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Bookkeeping Dictionary

A list of bookkeeping terms follows:


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Bookkeeping terms A-H (below)
Bookkeeping terms I-O
Bookkeeping terms P-Z 

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.

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.

Accrued Assets - Assets from revenues earned but not yet received.

Accrued Expenses - A liability incurred during the accounting period for which payment has not been made.

Accrued Income - Income earned during an accounting period but not received or recorded by the end of the period.

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.

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 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.

Audit - The scrutinising of accounting records and supporting documents for accuracy and completeness.

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 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.)

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.

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.)

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.

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 Financial Statements - Financial statements that have been audited and certified by a CPA.

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.

Chart of Accounts - A numerical listing of a businesses accounts.

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.

Closed-End Mutual Fund - MUTUAL FUND with a fixed number of shares outstanding that may be bought or sold. CMO - See COLLATERALIZED MORTGAGE OBLIGATION.

Closing Entries - Journal entries made at the end of the period to return the balance in all accounts to zero and ready the account for the next reporting period.

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 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 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.

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)

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.

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.

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.

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 retirement plans are: (1) defined benefit plans - a promise to pay participants specified benefits that are determinable and based on such factors as age, years of service, and compensation; or (2) defined contribution plans - provide an individual account for each participant and benefits based on items such as amounts contributed to the account by the employer and employee and investment experience. This type includes PROFIT-SHARING PLANS, EMPLOYEE STOCK OWNERSHIP PLANS and 401(k) PLANS.

Employee Stock Ownership Plan (ESOP) - Stock bonus plan of an employer that acquires SECURITIES issued by the plan sponsor.

Encumbrance - (1) MORTGAGE or other lien on the entity's ASSETS; (2) Anticipated EXPENDITURE; (3) Uncompleted or undelivered portion of a purchase commitment.

Engagement Completion Document - A document whereby the AUDITOR identifies all significant findings or issues. The document should be as specific as necessary in the circumstances for a reviewer to gain a thorough understanding of the significant findings or issues.

Equity - Residual INTEREST in the ASSETS of an entity that remains after deducting its LIABILITIES. Also, the amount of a business' total assets less total liabilities. Also, the third section of a BALANCE SHEET, the other two being assets and liabilities.

Equity Account - ACCOUNT in the EQUITY section of the BALANCE SHEET. Includes CAPITAL STOCK, ADDITIONAL PAID IN CAPITAL and RETAINED EARNINGS.

Equity Method of Accounting - Investors cost basis is adjusted up or down (in proportion to the % of stock ownership) as the investee's retained earnings fluctuation; used for long-term investments in equity securities of affiliate where holder can exert significant influence; 20% ownership or greater is arbitrarily presumed to have significant influence over the investee.

Equity Securities - CAPITAL STOCK and other SECURITIES that represent ownership shares, or the legal rights to purchase or acquire CAPITAL STOCK.

Error - Act that departs from what should be done; imprudent deviation, unintentional mistake or omission.

Escrow - Money or property put into the custody of a third party for delivery to a GRANTEE, only after fulfillment of specified conditions.

ESOP - See EMPLOYEE STOCK OWNERSHIP PLAN.

Estate Tax - Tax on the value of a DECENDENT'S taxable estate, typically defined as the decedent's ASSETS less LIABILITIES and certain expenses which may include funeral and administrative expenses.

Estimated Tax - Amount of tax LIABILITY a taxpayer may expect to pay for the current tax period. Usually paid through quarterly installments.

Estimation Transactions - Activities that involve management judgments or assumptions in formulating account balances in the absence of a precise means of measurement.

Evidential Matter - Underlying ACCOUNTING data and other corroborating information that support the FINANCIAL STATEMENTS.

Exchanges - Transfer of money, property or services in exchange for any combination of these items.

Excise Tax - Tax or duty on the manufacture, sale, or consumption of commodities.

Excluded Income - See EXCLUSIONS.

Exclusions - Income item which is excluded from a taxpayer's gross income by the INTERNAL REVENUE CODE or an administrative action. Common exclusions include gifts, inheritances, and death proceeds paid under a life insurance contract. Also known as excluded income.

Executor - Person appointed by a will to manage a DECENDENT'S estate.

Exempt Organization - Organization which is generally exempt from paying federal income tax. Exempt organizations include religious organizations, charitable organizations, social clubs, and others.

Exemption - Amount of a taxpayer's income that is not subject to tax. All individuals, TRUSTS, and estates qualify for an exemption unless they are claimed as a dependent on another individual's tax return. Exemptions also are granted to taxpayers for their dependents.

Expatriation Tax - Individuals that loose or terminate their residency within the 10 year period immediately preceding the close of a tax year, if the termination or loss is for the sole purpose of avoiding tax.

Expectation Gap - The difference in perception between the public and the CPA as a result of accounting and audit service.

Expenditure - Payment, either in cash, by assuming a LIABILITY, or by surrendering ASSET.

Expenses - The daily costs incurred in running a business.

Experienced Auditor - An AUDITOR that has a reasonable understanding of audit activities and has studied the company's industry as well as the accounting and auditing issues relevant to the industry.

Exploration Expenditures - Unlimited deductions are allowed for a taxpayer's expenses incurred while searching for any ore or mineral deposit (except oil or gas).

Exposure Draft - Document issued by the AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA), FINANCIAL ACCOUNTING STANDARDS BOARD (FASB), GOVERNMENTAL ACCOUNTING STANDARDS BOARD (GASB) or other standards setting authorities to invite public comment before a final pronouncement is issued.

Extension - Time granted by a taxing authority, such as the INTERNAL REVENUE SERVICE (IRS), a state or city, which allows the taxpayer to file tax returns later than the original due date.

Extent of Tests of Control - Each year the AUDITOR must obtain sufficient evidence about whether the company's internal control over financial reporting, including the controls for all internal control components, is operating effectively.

External Reporting - Reporting to stockholders and the public, as opposed to internal reporting for management's benefit.

Extinguishment of Debt - To get rid of the liability by payment; to bring to an end.

Extraordinary Items - Events and transactions distinguished by their unusual nature and by the infrequency of their occurrence. Extraordinary items are reported separately, less applicable income taxes, in the entity's statement of income or operations.

401(k) Plan - EMPLOYEE BENEFIT PLAN authorized by INTERNAL REVENUE CODE section 401(k), whereby an employer establishes an account for each participating employee and each participant elects to deposit a portion of his or her salary into the account. The amount deposited is not subject to income tax. This is the most common type of salary reduction plan.

Face Value - Amount due at maturity from a BOND or note.

Factoring - Selling a RECEIVABLE at a discounted value to a third party for cash.

FASB - See FINANCIAL ACCOUNTING STANDARDS BOARD (FASB).

Fair Market Value - Price at which property would change hands between a buyer and a seller without any compulsion to buy or sell, and both having reasonable knowledge of the relevant facts.

Favorable Variance - Excess of actual REVENUE over projected revenue, or actual costs over projected costs.

Fiduciary - Person who is responsible for the administration of property owned by others. Corporate management is a FIDUCIARY with respect to corporate ASSETS which are beneficially owned by the stockholders and CREDITORS. Similarly, a TRUSTEE is the fiduciary of a TRUST and partners owe fiduciary responsibility to each other and to their creditors.

FIFO - See FIRST IN, FIRST OUT.

Filing of Returns - Taxpayers meeting statutory requirements MUST file various returns on the prescribed forms. And they must be filed timely or the y may not be considered as filed.

Financial Accounting Standards - Official promulgations, known as STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS, by the FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) which are part of GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) in the United States.

Financial Accounting Standards Board (FASB) - Independent, private, non-governmental authority for the establishment of ACCOUNTING principles in the United States.

Financial Institution - Organization engaged in any of the many aspects of finance including commercial banks, thrift institutions, investment banks, securities brokers and dealers, credit unions, investment companies, insurance companies, and REAL ESTATE INVESTMENT TRUSTS.

Financial Statements - Presentation of financial data including BALANCE SHEETS, INCOME STATEMENTS and STATEMENTS OF CASH FLOW, or any supporting statement that is intended to communicate an entity's financial position at a point in time and its results of operations for a period then ended.

First in, First out (FIFO) - ACCOUNTING method of valuing INVENTORY under which the costs of the first goods acquired are the first costs charged to expense. Commonly known as FIFO.

Fiscal Year - Period of 12 consecutive months chosen by an entity as its ACCOUNTING period which may or may not be a calendar year. Fixed Asset - Any tangible ASSET with a life of more than one year used in an entity's operations.

Floor - Term used when discussing INVENTORIES. Inventory cannot be valued lower than the "floor" which is the net realizable value of the inventory less an allowance for a normal profit margin.

Forecast - Prospective FINANCIAL STATEMENTS that are an entity's expected financial position, results of operations, and cash flows.

Foreclosure - Seizure of COLLATERAL by a CREDITOR when DEFAULT under a loan agreement occurs.

Foreign Corporation - A corporation which is not organized under the laws of ones territories or states. Taxing of foreign corporations depends on whether the corporation has Nexus or effectively connected income in that state.

Foreign Currency Translation - Restating foreign currency in equivalent dollars; unrealized gains or losses are postponed and carried in Stockholder's Equity until the foreign operation is substantially liquidated.

Foreign Tax Credit - A U.S. taxpayer that pays or accrues income tax to a foreign country may elect to credit or deduct these taxes in a determinable us dollar amount. This is usually done on the annual individual tax return and there is s specific form provided for this.

Form 8-K - SEC filing which is a filing that must be made on the occurrence of an event that is deemed to be of significant importance to SECURITY holders.

Form 10-K - SEC filing which is the ANNUAL REPORT due 90 days after the registrant's BALANCE SHEET date.

Form 10-Q - SEC filing which is the quarterly report due 45 days after each of the first three quarter.ends of each fiscal year.

Franchise - Legal arrangement whereby the owner of a trade name, franchisor, contracts with a party that wants to use the name on a non-exclusive basis to sell goods or services, franchisee. Frequently, the franchise agreement grants strict supervisory powers to the franchisor over the franchisee which, nevertheless, is an independent business.

Fraud - Willful misrepresentation by one person of a fact inflicting damage on another person.

Fund Accounting - Method of ACCOUNTING and presentation whereby ASSETS and LIABILITIES are grouped according to the purpose for which they are to be used. Generally used by government entities and not-for-profits. (See RESTRICTED FUND and UNRESTRICTED FUND.)

Future Contract - Transferable agreement to deliver or receive during a specific future month a standardized amount of a commodity.

GAAP - See GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.

GAAS - See GENERALLY ACCEPTED AUDITING STANDARDS.

Gain - Excess of REVENUES received over costs relating to a specific transaction.

GAO - See GENERAL ACCOUNTING OFFICE.

GASB - See GOVERNMENTAL ACCOUNTING STANDARDS BOARD.

General Accounting Office (GAO) - Accounting and auditing office of the United States government. An independent agency that reviews federal financial transactions and reports directly to Congress.

General Ledger - Collection of all ASSET, LIABILITY, owners EQUITY, REVENUE, and expense accounts.

General Partnership - PARTNERSHIP with no limited partners. (See LIMITED LIABILITY PARTNERSHIP and LIMITED PARTNERSHIP.)

Generally Accepted Accounting Principles (GAAP) - Conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. The highest level of such principles are set by the FINANCIAL ACCOUNTING STANDARDS BOARD (FASB).

Generally Accepted Auditing Standards (GAAS) - Standards set by the AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA) which concern the AUDITOR'S professional qualities and judgment in the performance of his or her AUDIT and in the actual report.

Gift - A valid transfer of property from one taxpayer to another without consideration or compensation. A gift may be subject to the unified estate and gift transfer tax.

Going Concern - Assumption that a business can remain in operation long enough for all of its current plans to be carried out.

Going Public - Activities that relate to offering a private company's shares to the general investing public including registering with the SEC.

Goodwill - Premium paid in the acquisition of an entity over the fair value of its identifiable tangible and intangible ASSETS less LIABILITIES assumed.

Governing Documents - Official legal documents that dictate how an entity is operated. The governing documents of a CORPORATION include ARTICLES OF INCORPORATION and BYLAWS; a PARTNERSHIP includes the partnership agreement; a TRUST includes the trust agreement or trust indenture; and an LLC includes the ARTICLES OF ORGANIZATION and OPERATING AGREEMENT.

Governmental Accounting Standards Board (GASB) - Group that has authority to establish standards of financial reporting for all units of state and local government.

Grantee - Person to whom property is transferred.

Grantor - (1) Person who transfers property. (2) Person who creates a trust.

Greenmail - Any amount a corporation pays to a shareholder to directly or indirectly buy back its stock.

Gross Income - The beginning point for the determination of income, including income from whatever sources derived. (Also see ADJUSTED GROSS INCOME.)

Guaranty - Legal arrangement involving a promise by one person to perform the obligations of a second person to a third person, in the event the second person fails to perform.

Head of Household - An individual entitled to special tax rates that fall midway between single rates and married filing joint rates, if they fit the qualifying profile.

Hedge - A financial term for a specific type of commodities planning and trading.

Historical cost - Original cost of an asset to an entity.

Holding Period - The time in which a taxpayer acquires property and the date on which it is sold.

Hope Scholarship Credit - A maximum allowable credit of $1,500 per student for each of the first 2 years of post-secondary education. It is allowable after all additional requirements are met.

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