Accounting tax investment terms

Glossary of Tax, Accounting and Financial Terms

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A

Accounting Equation: The equation which is the basis of a balance sheet. It is as follows:
Assets = Liabilities + Owners' Equity.

Accrual Basis: The practice of record keeping by which income is recorded when earned and expenses are recorded when incurred, even though the cash may not be received or paid out until later. The other common basis of business accounting is known as the cash basis.

Adjusted Gross Income: Gross income minus adjustments allowed by tax code. Adjustments allowed change over time, but currently, individual retirement account contributions, alimony paid, a portion of a self-employed individual's medical insurance and social security tax are examples of allowed adjustments. Also, see Taxable Income.

American Institute of Certified Public Accountants (AICPA): An organization of certified public accountants, primarily in public practice, that formulates professional standards for those who are members. Because of its size and scope, its standards are considered to be the generally accepted standards of the industry.

Amortization: The gradual reduction of a debt by means of equal periodic payments sufficient to meet current interest and liquidate the debt at maturity. When the debt involves real property, often the periodic payments include a sum sufficient to pay taxes and hazard insurance on the property.

Appreciation: The increase in the value of an asset in excess of its depreciable cost which is due to economic and other conditions, as distinguished from increases in value due to improvements or additions made to it.

Asset: Anything owned by an individual or a business, which has commercial or exchange value. Assets may consist of specific property or claims against others, in contrast to obligations due others. (See also Liabilities).

Audit: A financial audit is a methodical examination of an entity's books and records by a qualified individual or group of individuals. The term is also applied to examinations of tax returns by applicable governmental groups.

Audit strategy: A game plan to attach audit issues before they are raised. Reasons and justifications for all positions must be understood and the foundation laid for taking the position.

B

Balance Sheet: A balance sheet is an itemized statement which lists the total assets and the total liabilities of a given business to portray its net worth at a given moment of time. The amounts shown on a balance sheet are generally the historic cost of items and not their current values. Also see Profit and loss statement.

Bank reconciliation: Verification of a bank statement balance and the depositor's check-book balance.

Bear Market/Bull Market: A Bear Market is a market where prices are low or declining; a Bull Market is the opposite, security prices are rising.

Beta: A statistical measure of a stock's volatility when compared to the overall market. When a stock has a beta of less than 1 it is less volatile (and therefore of less risk) than the market as a whole; a beta of more than 1 indicates a stock that carries a higher risk than the market as a whole (and, thus, is more volatile than the market).

Bond: A long-term promissory note in which the issuer agrees to pay the owner of the bond the face amount on the due date, some time into the future. In the mean while, the issuer will pay the bond owner interest at a specified rate and at regular intervals. Bonds of publicly held companies are traded on stock exchanges much like stocks.

Book value: An accounting term, which usually refers to a business' historical cost of assets less liabilities. The book value of a stock is determined from a company's records by adding all assets (generally excluding such intangibles as goodwill), then deducting all debts and other liabilities, plus the liquidation price of any preferred stock issued. The sum arrived at is divided by the number of common shares outstanding and the result is the book value per common share. Book value of the assets of a company may have little or no significant relationship to market value. See also the Accounting Equation.

Bookkeeping: The art, practice, or labor involved in the systematic recording of the transactions affecting a business. The invention of the double-entry bookkeeping system is generally credited to Luca Pacioli. However, the merchants of Venice really "created" the system and Brother Pacioli was the first to provide a detailed and systematic explanation of their double-entry system. Pacioli's work was considered so important when it was written, that it was the second book of of Guttenburg's new printing press!

Break-even point: The volume point at which revenues and costs are equal; a combination of sales and costs that will yield a no profit/no loss operation.

Budget: A budget is an itemized listing of the amount of all estimated revenue which a given business anticipates receiving, along with a listing of the amount of all estimated costs and expenses that will be incurred in obtaining the above mentioned income during a given period of time. A budget is typically for one business cycle, such as a year, or for several cycles (such as a five year capital budget).

C

Capital budget: This is the estimated amount planned to be expended for capital items in a given fiscal period. Capital items are fixed assets such as facilities and equipment, the cost of which is normally written off over a number of fiscal periods. The capital budget, however, is limited to the expenditures which will be made within the fiscal year comparable to the related operating budgets.

Capital gain or loss: The difference between the amount realized from the sale of a capital asset and that asset's original cost less accumulated depreciation plus acquisition expenses.

Capital stock: The ownership shares of a corporation authorized by its articles of incorporation, including preferred and common stock.

Cash basis: The practice of recording income and expenses only when cash is actually received or paid out. See also Accrual basis.

Cash flow: This term may have different meanings depending upon who is using the term and in what context. Bankers usually define it as net profits plus all non cash expenses, but it can also be defined as the difference between cash receipts and disbursements over a specified period of time.

Chinese Wall: Speaking in terms of the security markets, a Chinese Wall is the term used to describe procedures within security firms that separate sales departments from analysis and other departments. The procedures are designed to avoid the illegal use of "inside" information.

Common stock: A class of securities representing ownership and control in a corporation. Corporations can generally issue more than one class of common stock, each class having different rights and privileges.

Convertible bond: A bond that can be exchanged, at the option of the bond holder, for a pre-set number of common (or preferred) shares of stock. This means that the holder can go from the position of a creditor for a company to an equity interest owner in the company.

Corporation: A type of business organization chartered by a state and given many of the legal rights as a separate entity.

Cost of goods sold: The amount determined by subtracting the value of the ending merchandise inventory from the sum of the beginning merchandise inventory and the net purchases for the fiscal period.

Current assets: Current assets are those assets of a company which are reasonable expected to be realized in cash, or sold, or consumed during the normal operating cycle of the business (usually one year). Such assets include cash, accounts receivable and money due usually within one year, short-term investments, US government bonds, inventories, and prepaid expenses.

Current liabilities: Liabilities to be paid within one year of the balance sheet date.

CUSIP number: This is a number assigned to each security. The name is an acronym for Committee on Uniform Security Identification Procedures.

D

Deductions

Expenses that the tax code allows you to deduct from your income.

These expenses can change over time, but presently they include home mortgage interest, real estate taxes, charitable contributions, medical and miscellaneous business expenses. On a business return, deductions comprise ordinary and necessary business expenses.


Depreciation: The amount charged against earnings by a company to write off the cost of a plant or machine over its estimated useful life, giving consideration to wear and tear, obsolescence, and salvage value. If depreciation is assumed to be incurred in equal amounts in each business period over the life of the asset, the depreciation method used is straight line (SL). If the expense is assumed to be incurred in decreasing amounts in each business period over the life of the asset, the method used is said to be accelerated. Two commonly used methods of the accelerating the depreciation of an asset are the sum-of-years digits (SYD) and the double-declining balance (DDB) methods. Frequently, accelerated depreciation is chosen for a business' tax expense but straight line is chosen for its financial reporting purposes.


Dividend: That portion of a corporation's earnings which is paid to the stockholders.

E


EDGAR: This acronym stands for Electronic Data Gathering, Analysis, and Retrieval. It is an electronic system developed by the SEC and it permits companies to file all of the required documents with the SEC in an electronic format. These documents can then be easily accessed by investors over the Internet.

Entrepreneur: One who assumes the financial risk of the initiation, operation and management of a given business or undertaking.

Estate: The entire group of assets owned by an individual at the time of his or her death. The estate includes all funds, personal effects, interests in business enterprises, titles to property (real estate and chattels), and evidences of ownership such as stocks, bonds and mortgages owned, notes receivable, etc. The total value of all the assets is reduced by an individual's liabilities. All claims against an estate must be duly filed with the Executor or Administrator of the estate, and approved by the court of law under which the will is being probated or the line of heritage is being determined before the indebtedness may be satisfied.

Estate taxes: The Federal taxes levied on the transfer of property from the deceased to his or her heirs, legatees or devisees.

Executor: A legal entity, frequently an individual, known before death to a testator, who is named in the testator's will to carry out the desires of the deceased after his death. Executors must be approved by the court of law probating the will. An executor pays all indebtedness as claimed by creditors of the estate, with the approval of the court of law, and then carries out or executes the will according to the terms set forth by the testator.

F

Fair market value: The price at which a willing seller will sell, and a willing buyer will buy, in an arm's length transaction when neither is under compulsion to sell or buy and both have reasonable knowledge of relevant facts.

Fixed assets: Those assets of a permanent nature required for the normal conduct of a business, and which will not normally be converted into cash during the ensuring fiscal period. For example, furniture, fixtures, land, and buildings are all fixed assets. However, accounts receivable and inventory are not.

Fixed cost: Fixed costs are operating expenses that are incurred to provide facilities and organization which are kept in readiness to do business without regard to actual volumes of production and sales. Fixed costs remain relatively constant until changed by managerial decision. Within general limits they do not vary with business volume. Examples of fixed costs consist of rent, property taxes, and interest expense.

G

Generally Accepted Accounting Principles: This term represents the body of accounting practices that have the weight of some authority behind them. Frequently referred to as "GAAP" these principles or practices may differ from industry to industry, but should be fairly consistent among companies inside an industry. Also, as businesses change and develop new products and structures, GAAP also will change, or evolve.

Generally Accepted Auditing Standards (GAAS): A defined set of standards to which an individual auditor will be held. The American Institute of Certified Public Accountants has approved and adopted a set of auditing standards and those who purport to provide an audit to a company under those standards must comply with the standards.

Goodwill: That intangible possession which enables a business to continue to earn a profit which is in excess of the normal or basic rate of profit earned by other businesses of similar type. The goodwill of a business may be due to a particularly favorable location, its reputation in the community, or the quality of its employer and employees. The evidence that goodwill exists is the proven ability to earn excess profits. Goodwill is created on the books of a newly purchased company to the extent that the purchase price of the company is greater than the value of its net tangible assets.

Gross Income: All operating income received during the reporting period. Non-operating income, such as interest income, is reported as "Other Income" on financial statements.

Gross profit: The amount by which the net sales exceed the cost of goods sold. Also, refer to Adjusted Gross Income.

H

Head of Household: A US income tax filing status that can be used by an unmarried person who maintains a home for a dependent (or nondependent relative) during the tax year.

Historical Cost
The original amount that an item cost the business. Most financial statements issued by American businesses are done so based on the historical cost of items represented.
Net Assets: A term used in non-profit accounting to signify the difference between total assets and total liabilities. For a non-profit's statement of financial position to be in conformity with generally accepted accounting principles, it must show the net asset amount at the date of the statement.

Strategic Planning: The activity of defining what you want to accomplish in your business and then identifying the path that will allow you to reach your goal in the most efficient and sensible manner.

T

Taxable Income: Adjusted gross income minus itemized deductions and personal exemptions (on an individual income tax return). On a business return, it is total income minus allowable deductions (business expenses and net operating losses carried forward).

Timing differences: This term refers to the fact that financial measurement of income is not the same as tax measurement of income. Typical items which generate a timing difference are depreciation expenses, which is usually not accelerated for financial reporting, but is for tax computations, amortization of leasehold improvements, and accrued business expenses which can not be deducted for tax purposes until paid.

Trial balance: A trial balance is a listing of the accounts in your general ledger and their balances as of a specified date. A trial balance is usually prepared at the end of an accounting period and is used to see if additional adjustments are required to any of the balances. Since the basic accounting system relies on double-entry bookkeeping, a trial balance will have the same total debit amount as it has total credit amounts.

U

Unearned revenue

Unearned revenue represents money that you have received in advance of providing the goods or services to your customer. Unearned revenue is a liability of your business until you provide the goods or services you agreed to provide to the customer.

V

Value: A term which defines the worth of a thing. The term is usually preceded by the word, or words such as 'Fair" or "Fair Market", and it is usually defined in the document where it is found. Not all "value" for an item is the same.

W

Working capital: The difference between an entity's current assets and its current liabilities is its working capital.

X

Y

Yield to Maturity

The anticipated return on an investment over the life that the investment is held, represented as a percentage of the original cost of the investment.

Z

Zero Coupon Bonds: Zero-coupon bonds are bonds priced at a large discount from face value. The bonds mature at full face value so the difference between the original issue price and the face value represents interest income. The issuer of the zero coupon bond saves on cash flow since the interest isn't paid out until the end of the bond holding period.

Z-score: A z-score is a total arrived at by combining several normal business ratios. The weights given each ratio produces a score which is said to be indicative of a businesses health. A z-score below 1.5 means that the company is heading towards bankruptcy.

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