A

Absorption costing. A product costing approach that assigns both fixed and variable manufacturing costs to the finished product.

Accelerated-depreciation method. A method of depreciation which produces higher depreciation expense in the early years of the asset's life and lower depreciation expense in later years. These methods are often used because an asset is assumed to be more productive in the earlier years of its useful life, or because the asset may become technologically obsolete prior to the end of its originally estimated useful life. Common accelerated depreciation methods include Sum-of-the-Years'-Digits (SYD), 150% and 200% Declining Balance (DB), and Variable Charge Methods such as Service Hours or Productive Output.

Account. A form used to accumulate additions and deductions for each individual asset, liability, owner's equity, revenue, and expense. A listing of all the accounts of a business is found in the Chart of Accounts.

Account balance. The difference between the total debits and total credits entered into the accounts. After Debits and Credits are totaled, the totals are subtracted. If the account has more debits than credits, the account has a debit balance. If the credits are more than the debits, the account has a credit balance.

Account form of balance sheet. A balance sheet with the assets presented on the left side of the page and the liabilities and owner's equity presented on the right side of the page. See Report Form of Balance Sheet for another common Balance Sheet Format.

Accounting. The process of identifying, measuring, and communicating economic information to interested parties. Accounting is often referred to as "the language of business." Double-entry bookkeeping is the foundation of accounting.

Accounting cycle. The sequence of procedures followed during the accounting year (e.g. recording transactions, journalizing, preparing the financial statements, and closing the accounts).

Accounting equation. The fundamental accounting equation expresses the relationship between Assets, Liabilities, and Owners' Equity. The most common presentation is Assets = Liabilities + Owner's Equity. The expanded accounting equation takes into account the effect of current operations and distributions of capital. It is written as: Assets = Liabilities + Owners' Equity +[Revenues - Expenses - Distributions]

Accounting system. The methods and procedures used to control, record, and report financial information for users of the information.

Accounts receivable aging schedule. A schedule which groups unpaid accounts receivable according to the age of the account- i.e. period of time they have been outstanding.

Accounts receivable turnover ratio. This ratio is used to determine a company's average collection period for receivables. The ratio is computed by dividing net sales by the average accounts receivable.

Accrual basis of accounting. The accounting basis where revenues are recognized in the period earned and expenses are recognized in the period incurred or used in the process of generating revenue.

Accrued expenses. Expenses that have been incurred or used but not paid. Accrued expenses are also liabilities. Example: Wage expense incurred by the end of the accounting period that is between payroll payment dates.

Accrued revenues. Revenues that have been earned but not yet collected. Accrued revenues are sometimes referred to as accrued assets. Example: Rent owed to the company but not yet paid by the tenant.

Accumulated depreciation. The contra-asset account used to accumulate depreciation recognized on plant assets.

Acid-test ratio. Measures the "instant" debt-paying ability of a company. This ratio is also known as the "quick ratio."

Activity base. A measure used to allocate factory overhead to production. Other terms for activity base include "allocation base" or "cost driver." Examples include direct labor hours and machine hours.

Activity-based costing (ABC costing). A detailed costing method that determines the cost of activities, computes a rate per activity, and allocates costs to products using these rates.

Activity cost pools. Cost accumulations related to a given activity. Examples include machine usage, inspections, production setups, etc.

Activity drivers. An activity that causes a cost to move up or down.

Activity rates. The cost of an activity per unit of activity base. Formula: Activity cost pool divided by activity base.

Additions and improvements. Non-routine costs incurred to increase the operating efficiency, productive capacity, or expected useful life of a fixed asset. Compare: Betterment, Ordinary repairs

Adjunct account. An account that is added to another account. Examples include Transportation-In and Premium on Bonds Payable.

Adjusting entries. Journal entries required at the end of an accounting period before financial statements are prepared. They are often referred to as AJEs. Adjusting entries are generally classified as accruals or deferrals. They can be further categorized into four types: Accrued revenues, accrued expenses, deferred revenues, deferred expenses.

Administrative expenses. Expenses incurred in the administration of the business. Administrative expenses are also called "general expenses."

Allowance method of accounting for uncollectible accounts. A method of determining the amount of uncollectible accounts expense for a period. Allowance method uses estimates based on a company's previous experience. Percentage of Sales and Aging are two types of allowance methods. The advantage to using an allowance method (compared to the direct write-off method) is that better matching of expense against revenues in the period is achieved. Compare: Direct write-off method.

Amortization. The term used to describe the periodic expiration or using up of an intangible asset. Amortization is a concept similar to depreciation as it applies to fixed assets. The entry recording this expense is debit to Amortization Expense, credit to the intangible asset account. Notice that unlike depreciation of fixed assets, the credit is made directly to the intangible asset account. A contra-asset account similar to Accumulated Depreciation is not used.

Annual report. Prepared once a year by corporate management, it presents financial information including financial statements, notes to the financial statements, and a discussion of the company's business affairs for the year ended.

Annuity. A series of equal payments (sometimes called rents) made at fixed intervals.

Appropriation. A portion of a corporation's retained earnings that are not available for dividend distributions because the Board of Directors has restricted it.

Assets. Property or rights owned by a business. Examples include cash, accounts receivable, equipment, trademarks, etc.

Auditor's report. A report by an independent C.P.A firm that expresses an opinion on a company's financial statements as presented by management. The report addresses both the fairness of the financial statements and their compliance with generally accepted accounting principles (GAAP).

Authorized stock. The number of shares of stock that a corporation may issue or sell, as allowed by the state and specified in its charter. See also: Issued stock, Outstanding stock.

Available-for-sale-security. A debt or equity security that is not classified as either a held-to-maturity or a trading security.

Average cost method. An inventory costing method that computes an average cost per unit of inventory and uses it as the basis for assigning costs to expense (cost of goods sold) and ending inventory. The average-cost method is also called the "weighted average method." Compare: First in first out, Last in first out, and Specific Identification methods.

B

Backflush accounting. The process of recording costs in combined accounts as they are "pulled" through the plant from completed production.

Bad Debts Expense. An operating expense incurred because not all accounts receivable are collected. Another common name is "Uncollectible Accounts Expense."

Balance sheet. The financial statement that presents assets, liabilities, and owner's equity as of a specific date.

Bank reconciliation. An analysis that identifies the items that make up the cash balance difference reported on a bank statement and on the depositor's ledger.

Betterment. Expenditure that increases operating efficiency or capacity for the remaining life of a fixed asset. Compare: Additions and improvements, Ordinary repairs.

Board of Directors. The governing body of a corporation elected by the stockholders. The Board is empowered to appoint officers and others who are responsible for day-to-day management of the corporation. It retains for itself authority over dividend and general policy and other major matters affecting the corporation.

Bond. A type of long-term note issued by corporations and purchased by other corporations or individuals as investments.

Bond indenture. The contract between the corporation issuing the bonds and the bondholders. Bond indenture typically specifies interest rate, payment dates, assets pledged as security, if any, etc.

Book value. The amount at which an asset or liability is reported on the balance sheet. Book value is also called "carrying value."

Book value of a fixed asset. The difference between the balance of the fixed asset account and its related accumulated depreciation.

Boot. Cash paid/received to/from the seller when an old asset is traded for a new asset.

Break-even point. The level of business operations at which a company's revenues and expenses are equal. The company then has neither a net income nor a net loss.

Budget. The future plans of a business stated in financial terms. A budget is used to help a business control its costs and monitor its performance.

Budget performance report. A report that compares actual results to budgeted amounts.

Business. An organization formed to provide goods or services to customers and for earning a profit.

C

Capital expenditures budget. A company's plan for acquiring fixed assets.

Carrying value. The amount at which an asset or liability is reported on the balance sheet. Carrying value is also called "book value."

Capital lease. A lease whose characteristics make it similar to a debt-financed purchase. Leases that meet the specific criteria for capital leases, as outlined by FASB pronouncements, must be accounted for as debt-financed purchases.

Capital stock. The portion of a corporation's equity contributed by the owners (or investors) in exchange for stock.

Cash. Coins, currency, checks, money orders, and money on deposit that is available for unrestricted withdrawal from banks or other financial institutions.

Cash basis of accounting. An accounting basis where revenue is recognized in the period when cash is received and expenses are recognized in the period when cash is paid. Compare: Accrual basis of accounting

Cash budget. An analysis that presents projected or expected cash inflows and outflows for a specific period.

Cash dividend. Distribution of cash by a corporation to its stockholders.

Cash equivalents. Investments in securities that mature in 90 days or less from the time purchased and easily be converted into cash at any time because there is a market for them. Example: U.S. Treasury bills are an example.

Certified Internal Auditor (CIA). A designation earned by an accounting professional who has successfully completed a rigorous examination administered by the Institute of Internal Auditors.

Certified Management Accountant (CMA). A designation earned by an accounting professional who has successfully completed a rigorous examination administered by the Institute of the Certified Management Accountants.

Certified Public Accountant (CPA). A designation earned by an accounting professional who has met state mandated education, experience, and examination requirements.

Chart of accounts. Listing of all accounts used by a business. Chart of Accounts lists asset accounts first, followed by liabilities, equity accounts, revenues, and expenses.

Close. To make an entry or entries to an account resulting in the account having a zero balance.

Closing entries. Entries recorded at the end of the accounting period to close revenue, expense, and dividend accounts. Purpose of the entries is to prepare these temporary accounts for the next period and bring Retained Earnings up to date.

Common-size statements. A financial statement format where all items are expressed in terms relative to a total format, rather than dollar amounts. For example on a balance sheet, all items are expressed as a percentage of total assets. See also: Vertical analysis

Common Stock. The main classification of corporate stock. An owners equity account used to record that portion of the proceeds of a stock issue equal to the par value of the stock. See also: Par value, Paid in capital in excess of par.

Comparability. 1. The ability to compare the financial statements of different companies because all have been prepared in conformity with generally accepted accounting principles (GAAP). 2. The ability to compare financial statements of a single company over a period of years because accounting methods and procedures have been applied consistently each year and in conformity with GAAP.

Comparative statements. Financial statements for two or more successive years presented together.

Comprehensive income. All changes in the stockholders' equity accounts during the accounting period, excluding those resulting from dividends and capital contributions by the stockholders.

Conservatism. A principle that applies in situations requiring the use of estimates. Since estimates involve judgment, conservatism requires that when a company uses estimates, it would overstate liabilities and expenses, and understate assets and revenues.

Consolidated financial statements. Financial statements that combine parent and subsidiary company information as though the two operate as one entity.

Consolidation. The union of two or more corporations, which results in the formation of a new corporation. The original corporations then cease to exist. Compare: Merger

Continuous budgeting. A budgeting method that maintains projections twelve-months into the future.

Contra account. An account which is linked to another account but which has as its normal balance the opposite of the normal balance of the account to which it is linked. The opposite balance, in effect, offsets the balance in the other account. Examples: Accumulated Depreciation, Allowance for Uncollectible Accounts, Bond Discount.

Contract rate. The interest rate specified on a legal document. (e.g., bonds, and notes).

Contribution margin. The amount by which the production and sale of an item contributes to covering fixed costs and (once fixed costs are covered) generating profit. Formula: Contribution margin=Sales -variable costs

Contribution margin ratio. Contribution margin dollars expressed as a percentage of sales. The percentage of each sales dollar that is available to cover fixed costs and add to profit.

Controllable costs. Expenses that can be readily increased or decreased by management. Examples: salaries expense, office supplies

Controller. The chief accountant of an organization.

Controlling account. A general ledger account whose balance equals the sum of all the individual account balances in its related subsidiary ledger.

Conversion costs. Costs required for converting direct material into finished product. Conversion costs consist of direct labor and factory overhead costs.

Convertible bonds. Bonds that are convertible into common stock under certain conditions specified in the bond indenture.

Copyright. An exclusive right granted by the federal government that allows the owner to publish and sell an artistic, literary, or musical composition.

Corporation. A company organized as a separate legal entity under state laws. Shares of stock represent ownership in a corporation.

Cost of production report. A periodical report that summarizes units accounted and disposed of along with costs charged and allocated.

Cost principle. The principle, which states that all assets acquired by a business, should be recorded at their actual cost. The cost principle is sometimes referred to as the "historical cost principle."

Credit. The amount entered on the right side of accounts. An entry that increases revenues, liabilities, and equity accounts but decreases assets and expense accounts.

Crediting. The act of making a credit entry.

Creditor. A party to whom a company owes a debt.

Cumulative preferred stock. A type of preferred stock that pay its stated dividend for current period and past periods in which dividends were not paid. See also: Dividends in arrears. Compare: Noncumulative preferred stock.

Current asset. A balance sheet classification that includes cash and other assets that are expected to be converted into cash within twelve months from balance sheet date or normal business cycle, whichever is longer. Because 12 months is longer than the normal business cycle for most businesses, it is the most commonly used classification standard.

Current cost statements. Prior years financial statements adjusted for inflation to show all items at their current cost. Example: a 1960 statement adjusted to reflect 2000 costs.

Current liability. A balance sheet classification that includes all items due or payable within 12 months from balance sheet date and which are to be paid out of current assets.

Current ratio. A measure of a company's liquidity or ability to pay its bills as they become due. Formula: Current ratio = current assets / current liabilities

D

Debenture bonds. Bonds that are backed (secured) only by the general credit of the issuing corporation. Another term for debenture bonds is "unsecured bonds."

Debit. The amount entered on left side of an account. An entry which increases expenses, assets, dividends and draws but decreases revenues, liabilities and other equity accounts .

Debiting. The act of making a debit entry.

Debit memorandum. A memo issued by a buyer to inform the seller that a debit has been posted to the seller's accounts payable.

Debt investments. Investments in bonds and other debt instruments.

Decentralization. The distribution of a company's management responsibilities among separate operating units within the company.

Declaration date. The date on which the board of directors declares a dividend. Compare: Record date, Payment date

Declining-balance depreciation method. An accelerated depreciation method that applies a fixed percentage to the book value of a fixed asset each period to the amount of depreciation expense to be recorded. Commonly used are 200% or "double declining balance" and 150%. Declining balance refers to the book value of the fixed asset that decreases each period.

Deferred expenses. Expenses that are initially recorded as assets because they will benefit future periods and are then "expensed" over time as the benefit expires or is used up. Deferred expenses are sometimes called "prepaid expenses." Examples: Prepaid Rent, Prepaid Advertising.

Deferred revenues. Revenues that are initially recorded as liabilities because they have not yet been earned. Because the company has received cash but has not yet performed its end of the bargain, the company has an obligation to perform or a liability. The liability is eliminated and revenue recognized (debit liability, credit revenue) when the company has performed its obligation or earned the revenue. Deferred revenues are sometimes called "unearned revenues." Example: Student pays for airline ticket today for a flight next month. Airline has cash but not revenue because it has not flown student where he/she wants to go. Today airline has liability: the obligation to fly student. Next month, after the flight, airline has earned the revenue. It then reduces its liability and increases revenue.

Deficit. A debit balance in the Retained Earnings account. This means that, from the time of incorporation, expenses and cash dividends to shareholders have exceeded revenues.

Depletion. The expiration or using up of natural resources over the periods benefited.

Depreciation. A term that recognizes that fixed assets have limited useful lives and they do not last forever.

Depreciation expense. A portion of the cost of a fixed asset that is recorded as expense each period due to the reduction in the assets useful life.

Differential analysis. An analytical procedure used to determine the best choice among alternative courses of action. Differential analysis is sometimes called "incremental analysis."

Differential cost. The amount of increase or decrease in a cost that is expected to occur as a result of choosing one alternative over another alternative.

Differential revenue. The amount of increase or decrease in a revenue that is expected to occur as a result of choosing one alternative over another alternative.

Direct labor cost. Cost of salaries and benefits for of factory employees who are directly involved in the processes of converting materials into finished product.

Direct materials cost. The amount paid for materials that can be easily traced to the finished product.

Direct method of preparing a statement of cash flows. The method that uses actual cash receipts and disbursements to present cash flows from operating activities. Compare: Indirect Method.

Direct write-off method. A method that recognizes uncollectible accounts expense at the time a specific account receivable is deemed uncollectible. Unlike the Allowance method, the uncollectible accounts expense is not an estimate but is the actual amount equal to the specific account receivable considered uncollectible. Disadvantage of this method (compared to Allowance Method) is that proper matching of expenses against revenues in the period is most often not achieved. Compare: Allowance method

Discontinued operations. A major segment of a business that, by management decision, has ceased operations during the period.

Discount. 1. The interest deducted from the maturity value of a note. 2. The excess of the face value of bonds over their issue or selling price. 3. When stock is issued at an amount less than par, the difference is referred to as the discount.

Discount rate. Used to compute the interest to be deducted from the maturity value of a note.

Dishonored note. A note or debt instrument that the issuer fails to honor (pay) at the maturity date.

Dissolution. A term that describes the effect of a change in partners on a partnership. The admittance of a new or departure of an existing partner effectively terminates the existing partnership and creates a new one in its place.

Dividend yield. A stockholder's rate of return, in the form of dividends, on his investment in a corporation. It is computed by dividing annual dividend per share by the purchase price per share of stock.

Dividends. Distributions, in the form of cash, property, or stock, to stockholders of a corporation. A corporation is not obligated to pay dividends unless and until its Board of Directors "declares" them.

Dividends in arrears. The stated dividend on cumulative preferred stock for prior years in which dividends were not paid. Dividends in arrears and current year dividends must be paid to cumulative preferred stockholders before other preferred and common stockholders can receive dividends.

Division. A decentralized organizational unit that is structured around a common function, product, customer, or geographical territory. Divisions can be cost, profit, or investment centers.

Doomsday ratio. The measure of cash and cash equivalents to current liabilities. As an indicator of liquidity, it is more stringent than current ratio and quick ratio (acid test ratio).

Double-entry accounting system. Requires that every debit entry be offset by a credit in order to maintain the equality of the fundamental accounting equation A = L + OE.

Drawer. The party who issues or writes a check.

E

Earnings per share (EPS). The ratio of net income available to common stockholders to the number of common shares outstanding. Formula: (net income - preferred dividends) / number of common shares outstanding

Economic entity principle. An assumption that economic events can be identified with a particular unit of accountability.

Effective interest method of discount/premium amortization. Method of amortizing a bond discount or premium. This method applies the effective (or real) interest rate to the carrying value of the bonds each period to determine the interest expense (or income) each period.

Effective rate of interest. The market rate of interest at the issue date of the bonds. This rate represents the actual rate of return to the investor and actual interest expense rate to the issuing corporation. A difference between this rate and the rate stated on the face of the bonds causes the bond to sell at a premium or discount.

Employee's earnings record. Details the specifics of each employee's earnings such as gross pay, taxes, and other amounts withheld and net pay. The record can also includes personal information such as rate of pay, martial status, number of exemptions, and social security number.

Entity principle. A principle stating that an economic or business organization is separate from the person or persons who supply its assets. It follows from this principle that assets provided by an individual for use in a sole proprietorship are recorded on the ledger of the proprietorship, not the individual. Other assets of the individual not used in the business are not recorded on the proprietorship ledger.

Equity method. A method of accounting for long-term investment in stocks of other corporations which adjusts the carrying value of the investment to include the investor's share of the investee's net income and dividends.

Equivalent units of production. The number of units that could have been completed in a period given the amount of direct materials used and conversion costs incurred. Equivalent units are used to assign costs to Work in process and Finished goods inventories at the end of the period.

Ethics. Moral principles that guide the conduct of individuals and business organizations.

Expenses. Costs incurred during a period or assets utilized during a period contributing to the production of revenue in the period.

Extraordinary items. Events or transactions that are both unusual and infrequent. To qualify as an extraordinary event, one cannot reasonably expect it to happen again. Example: Tornados are extraordinary events in Vermont. They are not extraordinary events in Texas. Gains or losses resulting from extraordinary events are reported separately on the income statement.

F

Face value. The amount of principal due on the maturity date of a note or bond. Face value is sometimes called "stated value."

Factor. A finance company or bank that buys the accounts receivable of another company for an amount less than the total of the accounts receivable (discount) and then collects full payments directly from the customers. The advantage to the company selling its receivables is that, although it gets less cash than it would if it collected from its customers, it gets some cash and sooner.

Factory overhead cost. All manufacturing costs except direct materials and direct labor. Because these costs are not easily identified with a specific product, these costs need be assigned or allocated to a product by using some reasonable allocation basis. Factory overhead costs are sometimes called "manufacturing overhead costs."

FICA tax. Federal Insurance Contributions Act tax that is used to finance federal programs for retirement and disability benefits (Social Security) and health insurance for the elderly (Medicare). Both employers and employees are required to pay this tax.

Financial accounting. The branch of accounting that reports financial information to external users in the form of financial statements prepared in compliance with generally accepted accounting principles (GAAP). Compare: Managerial accounting

Financial Accounting Standards Board (FASB). A private, authoritative body that facilitates the development and implementation of accounting rules and regulations.

Finished Goods Inventory. Goods which require no further steps in the manufacturing process but have not yet been sold.

Finished goods ledger. The subsidiary ledger, which is a detailed listing of the finished goods on hand.

First-in, first-out (FIFO) method. An inventory costing method that assigns the earliest or oldest costs to expense (cost of goods sold) and the later or newer costs to inventory. Compare: Average cost or weighted average, Last in first out, and Specific identification methods.

Fiscal year. The annual accounting period adopted by a business. It may be the same as a calendar year or may be any other twelve-month period.

Fixed assets. Major tangible assets owned by a business such as land, equipment, and buildings. A common feature of fixed assets is that they are expected to benefit several periods. Other terms for fixed assets include "plant assets," "long-term assets" or "property, plant, and equipment (PP&E)."

Fixed costs. Costs that tend to remain the same (within the relevant range) in amount regardless of variations in the level of manufacturing or selling activity. Examples: insurance, rent, administrative salaries etc.

Flexible budget. A budget that takes into consideration multiple levels or degrees of activity.

FOB (free on board) destination. Shipping term whereby ownership of merchandise remains with the seller until the buyer receives the merchandise. The seller is responsible for paying the transportation costs. Compare: FOB shipping point.

FOB (free on board) shipping point. Shipping term whereby ownership of merchandise passes to the buyer when the merchandise is delivered to the freight carrier. The buyer is responsible for paying the transportation costs. Compare: FOB destination

Franchise agreement. A contractual agreement where the franchiser grants the franchisee the right to sell certain products, to render specific services, or to use certain trademarks or trade names within a designated geographic area.

Fringe benefits. A variety of employee benefits including vacation, insurance, pension, etc.

Full disclosure principle. A maxim requiring that all facts and circumstances relating to a company that might influence a user of financial statements be disclosed. This disclosure most often occurs within the notes to the financial statements.

Future value. The value that an investment made today at a given interest rate will grow to by a specified future date. Future value is always greater than the amount invested today. How much more depends on the interest rate and the length of time the investment is held. Compare: Present value

Future value of an annuity. The sum of the future values of a series of equal payments to be received (or paid) at fixed intervals.

G

General ledger. The main ledger containing all balance sheet and income statement accounts.

Generally accepted accounting principles (GAAP). Guidelines which govern the preparation of financial statements. Because primarily persons outside of a company (banks, investors etc.) use financial statements, it is important that external users know that the statements are prepared according to certain rules. GAAP may be formal pronouncements of the FASB or unwritten rules that have evolved over time and have become commonly accepted.

Going concern assumption. An assumption that a company will continue in operation indefinitely, despite the fact that is may not be generating a profit.

Goodwill. An intangible asset accumulated when one company purchases another company for more than the net book value of the acquired company. The acquiring company may be willing to pay more for the acquired company because it anticipates that the acquired company's future earnings will justify the extra cost.

Gross profit. The excess of net sales over cost of goods sold. Gross profit is a subtotal on a multi-step income statement but does not appear on a single step income statement. Compare: Net income, Operating income

Gross profit inventory method. A method of estimating ending inventory value using the relationship between a company's prior years gross profit to sales.

H

Held-to-maturity securities. Investments in bonds or other debt securities that the management intends to hold until maturity.

High/low method. A technique where the highest and lowest observation of a particular cost are used to estimate the variable cost per unit and the fixed cost component of a mixed cost. The high/low method is based on the slope equation.

Horizontal analysis. A financial analysis that compares an item on a current year financial statement to the same item from a prior year. The difference is typically presented as a dollar amount and a percentage change. Compare: Vertical analysis.

I

Impairment. A permanent decline in the market value of an asset.

Income from operations (operating income). Gross profit minus operating expenses. Interest expense, income tax expense, and the effect of extraordinary items are not reflected in operating income. Compare: Net income

Income statement. The financial statement that summarizes revenues and expenses for a specific period and computes the net income or loss. Income Statement is sometimes called "Profit & Loss Statement" or "P&L."

Income Summary. An account used to facilitate the closing process. Posting revenues on the credit side and expenses on the debit side creates a balance in this account equal to net income (or loss). The Income Summary account is then closed by transferring this balance to Retained Earnings (corporations) or Capital (proprietorships and partnerships).

Incremental analysis. See differential analysis.

Indirect method of preparing a statement of cash flows. A method that reconciles net income to net cash flow from operating activities by analyzing the aggregate change in certain balance sheet accounts rather than looking at actual cash receipts and disbursements. Compare: Direct method of preparing a statement of cash flows.

Insufficient funds. Describes a situation where a check is presented to the drawer's bank for payment but the balance in the drawer's checking account at that time is less than the amount of the check.

Intangible assets. Assets with no physical substance. Accountants define intangible assets as consisting of the following: patents, organizational costs, goodwill, franchises, trademarks, copyrights. See also: Amortization

Internal auditor. An employee of a company whose function is to review accounting and operating procedures in order to ensure compliance with company policy.

Internal controls. The range of policies and procedures adopted by a company for safeguarding its assets and enabling the accuracy and reliability of its financial reports.

Inventory shrinkage. Loss or decrease in inventory due to theft, spoilage or errors in recording or counting.

Investment center. A decentralized unit where a manager is responsible for decisions affecting costs, revenues, and fixed asset acquisitions for the unit.

Investment turnover. A component of rate of return on investment. Formula: sales / invested assets.

Investments. The balance sheet asset classification that includes a company's long-term investments in the stocks or bonds of other corporations.

Issued stock. Stocks a corporation has sold to investors (stockholders) or distributed to them in the form of a dividend. Number of issued shares will always be less than or equal to number authorized shares, and greater than or equal to number outstanding shares. Number of issued shares will never be less than outstanding shares. Compare: Authorized stock, Outstanding stock, Treasury stock

J

Job cost sheet. An account in the work in process subsidiary ledger that tracks the costs charged to production.

Journal. The book of original entry in which transactions are recorded.

Journal entry. The form representing a transaction in a journal.

Journalizing. The process of recording a journal entry.

Just-in-time (JIT) manufacturing. A business approach that focuses on eliminating time, cost, and poor quality within manufacturing processes.

L

Last-in, first-out (LIFO) method. An inventory costing method which assigns the most recent or newest costs to expense (cost of goods sold) and the earlier or older costs to inventory. Compare: Average cost or weighted average, First in first out and Specific identification methods

Lead time. The time between the start of the manufacturing of a product and its completion.

Ledger. A group of related accounts. See also: General ledger, Subsidiary ledger, Materials ledger

Legal capital. The minimum amount of capital that a corporation must maintain for the protection of its creditors. This minimum capitalization level is equal to the par value (if any) of common stock times number of shares. Not all states require corporations to maintain a minimum level or legal capital.

Lessee. A party who enters into a contract with a property owner for the use of the owner's property for a period of time and for a fee. A tenant or renter is a lessee.

Lessor. A property owner who allows another party to use his property for a period in exchange for a periodic payment by the user. A property owner or a landlord is a lessor.

Leverage. The tendency of the rate earned on stockholders' equity to vary from the rate earned on total assets because the amount earned on assets acquired through the use of funds provided by creditors varies from the interest paid to these creditors.

Liabilities. Obligations of a company. In addition to amounts owed to creditors, employees, customers etc, they can include obligations to perform that which a company has been paid in advance for.

Liquidity. The capability of being readily converted into cash.

Long form balance sheet. A balance sheet prepared in a downward sequence with assets at the top of the page and liabilities and equity at the bottom. Long form is also called "report form." Compare: Account form balance sheet

Long-term liabilities. Liabilities that are not due for more than twelve months from balance sheet date. Often, a single underlying obligation will have both a current and long-term component. Example: A ten-year mortgage or installment note requiring monthly payments. Twelve months worth of payments is a current liability; the remainder is long-term liability.

Loss from operations. Occurs when operating expenses exceed revenue. It is also called "operating loss." Compare: Net loss

Lower-of-cost-or-market (LCM) method. A method of valuing inventory that reports the inventory at the lower of its cost or current market value. In this case, current market value is replacement cost. Although using current market value (when it is lower than original cost) technically violates the cost principle, the conservatism guideline justifies its use.

M

Maker. The individual or company that issues a note, promising to pay an amount in the future. Debt issuer.

Managerial accounting. The branch of accounting that provides information for internal use by management in conducting daily activities, planning future operations, and developing overall business strategies. Because the information is not intended for external users (as are financial statements), managerial accounting is not subject to GAAP. Compare: Financial accounting

Manufacturing cells. A grouping of production processes where employees are cross-trained to perform more than one function.

Manufacturing margin. Sales less variable cost of goods sold (direct materials, direct labor and variable factory overhead).

Margin of safety. The difference between current sales and sales at the break-even point.

Market price approach. An approach to transfer pricing that uses as the transfer price the amount at which the product or service transferred could be sold to outside buyers.

Market segment. A part of a business that can be assigned to a manager for profit responsibility.

Markup. Amount added to the cost of a product to determine its selling price.

Master budget. A comprehensive plan encompassing all the individual budgets such as cost of goods sold, sales, operating expense, etc.

Matching principle. The rule stating that expenses should be recorded in the period in which they contributed to the production of revenue. Stated another way, expenses should be "matched" against the revenue they helped produce. See also: Accrual basis of accounting and Revenue recognition principle.

Materiality. A concept which recognizes that some events or transactions are so insignificant relative to the size of a company's total operations that they need not be reflected on the financial statements in the technically correct manner. Generally, the cost of recording (analysis, entries, etc) the "immaterial" item correctly outweighs the benefit a user of the financial statement would gain.

Materials Inventory. The cost of materials on hand and ready to be used in the manufacturing process.

Materials ledger. A subsidiary ledger that contains individual accounts for each type of material used in the manufacturing process.

Materials requisitions. A form or electronic transmission used by a department to authorize materials issuances from the materials storeroom.

Maturity value. The amount payable at the maturity or due date of a note. Other terms for maturity value include "face value," "stated value" and "par value."

Merchandise Inventory. Goods which a company has on hand and available for sale to customers.

Merger. The acquisition of the assets, liabilities, and equity of one corporation by another corporation. The acquiring corporation continues to exist. The corporation whose rights and liabilities were acquired ceases to exist. Compare: Consolidation

Minority interest. The portion of a subsidiary corporation's stock that is not owned by the parent corporation.

Mixed costs. A cost with both variable and fixed characteristics. Other names for mixed costs include "semi-variable costs" and "semi-fixed costs."

Mortgage note payable. A long-term note that is secured by a fixed asset, most often a building.

Multiple production department rate method. A factory overhead allocation method that assigns overhead to products using separate rates for each production department in the manufacturing process. Compare: Single plant-wide rate method.

Multi-step income statement. A detailed income statement with several sections, subsections and subtotals. Compare: Single step income statement.

N

Natural business year. A year that ends at the point in time when the activities of a company have reached the lowest point in its annual operating cycle.

Negotiated price approach. An approach to transfer pricing that allows managers of decentralized units to negotiate the transfer price among themselves.

Net income. The amount by which total revenues exceed total expenses. Compare: Gross profit, Income from operations.

Net loss. The amount by which total expenses exceed total revenues. Compare: Loss from operations

Net realizable value. The valuation of an asset at an amount equal to the amount for which the asset could be sold less costs of disposal. With respect to accounts receivable, net realizable value is accounts receivable minus allowance for uncollectible accounts.

Nominal accounts. These include all revenue and expense accounts, the Income summary and Dividend accounts. Common feature is they are all closed at the end of the period. Another term for nominal accounts is "temporary accounts." Compare: Real accounts, Permanent accounts.

Non-controllable costs. Costs which a manager has little or no influence over. Example: insurance, property taxes

Non-cumulative preferred stock. A type of preferred stock that must pay its stated dividend only for the current period before dividends may be paid on common stock. Once a dividend is passed up (not paid) in a period, the stockholder's right to that dividend also passes. Compare: Cumulative preferred stock

Non-financial measure. A performance measure stated in other than dollar terms. Managerial accounting often makes use of such measure while financial accounting generally does not.

Nonparticipating preferred stock. A type of preferred stock entitled to its stated dividend before common stockholders are paid dividends but does not share in the dividends paid to common stockholders. Compare: Participating preferred stock

Non-value added activities. Activities which add cost to a product or service but which customers do not perceive as adding any feature that results in the product or service being more desirable to the customer. Compare: Value-added activities.

Note receivable. A written promise to pay in the form of a signed promissory note, representing an amount to be received by a payee. A note receivable is recorded on the ledger of the payee or party to receive payment.

Note payable. A written promise to pay in the form of a signed promissory note, representing an amount to be paid by the maker. A note payable is recorded on the ledger of the maker or party who has promised to pay another.

Notes to the financial statements. Notes that clarify and expand upon information contained in financial statements. Notes are an integral part of the financial statements.

NSF check. A check that is not paid by the bank because the party who wrote the check, the drawer, has a checking account balance (at the time the check is presented to the bank for payment) that is less than the amount of the check written.

Number of day sales in inventory. A measure of the length of time it takes a company to acquire, sell and replace inventory.

Number of times interest charges earned. Measures the risk to debtholders that a company may be unable to make its interest payments if earnings were to decrease. A high measure (# of times) would indicate relatively low debtholder risk. A low measure means greater risk to the debtholder.

O

Objectivity principle. Requires that accounting records and reports be supported by unbiased evidence such as invoices, checks, etc.

Off-balance sheet financing. The intentional effort by management to structure its financing agreements in a way that avoids showing liabilities on its balance sheet.

Operating cycle. The average time it takes a company to use its cash to produce revenue and convert that revenue back into cash.

Operating expenses. Expenses incurred during the period that are directly related to the primary business activity of the company. Compare: Other expense

Operating income. See Income from Operations

Operating loss. See Loss from Operations

Operating lease. An agreement which allows one party (the lessee) to use an asset of another party (the lessor) for a fee. The receipt of the fee is recorded as rental income on the lessor's ledger and the payment of the fee as rent expense on the lessee's ledger.

Operating leverage. A measure of the relative mix of variable and fixed costs indicative of the risk to a company. Operating leverage pertains to the fact that a small change in sales will result in a large change in income from operations. If a high percentage of a company's total costs are fixed, the company is said to have a high degree of operating leverage.

Opportunity costs. The amount of revenue that a company foregoes or does not earn as a result of choosing one course of action over another.

Ordinary repairs. Routine costs incurred to maintain the operating efficiency of a fixed asset over its expected productive life. Compare: Betterments, Additions and improvements

Other expense. An expense that cannot be traced directly to a company's primary business activity. Examples: Interest expense, Income tax expense, and Loss on disposal of a fixed asset. Compare: Operating expense

Other income (revenue). Revenue from sources other than the primary activity of a business. Common examples include Rental income (when company is not in the business of renting property); Gain on disposal of fixed asset, Interest income (when company is not in the business of lending money) and Dividend Income.

Outstanding checks. Checks that have been issued and recorded by a company but have not yet been paid by the bank.

Outstanding stock. Stock that has been issued to stockholders and is still owned by stockholders. Stock that has been issued but reacquired by the corporation (treasury stock) is not part of the number of outstanding shares. Compare: Authorized stock, Issued stock, Treasury stock

Overapplied factory (or manufacturing) overhead. Factory overhead costs allocated to a product that exceed actual factory overhead costs incurred during a period.

Owner's equity. The owner's right to the assets of a business after the liabilities are paid. The owners' claim against the assets is a "residual" claim, that is, they get what is left after creditors claims are satisfied. Formula: Owners' Equity =Assets - Liabilities.

P

Paid in capital in excess of par. An owner's equity account used to record difference between the proceeds from a common stock issue (selling price of the stock) and the total par value of that stock. See also: Common stock, Par value

Par value. 1. A monetary amount printed on the face of a stock certificate, this value has no relationship to the selling price of the stock but does represent per share legal capital. The Common Stock account used to record this amount. 2. The face value or principal amount printed on the face of a bond. In this context, par value has nothing to do with the concept of legal capital. See also: Legal capital, Paid in capital in excess of par

Parent company. A corporation that owns a majority of the voting stock of another corporation (a subsidiary company).

Participating preferred stock. A type of preferred stock that, in addition to its stated dividend, is entitled to share in the dividends paid to common stockholders. Compare: Non-participating preferred stock.

Partnership. An unincorporated business entity owned by two or more individuals. Unlike shareholders of a corporation, individual partners are responsible for the debts of the partnership.

Patent. An exclusive right issued by the U.S. Patent Office (for a period of 20 years) to produce and sell goods with one or more distinctive features.

Payment date. The day that dividend checks are mailed to shareholders. Compare: Declaration date, Record date.

Payroll register. A multicolumn form used to assemble and summarize payroll data at the end of each payroll period.

Period costs. Costs, not related to the manufacturing process incurred, incurred during the current period. Examples: Advertising, Administrative salaries.

Periodic inventory system. An inventory system which requires that a physical count of inventory items on hand be taken at or near the end of the period before the amounts to be reported as Inventory on the balance sheet and Cost of Goods Sold on the income statement can be determined. Inventory valuation and cost of sales information is not continuously available throughout the period. Compare: Perpetual inventory system.

Periodicity principle. An accounting principle that requires accounting reports be prepared at periodic intervals. Net income is meaningless unless it is reported relative to a period of time.

Permanent accounts. Accounts that are not closed at the end of the accounting period. All balance sheet accounts are permanent accounts. Permanent accounts are sometimes called "real accounts." Compare: Temporary accounts or Nominal accounts.

Perpetual inventory system. An inventory system where Inventory and Cost of Goods Sold amounts are recorded at the time of each sale, thereby providing continuous balances for these accounts throughout the period. A physical count of inventory on hand is not required at the end of the period in order to determine these amounts though one may be taken for other reasons. Compare: Periodic Inventory System

Petty cash fund. A cash fund used to pay relatively small expenses more conveniently than through the processing of a check.

Physical inventory. An actual counting of merchandise on hand and detailed listing of each item and quantity.

Post-closing trial balance. A trial balance that is prepared after all the temporary accounts have been closed. Compare: Trial balance

Posting. The process of transferring debit and credit information from a journal to accounts in a ledger.

Predetermined factory overhead rate. The rate used to apply factory overhead costs to goods manufactured. Formula: estimated factory overhead costs / estimated activity usage.

Preferred stock. A class of stock that gives its holders/owners dividend rights superior to those of common stockholders. Preferred stockholders also have preference over common stockholders (but not creditors or debtholders) with respect to assets should the corporation be dissolved.

Premium. The amount by which the proceeds from the sale of bonds (selling price or issue price of bonds) exceed the face value of the bonds. Bonds sell at a premium when the market rate of interest at the time of sale is less than the rate stated on the face of the bonds.

Prepaid expenses. Purchased goods, rights, or services that have not been used up at the end of a period. Examples: supplies, prepaid insurance, prepaid advertising etc.

Present value (Present Day Value). The amount a future payment is worth today, given a certain interest rate. The present value is always less than the amount to be received or paid in the future. How much less depends on the interest rate and the length of time between today and receipt or payment of the cash. Compare: Future value

Present value of an annuity. The sum of the present values of a series of equal payments to be received (or paid) at fixed intervals. See also: Present value

Price-earnings (P/E) ratio. The ratio of a share of common stock's market price at a specific date to its earnings. It is computed by dividing the market price per share at a specific date by the company's earnings per share on common stock. This ratio is considered a measure of investors' confidence in the stock. A relatively high ratio indicates strong investor confidence. A low ratio indicates less confidence on the part of investors.

Privately held corporation. A corporation that has relatively few stockholders and whose stock is not publicly traded on the stock exchanges.

Proceeds. 1. The amount of cash received from discounting a note. 2. The amount of cash received from the sale of a bond issue or a stock issue. 3. Most generally, the amount of cash received from the sale of anything.

Process cost system. An accounting system that accumulates costs for each of the various production departments within a manufacturing facility.

Product costing. The process of determining how much it costs to manufacture a product.

Production bottleneck. A condition that occurs when demand for a product exceeds production capacity.

Production budget. An analysis involving the estimation of costs of production.

Profitability. The ability of a company to earn net income.

Profit center. A decentralized unit in which a manager has responsibility for and authority over decisions that affect costs and revenues within the unit.

Profit margin. A percentage measure of the profit each dollar of sales has produced. Formula: Net income / Sales

Profit-volume chart. A chart used to assist management in understanding the relationship between profit and volume.

Promissory note. A written promise to pay a sum in money. The maker of the note promises to pay; the holder of the note receives payment.

Proprietorship. A business owned by one person, it is also referred to as a sole-proprietorship. The sole owner is personally responsible for the debts of the proprietorship.

Publicly held corporation. A corporation that typically has many stockholders and whose stock is regularly bought and sold by investors on one of the stock exchanges.

Pull manufacturing. A just-in-time method where customer orders trigger the release of finished goods, which triggers production, which triggers release of materials from suppliers. Compare: Push manufacturing

Purchase discounts. An amount that a buyer may deduct from invoice price in exchange for his early payment of the invoice. Purchase discounts are the same as Sales discounts but considered from the standpoint of the buyer. See also: Sales discounts

Purchase returns and allowances. Reductions in purchases, resulting from merchandise being returned to the seller or from the seller's reduction in the original purchase price.

Push manufacturing. Materials are released into production and work in process is released into finished goods in anticipation of future sales. This is the traditional type of manufacturing. Compare: Pull manufacturing

Q

Quick Assets. The sum of cash, receivables, and marketable securities. The firm can "quickly" convert these assets into cash. Stated another way, quick assets are current assets minus the prepaid or deferred expenses.

Quick Ratio. Measures the "instant" debt-paying ability of a company. This ratio is also called the "acid-test ratio." This is a more stringent measure of liquidity than is the current ratio.

R

Rate of return on assets (ROA). A measure of how efficiently management has used the assets it has acquired. Formula: (income from operations)/(total assets).

Raw and In Process inventory. The cost of direct materials purchased, direct labor, and factory overhead charged to production. This account is used in a JIT system.

Real accounts. Accounts that are not closed at the end of the accounting period. All balance sheet accounts are real accounts. Real accounts are sometimes called "permanent accounts." Compare: Temporary accounts and Nominal accounts.

Receivables. Rights to collect payment from other persons or organizations some time in the future. Examples: Accounts receivable, Notes receivable, Interest receivable.

Record date. The date which determines who is to receive a dividend payment. Once a dividend is "declared," it is to be paid to parties who own the stock as of this specified date subsequent to the date the dividend was declared. Compare: Declaration date and Payment date.

Relevance. That characteristic of information that makes it useful to a decision maker.

Reliability. That characteristic of information that gives users of it assurance that it is free of error and bias.

Relevant Range. A band of activity in which a specific relationship between the level of activity and a cost are valid.

Report form of a balance sheet. A balance sheet prepared in a downward sequence that presents assets on the top and liabilities and owners equity on the bottom. It is also called "long form" balance sheet. Compare: Account form balance sheet.

Research and development costs. Costs incurred related to activities that may lead to patents, copyrights, new processes, or new products in the future.

Residual income. The excess of actual operating income over a minimum amount previously specified by management.

Responsibility accounting. Measuring and reporting operating results by areas of responsibility.

Responsibility center. A unit within a company over which a manager has responsibility for operating performance. The three types of responsibility centers include profit, cost, and investment. Retail inventory method. A method of estimating ending inventory value which uses the relationship between the cost and retail price of the merchandise. Compare: Gross profit inventory method.

Retained Earnings. The net income of a corporation that has not been distributed to shareholders in the form of dividends but kept (retained) by the corporation, from the time the corporation started.

Retained earnings statement. The financial statement that summarizes the changes in the Retained Earnings account over a specified period. This statement effectively reconciles the beginning Retained Earnings balance to the ending Retained Earnings balance.

Revenue. Amounts earned by a company in exchange for providing goods or services to customers. Common revenue account titles include Fees Earned, Professional Fees, Commissions Earned, and Sales.

Revenue expenditures. Amounts paid that benefit only the current period.

Revenue recognition principle. Rule that states revenue should be recognized and recorded in the period in which it is earned. When a company has performed its end of the bargain with a customer, the company is considered to earn revenue. . See also: Accrual basis of accounting and Matching principle.

Reversing entry. An entry made at the beginning of a period as the exact opposite of an adjusting entry made at the end of the previous period. Reversing the previous period's adjusting entries allows accountants to process related transactions in the current period without taking into consideration the effect of the previous period. Not all companies use reversing entries.

S

Sales budget. A major component of the income statement budget that includes estimated sales quantities and expected unit-selling prices. The sales budget is typically the first budget prepared during the budgeting process.

Sales discounts. A reduction in price that a seller makes available to a buyer if the buyer pays an invoice early.Sales discounts are the same as purchase discounts but considered from the standpoint of the seller. Compare: Purchase Discounts.

Sales mix. The relative distribution of sales among the various products offered for sale by a company.

Secured bonds. Bonds that have specific assets of the issuing corporation pledged as collateral.

Securities and Exchange Commission (SEC). A body of the U.S. government that oversees financial markets and accounting standards-setting bodies.

Service department charges. The costs of services provided by an internal service department and transferred to a responsibility center.

Setup. The process of modifying the characteristics of a machine to produce a different product.

Single plant-wide rate method. Allocates all factory overheads to products by using a single factory overhead rate. Compare: Multiple rate method.

Single-step income statement. A condensed income statement where total expenses are deducted from total revenues in one step. Details as to how certain amounts were derived, such as the computation of cost of goods sold are omitted. Compare: Multiple-step income statement.

Sinking fund. A non-current asset account that represents amounts set-aside (invested), for the purpose of plant asset replacement or payment of bond principle at some time in the future.

Slide. An error in recording a number when all digits in the number are moved one or more spaces to the right for left. Examples: writing $1,623 instead of $16,233 or writing $2,000 instead of $200. Compare: Transposition

Solvency. The ability of a company to pay its debts as they become due.

Specific identification method. An inventory costing method that assigns actual costs of product sold to Cost of Good Sold and actual cost of inventory on hand to ending Inventory. Specific identification method does not require any assumptions about the flow of costs. As a practical matter, only businesses that sell unique products (those that are easily identified with specificity) use this method. Typical businesses that use it are, automobile dealership, homebuilders, art dealers etc. Compare: FIFO, LIFO, Average cost (weighted average)

Standard cost. An estimate of what it should cost to make a product.

Standard cost systems. Accounting systems that use standards for each element of manufacturing costs attributable to the finished product.

Stated value. 1. An amount approved by the board of directors of a corporation as a substitute for par value when the corporation has issued no-par stock. In effect, the stated value becomes the unwritten par value when recording a stock issue transaction (though it does not represent legal capital). 2. The principal amount printed on the face of a note or bond, also called "face value" of the note or bond.

Statement of cash flows. A financial statement that explains the change in cash from the beginning to the end of a period. This statement summarizes the sources and uses of cash in three distinct areas of business activity: operating, investing, and financing activities.

Statement of stockholders' equity. A summary of the changes in the stockholders' equity accounts of a corporation for a period. In addition to presenting that which is included in a Retained Earnings Statement, this statement includes changes, if any, in common, preferred and treasury stock accounts.

Static budget. A budget that stays the same and does not adjust to changes in activity levels.

Stock. A certificate that represents a share of ownership of a corporation.

Stock dividend. A dividend distribution by a corporation to its stockholders in the form of additional shares of stock in the corporation instead of cash. Compare: Cash Dividend

Stock split. An action by a corporation which results in a share of stock being split into a larger number of shares (split-up), for the purpose of constraining the market price of the stock. From an accounting standpoint, a stock split (up) has no effect except that the number of issued shares increases and the par or stated value decreases proportionately. Example: XYZ Corp has 3,000 shares of $1 par value common stock issued. Its common stock account balance is $3,000 Following a 2 for 1 stock split, holders of XYZ stock now have 6,000 shares of .50 par value stock. XYZ Corp's common stock account balance is still $3,0000 but it now has 6,000 shares issued.

Stockholders. Persons or organizations that have purchased or otherwise acquired stock of a corporation. These parties are the owners of the corporation. They are also called "shareholders".

Straight-line depreciation. A deprecation method that spreads the cost of a fixed asset evenly over its useful life. As a result, depreciation expense does not vary from period to period. Compare: Accelerated depreciation, Units-of-production depreciation

Subsidiary company. A company that is controlled by another company (a parent company) by virtue of that other company owning a majority of its voting stock.

Subsidiary ledger. The ledger containing several individual accounts with a common characteristic that agrees in total to a controlling account. Examples: Accounts receivable subsidiary ledger, Accounts payable subsidiary ledger Compare: general ledger.

Sum-of-the-years'-digits depreciation. An accelerated depreciation method, the mechanics of which involves adding a sequence of numbers starting with one and ending with the number of years of the fixed asset's useful life.

Sunk cost. A cost that is not affected by subsequent decisions.

Supplier partnering. A just-in-time method that views suppliers as a valuable contributor to the overall success of the business.

T

T account. A form of account that resembles the letter T, with debits on the left and credits on the right.

Taxable income. The income base against which the tax rate is multiplied to compute the amount of income tax expense.

Temporary accounts. These include all revenue and expense accounts, the Income Summary and Dividend accounts. Common feature is that all are closed out at the end of the accounting period. Another name for temporary accounts is "nominal accounts." Compare: Real accounts, Permanent accounts.

Temporary differences. Differences between income before income tax and taxable income caused by certain items being recognized in one period for income statement purposes and in another period for tax reporting purposes. These timing differences reverse, or turn around, thereby netting to zero, in later years. Another name for temporary differences is "timing differences"

Temporary investments. Investments in liquid securities. A company will sell its temporary investments when it needs cash.

Term bond. Bonds that mature at one specific date. The principal amount of the entire bond issue is payable at one time, on the date stated on the face of the bond.

Theoretical standards. Standards that represent levels of performance that can be achieved only under perfect operating conditions.

Theory of constraints (TOC). A manufacturing strategy that attempts to remove the influence of bottlenecks (constraints) on a process.

Time period assumption. An assumption that the economic life of a business can be divided into artificial periods.

Time tickets. A form on which the time spent by each employee and the labor cost incurred for each individual job are recorded

Timing Differences. See Temporary differences

Trade discounts. Price discounts offered by sellers to certain classes of buyers. Trade discounts are not recorded in the accounting records.

Trade receivables. Receivables that arise from sales transactions with customers in the ordinary course of business.

Trade-in allowance. An amount a seller gives to a buyer for a fixed asset traded in for a similar asset. The value of the traded-in asset is applied to the selling price of the new similar asset, in effect, reducing the amount that the buyer must pay in cash or future payments.

Trademark. A name, term, or symbol used to identify a business and its products. The owner of a trademark has the right to its exclusive use for a fixed period of time.

Trading security. A debt or equity security that management intends to actively buy and sell for the purpose of making a profit on the investment.

Transaction. An economic event or condition that must be recorded in an accounting record or journal.

Transfer price. The price charged one decentralized unit by another for goods or services provided.

Transposition. A type of error when digits in a number are recorded out of sequence. For example, writing $638 as $368. A transposition will always cause an "out-of-balance" difference that is evenly divisible by 9 Example: recording 368 instead of 638 results in difference of 270 which is evenly divisible by 9) Compare: Slide

Treasurer. A corporate employee responsible for the management of a company's cash.

Treasury stock. Stock that has been issued to shareholders but reacquired by and currently owned by the corporation. Treasury stock is still considered issued stock but it is not part of outstanding stock. See also: Issued stock, Outstanding stock

Trial balance. A schedule listing all of the accounts and their balances as of a specific date prior to the processing of closing entries. Compare: Post-closing trial balance

Two-column journal. An all-purpose journal often referred to as the general journal.

U

Uncollectible Accounts Expense. The operating expense incurred because not all accounts receivable are collected. Another commonly used name is "Bad Debts Expense."

Underapplied factory overhead. The amount by which actual factory overhead costs incurred exceed the factory overhead allocated to production during a period. Other commonly used names are "underallocated" or "underabsorbed."

Unearned revenue. The liability created when a company receives cash from a customer in advance of providing the good or service to the customer. Another name is Deferred Revenue. See definition and example under Deferred Revenue.

Unit contribution margin. The amount by which the sale of a single unit of merchandise adds to the coverage of fixed costs and generation of profit. Formula: (Unit sales price) - (variable cost per unit) = unit contribution margin.

Unit of measure principle. An accounting principle requiring economic data to be recorded in dollars.

Units-of-production depreciation method. A method of computing depreciation expense based on the proportion of a fixed asset's actual usage during a period to its total lifetime expected productive capacity. Compare: Accelerated depreciation, Straight-line depreciation

Unrealized holding gain or loss. The difference between the market value of a security held as an investment at a certain date and its original cost.

Unsecured bonds. Bonds backed only by the general credit of the issuing corporation. The company posts no specific assets are pledged as collateral. Another commonly used name is ""debenture bonds."

V

Value-added activities. The cost of activities which produce some feature of a product or service that is perceived by customers as making the product or service more desirable. Compare: Non-value added activities

Variable costing. The approach to product costing that assumes all manufacturing costs are variable (direct materials, direct labor, and variable factory overhead) and there is no fixed factory overhead.

Variable costs. Costs that increase and decrease in proportion to increases and decreases in a level of activity (sales or productions). Examples: Direct labor costs increase and decrease as the number of units produced increases or decreases. Sales commission expense increases and decreases as total sales dollars increases or decreases. Compare fixed costs, mixed costs

Vertical analysis. A form of financial statement analysis that compares each item in a current statement with the total amount. For example, on a balance sheet all amounts are expressed as a percentage of total assets. If only percentages are presented, the analysis is referred to as "common-size statements."

Volume variance. The difference between the budgeted fixed overhead at 100% of normal capacity and the standard fixed overhead for the actual production achieved during the period.

Voucher. A document that serves as evidence of authority to pay cash. Voucher system. An accounting system that focuses on control over cash payments. The system consists of records, methods, and procedures used in verifying and recording liabilities and recording cash receipts and cash payments .

W - Z

Weighted-average inventory method. An inventory costing method that computes an average cost per unit of inventory and uses it as the basis for assigning costs to expense (Cost of goods sold) and ending inventory. Another name for the weighted-average method is the "average cost method." Compare: FIFO, LIFO and Specific indentification.

Working Capital. The amount by which total current assets exceed total current liabilities at specific point in time. This measure is close relative of the current ratio but is expressed as a dollar amount instead of a ratio.

Work in Process Inventory. An inventory method that records items which have entered the manufacturing process but are not yet complete. The costs of this inventory include direct materials, direct labor, and factory overhead related to the steps in the manufacturing process that have been completed.

Work Sheet. A tool used by accountants to adjust account balances and prepare financial statements.

Yield. A measure of materials usage efficiency. The yield measures the ratio of materials output quantity to the materials input quantity.

Zero-base Budgeting. An approach to budgeting that requires management to justify every cost to be budgeted each period without regard to prior periods budgeted or actual activity levels.