Glossary of Tax and Accounting Terms

A

Accrual Basis

The practice of record keeping by which income is recorded when earned and expenses are recorded when incurred, even though the cash may not be received or paid out until later.

Amortization

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

Appreciation

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

Asset

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

Accountant's Equation

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

Audit strategy

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

B

Balance Sheet

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

Bank reconciliation

Verification of a bank statement balance and the depositor\rquote s check book balance.

Book value

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

Bookkeeping

The art, practice, or labor involved in the systematic recording of the transactions affecting a business.

Break-even point

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

Budget

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

C

Capital budget

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

Capital gain or loss

The difference between the market or book value at purchase or other acquisition and that realized from the sale or disposition of a capital asset.

Capital stock

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

Cash basis

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

Cash flow

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

Corporation

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

Cost of goods sold

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

Current assets

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

Current liabilities

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

D

Depreciation

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

Dividend

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

E

Entrepreneur

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

Estate

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

Estate taxes

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

Executor

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

F

Fair market value

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

Fixed assets

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

Fixed cost

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

G

Goodwill

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

Gross profit

The amount by which the net sales exceed the cost of goods sold.

H

Head of Household

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

I

Installment Sale

Selling property and receiving the sales price over a series of payments, instead of all at once at the close of the sale, is an installment sale. Unless you elect out, you will report the gain on that transaction as you receive it through the series of payments.

J

Joint return

A US income tax filing status that can be used by a married couple. The married couple must be married as of the last day of their tax year in order to qualify for this filing status. A married couple can also elect to file as married, filing separate returns.

K

L

Like kind

In taxes, it refers to property that is similar to another for which it has been exchanged: real estate exchanged for real estate, for instance. The definitions of like kind properties can be found in the US tax code at section 1031.

Long-term liabilities

These are liabilities of a business that are due in more than one year. An example of a long-term liability would be a mortgage payable.

M

Minimum wage

The lowest compensation you are allowed to pay an employee for hourly work. It is defined by Federal and by state laws. State laws may be more restrictive than Federal law, and certainly may differ.

N

Net Income

The difference between a businesses total revenues and its total expenses is called its net income. This caption and amount is usually found at the bottom of a company's Profit and Loss statement.

Net Operating Loss

A net operating loss is experienced by a business when business deductions exceed business income for the fiscal year. For income tax purposes, a net operating loss can be used to offset income in a prior year, or a taxpayer can elect to forego the carry back and carry the net operating loss forward.

O

Original Issue Discount (OID)

When a long-term debt instrument is issued at a price that is lower than its stated redemption value, the difference is called Original Issue Discount (OID).

P

Partnership

A partnership is an unincorporated business that has more than one owner. It is different from a sole proprietorship in that a sole proprietorship can have only one owner.

Passive Activity

A passive activity is one defined in the US tax code as one or more trade, business or rental activity that the taxpayer does not materially participate in managing or running. All income and losses from passive activities are grouped together on an income tax return and generally, loss deductions are limited or suspended until the passive activity that generated them is disposed of in its entirety.

Points

Points are additional fee paid to a lender. Points are generally stated as a percent of the total amount borrowed and are in essence prepaid interest. Points paid can be deducted over the life of the loan.

Prepaid Expenses

These are amounts that are paid in advance to a vender or creditor for goods and services. Typically, insurance premiums are paid in advance of the coverage contained in the policy. Prepaid expenses are a current asset for your business because you have paid for something and someone owes you the service or the goods.

Profit and loss statement

This statement is also known as an income statement and it shows your business revenue and expenses for a specific period of time. The difference between the total revenue and the total expense is your business net income. A key element of this statement, and one that distinguishes it from a balance sheet, is that the amounts shown on the statement represent transactions over a period of time while the items represented on the balance sheet show information as of a specific date (or point in time).

Q

Qualified Domestic Relations Order (QDRO)

A state court can allocate an interest in a qualified retirement plan to a former spouse through a qualified domestic relations order. Payments made to a former spouse as the result of a QDRO will not result in the taxpayer being assessed a penalty for early withdrawal from the plan; the former spouse will be taxed on the benefits when received, or the benefits can be rolled over tax free into an IRS or another qualified retirement plan.

R

Rabbi Trust

A rabbi trust is a nonqualified deferred compensation plan whereby an employer and employee agree to defer payment for the employee's services until a specified future date. The rabbi trust features an irrevokable grantor trust which is set up by the employer to hold the contributions set aside for the employee. While this provides the employee some degree of safety that the money will be available when desired, the terms of the trust must be such that exposes the trust assets to the claims of the employer's creditors.

Retained Earnings

Retained earnings are profits of the business that have not been paid out to the owners as of the balance sheet date. The earnings have been "retained" for use in the business. Retained earnings is an account in the equity section of the balance sheet.

S

Sole Proprietorship

A sole proprietorship is a form of business organization. The distinguishing characteristics of a sole proprietorship include: only one owner for the business (hence, "sole") and the business is unincorporated.

Strategic Planning

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

T

Testimony

Evidence given by a competent witness under oath.

Trial balance

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

U

Unearned revenue

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

V

Value

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

W

Witness

An individual who testifies at a trial on what he has seen, heard, or otherwise observed.

X

Y

Z

Zero Coupon Bonds

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

Z-score

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