Scrap or waste that should have been avoided. In other words, abnormal spoilage is the amount that is over and above the normal amount that is expected in a production process.
Costing system wherein fixed manufacturing overhead is allocated to (or absorbed by) products being manufactured. This system, which treats fixed manufacturing costs as a product cost, is required for external financial statements.
A record in the general ledger that is used to collect and store similar information. For example, a company will have a Cash account in which every transaction involving cash is recorded. A company selling merchandise on credit will record these sales in a Sales account and in an Accounts Receivable account.
A term that describes the steps when processing transactions (analyzing, journalizing, posting, preparing trial balances, adjusting, preparing financial statements) in a manual accounting system. Today many of the steps occur simultaneously when using accounting software.
Accounting net income flows
The amounts reported on the income statement. Because of accrual accounting the net income flows will be different from the cash flow.
Accounting Principles Board (APB)
This group preceded the current Financial Accounting Standards Board (FASB). The APB members served in a part-time capacity to determine the accounting standards from 1962 to 1973. The accounting rules established by the APB were titled Opinions and remain as part of the generally accepted accounting principles (unless superseded by standards issued by the FASB).
Accrual basis of accounting
The accounting method under which revenues are recognized on the income statement when they are earned (rather than when the cash is received). The balance sheet is also affected at the time of the revenues by either an increase in Cash (if the service or sale was for cash), an increase in Accounts Receivable (if the service was performed on credit), or a decrease in Unearned Revenues (if the service was performed after the customer had paid in advance for the service).
Accrual-type adjusting entry
An adjusting entry made at the end of the accounting period in order to report (1) revenues that have been earned but have not yet been entered into the accounting records, (2) expenses that have been incurred but have not yet been entered into the accounting records, (3) revenues already recorded that involve more than the current accounting period, or (4) expenses already recorded that involve more than the current accounting period.
The term used in place of retained earnings when a corporation has a negative (debit) balance in its account Retained Earnings.
Adjusted trial balance
A listing of the general ledger accounts and their account balances at a point in time after the adjusting entries have been posted. The grand total of the accounts with debit balances should equal the grand total of the accounts with credit balances.
Administrative expenses are part of the operating expenses (along with selling expenses). Administrative expenses include expenses associated with the general administration of the business. Examples include the salaries and fringe benefits of the company president, human resource personnel, accounting, information technology, the depreciation expense for equipment and space used in administration, as well as supplies, utilities, etc.
The result after subtracting the income tax associated with a given amount. For example, if a corporation has a gain of $100,000 before tax, and its income tax rate is 30%, its after-tax gain is $70,000. If a corporation has a loss of $30,000 before tax, and its income tax rate is 30%, its after-tax loss is $21,000.
The systematic allocation of the discount, premium, or issue costs of a bond to expense over the life of the bond.
A series of equal amounts at equal time intervals. Also see annuity due, annuity in advance, annuity in arrears, and ordinary annuity.
Things that are resources owned by a company and which have future economic value that can be measured and can be expressed in dollars. Examples include cash, investments, accounts receivable, inventory, supplies, land, buildings, equipment, and vehicles.
Assets are reported on the balance sheet usually at cost or lower. Assets are also part of the accounting equation: Assets = Liabilities + Owner’s (Stockholders’) Equity.
Audited financial statements
Financial statements that bear the report of independent auditors attesting to the financial statements’ fairness and compliance with generally accepted accounting principles.
The average amount of inventory during a period of time. Since the amount reported in the Inventory account is the ending balance on one specific day, it is necessary to compute an average balance when relating this account to the cost of goods sold (which covers a period of time).
One of the main financial statements. The balance sheet reports the assets, liabilities, and owner’s (stockholders’) equity at a specific point in time, such as December 31. The balance sheet is also referred to as the Statement of Financial Position.
A negative balance in the bank’s records for the company’s checking account.
The process of comparing the amounts in the Cash account in the general ledger to the amounts appearing on the bank statement. The objective is to be certain that there is consistency between the amounts and that the company’s amounts are accurate and complete.
Bill of materials
A listing of the materials included in a product. A bill of material could be thought of as a bakery’s recipe for producing one of its products.
Generally a long term liability account containing the face amount, par amount, or maturity amount of the bonds issued by a company that are outstanding as of the balance sheet date.
A liability account with a credit balance associated with bonds payable that were issued at more than the face value or maturity value of the bonds. The premium on bonds payable is amortized to interest expense over the life of the bonds and results in a reduction of interest expense.
The depreciation computed for financial reporting purposes—as opposed to income tax depreciation.
The book value of an asset is the amount of cost in its asset account less the accumulated depreciation applicable to the asset. The book value of a company is the amount of owner’s or stockholders’ equity. The book value of bonds payable is the combination of the accounts Bonds Payable and Discount on Bonds Payable or the combination of Bonds Payable and Premium on Bonds Payable.
The recording of a company’s transactions into the accounts contained in the general ledger. It is usually associated with the accounting tasks prior to the preparation of the trial balance.
A detailed plan with dollar amounts. Examples of budgets used in business include the cash budget, sales budget, production budget, department budgets, the master budget, and the capital expenditures budget. Some budgets are designed to be flexible budgets, while others are static budgets.
The difference between the call price of a bond or preferred stock and its stated or par value.
The amount at which the holder of preferred stock or bonds must sell the stock or bonds back to the issuing corporation.
A reference to stockholders’ equity. Also an adjective that references property, plant and equipment used in a business; for example, capital expenditures and capital budgeting.
The formal planning for significant expenditures, such as property, plant and equipment.
A structured market for trading stocks and bonds such as the New York Stock Exchange or NASDAQ. Capital market can also include less structured markets such as private placements.
A heading that includes common stock and preferred stock.
A current asset account which includes currency, coins, checking accounts, and undeposited checks received from customers. The amounts must be unrestricted.
The general ledger account Cash that reports currency, coins, undeposited checks, and the checking accounts of a company.
Actual changes in cash as opposed to accounting revenues and expenses.
Cash short and over
A miscellaneous expense account used to record the difference between the amount of cash needed to replenish a petty cash fund and the amount of petty cash receipts at the time the petty cash fund is replenished.
A term used in the lower of cost or market (LCM) that serves as a constraint for the market value. In the LCM for inventory, the ceiling is the net realizable value (NRV). This means that if the replacement cost of an inventory item is greater than the NRV, the NRV becomes the market amount that will be compared with the item’s cost for valuing inventory under LCM.
Chief executive officer.
Certified management accountant
A professional certification awarded to an accountant who has successfully completed the CMA Exam and has achieved the required work experience. The certified management accountant is recognized as a person with a strong proficiency in both management and financial accounting.
Chief financial officer.
Chart of accounts
A listing of the accounts available in the accounting system in which to record entries. The chart of accounts consists of balance sheet accounts (assets, liabilities, stockholders’ equity) and income statement accounts (revenues, expenses, gains, losses). The chart of accounts can be expanded and tailored to reflect the operations of the company.
A general ledger account which serves to summarize similar transactions. For example, all of the closing entries involving operating expenses might be posted to an operating expense clearing (or summary) account.
Costs that are common to several products, processes, activities, departments, territories, etc. Often common costs are subsequently allocated to each of the joint products, joint processes, etc. in order to determine the cost of each.
The party receiving goods to be sold.
Consumer price index
A government index that tracks the changes in prices in order to measure general inflation. This index can be used by small companies to obtain the benefits of LIFO without tracking individual units in inventory.
A potential gain that is not recognized by accountants in the financial statements until it actually occurs. For example, Company P is suing Company D over a patent infringement. Company P has a contingent gain.
A potential loss that is dependent upon some future event occurring or not occurring. If the loss is probable and the amount can be estimated, then the loss and a liability are recorded with a journal entry. If the loss is only reasonably possible (not probable), then a journal entry is not recorded but a disclosure should be made in the notes to the financial statements. If the loss is remote, then neither a journal entry nor a disclosure is required.
An account with a balance that is the opposite of the normal balance. For example, Accumulated Depreciation is a contra asset account, because its credit balance is contra to the debit balance for an asset account. Another example is the owner’s drawing account. This is an owner’s equity account and as such you would expect a credit balance. However, the drawing account has a debit balance. Other examples include (1) the allowance for doubtful accounts, (2) discount on bonds payable, (3) sales returns and allowances, and (4) sales discounts. The contra accounts cause a reduction in the amounts reported. For example net sales is gross sales minus the sales returns, the sales allowances, and the sales discounts. The net realizable value of the accounts receivable is the accounts receivable minus the allowance for doubtful accounts.
The result of subtracting all variable expenses from revenues. It indicates the amount available from sales to cover the fixed expenses and profit.
The chief accounting officer of a company. This person would head up the accounting department.
Chief operating officer.
An exclusive right granted by the federal government to publish and sell various works. In accounting a copyright is recorded at its cost and is reported on the balance sheet as an intangible asset.
A legal entity organized under state laws that is considered separate from its owners. Ownership is evidenced by shares of stock.
The analysis of how profits change as volume changes. The calculation of the break-even point is a part of cost-volume-profit analysis.
Certified public accountant.
A balance on the right side (credit side) of an account in the general ledger.
Someone who has granted credit. If a bank lends a company money, the bank is a creditor. If a supplier sold merchandise to a company on credit, the supplier is a creditor.
See cash surrender value.
A balance on the left side of an account in the general ledger. Typically expenses, losses, and assets have debit balances.
A form used at a bank to inform its customer that the customer’s account is being reduced for a fee or other charge.
The ratio of total liabilities to total assets.
The person that owes money. If a bank lent you money, the bank is the creditor and you are the debtor.
In accounting this means to defer or to delay recognizing certain revenues or expenses on the income statement until a later, more appropriate time. Revenues are deferred to a balance sheet liability account until they are earned in a later period. When the revenues are earned they will be moved from the balance sheet account to revenues on the income statement.
Expenses are deferred to a balance sheet asset account until the expenses are used up, expired, or matched with revenues. At that time they will be moved to an expense on the income statement.
The systematic allocation of the cost of a natural resource from the balance sheet to the income statement.
A liability account in a bank’s general ledger that indicates the amounts owed to bank customers for the balances in the customers’ individual checking, savings, and certificate of deposit accounts.
A cost that can be traced to a cost object. For example, the flour used in baking bread is a direct cost of a bakery’s bread. The wages and salaries of the employees working exclusively in a manufacturer’s maintenance department aredirect costs of the maintenance department.
Raw materials that are a traceable component of a manufactured product. For example, the direct material of a baseball bat is the wood. Flour, sugar, and vegetable oil are direct materials of a company that manufactures dessert products.
A person or organization that gives or donates money, property, services, etc.
The withdrawal of business cash or other assets by the owner for the personal use of the owner. Withdrawals of cash by the owner are recorded with a debit to the owner’s drawing account and a credit to the cash account.
Earnings per share (EPS)
This financial statistic is the net income of a corporation after income tax (less any preferred dividends) divided by the weighted average number of shares of common stock outstanding during the same period of time.
Economic entity assumption
An accounting principle/guideline that allows the accountant to keep the sole proprietor’s business transactions separate from the owner’s personal transactions even though a sole proprietorship is not legally separate from the owner.
Electronic funds transfer (EFT)
A method of payment used in place of a paper check.
Employer payroll taxes
Employer payroll taxes include an employer’s portion of Social Security and Medicare taxes and the state and federal unemployment taxes.
Economic order quantity.
The difference between assets and liabilities, such as stockholders’ equity, owner’s equity, or a nonprofit organization’s net assets. Also used to indicate an owner’s interest in a personal asset.
A payment. The expenditure might be for a significant long term asset (capital expenditure), a short term asset (prepaid insurance), a reduction in a liability, or for an immediate expense such as rent.
Costs that have been used up or consumed. Expired costs are reported as expenses. (Costs that have not yet expired are reported as assets).
Factoring accounts receivable
The sale of the accounts receivable (usually for a fee) to a third party known as a factor.
Free Alongside Ship. Terms indicating that the seller’s price includes delivery of goods at a ship’s pier. Title to the goods will transfer to the buyer alongside the ship.
Financial Accounting Standards Board.
A difference between an actual cost and a budgeted or standard cost, and the actual cost is the lesser amount. In the case of revenues, a favorable variance occurs when the actual revenues are greater than the budgeted or standard revenues.
Federal Insurance Contribution Act (FICA).
First in, first out (FIFO).
Using debt (such as loans and bonds) to acquire more assets than would be possible by using only owners’ funds. Also referred to as trading on equity.
First in, still here (FISH)
A parody of FIFO used to describe a very slow-moving item in inventory.
A term used when referring to property, plant, and equipment. Fixed assets other than land are depreciated.
The time between when a check is written and when the check clears the bank account on which it is drawn.
A term used in the lower of cost or market (LCM) that serves as a constraint for the market value. In the LCM for inventory, the floor is the net realizable value (NRV) minus the normal profit. This means that if the replacement cost of an inventory item is less than this amount, this amount becomes the market amount that will be compared with the item’s cost for valuing inventory under LCM.
A word that means to add a column of numbers as in “Foot the amounts listed in column A”.
The shipping cost to be paid by the buyer of merchandise purchased when the terms are FOB shipping point. Freight-in is considered to be part of the cost of the merchandise and should be included in inventory if the merchandise has not been sold.
Compensation for employees that is in addition to salaries and wages. Examples include paid absences (vacation, sick, holiday), insurances (health, dental, vision, life), pensions, profit sharing contributions, employer matching of Social Security and Medicare taxes, unemployment taxes, worker compensation insurance, continuing education costs, etc. Generally, the cost of fringe benefits should be expensed when they are earned by the employee, not in the period in which they are paid.
Federal Unemployment Tax Act.
Generally accepted accounting principles (GAAP)
Gains result from the sale of an asset (other than inventory). A gain is measured by the proceeds from the sale minus the amount shown on the company’s books. Since the gain is outside of the main activity of a business, it is reported as a nonoperating or other revenue on the company’s income statement.
A book of original entry that requires that both the account being debited and the account being credited be listed along with the respective amounts. Because of accounting software and special journals there are relatively few entries made into the general journal.
That part of the accounting system which contains the balance sheet and income statement accounts used for recording transactions.
The amount before deductions. For example, gross pay is the amount before withholding deductions. Gross sales is the amount before sales returns and allowances and sales discounts.
An employee’s pretax compensation that is based on annual or monthly amounts rather than an hourly rate. Management employees are usually paid salaries.
Bonds and other debt securities that a company intends to hold until the securities mature. In addition to intent, the company must have the financial ability to be able to hold them until they mature.
The original cost incurred to acquire an asset (as opposed to replacement cost, current cost, or cost adjusted by a general price index).
One component of financial statement analysis. This method involves financial statements reporting amounts for several years. The earliest year presented is designated as the base year and the subsequent years are expressed as a percentage of the base year amounts. This allows the analyst to more easily see the trend as all amounts are now a percentage of the base year amounts.
A target rate. For example, companies may decide to invest only in projects that generate an internal rate of return that is in excess of 12%. The 12% figure becomes the hurdle rate.
International Accounting Standards Board (IASB).
International Financial Reporting Standards (IFRS).
The acronym for Institute of Management Accountants, an international organization dedicated to enhancing management accounting and financial management. It offers various programs and networking opportunities. IMA also awards the Certified Management Accountant designation to members who have successfully passed its CMA Exam and have met its experience requirements.
A decrease in the value of a long term asset to an amount that is less than the amount shown under the cost principle.
Goods or services provided instead of money.
Inappropriate retained earnings
The regular retained earnings. Retained earnings that have not been restricted.
One of the main financial statements (along with the balance sheet, the statement of cash flows, and the statement of stockholders’ equity). The income statement is also referred to as the profit and loss statement, P&L, statement of income, and the statement of operations. The income statement reports the revenues, gains, expenses, losses, net income and other totals for the period of time shown in the heading of the statement. If a company’s stock is publicly traded, earnings per share must appear on the face of the income statement.
A word used by accountants to communicate that an expense has occurred and needs to be recognized on the income statement even though no payment was made. The second part of the necessary entry will be a credit to a liability account.
A document that discloses important information on bonds or preferred stock. Included in the indenture would be the call price, the actions that can occur if the company fails to pay the interest or dividend, etc
The inability to pay liabilities as they become due. Some consider a company to be insolvent when its current liabilities exceed its current assets.
A contract to provide coverage or protection in exchange for a payment or “premium.” Examples of insurance protection include liability, property, business interruption, life, disability, etc. The company paying the premiums for the protection will have insurance expense and possibly an asset, Prepaid Insurance (if the premiums are paid in advance). The insurance company would have insurance premium revenues and possibly a liability, Unearned Insurance Premiums (if the premiums were paid in advance).
Some examples of intangible assets include copyrights, patents, goodwill, trade names, trademarks, mail lists, etc. These assets will be reported at cost (or lower) on the balance sheet after property, plant and equipment. Trade names and trademarks that were developed by a company (as opposed to buying them from another company at a significant cost) may not appear on the balance sheet, even though they might be a company’s most valuable asset.
Interim financial statement
Financial statements issued between the official annual financial statements. For example, quarterly financial statements are interim financial statements.
A current asset whose ending balance should report the cost of a merchandiser’s products awaiting to be sold. The inventory of a manufacturer should report the cost of its raw materials, work-in-process, and finished goods. The cost of inventory should include all costs necessary to acquire the items and to get them ready for sale.
When inventory items are acquired or produced at varying costs, the company will need to make an assumption on how to flow the changing costs
Inventory that is less than the expected amount. It might be associated with theft or damage.
The long term asset category of a classified balance sheet which appears immediately after the current assets. Listed in this category would be a bond sinking fund, funds held for construction, the cash surrender value of a life insurance policy owned by the company, and long term investments in stocks and bonds.
Internal rate of return.
Internal Revenue Service (IRS).
A common cost. Often refers to the costs prior to the point where several products emerge from a common process.
The products with significant value that emerge at a split-off point in a process. When a joint product has little value it is referred to as a by-product.
The entry made in a journal. It will contain the date, the account name and amount to be debited, and the account name and amount to be credited. Each journal entry must have the euros/dollars of debits equal to the euros/dollars of credits.
This activity, which involves playing the float, is sometimes used when a company is facing an overdrawn checking account.
Lower of cost or market.
The time from when goods are ordered until the time when the goods are received.
An expectation that as a task is repeated there will be significant time reductions during the early repetitions. The time savings will dissipate after continuous performance. This is important to consider when setting the direct labor standard cost.
A legal agreement to pay rent to the lessor for a stated period of time. Sometimes the lease is in substance a purchase of an asset and a financing arrangement. For example, if a company agrees to lease a forklift truck for 60 months and the agreement cannot be canceled without purchasing the asset, it is possible the arrangement is more than a mere rental of equipment.
A “book” containing accounts. For example, there is the general ledger that contains the balance sheet and income statement accounts. There is a subsidiary ledger that contains the detailed, customer account balances for the general ledger account Accounts Receivable.
The party owning an asset and receiving rent from another party (the lessee).
Letter of credit
This is granted by banks only to very creditworthy customers. It states that the bank will guarantee amounts that its customer incurred when purchasing goods.
A claim on another party’s assets. For example, the bank will likely put a lien on your automobile if you want to borrow money and have no other collateral.
Last in, first out (LIFO).
Limited Liability Company.
Loan amortization schedule
A multi column listing of each payment required during the period of a loan. Each payment is detailed by the amount of interest, the principal payment, and the remaining unpaid principal balance. The interest portion of the payment is based on the unpaid principal balance after the previous payment. Usually the total payment remains constant and each period the interest portion of the payment decreases and the principal portion of the payment increases.
The result of the sale of an asset for less than its carrying amount; the write-down of assets; the net result of expenses exceeding revenues.
An example is the major overhaul of a truck’s engine that will extend the useful life of the truck. This expenditure is recorded on the balance sheet in an asset (or in a contra asset) account and then depreciated over the remaining life of the truck.
Make or buy decision
A decision whether to make some products or equipment in-house versus purchasing the products or equipment from another company. As in any decision, one must compare the relevant costs and other opportunities. It is possible that the cost to make an item will involve an increase in only some costs and will, therefore, be less costly than purchasing the item from another company.
The field of study within accounting that is devoted to information needed by the management of the company (as opposed to financial accounting to external parties). Topics covered in managerial accounting include cost behavior, product costing for manufacturers, budgeting, amounts needed for decision making, transfer pricing, capital budgeting, etc.
Manufacturing costs other than direct materials and direct labor.
Margin of safety
A term used in break-even analysis to indicate the amount of sales that are above the break-even point. In other words, the margin of safety is the amount by which a company’s sales could decrease before the company will become unprofitable.
A reduction in the original selling price.
The accounting guideline that permits the violation of another accounting guideline if the amount is insignificant. For example, a profitable company with several million dollars of sales is likely to expense immediately a $200 printer instead of depreciating the printer over its useful life.
This term is usually associated with assets that are depreciated. In the month that an asset is acquired or disposed, it is assumed to have occurred in the middle of the month.
The practice where an asset purchased within a year is assumed to have been purchased at the mid-point of the year. For example, an asset purchased during the calendar year 2012 is assumed to have been purchased on July 1, 2012.
Costs that have both a fixed and variable component. For example, the cost of operating an automobile includes some fixed costs that do not change with the number of miles driven (e.g., operating license, insurance, parking, some of the depreciation, etc.) Other costs vary with the number of miles driven (e.g., gasoline, oil changes, tire wear, etc).
Monetary unit assumption
An accounting guideline where the U.S. dollar is assumed to be constant (no change in purchasing power) over time.
A lien on real estate to protect a lender. The loan made with such security is referred to as a mortgage loan.
An average that changes with an additional purchase.
National Association of Accountants. This organization’s name was changed to Institute of Management Accountants and currently is referred to as IMA.
The result of two or more amounts being combined. For example, net sales is equal to gross sales minus sales returns, sales allowances, and sales discounts. The net realizable value of accounts receivable is the combination of the debit balance in accounts receivable and the credit balance in the allowance for doubtful accounts. The book value of equipment is also a net amount: the cost of the equipment minus the accumulated depreciation of the equipment.
The bottom line of the income statement when revenues and gains are less than the aggregate amount of cost of goods sold, operating expenses, losses, and income taxes (if the company is a regular corporation).
Net of tax
A gross amount minus the income tax associated with the gross amount.
Next-in, first-out cost flow assumption
This is the expression for replacement cost, which is not an acceptable cost flow, since it violates the cost principle. However, an economist and decision makers would argue that the cost to replace the item is the relevant amount.
Next-in, first-out cost flow assumption (NIFO).
An expense reported on the income statement that did not require the use of cash during the period shown in the heading of the income statement. The typical example is depreciation expense. Also, the write-down of an asset’s carrying amount will result in a noncash charge against earnings.
Assets other than cash, accounts receivables, and notes receivables. Holders of nonmonetary assets could avoid holding losses during periods of inflation.
An organization without owners and with the main purpose of providing services needed by society.
Normal account balance
The debit or credit balance that would be expected in a specific account in the general ledger. For example, asset accounts and expense accounts normally have debit balances. Revenues, liabilities, and stockholders’ equity accounts normally have credit balances.
The amount of principal due on a formal written promise to pay. Loans from banks are included in this account.
An asset representing the right to receive the principal amount contained in a written promissory note. Principal that is to be received within one year of the balance sheet date is reported as a current asset. Any portion of the notes receivable that is not due within one year of the balance sheet date is reported as a long term asset.
Notes to financial statements
Also referred to as footnotes. These provide additional information pertaining to a company’s operations and financial position and are considered to be an integral part of the financial statements. The notes are required by the full disclosure principle.
Net realizable value.
Sufficient funds (NSF).
The process of becoming outdated or no longer being economically feasible (often caused by technology advances).
Off balance sheet financing
Obligations not reported as liabilities on the balance sheet.
On credit; not for cash.
Goods placed with another party without transferring ownership.
On account. Goods purchased with terms of net 10 days, net 30 days, or 2/10, net 30 are goods purchased on credit. Goods sold with similar terms are sales on credit.
The next best benefit foregone. The opportunity lost. Often measured as the contribution margin given up by not doing an activity.
In the EOQ model, order costs are the incremental costs of processing an order of goods from a supplier. Examples of order costs include the costs of preparing a requisition, a purchase order, and a receiving ticket, stocking the items when they arrive, processing the supplier’s invoice, and remitting the payment to the supplier.
The internal growth of a company’s existing businesses. Organic growth excludes the additional sales resulting from acquiring another company.
A diagram depicting a company’s hierarchy or chain of command, its business segments, functions, and departments.
Activities that are not specifically associated with a specific product or customer. For example, the costs of an audit and filing information with government agencies are examples of organization-sustaining activities.
Sending work to another organization instead of processing the work in-house. Often payroll is outsourced to a company that specializes in payroll processing.
Checks which have been written, but have not yet cleared the bank on which they were drawn. In the bank reconciliation, outstanding checks are deducted from the balance per bank.
A term that refers to a negative checking account balance. It arises when a company writes checks in excess of the amount it has on deposit in its checking account.
P & L
The abbreviation for profit and loss statement. Also known as the income statement.
The amount paid or contributed by stockholders in exchange for shares of a corporation’s stock.
Contributions collected by Charity #1 who is merely acting as a collection agent for Charity #2. Also known as flow-through contributions.
Also referred to as a sunk cost. A past cost is not relevant to a decision.
In business decision-making, payback means the number of years before the cash invested in a project is returned. It involves the cash flows from the project but generally the cash flows are not discounted to reflect the time value of money.
Payroll taxes payable
A current liability that includes payroll taxes withheld from employees and payroll taxes that are levied on an employer but have not yet been remitted.
Also referred to as real accounts. Accounts that do not close at the end of the accounting year. The permanent accounts are all of the balance sheet accounts (asset accounts, liability accounts, owner’s equity accounts) except for the owner’s drawing account.
A current asset account that represents an amount of cash for making small disbursements for postage due, supplies, etc.
Also referred to as illusory profits. Occurs because accountants use past costs rather than replacement costs. For example, in computing the cost of goods sold accountants often use the FIFO cost flow assumption. This results in the oldest costs being matched with sales. Economists prefer that the replacement cost of the inventory be matched with sales. The difference in profits from using FIFO instead of the replacement cost is referred to as phantom or illusory profits. Similarly, accountants depreciate the original cost of buildings and equipment. Economists prefer that the replacement cost be depreciated. With inflation the accounting profits are higher than the economists would report using replacement cost.
An asset which serves as collateral for a loan.
A class of corporation stock that provides for preferential treatment of dividends: preferred stockholders will be paid dividends before the common stockholders receive dividends. In exchange for the preferential treatment of dividends, preferred shareholders usually do not share in the corporation’s earnings and instead receive only their fixed dividend.
A current asset account that reports the amount of future rent expense that was paid in advance of the rental period. The amount reported on the balance sheet is the amount that has not yet been used or expired as of the balance sheet date.
In standard costing the difference between the actual cost and the standard cost of direct materials or direct labor. The price variance of direct labor is usually referred to as the labor rate variance.
For a retailer, wholesaler, and distributor the primary activities would be the buying of merchandise and then the sale of that merchandise. A manufacturer’s primary activities would be the production and sale of products.
Pro forma income
Income based upon some assumptions.
Another word for purchasing.
Net income divided by net sales.
A word to describe whether a company is able to earn more revenues than expenses.
Program evaluation and review technique (PERT)
A management tool that identifies the critical path—the path of sequential activities requiring the longest time to complete.
An individual owner of a business that is not incorporated.
A commitment to purchase a specific number of items in the future at a fixed price. If the agreement is non cancelable, the company must report a loss when the current cost of the items falls below the contracted price.
Also referred to as a “p.o.” A multi-copy form prepared by the company that is ordering goods. The form will specify the items being ordered, the quantity, price, and terms. One copy is sent to the vendor (supplier) of the goods, and one copy is sent to the accounts payable department to be later compared to the receiving ticket and invoice from the vendor.
In accounting the qualitative characteristics include relevance, reliability, comparability, and consistency.
Quality of earnings
Earnings are said to be of a high quality if the accounting policies are conservative. One indication is that the cash flows from operating activities shown on the statement of cash flows consistently exceed the amount of net income shown on the income statement.
In standard costing, the quantity variance could be the direct materials’ usage variance or the direct labor’s efficiency variance. The quantity variance is the difference between the quantity of inputs that were actually used versus the quantity of inputs that should have been used to manufacture the period’s output.
Also known as the acid test ratio. This ratio compares the amount of cash + marketable securities + accounts receivable to the amount of current liabilities.
Also known as a permanent account. Includes the balance sheet accounts (assets, liabilities, and owner’s or stockholders’ equity accounts) but excludes the owner’s drawing account, which is a temporary account.
Cash received. Receipts are different from revenues.
The situation where manufacturing service departments of a factory, provide service to each other.
Redemption of bonds payable
The repurchase of bonds by the issuer of the bonds.
A current or future cost that will differ among alternatives. For example, if a company is deciding whether to expand its sales territory, the real estate tax and depreciation on the company’s headquarters building is not relevant. The additional travel expenses to the new territory and the additional sales from the new territory are relevant to the decision.
A qualitative characteristic in accounting. It is achieved when information is verifiable, objective (not subjective) and you can depend on it.
Residual income (RI)
A division’s operating income after deducting a charge for the cost of the corporation’s capital being used by the division.
Return on investment (ROI)
A financial ratio that expresses the income statement effect from employing an asset as a percentage of the asset’s cost on the balance sheet.
An amount that is expensed immediately. For example, routine repair costs on equipment are revenue expenditures because they are charged directly to an income statement account such as Repairs and Maintenance Expense.
Fees earned from providing services and the amounts of merchandise sold. Under the accrual basis of accounting, revenues are recorded at the time of delivering the service or the merchandise, even if cash is not received at the time of delivery. Often the term income is used instead of revenues.
Return on capital employed.
Return on investment (ROI).
Rule of 72
A technique for estimating the number of years or the interest rate necessary to double your money. Divide 72 by the interest rate and you will have the approximate number of years needed to double your money. If your money earns 4%, your money will double in 18 years (72 divided by 4). If you earn 8%, your money will double in 9 years (72 divided by 8).
An additional quantity of items held in inventory in order to minimize the chance of an item being out of stock.
A revenue account that reports the sales of merchandise. Sales are reported in the accounting period in which title to the merchandise was transferred from the seller to the buyer.
Statement of Cash Flows.
A lender such as a bank who has placed a lien on a borrower’s assets. As a result, the lender has collateral until the loan amount is repaid.
Selling expenses are part of the operating expenses (along with administrative expenses). Selling expenses include sales commissions, advertising, promotional materials distributed, rent of the sales showroom, rent of the sales offices, salaries and fringe benefits of sales personnel, utilities and telephone usage in the sales department, etc. Under the accrual basis of accounting, selling expenses appear on the income statement in the period in which they occurred (not the period in which they were paid).
A bond issued with a series (or staggering) of maturity dates.
Statement of Financial Accounting Standards.
Selling, general and administrative expenses.
A certified public accountant (CPA) who practices accounting in his or her own firm without another CPA as a partner or shareholder.
The point at which several products emerge from a common process.
Waste, scrap, evaporation, etc. in the manufacturing of products. Normal spoilage is considered unavoidable and is part of the cost of producing the good output. Abnormal spoilage is considered avoidable and is not part of the cost of producing good output. The cost of abnormal spoilage should be expensed when it occurs.
Paper evidence of ownership in a corporation. The certificate would indicate the type of stock (common, preferred), any restrictions pertaining to the sale of the stock, the number of shares, the par value, etc. Today, the larger corporations with many shareholders are likely to use electronic records instead of issuing the paper stock certificates.
Stop payment order
A directive to a company’s bank to not honor (pay) a specific check that the company had written. The company making the request will be charged a fee by the bank for this service.
The accounts outside of the general ledger which provide the detail for the balance reported in a general ledger account.
A past, historical cost. They are called sunk because a past cost cannot be changed and decisions involve only the present and the future.
A temporary holding place for amounts that need further analysis.
A visual aid used by accountants to illustrate a journal entry’s effect on the general ledger accounts. Debit amounts are entered on the left side of the “T” and credit amounts are entered on the right side.
The depreciation used on a company’s income tax return. Usually this is different from the depreciation used on the financial statements.
Bonds with one maturity date (as opposed to serial bond).
An intangible asset that is reported at cost (or lower) on the balance sheet. It might consist of a name or a logo.
The price at which one division or subsidiary of a company transfers products to another division or subsidiary of the company.
A listing of the accounts in the general ledger along with each account’s balance in the appropriate debit or credit column. The total of the amounts in the debit column should equal the total of the amounts in the credit column.
A ratio consisting of an income statement account balance divided by the average balance of a balance sheet account.
Unrelated business income tax.
The amounts in a company’s bank account that are not yet accessible because the checks deposited into the account have not yet cleared the bank on which they were drawn.
Checks received from customers and others that are not yet deposited into a bank account. Undeposited checks which are not postdated are reported as part of a company’s cash.
In securities, a party that assists a company in issuing stock or bonds.
United Way payable
This current liability account reports the amount a company owes the United Way organization as of the balance sheet date. The amount includes the withholdings from employees’ pay plus the amount owed by the employer.
Unrelated business income tax
A tax imposed on income earned by a nonprofit that is unrelated to its exempt purpose.
A common fringe benefit given to employees during a period in which they do not have to work. If an employee earns one week of paid vacation to be taken after working one full year, the employer should recognize this cost/expense and liability while the employee is earning it. One possible journal entry is to debit Vacation Pay Expense and to credit Vacation Pay Payable. Later, when the employee takes the vacation time, the employer would debit Vacation Pay Payable and credit Cash.
Billing a client based on the value of the information or service provided rather than billing based on time spent.
Variable manufacturing overhead applied
The variable manufacturing costs other than direct materials and direct labor that have been assigned to the products manufactured via a predetermined rate. Ideally, by the end of the accounting year the amount applied will equal the amount actually incurred.
A long-term asset account that reports a company’s cost of automobiles, trucks, etc. The account is reported under the balance sheet classification property, plant, and equipment. Vehicles are depreciated over their useful lives.
Suppliers. Companies that provide goods or services.
A type of financial analysis involving income statements and balance sheets. All income statement amounts are divided by the amount of net sales so that the income statement figures will become percentages of net sales. All balance sheet amounts are divided by total assets so that the balance sheet figures will become percentages of total assets.
Sometimes referred to in the context of cost or expense behavior such as “variable expenses increase as volume increases.” In this context volume might be an activity such as the number of machine hours, the number of units produced, the number of pounds processed or the number of units sold.
The compensation earned by employees who are paid on an hourly basis. It is common for production workers to earn wages, since they are usually paid via an hourly rate.
A promise to repair, replace, refund, etc. a product during a specified period. The company making the promise has a contingent liability and a warranty expense that should be recorded at the time the product is sold.
A term often used when referring to office workers, managers, professionals, and executives. These employees’ pay is often stated as a salary for a month (and not as an hourly pay rate).
Actions taken or not taken prior to issuing financial statements in order to improve the amounts appearing in the financial statements.
Withdrawals by owner
Also referred to as draws. These are a reduction of owner’s equity, but are not a business expense and they do not appear on the sole proprietorship’s income statement.
The term associated with payroll deductions from an employee’s gross wages or gross salary.
Current assets minus current liabilities.
The reduction or removal of an asset amount. For example, an account receivable will be removed or written off if the customer is not able to pay the amount owed to the company.
The increase in a carrying amount.
The preparation of financial statements from a client’s information and without any review or audit of the amounts.
Yield to maturity
The total annual return on a bond investment if held to maturity. For example, if a bond is purchased at less than its maturity value, the yield to maturity includes the annual interest plus the gain as the bond increases from the investment amount to the maturity value.
If the bond is purchased at more than its maturity value, the yield to maturity includes the annual interest minus the loss as the bond decreases from the investment amount to the maturity value.
Zero coupon bonds
A bond without a stated interest rate. Because no interest is paid, the bond will sell for a discount from its maturity value. Rather than receiving interest, an investor’s compensation will be the difference between the discounted price at which the bond was purchased and the price the investor receives when selling the bond. If the investor holds the bond to maturity, the investor will earn the difference between its discounted cost and its maturity value.
Rather than the previous year’s budget being the starting point for the next budget, a zero-based budget assumes no activities: everything in the budget must be justified.