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GLOSSARY


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A

ABA (American Bankers Association) Numbers

Numbers printed on checks and deposit slips that contain information as to the bank, the area in which it is located, and the like.

Accelerated Cost Recovery System (ACRS)

A method of calculating depreciation for federal tax purposes that was introduced by Congress in the Economic Recovery Tax Act of 1981. ACRS allows businesses to write off the costs of assets more quickly than with traditional depreciation methods.

Accelerated method of depreciation

A depreciation method that allows for larger amounts of depreciation in early years and smaller amounts in later years. The double declining-balance method is an example.

Account

An individual form or record used to record and summarize information related to each asset, each liability, and each aspect of owner's equity.

Accounting

The process of recording, summarizing, analyzing, and interpreting financial (money-related) activities to permit individuals and organizations to make informed judgments and decisions.

Accounting cycle

The steps involved in the recording and summarizing processes of accounting.

Accounting equation

The equation that expresses the relationship between the accounting elements in a simple mathematical form: Assets = Liabilities + Owner's Equity.

Accounting period

A period that is typically one year; however, it can be any length of time for which accounting records are maintained, often for a month.

Accounts payable

The liability that results from purchasing goods or services on credit.

Accounts payable ledger

A subsidiary ledger that lists the individual accounts of creditors. Also called the creditors' ledger.

Accounts Receivable account

An asset account that shows the total dollar amount due from credit customers.

Accrual basis of accounting

The basis of accounting that requires that revenue is recorded when earned, no matter when cash is received, and that expenses are recorded when incurred, no matter when cash is paid.

Accruals

Expenses incurred and revenue earned in the current accounting period but not recorded as of the end of the period.

Accrued expenses

Expenses that build up or accumulate during the current period but will not be paid until the next period. Also called accrued liabilities.

Accrued revenue

Revenue that has been earned in the current accounting period but will not be received until the next period. Also called accrued assets.

Accumulated depreciation

The total depreciation from the start of the life of a plant asset to any point in time.

Acid-test ratio

The ratio of quick assets to current liabilities. A yardstick commonly used is a 1-to-1 ratio. Also called quick ratio.

Adjusting entries

Entries made at the end of an accounting period to bring the balances of certain accounts up to date.

Aging schedule

A schedule in which accounts receivable are grouped into age categories and an estimated bad debts rate is applied to each age category. Aging the receivables a way of estimating bad debts expense when using the balance sheet approach.

Amortization

The periodic write-off of the cost of an intangible asset.

Apportionment

The process of dividing operating expenses among departments.

Articles of incorporation

An application filed with a state to incorporate a business.

Articles of partnership

An agreement made between partners that sets forth the terms of their partnership, such as the amount of cash or other assets each is to invest, the amount of time each is to devote to running the business, and how the net income or loss will be divided. Also called a partnership agreement.

Assets

Items with money value that are owned by a business.

Asset turnover

A measure of the net sales generated by the assets of a firm. Calculated by dividing net sales by total assets excluding investments.

Auxiliary record

A business record that is not essential but is helpful in maintaining records that are essential; an example is the petty cash payments record.


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Bad debt

An account receivable that, for one reason or another, cannot be collected.

Balance

The balance of an account is determined by footing (adding) the debit side, footing the credit side, and calculating the difference between the two sides.

Balance form of account

A ledger account form with four amount columns that many businesses prefer to use because the balance is always known and it is easy to see whether the balance is a debit or a credit. Also called the four-column account form.

Balance sheet

A listing of a firm's assets, liabilities, and owner's equity at a specific point in time. Other terms used to describe the balance sheet are statement of financial position and position statement.

Balance sheet approach

A method of estimating the bad debts expense under the allowance method in which the expense is based on aging the accounts receivable.

Bank checking account

An amount of cash on deposit with a bank that the bank must pay at the written order of the depositor.

Bank discount

Interest deducted in advance by a bank.

Bank reconciliation

Making the bank statement balance agree with the checkbook balance.

Bankruptcy

A condition in which a firm does not have sufficient cash to pay its creditors.

Bank statement

A monthly report showing the bank's record of the checking account.

Board of directors

People elected by a corporation's stockholders to oversee the business and appoint the officers.

Bond

A long-term debt instrument issued in return for a loan of cash.

Book of final entry

The ledger is referred to as the book of final entry because amounts are transferred (posted) to the ledger from the journal.

Book of original entry

The journal is referred to as the book of original entry because it is the first place in which transactions are formally recorded.

Book value

The difference between the cost of a plant asset and its accumulated depreciation.

Break-even point

The point in operations where total sales dollars exactly equal total fixed and variable costs; the point of zero profit or loss.

Budget

A formal statement of management's financial plans for the future.

Budgeted balance sheet

A balance sheet that estimates each element of financial condition at a specified future time.

Budgeted income statement

An income statement that estimates net income for the next fiscal period, based on all income statement budgets.

Business

An organization that operates with the objective of earning a profit.

Business entity concept

The principle that states that, for accounting purposes, a business is a distinct economic entity or unit that is separate from its owner and from any other business.


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Canceled checks

Checks that have been paid by the bank out of the depositor's account.

Capital expenditures

Expenditures for a plant asset that benefit more than one accounting period. Examples include additions, betterments, and extraordinary repairs. Capital expenditures increase either the value or the life of the asset and are debited to either the plant asset account or its accumulated depreciation account, depending on the type of expenditure.

Capital expenditures budget

A budget used for long-term planning of when plant assets will need to be replaced.

Capital projects funds

Government funds that are used for major projects, such as building a park.

Capital stock

Shares of ownership in a corporation.

Cash

In its most basic meaning, cash is currency (paper money) and coin. The definition in a business context also includes checks, money orders, traveler's checks, cashier's checks, bank drafts, and receipts from credit card sales.

Cash basis of accounting

A basis of accounting where revenue is recorded only when cash is received, and expenses are recorded only when cash is paid.

Cash budget

A budget that estimates the expected cash to be received and spent over a period of time.

Cash discounts

Discounts offered by a seller to encourage early payment by a buyer. To the seller, cash discounts are sales discounts; to the buyer, cash discounts are purchases discounts.

Cash dividend

A dividend paid in cash.

Cash equivalents

Highly liquid, short-term investments that can be turned to cash with little or no delay.

Cash flows

Cash receipts and cash payments from operating activities, investing activities, and financing activities.

Cash payments journal

A special journal used for recording all disbursements of cash. Also called the cash disbursements journal.

Cash receipts journal

A special journal used to record all receipts of cash, regardless of the source.

Chart of accounts

A directory or listing of accounts in the ledger.

Check

A written order directing a bank to pay a specified sum of money to a designated person or business.

Checkbook

A bound book of checks with stubs; the depositor's record of the checking account.

Check stub

Part of a check that remains in the checkbook as a permanent record of the check.

Classified balance sheet

A balance sheet that divides the assets and liabilities sections into the following subsections: current assets and plant assets, and current liabilities and long-term liabilities.

Classified income statement

An income statement divided into the following sections: revenue, cost of goods sold, operating expenses, and other income and expenses.

Clearing account

An account used to summarize the balances of other accounts.

C. O. D. (cash on delivery)

Terms set by the seller that call for payment when the goods are delivered.

Combined journal

A multicolumn journal used by small businesses to help save journalizing and posting time. It has two special columns for recording debits and credits to cash, various other special columns for recording transactions that occur often, and two general columns for recording transactions that occur less often. Also called a combination journal.

Common stock

Shares of ownership in a corporation. The class of stock that usually has voting rights.

Comparative financial statements

A side-by-side comparison of a company's financial statements for two or more accounting periods.

Compound entry

An entry requiring three or more accounts.

Consignment

A procedure in which one business (the consignee) accepts goods from another business (the consignor) for sale on a commission basis. Consigned goods should be counted in the inventory of the consignor.

Consistency

The accounting principle that requires a firm to continue to use a method once chosen, rather than switch from method to method arbitrarily or for temporary advantage.

Contingent liability

A possible liability, such as on a discounted note of a customer, that may become a real liability if certain events occur.

Corporation

A form of business that legally exists separate from the investors who own it.

Correcting entry

An entry used to correct certain types of errors in the ledger.

Cost

An input into the manufacturing of a product. There are three common inputs in manufacturing: (1) raw materials, (2) direct labor, and (3) factory overhead.

Cost accounting

The field of accounting that is used to determine the dollar value of goods that are manufactured.

Cost accounts

Accounts that are presented on the income statement; used to determine the cost of goods sold to customers.

Cost of goods manufactured budget

A budget that estimates cost of goods manufactured for the next fiscal period.

Cost of goods sold

The cost of merchandise sold to customers during the accounting period. The formula used to find cost of goods sold is: Beginning Merchandise Inventory + Net Purchases of Merchandise = Cost of Goods Available for Sale - Ending Merchandise Inventory = Cost of Goods Sold

Cost of goods sold budget

A budget that estimates cost of goods sold for the next fiscal period.

Cost of production report

A report that summarizes all of the units and costs transferred into and out of a production department in a process cost accounting system.

Cost principle

The principle that states that, when purchased, all assets are recorded at their actual cost regardless of market value.

Cost-volume-profit analysis

The study of the relationships among costs, selling prices, production volume, expenses, and profits.

Credit

The allowance of cash, goods, or services in the present, with payment expected in the future. To credit (Cr.) an account means to enter an amount on the right, or credit, side of the account.

Credit balance

Occurs when the amount on the credit side of an account is greater than the amount on the debit side.

Credit Card Expense

An expense account that is used to record discounts paid when receipts for credit card sales are deposited with the bank that issued the card (such as VISA or MasterCard) or with the credit card company that issued the card (such as American Express).

Credit Card Memorandum

A document issued to the customer showing the amount of credit granted and the reason for the return.

Creditor

A business or person to whom a debt is owed.

Credit period

The amount of time a seller allows a credit customer to pay for a purchase.

Credit terms

The terms for payment set by a seller of goods or services; includes the amount of time before payment is due and the rate of discount (if any) for paying early.

Cross-reference

A way of connecting a journal entry to its corresponding ledger entries so that the transaction can be traced back to its original entry or forward to its final entry.

Cumulative preferred stock

Preferred stock in which unpaid dividends accumulate from year to year. These unpaid dividends must be paid in full before any amount can be paid to the holders of common stock.

Current assets

Cash and assets that will be sold, used up, or turned into cash within the current accounting period, usually one year. Besides cash, examples are receivables, supplies, and merchandise inventory.

Current liabilities

Debts that are due for payment within one year. Examples are accounts payable, salaries payable, sales tax payable, and the current portion of notes payable.

Current ratio

The ratio obtained by dividing current assets by current liabilities. It is an indicator of a firm's ability to pay its short-term debts as they become due.


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Debit

To debit (Dr.) an account means to enter an amount on the left, or debit, side of the account.

Debit balance

Occurs when the amount(s) on the debit side of an account is greater than the amount(s) on the credit side.

Deferrals

Expenses and revenue that have been recorded in the current accounting period but are not incurred or earned until a future period.

Deficit

A debit balance in the Retained Earnings account.

Depletion

The expense resulting from the using up of a natural resource.

Depositor

The business or person under whose name a checking account is opened.

Deposits in transit

Deposits made and appearing in the checkbook but not appearing on the bank statement. Also called outstanding deposits.

Deposit slip

A form that is prepared when coin, currency, or checks are deposited in a bank account. It indicates the depositor's name and account number and summarizes the amount deposited. Also called deposit ticket.

Depreciation

An allocation process in which the cost of a long-term asset (except land) is divided over the periods in which the asset is used in the production of the business's revenue.

Depreciation expense

The expense that results from the allocation process of depreciation.

Depreciation schedule

A table that lists for a plant asset the amount of depreciation for each year and the accumulated depreciation and book value of that plant asset at the end of each year.

Direct expense

An expense that is associated with a specific department; an expense that benefits only that department and that would not exist if the department did not exist.

Direct labor

The cost of those employees who work directly to produce the product.

Direct labor cost budget

A budget that estimates direct labor costs for the next fiscal period.

Direct labor rate variance

The difference between the actual cost per hour and the budgeted cost per hour.

Direct labor time variance

The difference between the number of direct labor hours used and the budgeted direct labor hours. Also called labor efficiency variance.

Direct labor variance

The difference between actual direct labor costs and budgeted direct labor costs.

Direct method

A format for the statement of cash flows that discloses each major class of cash inflow and cash outflow from operating activities. It shows the amount of cash received or paid for revenues and expenses reported on the income statement. This is the method recommended by the FASB.

Direct write-off method

A method of accounting for bad debts in which the expense is recorded at the time of the write-off of a customer's account.

Discounting a note payable

Borrowing from a bank on one's own note with the interest being deducted at the time of borrowing.

Dishonored note

A note that is not paid by its maker on the due date.

Dividend

A distribution of corporate earnings to the stockholders of the company.

Double declining-balance method

A depreciation method that allows greater depreciation in the early years of the life of a plant asset and less depreciation in later years. This is achieved by applying a constant rate to each year's decreasing book value.

Double-entry accounting

Each business transaction affects the accounting elements in at least two ways. Recording both effects of a transaction is called double-entry accounting.

Drawee

The bank on which a check is drawn.

Drawer

The business or person who writes a check.

Drawing account

A temporary owner's equity account that is used when an owner withdraws cash or other assets from the business for personal use.

Dual effect

The principle that states that all business transactions are recorded as having at least two effects on the basic accounting elements.

Due date

The date on which a note must be paid. Also called the maturity date.


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Earned capital

Capital that arises from profitable operations of the corporation; usually called retained earnings.

Earnings per share on common stock

The amount of net income available to the owner of each share of common stock. Calculated by dividing net income (less preferred dividend requirements) by the number of common shares outstanding.

Employee

A person who works under the direct control of an employer on a continuing basis.

Employee's earnings record

A record maintained for each employee that contains basic employee information and a summary of payroll data for that employee.

Employer identification number (EIN)

An identifying number each business must have if, during any part of the year, it employs one or more people.

Employer's Tax Guide--Circular E

An IRS publication containing federal income tax tables for various payroll periods for married and single persons.

Encumbrances

Expected liabilities.

Endorsement

A signature or stamp on the back of a check that transfers ownership of the check to the bank or another person.

Enterprise funds

A type of proprietary fund similar to a private business, whereby a service is provided and a fee is charged (such as for a transit system).

Equipment

The physical assets needed by a business in order to operate.

Equity securities

Investments in stocks issued by corporations.

Equivalent units

The production work actually done.

Estimated revenues budget

A budgetary account that lists all anticipated revenues to the governmental unit.

Estimated useful life (EUL)

The amount of time that an asset is expected to be in use or the amount of output it is expected to produce.

Expended

When a liability is incurred, per authorization.

Expenses

The costs of operating a business. Unlike the cost of an asset, the cost of an expense does not provide a future benefit to the business. Therefore, its effect is a reduction in owner's equity.

Extension

The amount found by multiplying the unit cost of an item by the quantity.

Extraordinary repair

A capital expenditure that prolongs the life of a plant asset, such as new wiring in a building. The cost of an extraordinary repair is debited to an accumulated depreciation account.


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Fair Labor Standards Act (or Wages and Hours Law)

An act passed by Congress that established standards for minimum wages, overtime pay, child labor, and required payroll record keeping.

Federal Income Tax Payable account

A liability account used to record the amount of federal income taxes withheld from the earnings of employees. It is credited when taxes are withheld and debited when the taxes are sent in.

Federal Insurance Contributions Act (FICA)

An act that requires contributions by both the employer and the employee to the federal social security system. The FICA tax has two component parts: OASDI (Old-Age, Survivors, and Disability Insurance) and HIP (Hospital Insurance Plan). OASDI and HIP rates are set by Congress and are revised periodically. The OASDI tax has a wage limit that is usually revised annually.

Federal Tax Deposit, Form 8109

A form that must be filled out when FICA taxes and withheld income taxes are deposited in an authorized bank.

Federal Unemployment Tax Act (FUTA)

An act requiring employers to pay into a fund designed to assist workers who are temporarily unemployed.

FICA Tax Payable--HIP account

A liability account used to record the amount of HIP taxes withheld from employees' earnings and matched by the employer. It is credited when HIP taxes are withheld (or imposed on the employer) and debited when the taxes are sent in.

FICA Tax Payable--OASDI account

A liability account used to record the amount of OASDI taxes withheld from employees' earnings and matched by the employer. It is credited when OASDI taxes are withheld (or imposed on the employer) and debited when the taxes are sent in.

Fiduciary funds

Monies held by the government, which is acting as a trustee or as a collecting and disbursing agent.

Financial statements

Summaries of financial activities.

Financing activities

Transactions that involve cash receipts or payments from changes in long-term liabilities and stockholders' equity--such as selling stock to stockholders and paying dividends, and borrowing from creditors and repaying these loans.

Fiscal period

The period of time that covers a complete accounting cycle. A fiscal year is a fiscal period covering twelve months; it does not necessarily coincide with the calendar year.

Fiscal year

A 12-month time period that may or may not be from January 1 to December 31.

Flexible budget

A budget that is actually a series of budgets for different levels of production activity.

FOB destination

A shipping term that means that the seller is responsible for all freight costs until the goods reach their destination.

FOB shipping point

A shipping term that means that the buyer is responsible for all freight costs while the goods are in transit.

Footing

The total of the debit column or credit column of an account.

Form 940--Employer's Annual Federal Unemployment Tax Return

A form filed by the employer by January 31, summarizing FUTA deposits during the preceding year.

Form 941--Employer's Quarterly Federal Tax Return

A quarterly report that summarizes FICA taxes (employer and employee shares) and income taxes withheld during the quarter.

Form W-2 (Wage and Tax Statement)

A form given by the employer to each employee by January 31 that contains a summary of the employee's earnings and deductions for the past year.

Form W-3 (Transmittal of Wage and Tax Statements)

An annual form employers file with the Social Security Administration to summarize employee earnings and tax deductions. Copy A of each employee's Form W-2 is filed with Form W-3.

Form W-4 (Employee's Withholding Allowance Certificate)

A form filled out by each employee showing marital status and number of withholding allowances claimed.

Freight In account

A general ledger account in which charges for freight on incoming merchandise are recorded. Also called Transportation In.

Full endorsement

Uses the phrase Pay to the order of, followed by the name of the business or person to whom the check is being transferred. Only the specified business or person can cash the check.

Fund

A fiscal and accounting entity with a self-balancing set of accounts.

FUTA Tax Payable account

A current liability account used to record the employer's obligation for federal unemployment taxes.


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General accounting for manufacturing

A system in which costs are gathered throughout the year and transferred periodically to a summary account.

General expenses

Expenses related to (1) running a firm's office or (2) any other operating activities that do not involve the sale of merchandise. Also called administrative expenses.

General journal

The basic form of journal that has two money columns.

General ledger

A ledger containing the financial statement accounts.

Goodwill

An intangible asset made up of such factors as an excellent reputation, a fine location, a superior product line, or outstanding management skills. Used to give a partner a greater capital credit than the amount of assets invested.

Gross earnings

An employee's earnings before any amount is deducted by the employer.

Gross profit

The profit before we subtract the expenses of doing business; it is obtained by subtracting cost of goods sold from net sales.

Gross profit method

A method for estimating the cost of the ending inventory by using a modified version of the cost of goods sold equation.


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Home office

The main location of a business.

Hourly workers

Individuals who work for a fixed hourly rate.


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Income from operations

Gross profit minus operating expenses. Also called operating income.

Income statement

A summary of a business's revenue and expenses for a specific period of time, such as a month or a year. Other terms used to describe the income statement are earnings statement, operating statement, statement of operations, and profit and loss statement.

Income statement approach

A method of estimating the bad debts expense under the allowance method in which the expense is based on a percent of credit sales.

Income Summary account

A clearing account used to summarize the balances of revenue and expense accounts. It is used only at the end of an accounting period and is opened and closed during the closing process.

Indirect expense

An expense of operating a business that is not associated with a specific department; an expense that benefits an entire business and would continue to exist even if a specific department were eliminated.

Indirect labor

The cost of those employees who work in the factory, but not on the product itself.

Indirect method

A format for the statement of cash flows that adjusts the net income figure in order to calculate net cash flows from operating activities.

Intangible assets

Long-term assets used in a business that lack physical substance. Examples include patents, copyrights, trademarks, and franchises.

Interest

The charge for credit; calculated as principal x rate x time.

Interest allowances

A method of sharing net income that recognizes differences in partners' investments.

Interim statements

Statements that are prepared during the fiscal year for periods of less than 12 months--such as monthly, quarterly, and semiannually.

Internal service funds

Funds that account for activities provided by one governmental unit to another, such as a print shop, on a cost reimbursement basis.

Internal transactions

Transactions, such as adjustments, that occur within a company and do not affect parties outside the company.

Investing activities

Transactions that increase and decrease the assets that a business owns.

Invoice

A business document that contains the names and addresses of the buyer and the seller, the date and terms of the sale, a description of the goods, the price of the goods, and the mode of transportation used to ship the goods. The seller calls the invoice a sales invoice; the buyer calls it a purchase invoice.


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Journal

A form in which transactions are recorded in chronological order (by order of date).

Journalizing

The process of recording transactions in a journal.

Just-in-Time (JIT) Inventory System

An inventory system designed to reduce storage costs and improve efficiency by ordering just enough raw materials to meet daily production needs and finishing just enough goods to be shipped to customers at the end of each day.


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Land Improvements

The title of an account to which the cost of improvements to real estate, such as sidewalks, driveways, fences, and parking lots (all of which have a limited life), are debited.

Ledger

A collective grouping of accounts.

Legal capital

The amount of earnings that a corporation must retain before a dividend can be paid to stockholders; usually equals the par value of the stock outstanding.

Leverage

The use of borrowed funds to earn a greater return than the cost of the borrowed funds.

Liabilities

Debts owed by the business.

Limited liability

Means that stockholders of a corporation are not personally liable for the debts of the company.

Liquidation

The process of winding up a business.

Liquidation schedule

A table that shows the three steps in liquidation.

Liquidity

Refers to how quickly an asset can be turned into cash, used up, or expire; used in reference to assets, which are listed on the balance sheet in the order of their liquidity.

List price

The price appearing in a price catalog issued by the seller.

Long-term investments

Investments that management intends to hold for more than one year.

Long-term liabilities

Debts that will not come due for payment within one year. Examples are long-term notes payable and mortgages payable.

Lookback period

A four-quarter period ending on June 30 of the prior year. Employers look at the amount of FICA taxes (employee and employer shares) and withheld income taxes during the look back period to determine if they are monthly or semiweekly depositors.

Lower of cost or market (LCM) rule

An alternate way to value an inventory in which the cost of the merchandise is compared with the market price (current cost to replace) and the lower value is used.


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Maker

The person who has received credit and issues a note.

Manufacturing business

A business that produces a product to sell to its customers.

Margin of safety

The amount of sales above break-even sales.

Market interest rate

The prevailing rate of interest in the bond market. Also called the effective interest rate.

Matching principle

Requires that revenue earned during an accounting period be offset by the expenses that were necessary to produce that revenue, so that the accurate net income or net loss for the period can be reported. Materials ledger records Subsidiary records of raw materials kept as a perpetual inventory.

Math errors

Errors made in addition or subtraction.

Maturity date

The date on which the principal must be repaid to bondholders.

Maturity value

The principal plus the interest on a note; the amount that must be paid to the payee on the maturity date of the note.

Memorandum entry

A notation in the journal that is used to report the effect of a stock split.

Merchandise Inventory account

An asset account that shows the value of goods (inventory) on hand at a given moment (usually at the beginning or end of the accounting period).

Merchandise inventory

Goods held for sale to customers in the normal course of business. Also called stock in trade.

Merchandise inventory turnover

A measure of the number of times a firms average inventory is sold during the year. Calculated by dividing cost of goods sold by the average inventory.

Merchandising business

A business that earns its revenue by buying goods and then reselling those goods. Also called a trading business.

Minimum wage

An amount set by Congress that is the minimum rate that can be paid to workers who are covered by the Fair Labor Standards Act.

Mixed costs

Costs that have both variable and fixed characteristics.

Modified Accelerated Cost Recovery System (MACRS)

A revision of ACRS introduced by the Tax Reform Act of 1986. This method adds new categories of property and the half-year convention.

Modified cash basis of accounting

A basis of accounting where revenue is recorded only when cash is received and expenses are recorded only when cash is paid. However, adjustments are made for expenditures for items having an economic life of more than one year--such as equipment, prepaid insurance, and large purchases of supplies.


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Natural business year

A fiscal year ending at a business's lowest point of activity.

Natural resources

Long-term assets that are acquired to extract or remove resources from the ground. Examples are oil wells, coal mines, and forests. Also called wasting assets.

Negotiable

Able to be transferred by endorsement to another party.

Net earnings

Gross earnings minus payroll deductions. Also called net pay.

Net income

Occurs when revenue earned during an accounting period exceeds the expenses of the same period.

Net loss

Occurs when expenses exceed revenue during an accounting period.

Net realizable value

The difference between the balance in the Accounts Receivable account and the Allowance for Doubtful Accounts account; the actual amount of receivables that the firm expects to collect.

Net receivables

Another name for net realizable value.

Net sales

The amount obtained by subtracting the amount of sales returns and allowances and the amount of sales discounts from the amount of sales.

Noncumulative preferred stock

Preferred stock in which undeclared dividends do not accumulate; in a year in which the board of directors does not declare a dividend, it is lost forever.

Noninterest-bearing note

A note that has no interest charge.

Nonoperating expense

An expense, such as interest expense, that is not related to the everyday process of doing business.

Nonoperating revenue

Revenue, such as interest income, that is earned from a source other than the normal operations of the business.

Normal balance

The normal balance of an account is always the same as the increase side of that account; it is where you would expect to find the balance of that account.

Note payable

A formal written promise to pay a specified amount at a definite future date.

NSF check (nonsufficient funds check)

A check drawn against an account in which there is nonsufficient funds; a bad check.


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OASDI taxable wage

The maximum amount of earnings during a calendar year that is subject to OASDI taxes.

Operating activities

Transactions that enter into the calculation of net income; operating activities affect the income statement.

Operating expenses

Expenses incurred in the normal operation of the business.

Operating expenses budget

A budget that estimates operating expenses for the next fiscal period.

Operating Transfers In account

An account that details monies received from other departments.

Operating Transfers Out account

An account that details monies paid to other departments.

Other financing sources

Revenue received from interfund transfers and debt issue proceeds.

Other financing uses

Money spent for interfund transfers.

Other income or expenses

Income or expenses that are not directly associated with the normal operation of the business, such as vending machine sales, interest income, and interest expense.

Overtime pay

A minimum of one and one-half times the regular rate of pay for hours worked over 40 in a week; commonly called time-and-a-half.

Owner's equity

The excess of assets over liabilities (also called capital, proprietorship, and net worth).


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Paid-in capital

Capital that comes from stockholders through the purchase of the company's stock.

Partnership

An association of two or more persons who co-own a business for profit.

Partnership agreement

Another name for articles of partnership.

Payee

The business or person to whom a check or promissory note is made payable.

Payroll register

Summary of the gross earnings, deductions, and net pay for all employees for a specific payroll period.

Payroll Tax Expense account

An operating expense account used to record the total payroll taxes imposed on the employer.

Permanent accounts

Assets, liabilities, and owner's capital are permanent accounts in the sense that their balances will be carried into the next accounting period. Permanent accounts are also called real accounts.

Perpetual inventory record

A record used in the perpetual system to record purchases and sales of an item of inventory and to keep a running balance of that item.

Petty cash fund

A small amount of cash kept in the office for making small payments for items such as postage and office supplies.

Plant assets

Assets that (1) have a useful life of more than one year, (2) are acquired for use in the operation of a business, (3) are not intended for resale to customers in the normal course of business, and (4) are tangible--that is, capable of being touched. Examples are land, buildings, cars, machinery, and equipment. Also called fixed assets, capital assets, and property, plant, and equipment.

Post-closing trial balance

A trial balance prepared after closing entries have been posted. The post-closing trial balance is also called an after-closing trial balance and consists only of permanent accounts.

Posting

The process of transferring amounts from the journal to the ledger.

Posting errors

Errors that result from incorrect transfers from the journal to an account or from the ledger to the trial balance.

Preemptive right

The right of common stockholders to maintain their proportionate ownership share of the corporation if the corporation issues additional shares of stock.

Preferred stock

A class of stock that a corporation can issue in addition to common. Such stockholders have special rights or privileges that are not available to the holders of common stock: they have a prior claim to dividends and a prior claim to assets if the corporation were to cease operations and liquidate its assets.

Premium

A fee paid for insurance coverage that will benefit the business in the future.

Prepaid expenses

Another name for deferred expenses, usually applying to advance payments that cover a year or less.

Price/earnings (P/E) ratio

A measure of the future prospects of a stock. Calculated by dividing the market price per share of stock by earnings per share.

Principal

The amount of money borrowed or the amount of credit extended. Also called the face value.

Principle of materiality

States that proper accounting procedures have to be strictly followed only for events and transactions that would have an effect on a business's financial statements.

Principle of objective evidence

States that source documents should form the foundation for recording business transactions.

Proceeds

The difference between the maturity value of a discounted note and the bank discount charged.

Process cost accounting

A system in which costs are gathered and assigned to a stage or a department in the manufacturing process.

Production budget

A budget that estimates the number of units to be produced in the upcoming fiscal period.

Profitability

The ability of a business to earn a reasonable return on the owners' investments.

Profit center

Any segment of a business that incurs expenses while producing revenue.

Promissory note

A written promise to pay a sum of money at a definite time in the future. Also called a note.

Protest fee

A fee charged by a bank to the payee of a note when the note is dishonored by its maker.

Purchases account

A temporary owner's equity account that is used to record the cost of merchandise purchased for resale. Other possible titles include Merchandise Purchases or Purchases of Merchandise.

Purchases journal

A special journal used only to record credit purchases of merchandise. (Some businesses design a multicolumn purchases journal that is used to record all credit purchases, not just merchandise.)

Purchases Returns and Allowances account

A contra purchases account that is used to record returns and allowances on merchandise purchases.


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Q-external

Interfund transfers are called quasi-external because they are similar to receiving money from an outside source.

Quick assets

Current assets that can be converted to cash right away, such as receivables and marketable securities.


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Rate

The annual percent charged on the principal.

Ratio

A fractional relationship of one number to another.

Ratio of owner's equity to total liabilities

A measure of the position of a company in the eyes of its creditors.
Calculated by dividing owner's equity by total liabilities.

Ratio of plant assets to long-term liabilities

A measure of the margin of safety for those who hold notes and bonds of a company. Calculated by dividing plant assets by long-term liabilities.

Raw and In-Process Inventory account

An asset account (used in a just-in-time, or JIT, inventory system) to record the cost of raw materials purchased and issued to production.

Raw materials

Materials used in the manufacturing process.

Raw materials inventory

The inventory of goods not yet put into production at the end of an accounting period.

Realization

The step in liquidation in which all noncash assets are converted into cash.

Realization principle

The principle that states that revenue should be recorded when it is earned, even though cash may not be collected until later.

Receiving report

A report prepared by the receiving department to indicate what goods were received and in what quantity.

Reciprocal accounts

Accounts in sets of interrelated records, such as those for a home office and a branch, that match in dollar amount but have opposite balances.

Recording errors

Errors made in journal entries.

Reinstate

To reopen a customer's account when a bad debt is recovered.

Responsibility accounting

A management tool that uses the organization's accounting system to hold people responsible for their work.

Restrictive endorsement

An endorsement on the back of a check that specifies the purpose for which the money is to be used. For deposit only is a common one. It means that the check cannot be cashed--it can only be deposited.

Retail businesses

Those who own businesses such as grocery stores, drugstores, and restaurants, which sell directly to consumers.

Retail method

A method for estimating the cost of the ending inventory by using a cost percentage derived from cost and retail prices of the goods available for sale.

Retained earnings

Past earnings that have not been paid out as dividends to stockholders.

Retained earnings statement

A statement that shows the changes that have taken place in retained earnings over a specific period of time, such as a month or a year.

Return on stockholders' equity

A measure of the return on each dollar invested by stockholders. Calculated by dividing net income by average stockholders equity.

Return on total assets

A measure of the profitability of a firm's assets. Calculated by dividing the sum of net income and interest expense by average total assets.

Revenue

Income earned from carrying out the activities of a firm.

Revenue expenditures

Expenditures for a plant asset that benefit only the current accounting period. Examples include repairs and maintenance expenses. Revenue expenditures are debited to expense accounts.

Reversing entry

An entry made at the start of a new accounting period to reverse an adjusting entry made at the end of the previous period. A reversing entry is the exact opposite of the adjusting entry.

Revolving charge plan

Payment system in which customers pay a percentage of their account plus finance charges on a monthly basis.


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Salaried employees

Individuals who work for a fixed amount for a definite period of time, such as a week, a month, or a year.

Salaries Expense account

An expense account used to record the gross amount of the payroll. May sometimes be broken down into several accounts, such as Sales Salaries Expense and Office Salaries Expense.

Salary

A fixed amount paid to employees for a certain period of time, such as a week or a month.

Salary allowances

A method of sharing net income that recognizes how much work was done by each partner.

Sales account

A revenue account used only to record sales of merchandise.

Sales budget

A budget that estimates the total dollar volume of sales revenue for the upcoming period.

Sales invoice

Document prepared by a seller of goods and shipped with the goods (or a few days after the goods). It describes the goods and identifies credit terms, price, and the mode of transportation.

Sales journal

A special journal used only to record credit sales of merchandise.

Sales order

A document prepared when an order is received from a customer.

Sales Returns and Allowances

A contra revenue account with a normal debit balance. It is used to record returns from and allowances to customers.

Sales tax

A tax on the retail price of goods sold. It is collected by the merchant and paid to the governmental body that levies the tax.

Schedule of accounts payable

A listing of the individual creditor balances in the accounts payable ledger.

Schedule of accounts receivable

A listing of the balances in the accounts receivable ledger.

Secured bonds

Bonds that have a specific asset (or assets) pledged as security for the debt. Also called mortgage trust bonds.

Segmentation

The division of an organization into parts.

Selling expenses

Operating expenses related to the sale of a firm's merchandise.

Serial bonds

A bond issue in which the bonds mature periodically over a number of years.

Service business

A business that performs services for customers to earn a profit.

Shift in assets

Occurs when one asset is exchanged for another asset, such as when supplies are purchased for cash.

Signature card

Lists personal information and contains the signature of the person(s) authorized to write checks on a bank account. The bank keeps these cards on file to help identify possible forgeries.

Slide

An entry with an incorrectly placed decimal point, such as entering 100 for 1,000 or 24. 50 for 245.

Sole proprietorship

A business owned by one person.

Source documents

Various types of business papers used as a basis for recording business transactions.

Special journals

Journals used by businesses to record transactions that are similar in nature; examples are the purchases journal and the cash payments journal. Also called special-purpose journals.

Special revenue funds

Government funds that contain restricted monies that must be used for specific purposes.

Specific identification method

An inventory costing method in which units are identified as coming from specific purchases and are assigned a cost based on the price of those purchases.

Stability

Refers to how long an asset will last. Plant assets are usually listed on the balance sheet according to their stability.

Standard cost accounting

A system in which costs are assigned to manufactured products in advance and adjusted periodically to the actual costs. This system can be used as part of a job order or process cost accounting system.

Standard form of account

A form of account with separate debit and credit sides.

Stated value stock

A value that is sometimes assigned to no-par stock. There is little difference between accounting for par value stock and for stated value stock.

Statement of cash flows

A financial statement that provides information about the cash flows from operating activities, investing activities, and financing activities during an accounting period and the net increase or decrease in cash that occurred.

Statement of cost of goods manufactured

A statement used by a manufacturer in a general accounting system to show the costs of manufacturing for an accounting period.

Statement of owner's equity

A summary of the changes that have occurred in owner's equity during a specific period of time, such as a month or a year. Another term used to describe the statement of owner's equity is capital statement.

State Unemployment Tax Act (SUTA)

A law that requires employers to pay unemployment taxes (for the benefit of employees) to the states in which they conduct business.

Stock certificate

A document issued to a purchaser of stock when the stock has been paid for in full.

Stock dividend

A proportional distribution of additional shares of a corporation's own stock to stockholders of record.

Stockholders

Those who own shares of stock in a corporation. Also called shareholders.

Stockholders' equity

The owners' claim against the assets of the corporation; it represents the excess of total assets over total liabilities. It can be divided into paid-in capital and earned capital (or retained earnings). It is also called shareholders' equity.

Stock split

Occurs when corporations call in their stock and issue two, three, or more shares in place of each old share; usually declared to reduce the market price of shares outstanding.

Straight-line method

A popular method of calculating depreciation that yields the same amount of depreciation for each full period an asset is used.

Straight-line rate

The annual percent of depreciation in the straight-line method. It is calculated by dividing 100% by the estimated years of life.

Subsidiary ledgers

Ledgers that contain only one type of account; the example in this chapter is the accounts payable ledger.

Sum-of-the-years'-digits method

An accelerated depreciation method that uses a fraction to calculate depreciation. The constant denominator of the fraction is the sum of the digits of the years making up the estimated useful life of the asset. The numerator of the fraction changes each year and is the number of years remaining in the useful life of the asset.

Supplies

Short-term physical assets needed to operate a business.

SUTA Tax Payable account

A current liability account used to record the employer's obligation for state unemployment taxes.


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T account

The T account, so named because it looks like a capital letter T, is a skeleton version of the standard form of account.

Tangible

All physical assets used by a business are tangible (capable of being touched).

Temporary accounts

Revenue, expense, and drawing accounts are temporary accounts used to show changes in owner's equity during a single fiscal period. When that period is over, the balances of all temporary accounts are summarized, and the information is transferred to the owner's capital account. Temporary accounts are also called nominal accounts.

Temporary investments

Investments that can be turned into cash with little delay. Also called marketable securities.

Temporary owner's equity accounts

Expense accounts, revenue accounts, and the owner's drawing account are called temporary owner's equity accounts because their balances will be transferred to the owner's capital account at the end of the accounting period.

Term bonds

A bond issue in which all of the bonds mature at one point in time.

Time

The number of years, months, or days for which interest is charged. Also called the term.

Times interest earned

A measure of a company's ability to meet its interest payments. Calculated by dividing the sum of net income, interest paid, and income taxes by interest paid.

Trade discount

A percentage reduction from the list price of merchandise.

Transaction

Any activity that changes the value of a firm's assets, liabilities, or owner's equity.

Transposition

The reversal of digits, such as entering 240 for 420.

Treasury stock

Shares of a company's stock that have been (1) issued as fully paid, (2) later reacquired, and (3) not retired or reissued.

Trial balance

A listing of all ledger accounts with their balances to test the equality of debits and credits; it is usually prepared at the end of each month.


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Uncollectible account

Another name for bad debt.

Underapplied overhead

When factory overhead charged to production is less than actual factory overhead charges. When factory overhead is underapplied, the Factory Overhead Control account has a debit balance.

Unearned revenue

Another name for deferred revenue, usually applying to amounts received a year or less in advance.

Unfavorable variance

A variance that exists when actual costs exceed budgeted costs.

Unit contribution margin

The sales price of an item minus the variable cost per unit.

Units-of-production method

A depreciation method in which cost is allocated over the estimated productive life of a plant asset. Life is expressed by such measures as hours, units, or miles.


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Variable costs

Costs that vary in total as production varies, but remain the same per unit regardless of how many units are produced.

Variance

The difference between an actual and a budgeted (standard) cost.

Vertical analysis

The expression of each item in a company's financial statement as a percent of a base figure, in order to see the relative importance of each item. For the balance sheet, the base is total assets; for the income statement, the base is net sales.

Voucher

A method of accounting for cash payments in which all payments are authorized in advance and kept track of internally through five components: voucher, voucher register, unpaid voucher file, check register, and paid voucher file.

Voucher system

A method of accounting for cash payments in which all payments are authorized in advance and kept track of internally through five components: voucher, voucher register, unpaid voucher file, check register, and paid voucher file.


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Wage

A fixed hourly rate paid to an employee.

Wage bracket method

A method that uses government-issued tax tables to compute the amount of federal income tax to be withheld from employees.

Weighted-average method

An inventory costing method in which it is assumed that all units have the same average price. The weighted average is calculated by dividing the total cost of goods available for sale by the total units available for sale. Also called the average cost method.

Wholesalers

Those who purchase goods in bulk from manufacturers and sell them to retailers, other wholesalers, schools and other not-for-profit institutions, and, at times, directly to consumers.

Withdrawal

The removal of business assets for the owner's personal use.

Withhold

To deduct amounts from an employee's gross earnings.

Withholding allowance

An amount of earnings that is not subject to taxation. For federal income tax, each person gets one allowance for himself or herself, one for his or her spouse (if the spouse is not working and claiming the allowance), and one for each dependent. Also called an exemption.

Workers' compensation insurance

Insurance employers must carry to provide protection for employees who suffer a job-related illness or injury.

Working capital

The excess of a firm's current assets over its current liabilities. A strong working capital means that the firm is likely to be able to carry on its current operations.

Work-in-process inventory

The inventory of goods that are partially completed at the end of an accounting period.

Work sheet

An informal working paper used by the accountant to organize data for the financial statements and lessen the possibility of overlooking an adjustment.


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*11) "Blondes have more fun"*

Zero proof test

A test performed using the plus and minus bars of a calculator--zero proof means that two equal columns have a zero difference.