Glossary of Tax and Accounting Terms
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- Accrual Basis
- The practice of record keeping by which income is recorded when earned
and expenses are recorded when incurred, even though the cash may not be
received or paid out until later.
- The 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.
- 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.
- 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.
- 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.
- 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.}
- 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).
- 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
- 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
- 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.
- 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.
- 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.
- That portion of a corporation's earnings which is paid to the stockholders.
- One who assumes the financial risk of the initiation, operation and
management of a given business or undertaking.
- 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.
- 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.
- 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
- 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.
- 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
- Gross profit
- The amount by which the net sales exceed the cost of goods sold.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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).
- 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 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).
- 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
- 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
- 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.
- 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.
- 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.
- 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.
- 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.
- An individual who testifies at a trial on what he has seen, heard,
or otherwise observed.
- 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.
- 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.
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