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ADJ. Of the utmost importance.
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es·sen·tial ADJ. Of the utmost importance.
es·sen·tial ADJ. Of the utmost importance.
AN IMPRINT OF SOURCEBOOKS, INC.®
Copyright © 2008 by Kate Mooney
Cover and internal design © 2008 by Sourcebooks, Inc.®
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First Edition: 2008
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This product is not a substitute for legal advice.
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Library of Congress Cataloging-in-Publication Data Mooney, Kate.
Essential accounting dictionary / by Kate Mooney. -- 1st ed.
ISBN 978-1-57248-779-6 (pbk. : alk. paper) 1. Accounting--Dictionaries. I. Title. HF5621.M658 2008
Printed and bound in Canada.
TR 10 9 8 7 6 5 4 3 2 1
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . 601 Websites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 613
Accounting has always been seen as a necessary task that enables business to occur. Important activities such as investing, regulating, and the gathering, reporting, and analysis of financial data all depend upon the principles and procedures of accounting.
In the past decade, names such as Enron and WorldCom have become everyday news items. As huge, well-respected compa-nies have been failing and restating their earnings, the impor-tance of understanding accounting terms and procedures has taken on a whole new meaning.
I have designed this book for the average person who needs a working knowledge of accounting terms in order to understand financial statements, investment reports, financial news articles, or college courses. It is also a useful reference for business-people who need to communicate with accountants.
Each term is defined in clear, concise, and understandable language. The terms are also placed in context with examples, common synonyms, and cross-references to help the reader truly understand the term rather than just its factual aspects.
I have enjoyed this challenge and hope that you gain from using this dictionary.
—Kate Mooney, PhD, CPA
10-K. N. A form that companies file within ninety days of the year-end to comply with Securities and Exchange Commission (SEC) rules. The 10-K includes the annual report plus some other detailed financial and legal information. The purpose of the 10-K is to provide a comprehensive synopsis of the company’s performance over the past year to people outside the company. The SEC main-tains a database that allows anyone to view the filings.
10-Q. N. A form filed by public companies that presents unauditedquarterly information similar to the annual report 10-K, only with less detail. The Securities and Exchange Commission requires this filing. Synonymous with quarterly report.
1040. N. The Internal Revenue Service form number for an indi-vidual tax return. The number may have letters following it to indi-cate an abbreviated individual tax return, such as 1040EZ, in which “EZ” stands for “easy.”
1099-DIV. N. A tax form that indicates the amount of dividends orother distributions a company paid to an individual or other tax-paying entity. The company must provide the recipient with this form and report the amount to the government if it is more than $10. That limit is increased to $600 if the distribution is from a liqui-dation of the company.
1099-INT. N. A tax form that indicates the amount of interest paidto an individual or other tax-paying entity. The payer must provide the recipient with this form and report the amount to the govern-ment if it is more than $600.
1099-R. N. A tax form that indicates the amount of pension,annuity, or lump-sum payments an individual receives from a pension plan or profit-sharing plan. The plan must issue the form to the recipient and report the amount to the government if the amount received is over $10.
12b-1 fees. N. Mutual fund costs that can be passed along to share-holders and can amount to up to 0.75% of the average assets held by the fund. Costs included in these fees are advertising, sales brochures, annual reports, prospectuses, and commissions to the sales force. Different classes of shares in a mutual fund are charged different amounts of 12b-1 fees, depending on the type of costs the class pays to get in or out of the fund. These fees are paid from the fund assets.
401(k). N. An employer-sponsored way for employees to save tax-free until the savings are withdrawn. The employer deducts the dollars from the employee’s gross pay, may or may not add some additional dollars, and then invests it in stocks, bonds, or mutual funds. The employer then calculates and withholds income taxes on the remaining salary. The employee does not pay any taxes on the deducted dollars, the employer’s contribution, or the earnings on the investment until those dollars are taken out of the plan, usually at retirement. While the regulations limit the amount of dollars involved (to $15,500 in 2007), this type of plan is an excellent way to save because the tax rate at retirement is usually lower than it is during the employee’s career. See also 403(b). Synonymous with salary reduction plan.
403(b). N. An employer-sponsored way for employees to save tax-free until the savings are withdrawn. The employer deducts the dollars from the employee’s gross pay, adds some additional dollars, and then invests it in stocks, bonds, or funds. The employer then calculates and withholds income taxes on the remaining salary. The employee does not pay any taxes on the deducted dollars, the employer’s contribution, or the earnings on the invest-ment until those dollars are taken out of the plan, usually at retire-ment. While the regulations limit the amount of dollars involved, this type of plan is an excellent way to save because the tax rate at retirement is usually lower than during the employee’s career. A
403(b) plan is similar to a 401(k) plan, except 403(b) plans are used when the employer is a not-for-profit entity.
529 plan. N. A state-sponsored mechanism for saving that allowsfor generous contribution limits, no taxes on growth until with-drawal, and tax-free withdrawals for education expenses. Unlike
530 ESAs or Coverdell Education Savings Accounts, this plan applies to college education expenses. Synonymous with qualified tuition plans.
530 ESA. N. SeeCoverdell Education Savings Account.
8-K. N. A form filed by public companies when some major eventhappens that affects the corporation’s financial position. The Securities and Exchange Commission requires this filing within five business days of the happening. Examples of events that trigger this requirement include the changing of auditors, a major lawsuit filed against the company, or the resignation of one of the company’s top executives. The filings are available at www.sec.gov/edgar/searchedgar/currentevents.htm.
AAA. ABBRV. American Accounting Association.
AAER. ABBRV. Accounting and Auditing Enforcement Release.
abatement. N. The process of allocating the shortfall of estateassets to the distributions. Distributions from the estate proceed in a particular order starting with specific legacies, demonstrative legacies, general legacies, and finally residuary legacies. If estate assets are not adequate to meet the will’s provisions for the legacy category, all legacies in the category are reduced by the same percentage.
ABC. ABBRV. Activity-based costing.
ABM. ABBRV. Activity-based management.
abnormal profits. N. Earnings that produce a rate of return eitherabove or below the cost of capital. Positive abnormal profits produce a rate of return above the cost of capital. Negative abnormal profits produce a rate below the cost of capital. The term is used most frequently by technical analysts and researchers.
abnormal spoilage. N. Spoilage that results from errors, break-downs, accidents, etc., in a manufacturing process. Abnormal spoilage is in excess of normal spoilage and the cost is a separate line item on the income statement. It is not included in the unit cost because it is avoidable.
abnormal yield curve. N. Seeinverted yield curve.
ABO. ABBRV. Accumulated benefit obligation.
absorption costing. N. A system of assigning costs to products thatincludes all the costs it takes to manufacture the product, both fixed and variable. Absorption costing is the required system for financial reporting purposes. An alternative to absorption costing
7 accelerated share repurchase
is variable costing, which is often used for internal decisions. See also variable-costing system. Synonymous with full costing.
abusive tax shelters. N. Seetax shelters.
Academy of Accounting Historians. N. A professional associationthat encourages teaching and research about all phases of accounting history and its relationship to business and economics. http://accounting.rutgers.edu/raw/aah.
accelerated cost-recovery system. N. A cost-recovery methodused for tax purposes for assets used after 1980, but before 1987, in a business or trade. Cost recovery means that the business can deduct the cost of the asset on the tax return, thereby saving tax payments. The accelerated cost-recovery system allowed busi-nesses to write off the asset’s cost over a shorter time period than the economic life. The purpose was to stimulate capital invest-ment, because when further deductions were unavailable, compa-nies would buy new assets. ABBRV. ACRS.
accelerated depreciation. N. Methods of allocating the cost of anasset against income. Accelerated-depreciation methods charge off more of the cost in the early years of the asset’s use. Accelerated depreciation is mainly used for tax accounting because it can result in the company paying lower taxes in the early years of asset use. See also depreciation.
accelerated share repurchase. N. A company agrees to buy backa large quantity of its own stock at a particular price on a particular date from an investment bank. Usually the investment bank does not own all the necessary shares but will acquire them over a period of time. The company sees an immediate reduction in shares outstanding and an increase in earnings per share. However, the company also must account for the obligation associated with the investment bank’s forward contract. If the forward contract is
dilutive, the effects must be reflected in earnings per share. ABBRV.
acceleration clause. N. A term in a debt agreement that allows thelender to demand payment prior to maturity. Objective accelera-tion clauses specify precise actions or a lack of actions that trigger the acceleration clause. Subjective acceleration clauses do not specify the triggering event.
acceptable quality level. N. The point at which the cost of addi-tional quality-control activities exceeds the decrease in the costs of poor quality and failure costs. Acceptable quality level is a tradi-tional view of quality.
acceptance sampling. N. A method of determining whether abatch of items is of acceptable quality. Based on a statistically valid sampling plan, only a few of the batch are checked for quality. The quality of the sample is assumed to be the overall quality of the batch, and the entire batch is then accepted or rejected.
account. N. A structure for showing the effect of business eventson a particular asset, liability, equity, revenue, or expense. The effects are measured in terms of dollars. The account acts as a collection point during the processing of all the transactions involving the balance sheet or income-statement item, providing the value that appears on the financial statement. All the increases and decreases to a company’s cash are collected in the cash account, which appears on the balance sheet.
accountable plan. N. A method of managing business expensesand reimbursements to employees. An accountable plan requires the employee to verify and support expenses in order to receive reimbursement from the employer; any excess reimbursement must be returned to the employer. An accountable plan is impor-tant to both the employer who wants to track expenses, and to the
9 Accountant’s Magazine, The
employee who does not want to pay income taxes on reimburse-ment money. If the employee receives reimbursement through an accountable plan, then the reimbursement is not included in the employee’s wages, and the employer can deduct the costs as a busi-ness expense.
account analysis. N. A process of reviewing all the entries in anaccount to determine the balance or to discern patterns. Account analysis is useful in cost accounting to build a model of standard costs or to predict costs. Auditors use it to find unusual patterns for further investigation.
accountancy. N. Another word for accounting, usually used todesignate the profession; it is used more often in the United Kingdom or former British colonies.
accountant. N. A person who performs accounting for a career. Thetypes of activities vary significantly. Some accountants are clerks who do bookkeeping functions, and some are business advisors to large corporations.
Accountants for the Public Interest. N. A professional organizationthat encourages accountants to volunteer to help people who cannot afford their services. www.geocities.com/api_ woods/api/ apihome.html.
Accountants’ Index. N. A bibliography of accounting research arti-cles from 1920 to 1991.
Accountants International Study Group. N. The predecessor to theInternational Accounting Standards Board.
Accountant’s Magazine, The. N. The publication of the Institute ofChartered Accountants of Scotland.
account form of the balance sheet
account form of the balance sheet. N. A presentation format of thebalance sheet that lists assets on the left side of the sheet and liabil-ities and equities on the right side. Contrast with the report form of the balance sheet, in which assets are listed first, followed verti-cally by liabilities and equities.
account groups. N. A set of accounts used in governmentalaccounting that keeps track of general long-term assets and general long-term liabilities. This set of accounts is not required, but is a convenient way to keep records.
accounting. N. The process of representing business transactionsin financial reports.
Accounting and Auditing Enforcement Release. N. A report onSecurities and Exchange Commission (SEC) actions against an organization violating securities laws. The reports are available on the SEC’s website. ABBRV. AAER.
Accounting and Tax Database. N. An online compilation of articlesfrom three hundred publications. The Accounting and Tax Database is indexed and contains abstracts. http://library. dialog.com/bluesheets/html/bl0485.html#top.
accounting anomalies. N. A symptom of fraud. Accounting anom-alies can involve unusual characteristics of source documents, such as alterations or photocopies rather than originals. Accounting anomalies can also be evident in journal entries and ledgers.
accounting change. N. Seecumulative effect of change inaccounting principle.
accounting cycle. N. The set of procedures that record businessevents into the accounting records and culminate in the production of financial statements. The accounting cycle involves first
11 Accounting Hall of Fame
entering the transaction into the company’s journal. The journal entry consists of the date and the amount of increases or decreases to the accounts involved. The second step in the accounting cycle is to show the effect of increases and decreases on each account through a process of posting to the ledger accounts. After all journal entries are posted, the third step is to prepare a trial balance to check for errors. The fourth step is to adjust the ledger accounts for year-end transactions. The next step is to prepare the financial statements and then finally close the temporary (income statement) accounts.
accounting entity. N. The object of the accounting process. Theaccounting entity is the organization or part of the organization for which the process of representing business transactions in finan-cial reports is separated from the other parts. The accounting entity is necessary for meaningful information. A sole proprietor must separate the business part of life from the personal part of life. The business is the accounting entity, and to measure perform-ance, only the transactions associated with the business are counted in revenues and expenses. Personal income, such as inher-itances or gifts, cannot be added to the revenues of the accounting entity.
accounting equation. N. Seebalance sheet equation.
accounting estimate. N. An educated guess made to facilitate therecording of expenses or revenues. Generally accepted accounting principles allow the estimation of things like uncollectible accounts, warranty costs, useful lives of fixed assets, and some other items. These accounting estimates, which make it possible to match expenses with revenues, are based on historical patterns of bad debts, warranty costs, or machine usage.
Accounting Hall of Fame. N. Located at the Ohio State University inColumbus, Ohio. Honors scholars who have completed significant
Accounting Historians Journal
research in accounting and professionals who have made significant contributions to accounting. http://fisher.osu.edu/ departments/accounting-and-mis/the-accounting-hall-of-fame.
Accounting Historians Journal.N. The publication of the Academyof Accounting Historians.
accounting income. N. A term used to distinguish the incomenumber on the income statement (measured using generally accepted accounting principles) from taxable income (measured using tax laws). See also accounting profit.
accounting information systems. N. The systems within acompany for collecting and communicating information. Accounting information systems collect information from various areas in the entity and make it available for processing into reports. They are concerned with secu