK VALUE. 13 Carryovers - Provision of tax law that allows current losses or certain tax credits to be utilized in the tax returns of future periods. Cash Basis - Method of bookkeeping by which REVENUES and EXPENDITURES are recorded when they are received and paid. (See OTHER COMPREHENSIVE BASIS OF ACCOUNTING.) Cash Equivalents - Short-term (generally less than three months), highly liquid INVESTMENTS that are convertible to known amounts of cash. Cash Flows - Net of cash receipts and cash disbursements relating to a particular activity during a specified accounting period. Casualty Loss - Any loss of an asset due to fire storm act of nature causing asset damage from unexpected or accidental force. Generally it is deductible regardless of whether it is business or personal. CD - See CERTIFICATE OF DEPOSIT. Certificate of Deposit (CD) - Formal instrument issued by a bank upon the deposit of funds which may not be withdrawn for a specified time period. Typically, an early withdrawal will incur a penalty. Certified Financial Planner (CFP) - Individual who is trained to develop and implement financial plans for individuals, businesses, and organizations, utilizing knowledge of income and estate tax, investments, risk management analysis and retirement planning. CFPs are certified after completing a series of requirements that include education, experience, ethics and an exam. CFPs are not regulated by a governmental authority. Certified Internal Auditor (CIA) - Internal AUDITOR who has satisfied the examination requirements of the Institute of Internal Auditors. Certified Management Accountant (CMA) - An accreditation conferred by the Institute of Management Accountants that indicates the designee has passed an examination and attained certain levels of education and experience in the practice of accounting in the private sector. Certified Public Accountant (CPA) - ACCOUNTANT who has satisfied the education, experience, and examination requirements of his or her jurisdiction necessary to be certified as a public accountant. CFP - See CERTIFIED FINANCIAL PLANNER. CIA - See CERTIFIED INTERNAL AUDITOR. Claim for Refund - A refund is not automatically mailed if one is due. A taxpayer, whether business or individual, must file a request on a form. It must also be filed within the timeframe allotted or the refund may be lost. An individual can claim a refund back to whatever year it was due but it will only be paid three years back or less. Clean Opinion - AUDIT opinion not qualified for any material scope restrictions nor departures from GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP). Also known as UNQUALIFIED OPINION. 14 Closed-End Mutual Fund - MUTUAL FUND with a fixed number of shares outstanding that may be bought or sold. CMO - See COLLATERALIZED MORTGAGE OBLIGATION. Collateral - ASSET provided to a CREDITOR as security for a loan. Collateralized Mortgage Obligation (CMO) - SECURITY whose cash flows equal the difference between the cash flows of the collateralizing ASSETS and the collateralized obligations of a securitized TRUST. Characteristics of CMO residuals vary greatly and can be extremely complex in nature. Combined Financial Statement - FINANCIAL STATEMENT comprising the accounts of two or more entities. Comfort Letter - Letter provided by a company's independent public accountant to an underwriter when the underwriter has a DUE DILIGENCE responsibility under Section 11 of the Securities Act of 1933 regarding financial information included in an offering statement. Committee of Sponsoring Organizations of the Treadway Commission (COSO) - An alliance of five professional organizations dedicated to disseminating appropriate internal control standards. Common Stock - CAPITAL STOCK having no preferences generally in terms of dividends, voting rights or distributions. (See PREFERRED STOCK.) Company Level Controls - Controls that exist at the company level that have an impact on controls at the process, transaction, or application level. Comparative Financial Statement - FINANCIAL STATEMENT presentation in which the current amounts and the corresponding amounts for previous periods or dates also are shown. Compensatory Balance - Funds that a borrower must keep on deposit as required by a bank. Compilation - Presentation of financial statement data without the ACCOUNTANT'S assurance as to conformity with GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP). Compilation Engagement - Agreement between a CPA firm and its client to issue a COMPILATI0N REPORT. (See ACCOUNTANTS' REPORT.) Compilation Report - See ACCOUNTANTS' REPORT. Compliance Audit - Review of financial records to determine whether the entity is complying with specific procedures or rules. Complex Trust - A trust that is to be distinguished from a simple trust in the fact that it permits accumulation or distribution of current income during the tax year and provides for charitable contributions. Compound Interest Principles - Interest computed on principal plus interest earned in previous periods. Comprehensive Income - Change in EQUITY of a business enterprise during a period from transactions and other events and circumstances from sources not shown in the income 15 statement. The period includes all changes in equity except those resulting from INVESTMENTS by owners and distributions to owners. Confirmation - AUDITOR'S receipt of a written or oral response from an independent third party verifying the accuracy of information requested. Conservatism - An investment strategy aimed at long-term capital appreciation with low risk; moderate; cautious; opposite of aggressive behavior; show possible losses but wait for actual profits. Concept which directs the least favorable effect on net income. Consistency - ACCOUNTING postulate which stipulates that, except as otherwise noted in the FINANCIAL STATEMENT, the same accounting policies and procedures have been followed from period to period by an organization in the preparation and presentation of its financial statements. Consolidated Financial Statements - Combined FINANCIAL STATEMENTS of a parent company and one or more of its subsidiaries as one economic unit. Consolidation - BUSINESS COMBINATION of two or more entities that occurs when the entities transfer all of their NET ASSETS to a new entity created for that purpose. (See MERGER.) Constructive Receipt - A taxpayer is considered to have received the income even though the monies are not in hand, it may have been set aside or otherwise made available. An example is interest on a bank account. Contingent Liability - Potential LIABILITY arising from a past transaction or a subsequent event. Continuing Operations - Portion of a business entity expected to remain active. Continuing Professional Education (CPE) - Educational programs for CERTIFIED PUBLIC ACCOUNTANTS (CPAs) to keep informed on changes that occur within the profession. State Boards for Public Accountancy and the AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA) each have separate CPE requirements. Contra Account - ACCOUNT considered to be an offset to another account. Generally established to reduce the other account to amounts that can be realized or collected. Control Deficiency - This exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. Control Risk - Measure of risk that errors exceeding a tolerable amount will not be prevented or detected by an entity's internal controls. Controls Tests - Tests directed toward the design or operation of an internal control structure policy or procedure to assess its effectiveness in preventing or detecting material misstatements in a financial report. Convertible Stock - Stock that may be exchanged for other SECURITIES of the issuer. Corporation - Form of doing business pursuant to a charter granted by a state or federal government. Corporations typically are characterized by the issuance of freely transferable 16 CAPITAL STOCK, perpetual life, centralized management, and limitation of owners' LIABILITY to the amount they invest in the business. Cost Accounting - Procedures used for rationally classifying, recording, and allocating current or predicted costs that relate to a certain product or production process. Cost Recovery Method - METHOD OF REVENUE RECOGNITION which recognizes profits after costs are completely recovered. Generally used only when the total amount of collections is highly uncertain. In tax, the ACCOUNTING METHOD used to depreciate ASSETS. Coverdell Education Savings Account (Education IRA) - A tax exempt trust exclusively for the purpose of paying qualified higher education costs of the trusts designated beneficiary. CPA - See CERTIFIED PUBLIC ACCOUNTANT. CPE - See CONTINUING PROFESSIONAL EDUCATION. Credit - Entry on the right side of a DOUBLE-ENTRY BOOKKEEPING system that represents the reduction of an ASSET or expense or the addition to a LIABILITY or REVENUE. (See DEBIT.) Credit Agreement - Arrangement in which one party borrows or takes possession in the present by promising to pay in the future. Credit Balance - BALANCE remaining after one of a series of bookkeeping entries. This amount represents a LIABILITY or income to the entity. (See BALANCE.) Creditor - Party that loans money or other ASSETS to another party. Current Asset - ASSET that one can reasonably expect to convert into cash, sell, or consume in operations within a single operating cycle, or within a year if more than one cycle is completed each year. Current Liability - Obligation whose LIQUIDATION is expected to require the use of existing resources classified as CURRENT ASSETS, or the creation of other current liabilities. Current Value - (1) Value of an ASSET at the present time as compared with the asset's HISTORICAL COST. (2) In finance, the amount determined by discounting the future revenue stream of an asset using COMPOUND INTEREST PRINCIPLES. Top of Page D Date of Auditors'/Accountants' Report - Last day the AUDITORS perform fieldwork and the last day of responsibility relating to significant events subsequent to the financial statement date. Death Benefit - Amounts received under a life insurance contract and paid by reason of the death of the insured. (Although most death benefits are paid at termination of life, certain plans now pay accelerated death benefits while the insured is still alive, i.e.: an AIDS patient might possibly receive accelerated death benefit) 17 Debit - Entry on the left side of a DOUBLE-ENTRY BOOKKEEPING system that represents the addition of an ASSET or expense or the reduction to a LIABILITY or REVENUE. (See CREDIT.) Debit Balance - BALANCE remaining after one or a series of bookkeeping entries. This amount represents an ASSET or an expense of the entity. (See BALANCE.) Debt - General name for money, notes, BONDS, goods or services which represent amounts owed. Debt Security - Document which is evidence of an obligation or LIABILITY. Debt Service Fund - Fund whose PRINCIPAL or INTEREST is set aside and accumulated to retire DEBT. Debtor - Party owing money or other ASSETS to a CREDITOR. Decedent - Individual who has died. Defalcation - To misuse or embezzle funds. Default - Failure to meet any financial obligation. Default triggers a CREDITOR'S rights and remedies identified in the agreement and under the law. Defeasance - Annulment of a contract or deed; a clause within a contract or deed that provides for annulment. Deferred Charge - Cost incurred for subsequent periods which are reflected as ASSETS. Deferred Income - Income received but not earned until all events have occurred. Deferred income is reflected as a LIABILITY. Deferred Income Taxes - ASSETS or LIABILITIES that arise from timing or measurement differences between tax and accounting principles. Deficiency in Design - This exists when a control necessary to meet the control objective is missing or an existing control is not properly designed so that even if the control operates as designed, the control objective is not always met. Deficiency in Operation - This exists when a properly designed control does not operate as designed, or when the person performing the control does not possess the necessary authority or qualifications to perform the control effectively. Deficit - Financial shortage that occurs when LIABILITIES exceed ASSETS. Defined Benefit Plan - See EMPLOYEE BENEFIT PLAN. Defined Contribution Plan - See EMPLOYEE BENEFIT PLAN. Demand Loan - Loan repayable on demand. Also known as a CALL LOAN. 18 Dependent Care Expenses - Qualified child care expenses will allow a taxpayer this computed credit against tax. The amounts can be found on the individual forms as the limitations and computation may change each tax year. Depletion - Method of computing a deduction to ACCOUNT for a reduction in value of extractable natural resources. Deposit Method - Related to the sales of real estate, under this method the seller does not recognize any profits, does not record a note RECEIVABLE, and continues to reflect the property and related DEBT in the seller's FINANCIAL STATEMENTS, recording the buyer's initial investment and subsequent payments as a deposit. Depreciation - Expense allowance made for wear and tear on an ASSET over its estimated useful life. (See ACCELERATED DEPRECIATION and STRAIGHT-LINE DEPRECIATION.) Derivatives - Financial instruments whose value varies with the value of an underlying asset (such as a stock, BOND, commodity or currency) or index such as interest rates. Financial instruments whose characteristics and value depend on the characterization of an underlying instrument or asset. Detection Risk - Risk that the AUDITOR will not detect a material misstatement. Detective Controls - These have the objective of detecting errors or fraud that have already occurred that could result in a misstatement of the financial statements. Disbursement - Payment by cash or check. Disclaimer of Opinion - Statement by an AUDITOR indicating inability to express an opinion on the fairness of the FINANCIAL STATEMENTS provided and the reason for the inability. The auditor is required to disclaim depending on the limitation in scope. Disclosure - Process of divulging accounting information so that the content of FINANCIAL STATEMENTS is understood. Discontinued Operations - Portion of a business that is planned to be or is discontinued. Discount - Reduction from the full amount of a price or DEBT. Discount Rate - Rate at which INTEREST is deducted in advance of the issuance, purchasing, selling, or lending of a financial instrument. Also, the rate used to determine the CURRENT VALUE, or present value, of an ASSET or income stream. Discounted Cash Flow - Present value of future cash estimated to be generated. Discretionary Trust - Arrangement in which the TRUSTEE has the authority to make INVESTMENT decisions and has control over investments within the framework of the TRUST instrument. Dissolution - Termination of a CORPORATION. Distribution Expense - Expense of selling, advertising, and delivery of goods and services. 19 Distributions - Payment by a business entity to its owners of items such as cash ASSETS, stocks, or earnings. Dividends - Distribution of earnings to owners of a CORPORATION in cash, other ASSETS of the corporation, or the corporation's CAPITAL STOCK. Documentation Completion Date - A complete and final set of audit documentation should be assembled for retention as of a date not more than 45 days after the report release date. Double-Entry Bookkeeping - Method of recording financial transactions in which each transaction is entered in two or more accounts and involves two-way, self-balancing posting. Total DEBITS must equal total CREDITS. Dual Dating - Dating of the ACCCOUNTANTS' or AUDITORS' REPORT when a subsequent event disclosed in the FINANCIAL STATEMENTS occurs after completion of the field work but before issuance of the report. For example, "January 3, 19xx, except for Note x, as to which the date is March 10, 19xx." Due Date - Each governing agency and its forms scheduled reporting and most importantly payments have a required due date. It is this date that if most files timely may result in a penalty, fine, and commence interest charges. Due Diligence - (1) Procedures performed by underwriters in connection with the issuance of a SECURITIES EXCHANGE COMMISSION (SEC) registration statement. These procedures involve questions concerning the company and its business, products, competitive position, recent financial and other developments and prospects. Also performed by others in connection with acquisitions and other transactions. (2) Requirement found in ethical codes that the person governed by the ethical rules exercise professional care in conducting his or her activities. Top of Page E Earned Income - Wages, salaries, professional fees, and other amounts received as compensation for services rendered. Earned Income Credit - A refundable tax credit for eligible low income workers, subject to computations based on qualifying children and phase in and phase out income levels. Earnings Per Share (EPS) - Measure of performance calculated by dividing the net earnings of a company by the average number of shares outstanding during a period. Effective Tax Rate - Total income taxes expressed as a percentage of NET INCOME before taxes. EITF - See EMERGING ISSUES TASK FORCE. Emerging Issues Task Force (EITF) - Assists the FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) and provides guidance on early identification of emerging issues affecting financial reporting and problems in implementing authoritative pronouncements. Employee Benefit Plan - Compensation arrangement, generally in writing, used by employers in addition to salary or wages. Some plans such as group term life insurance, medical insurance and qualified retirement plans are treated favorably under the tax law. Most common qualified 20