Accounting Terms


Absorption Costing

An approach to product costing that assigns a representative portion of all types of manufacturing costs–direct materials, direct labor, variable factory overhead, and fixed factory overhead–to individual products.


Accelerated Depreciation

Method that records greater DEPRECIATION than STRAIGHT-LINE DEPRECIATION in the early years and less depreciation than straight-line in the later years of an ASSET’S HOLDING PERIOD.



Recording and reporting of financial transactions, including the origination of the transaction, its recognition, processing, and summarization in the FINANCIAL STATEMENTS


Accounting Cycle

The sequence of steps followed in the accounting process to measure business transactions and transform the measurements into FINANCIAL STATEMENTS for a specific period.



The recognition of an expense or revenue that has occurred but has not yet been recorded.


Accrual Accounting

The attempt to record the financial effects of transactions and other events in the periods in which those transactions or events occur rather than only in the periods in which cash is received or paid by the business


Accrual Basis

Method of ACCOUNTING that recognizes REVENUE when earned, rather than when collected. Expenses are recognized when incurred rather than when paid.


Accrued Expense

An expense that has occurred but is not recognized in the accounts.


Accumulated Depreciation

Total DEPRECIATION pertaining to an ASSET or group of assets from the time the assets were placed in services until the date of the FINANCIAL STATEMENT or tax return. This total is the CONTRA ACCOUNT to the related asset account.



One company taking over controlling interest in another company.



Mathematician employed by an insurance company to calculate PREMIUMS, RESERVES, DIVIDENDS, and insurance, PENSION, and ANNUITY rates, using risk factors obtained from experience tables.



Gradual and periodic reduction of any amount, such as the periodic writedown of a BOND premium, the cost of an intangible ASSETor periodic payment Of MORTGAGES or other DEBT.


Annual Report

Report to the stockholders of a company which includes the company’s annual, audited BALANCE SHEET and related statements of earnings, stockholders’ or owners’ equity and cash flows, as well as other financial and business information.



Series of payments, usually payable at specified time intervals



Increase in the value of an ASSET such as a stock, BOND, commodity, or real estate.



Any owned tangible or intangible object having economic value useful to the owner.



A professional examination of a company’s financial statement by a professional accountant or group to determine that the statement has been presented fairly and prepared.


Average Days’ Inventory On-Hand

The average number of days required to sell the current inventory of products available for sale. It is found by dividing the number of days in a year by inventory turnover.


Average Days’ Sales Uncollected

A ratio that shows the average length of time it takes a company to receive payment for credit sales.


Average-Cost Method

A way of arriving at the cost of inventory that computes the average cost of all goods available for sale during a fixed period in order to determine the value of inventory.

Bad Debt

All or portion of an ACCOUNT, loan, or note receivable considered to be uncollectible.


Bank Reconciliation

A process by which an accountant determines whether and why there is a difference between the balance shown on the bank statement and the balance of the cash account in the firm’s GENERAL LEDGER.


Bank Statement

A periodic statement, usually monthly, that a bank sends to the holder of a checking account showing the balance in the account at the beginning of the month, during, and at the end of the month.



Legal process, whereby the DEBTS of an insolvent person are liquidated after being satisfied to the greatest extent possible by the DEBTOR’S ASSETS. During bankruptcy, the debtor’s assets are held and managed by a court appointed TRUSTEE.


Beginning Inventory

The quantity of merchandise available for sale at the beginning of an ACCOUNTING period.


Board of Directors

Individuals responsible for overseeing the affairs of an entity, including the election of its officers. The board of a CORPORATIONthat issues stock is elected by stockholders.


Book Value

Amount, net or CONTRA ACCOUNT balances, that an ASSET or LIABILITY shows on the BALANCE SHEET of a company. Also known as CARRYING VALUE.



The process of recording financial transactions and keeping financial records.


Break-Even Point

The point at which TOTAL REVENUES equals TOTAL COSTS.



Financial plan that serves as an estimate of future cost, REVENUES or both.


Business Segment

Any division of an organization authorized to operate, within prescribed or otherwise established limitations, under substantial control by its own management.

Capital Expenditure

Outlay of money to acquire or improve capital assets such as buildings and machinery.


Capital Gain

Portion of the total GAIN recognized on the sale or exchange of a noninventory asset which is not taxed as ORDINARY INCOME. Capital gains have historically been taxed at a lower rate than ordinary income.


Carrying Value

Amount, net or CONTRA ACCOUNT balances, that an ASSET or LIABILITY shows on the BALANCE SHEET of a company. Also known as BOOK VALUE.


Cash Basis

Method of bookkeeping by which REVENUES and EXPENDITURES are recorded when they are received and paid.


Cash Equivalents

Short-term (generally less than three months), highly liquid INVESTMENTS that are convertible to known amounts of cash.


Cash Flows

Net of cash receipts and cash disbursements relating to a particular activity during a specified accounting period.


Cash Payments Journal

A multicolumn journal used to record sums of cash paid out for expenses.


Cash Receipts Journal

A multicolumn journal used to record business transactions involving the receipt of CASH from other individuals or businesses.


Closing Entry

A journal entry made at the end of an accounting period in order to prepare for the next accounting period by clearing the BALANCES of temporary accounts and summarizing the period’s REVENUES and expenses.



ASSET provided to a CREDITOR as security for a loan.


Combined Financial Statement

FINANCIAL STATEMENT comprising the accounts of two or more entities.


Commercial Paper

A way of borrowing money by using unsecured short-term loans sold directly to the public, usually through professionally managed investments firms.



Percentage of the selling price of the property, paid by the seller.



Bulk goods such as grains, metals, and foods traded on a commodities exchange or on the SPOT MARKET.


Comparative Financial Statement

FINANCIAL STATEMENT presentation in which the current amounts and the corresponding amounts for previous periods or dates also are shown.



To pay or make payment for something.


Compound Interest Principles

Interest computed on principal plus interest earned in previous periods.


Comprehensive Income

Change in EQUITY of a business enterprise during a period from transactions and other events and circumstances from sources not shown in the income statement. The period includes all changes in equity except those resulting from INVESTMENTS by owners and distributions to owners.


Consolidated Financial Statements

Combined FINANCIAL STATEMENTS of a parent company and one or more of its subsidiaries as one economic unit.



BUSINESS COMBINATION of two or more entities that occurs when the entities transfer all of their NET ASSETS to a new entity created for that purpose.


Consumer Goods

Goods bought for personal or household use, as distinguished from capital goods or producer’s goods, which are used to produce other goods.



An event that might happen but that is not likely or planned.


Contingent Liability

Potential LIABILITY arising from a past transaction or a subsequent event.


Contra Account

ACCOUNT considered to be an offset to another account. Generally established to reduce the other account to amounts that can be realized or collected.


Contra-Liability Account

A deduction from a LIABILITY, such as discounts on notes payable, which is a deduction from the balance of notes payable.



In general, agreement by which rights or acts are exchanged for lawful consideration.


Contribution Margin

The excess of REVENUES over all variable costs related to a particular sales volume.



Exchange of a convertible security such as a BOND into another security such as a fixed number of shares of the issuing CORPORATION’s COMMON STOCK.



An exclusive right granted by the federal government to the possessor to publish and sell literary, musical, or other artistic materials for a period of the author’s life plus 50 years, including computer programs.


Corporate Income Tax

The TAX that an incorporated business must pay to the federal government and, often, to state and city governments as well.


Cost Accounting

Procedures used for rationally classifying, recording, and allocating current or predicted costs that relate to a certain product or production process.


Cost Basis

Original price of an ASSET, used in determining CAPITAL GAIN.


Cost of Capital

Rate of return that a business could earn if it chose another investment with equivalent risk.


Cost of Goods Sold

Figure representing the cost of buying raw materials and producing finished goods.



Entry on the right side of a DOUBLE-ENTRY BOOKKEEPING system that represents the reduction of an ASSET or expense or the addition to a LIABILITY or REVENUE.


Credit Agreement

Arrangement in which one party borrows or takes possession in the present by promising to pay in the future.


Credit Balance

BALANCE remaining after one of a series of bookkeeping entries. This amount represents a LIABILITY or income to the entity.



Party that loans money or other ASSETS to another party.


Current Asset

ASSET that one can reasonably expect to convert into cash, sell, or consume in operations within a single operating cycle, or within a year if more than one cycle is completed each year.


Current Liability

Obligation whose LIQUIDATION is expected to require the use of existing resources classified as CURRENT ASSETS, or the creation of other current liabilities.


Current Value

1) Value of an ASSET at the present time as compared with the asset’s HISTORICAL COST. (2) In finance, the amount determined by discounting the future revenue stream of an asset using COMPOUND INTEREST PRINCIPLES.


Individual or firm acting as a principal in a securities transaction.



Entry on the left side of a DOUBLE-ENTRY BOOKKEEPING system that represents the addition of an ASSET or expense or the reduction to a LIABILITY or REVENUE.


Debit Balance

BALANCE remaining after one or a series of bookkeeping entries. This amount represents an ASSET or an expense of the entity.



General name for money, notes, BONDS, goods or services which represent amounts owed.



Party owing money or other ASSETS to a CREDITOR.



To misuse or embezzle funds.


Deferred Charge

Income received but not earned until all events have occurred. Deferred income is reflected as a LIABILITY.


Deferred Income Taxes

ASSETS or LIABILITIES that arise from timing or measurement differences between tax and accounting principles.



Financial shortage that occurs when LIABILITIES exceed ASSETS.



Decline in the prices of goods and services.



Expense allowance made for wear and tear on an ASSET over its estimated useful life.


Detailed Income Statement

A complete and explicit statement of an economic entity’s financial activities and holdings.


Direct Labor Costs

The labor cost is for specific work that can be easily and economically traced to an end product.


Direct Material

A material that will become part of a finished product and can be easily and economically traced to specific product units.


Direct Overhead

Portion of OVERHEAD costs allocated to manufacturing, by the application of a standard factor termed a BURDEN RATE or OVERHEAD APPLICATION RATE.



Payment by cash or check.


Distribution Expense

Expense of selling, advertising, and delivery of goods and services.



Payment by a business entity to its owners of items such as cash ASSETS, stocks, or earnings.



Distribution of earnings to owners of a CORPORATION in CASH, other ASSETS of the corporation, or the corporation’s CAPITAL STOCK.


Double-Entry Bookkeeping

Method of recording financial transactions in which each transaction is entered in two or more accounts and involves two-way, self-balancing posting. Total DEBITS must equal total CREDITS.

Due Date

Each governing agency and its forms scheduled reporting and most importantly payments have a required due date. It is this date that if most files timely may result in a penalty, fine, and commence interest charges.

Earned Income

Wages, salaries, professional fees, and other amounts received as compensation for services rendered.



The study of the ways goods and services are produced, transported, sold, and used.


Ending Inventory

Merchandise on hand at the end of an accounting period



Act that departs from what should be done; imprudent deviation, unintentional mistake or omission.



Money or property put into the custody of a third party for delivery to a GRANTEE, only after fulfillment of specified conditions.



Transfer of money, property or services in exchange for any combination of these items.



Amount of a taxpayer’s income that is not subject to tax. All individuals, TRUSTS, and estates qualify for an exemption unless they are claimed as a dependent on another individual’s tax return. Exemptions also are granted to taxpayers for their dependents.



Payment, either in CASH, by assuming a LIABILITY, or by surrendering ASSET.



Something spent on a specific item or for a particular purpose.


External Reporting

Reporting to stockholders and the public, as opposed to internal reporting for management’s benefit.


Selling a RECEIVABLE at a discounted value to a third party for cash.


Factoring: Over-Advances

Circumstance where a business receives more money from a factor than the value of the RECEIVABLES, which is a loan against inventory in anticipation of future sales.


Factory Overhead Costs

Various production-related costs that cannot be practically or conveniently traced to an end product.



ACCOUNTING method of valuing INVENTORY under which the costs of the first goods acquired are the first costs charged to expense. Commonly known as FIFO.


Financial Institution

Organization engaged in any of the many aspects of finance including commercial banks, thrift institutions, investment banks, securities brokers and dealers, credit unions, investment companies, insurance companies, and REAL ESTATE INVESTMENT TRUSTS.


Financial Statements

Presentation of financial data including BALANCE SHEETS, INCOME STATEMENTS and STATEMENTS OF CASH FLOW, or any supporting statement that is intended to communicate an entity’s financial position at a point in time and its results of operations for a period then ended.


Finished Goods

The products that have been made and are ready for sale.


Finished Goods Inventory

An inventory account unique to manufacturing operations.



A business partnership, especially when it is unincorporated.


Fiscal Year

Period of 12 consecutive months chosen by an entity as its ACCOUNTING period which may or may not be a calendar year.


Fixed Assets

Tangible LONG TERM ASSETS used in the continuing operation of a business that are unlikely to change for a long time.


Fixed Costs

Costs that remain constant within a defined range of activity, volume, or time period.


Fixed Price

In a public offering of new SECURITIES, price at which investment bankers in the underwriting syndicate agree to sell the issue to the public.



Attachment to real property that is not intended to be moved and would create damage to the property if it were moved.



Term used when discussing INVENTORIES. Inventory cannot be valued lower than the “floor” which is the net realizable value of the inventory less an allowance for a normal profit margin.


Free On Board (FOB)

Indicates the point at which title to goods passes.


FOB Destination

A shipping term that means that the seller bears transportation costs to the place of delivery.


FOB Shipping Point

A shipping term that means that the buyer bears transportation costs from the point of origin.



Prospective FINANCIAL STATEMENTS that are an entity’s expected financial position, results of operations, and cash flows.


Forecasted Balance Sheet

A balance sheet that projects the financial position of a business for a future period.


Forecasted Income Statement

An INCOME STATEMENT that projects the NET INCOME of a business for a future period.


Forecasting of Cash Flow

Projecting the cash receipts and the cash payments for a future period.



Seizure of COLLATERAL by a CREDITOR when DEFAULT under a loan agreement occurs.


Foreign Exchange

Instruments employed in making payments between countries.



Legal arrangement whereby the owner of a trade name, franchisor, contracts with a party that wants to use the name on a non-exclusive basis to sell goods or services, franchisee. Frequently, the franchise agreement grants strict supervisory powers to the franchisor over the franchisee which, nevertheless, is an independent business.



Willful misrepresentation by one person of a fact inflicting damage on another person.


Freight In

Transportation charges on merchandise purchased for resale.


Freight Out

Transportation charges on merchandise sold; an operating expense.


Full Disclosure

Requirement to disclose all material facts relevant to a transaction.


Fundamental Analysis

Research of such factors as interest rates, gross national product, inflation, unemployment, and inventories as tools to predict the direction of the economy.



Refinancing a DEBT on or before its MATURITY; also called REFUNDING and, in certain instances, pre-refunding.


Future Contract

Transferable agreement to deliver or receive during a specific future month a standardized amount of a commodity.


Future Value

The amount that an investment will be worth at a future date if it is invested at compound interest.


Excess of REVENUES received over costs relating to a specific transaction.


General Journal

The simple and most flexible type of journal.


General Ledger

Collection of all ASSET, LIABILITY, owners EQUITY, REVENUE, and expense accounts.


Generally Accepted Accounting Principles (GAAP)

Conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. The highest level of such principles are set by the FINANCIAL ACCOUNTING STANDARDS BOARD (FASB).


Generally Accepted Auditing Standards (GAAS)

Standards set by the AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA) which concern the AUDITOR’S professional qualities and judgment in the performance of his or her AUDIT and in the actual report.


Goods Available for Sale

The sum of beginning inventory and the net cost of purchases during a period; the total goods available for sale to customers during an accounting period.



Premium paid in the acquisition of an entity over the fair value of its identifiable tangible and intangible ASSETS less LIABILITIES assumed.



Person to whom property is transferred.



(1) Person who transfers property. (2) Person who creates a trust.


Gross Income

The beginning point for the determination of income, including income from whatever sources derived.


Gross Margin

The difference between NET SALES and COST OF GOODS SOLD.


Gross Sales

The total amount of sales for cash and on credit accumulated during a specific accounting period.



Legal arrangement involving a promise by one person to perform the obligations of a second person to a third person, in the event the second person fails to perform.

Historical Cost

Original cost of an asset to an entity.


Holding Period

The time in which a taxpayer acquires property and the date on which it is sold.


Inflow of REVENUE during a period of time.


Income from Operation

Gross margin with operating expenses subtracted.


Income Statement

Summary of the effect of REVENUES and expenses over a period of time.



Process by which a COMPANY receives a state charter allowing it to operate as a CORPORATION.


Indirect Cost

Any cost that cannot be conveniently and economically traced to a specific department; a manufacturing cost that is not easily traced to a specific product and must be assigned using an allocation method.


Indirect Labor Costs

Labor costs for production-related activities that cannot be connected with or conveniently and economically traced to a specific end product.


Indirect Manufacturing Costs

Various production-related costs that cannot be practically or conveniently traced to an end product.


Indirect Materials

Minor materials and other production supplies that cannot be conveniently and economically traced to specific products.


Indirect Method

The procedure for converting the INCOME STATEMENT from an ACCRUAL to a CASH BASIS.



Rise in the prices of goods and services, as happens when spending increases relative to the supply of goods on the market.


Inflation Rate

Rate of change in prices.



Inability to pay DEBTS when due.



When an entity’s LIABILITIES exceed its ASSETS.


Intangible Asset

Asset having no physical existence such as trademarks and patents.


Interest Rate

An amount of money charged for borrowing money or paid for the use of somebody else’s money.


Internal Audit

AUDIT performed within an entity by its staff rather than an independent certified public accountant.


Intrinsic Value

Valuation determined by applying data inputs to a valuation theory or model.



Tangible property held for sale, or materials used in a production process to make a product.



EXPENDITURE used to purchase goods or services that could produce a return to the investor.



Bill prepared by a seller of goods or services and submitted to the purchaser.

Joint Venture

When two or more persons or organizations gather CAPITAL to provide a product or service. Often carried out as a PARTNERSHIP.



Any book containing original entries of daily financial transactions.


Journal Entry

A notation in the GENERAL JOURNAL. It records a single transaction.


Writing checks against a bank account with insufficient funds to cover them, hoping that the bank will receive deposits before the checks arrive for clearance.


Conveyance of land, buildings, equipment or other ASSETS from one person (LESSOR) to another (LESSEE) for a specific period of time for monetary or other consideration, usually in the form of rent.


Lease Acquisition Cost

Price paid by a real estate limited partnership, when acquiring a lease, including legal fees and related expenses.


Lease-Purchase Agreement

Agreement providing that portions of lease payments may be applied toward the purchase of the property under lease.



Property INTEREST a LESSEE owns in the leased property.



Any book of accounts containing the summaries of debit and credit entries.


Ledger Account

A complete record of the transactions recorded in each individual account.



Individual or firm that extends money to a borrower with the expectation of being repaid, usually with INTEREST.



Person or entity that has the right to use property under the terms of a LEASE.



Owner of property, the temporary use of which is transferred to another (LESSEE) under the terms of a LEASE.


Letter of Credit

Conditional bank commitment issued on behalf of a customer to pay a third party in accordance with certain terms and conditions. The two primary types are commercial letters of credit and standby letters of credit.


Letter of Intent

Any letter expressing an intention to take an action, sometimes subject to other action being taken.



DEBTS or OBLIGATIONS owed by one entity (DEBTOR) to another entity (CREDITOR) payable in money, goods, or services.


Liquid Assets

Cash, cash equivalents, and marketable SECURITIES.



Form of doing business combining LIMITED LIABILITY for all owners (called members) with taxation as a PARTNERSHIP. An LLC is formed by filing ARTICLES OF ORGANIZATION with an appropriate state official. Rules governing LLCs vary significantly from state to state.



Transaction wherein an owner of property, called the LENDER allows another party, the borrower, to use the property.


Long-Term Asset

An ASSET that has the following characteristics: (1) it has a useful life of more than one year; (2) it is acquired for use in the operation of a business; and (3) it is not intended for resale to customers.


Long-Term Debt

DEBT with a maturity of more than one year from the current date.


Long-Term Liability

A DEBT that falls due more than one year in the future or beyond the normal OPERATING CYCLE, or that is to be paid out of noncurrent assets.



Excess of EXPENDITURES over REVENUE for a period or activity. Also, for tax purposes, an excess of basis over the amount realized in a transaction.


Combined fields of policy and administration and the people who provide the decisions and supervision necessary to implement the owner’s business objectives and achieve stability and growth.



Buying or selling a SECURITY to create a false appearance of active trading and thus influence other investors to buy or sell shares.



To make or process (a product), especially by using machines.


Manufacturing Overhead




Excess of selling price over the unit cost.


Margin of Profit

Relationship of gross profits to net sales.


Marginal Cost

Increase or decrease in the TOTAL COSTS of a business firm as the result of one more or one less unit of output.


Market Capitalization



Market Price

Last reported price at which a SECURITY was sold on an exchange.



The amount added to the price of a product by a retailer to arrive at a selling price.



Moving goods and services from the provider to consumer.



The substance or substances from which something is made.



Items that can be bought or sold; commercial goods.


Merchandise Inventory

The goods on hand at any one time that are available for sale to customers in the regular course of business.



BUSINESS COMBINATION that occurs when one entity directly acquires the ASSETS and LIABILITIES of one or more entities and no new corporation or entity is created.


Mixed Costs

Costs that result when both VARIABLE COSTS and FIXED COSTS are charged to the same GENERAL LEDGER account.


Money Laundering

The use of an intermediate agent, such as a bank, to disguise the source of money received from illegal activities.



Legal instrument evidencing a security interest in ASSETS, usually real estate.Mortgages serve as COLLATERAL for PROMISSORY NOTES.


Something that can be sold or transferred to another party in exchange for money or as settlement of an obligation.

Net Assets

Excess of the value of SECURITIES owned, cash, receivables, and other ASSETS over the LIABILITIES of the company.


Net Current Assets

Difference between current assets and current liabilities; another name for WORKING CAPITAL.


Net Income

Excess or DEFICIT of total REVENUES and GAINS compared with total expenses and losses for an ACCOUNTING period.


Net Loss

The difference between expenses and REVENUES when expenses exceed revenues over a period of time.


Net Sales

Sales at gross invoice amounts less any adjustments for returns, allowances, or discounts taken.



Type of incorporated organization in which no stockholder or TRUSTEE shares in profits or losses and which usually exists to accomplish some charitable, humanitarian, or educational purpose.


Notes Payable

Collective term for written promissory notes that are due in less than one year.


Notes Receivable

Collective term for written promissory notes that are due in less than one year and are held by the entity to whom payment is promised.



Value assigned to ASSETS or LIABILITIES that is not based on cost or market (e.g., the value of a service not yet rendered).


The process of becoming out-of-date.


Operating Cycle

Period of time between the acquisition of goods and services involved in the manufacturing process and the final cash realization resulting from sales and subsequent collections.


Operating Expense

An EXPENSE other than COST OF GOODS SOLD that is incurred in running a business.


Operating Profit (or Loss)

The difference between the REVENUES of a business and the related costs and expenses, excluding INCOME derived from a sources other than its regular activities and before income deductions.


Opportunity Cost

Highest price or rate of return an alternative course of action would provide.


Organization Expenditures

The costs of organizing a trade or business or for profit activity before it begins active business.


Original Cost

In ACCOUNTING, all costs associated with the acquisition of an ASSET.



Not settled or paid.


Outstanding Check

A CHECK that has been written by the drawer and deducted on his or her records but has not reached the bank for payment and is not deducted from the bank BALANCE by the time the bank issues its statement.



Sold to customers at retail and without any special restrictions.



Costs of a business that are not directly associated with the production or sale of goods or services.

Payback Period

In capital budgeting; the length of time needed to recoup the cost of capital investment.



The various government codes contain numerous provisions which impose penalties on a taxpayer (any type of taxpayer) for failure to perform a specific act or omitting vital information on a return.



An interval of time with a specified length or characterized by certain conditions.


Perpetual Inventory

System that requires a continuous record of all receipts and withdrawals of each item of INVENTORY.


Petty Cash

A small amount of CASH that a company keeps on hand to pay for minor expenses in an office.


Phantom Income

Income reported on a TAX BASIS for which no cash or financial benefit is realized.


Physical Inventory

An actual count of all MERCHANDISE on hand at the end of an accounting period.



A building or group of buildings where something is made or processed; factory.


Pledged Asset

ASSET placed in a TRUST and used as COLLATERAL for a DEBT.


Post-Closing Trial Balance

A trial BALANCE prepared at the end of an accounting period after all adjusting and closing entries have been posted; a final check on the balance of the LEDGER.



(1) Excess amount paid for a BOND over its face amount. (2) In insurance, the cost of specified coverage for a designated period of time.


Prenuptial Contract

Agreement between a future husband and wife that details how the couple’s financial affairs are to be handled both during the marriage and in the event of divorce.


Prepaid Expense

Cost incurred to acquire economically useful goods or services that are expected to be consumed in the revenue-earning process within the operating cycle.



Face amount of a SECURITY, exclusive of any PREMIUM or INTEREST. The basis for INTEREST computations.


Pro Forma

Presentation of financial information that gives effect to an assumed event (e.g., MERGER).


Pro Rata

Distribution of an expense, fund, or DIVIDEND proportionate with ownership.


Product Line

The place in a factory where products are made.



The act or process of creating something.



Positive difference that results from selling products and services for more than the cost of producing these goods.


Profit Margin

Used to measure the percentage of each sales dollar that results in NET INCOME.



The ability to earn enough INCOME to attract and hold INVESTMENT capital.


Promissory Note

Evidence of a DEBT with specific amount due and interest rate. The note may specify a maturity date or it may be payable on demand.


Property, Plant, and Equipment

Long-term tangible assets used in the continuing operation of a business for a long time.



Business owned by an individual without the limited liability protection of a CORPORATION or a LIMITED LIABILITY COMPANY (LLC). Also known as SOLE PROPRIETORSHIP.


Purchase Method of Accounting

ACCOUNTING for a MERGER by adding the acquired company’s ASSETS at the price paid for them to the acquiring company’s assets.


Purchase Order

Written authorization to a vendor to deliver specified goods or services at a stipulated price.


Purchases Returns and Allowances

A CONTRA ACCOUNT used under the PERIODIC INVENTORY SYSTEM to accumulate CASH refunds, credits on ACCOUNT, and other allowances made by suppliers for unsatisfactory or incorrect MERCHANDISE that was originally purchased for resale.


Relating to quality, especially as distinguished from quantity or amount.



An operating environment in which a company’s product or service meets a customer’s specifications the first time it is produced or delivered.

Rate of Return

The amount of PROFIT or INTEREST earned on an INVESTMENT, usually expressed as a percentage, such as an interest; the COST OF CAPITAL; the cost of money.


Raw Material

Something in its natural state that will be used in a manufacturing process.


Real Income

Income of an individual, group, or country adjusted for changes in purchasing power caused by INFLATION.


Real Property

LAND and improvements, including buildings and PERSONAL PROPERTY, that is permanently attached to the land or customarily transferred with the land.


Realized Profit (or Loss)

PROFIT or LOSS resulting from the sale or other disposal of a SECURITY.



Amounts of money due from customers or other DEBTORS.



Downturn in economic activity, defined by many economists as at least two consecutive quarters of decline in a country’s gross national product.



Comparison of two numbers to demonstrate the basis for the difference between them.



Period in a business cycle when economic activity picks up and the gross national product grows, leading into the expansion phase of the cycle.



Replacing an old DEBT with a new one, often in order to lower the INTEREST costs of the issuer.


Regression Analysis

Statistical technique used to establish the relationship of a dependent variable, such as the sales of a COMPANY, and one or more independent variables, such as family formations, gross national product, per capita income, and other economic indicators.



EXPENDITURES for making good or whole the portions of property that have deteriorated through use or have been destroyed through accident.


Research & Development (R&D)

Research is a planned activity aimed at discovery of new knowledge with the hope of developing new or improved products and services. Development is the translation of research findings into a plan or design of new or improved products and services.


Residual Value

The estimated NET scrap, salvage, or trade-in value of a TANGIBLE ASSET at the estimated date of disposal.


Retained Earnings

Accumulated undistributed earnings of a company retained for future needs or for future distribution to its owners.


Return on Assets

A measurement of a company’s PROFITABILITY or overall earning power, that is, how efficiently a company uses its assets to produce INCOME. It is found by dividing INCOME by average total assets.


Revenue Recognition

Method of determining whether or not income has met the conditions of being earned and realized or is realizable.



Sales of products, merchandise, and services; and earnings from INTEREST, DIVIDEND, rents.

Salvage Value

Selling price assigned to retired FIXED ASSETS or merchandise unsalable through usual channels.


Secondary Market

EXCHANGES and OVER-THE-COUNTER markets where securities are bought and sold subsequent to original issuance, which took place in the primary MARKET.


Separate Entity

A business that is treated as distinct from its creditors, customers, and owners.



State of being able to meet maturing OBLIGATIONS as they come due.



Capable of paying one’s financial obligations.



Assumption of RISK in anticipation of gain but recognizing a higher than average possibility of LOSS.


Standard Cost

Realistic costs for direct materials, direct labor, and factory overhead that have been determined before they occur.


Start-Up Costs

(1) Costs, excluding acquisition costs, incurred to bring a new unit into production. (2) Costs incurred to begin a business.


Statement of Cash Flows

One of the basic FINANCIAL STATEMENTS that is required as part of a complete set of financial statements



COMPANY of which more than 50% of the voting shares are owned by another CORPORATION, called the PARENT COMPANY.



Not needed; extra.


The act or an instance of taking control of something, especially by force.


Tangible Asset

ASSETS having a physical existence, such as cash, land, buildings, machinery, or claims on property, investments or goods in process.



Charge levied by a governmental unit on income, consumption, wealth, or other basis.


Tax Basis

Original cost of an ASSET, less ACCUMULATED DEPRECIATION, that goes into the calculation of a GAIN or LOSS for TAX purposes.


Taxable Earnings

The amount of an employee’s earnings subject to a TAX.


Taxable Income

Taxable income is generally equal to a taxpayer’s ADJUSTED GROSS INCOME during the TAX YEAR less any allowable EXEMPTIONS and deductions.



Period of time during which the conditions of a CONTRACT will be carried out.


Term Loan

Loan for a specified time period.


Total Cost

Sum of FIXED COSTS, semi-variable costs, and VARIABLE COSTS.


Total Direct Labor Cost Variance

The difference between the actual LABOR costs incurred and the standard labor costs for the good units produced.


Total Direct Materials Cost Variance

The difference between the actual materials costs incurred and the standard costs of those items.


Total Gain

Excess of the proceeds realized on the sale of either INVENTORY or noninventory goods.


Total Inventory Method

A lower-of-cost-or-market method of valuing INVENTORY.


Total Quality Management

An organizational environment in which all business functions work together to build quality into the firm’s products or services.



Buying or selling goods and services among companies, states, or countries, called commerce.



Distinctive name, symbol, motto, or emblem that identifies a product, service, or firm.



To move or cause to go from one place, person, or thing to another.


Trial Balance

A comparison of the total of DEBIT and CREDIT balances in the LEDGER to check that they are equal.



The number of times a particular product is sold and restocked during a fixed period of time.

Unaudited Financial Statements

FINANCIAL STATEMENTS which have not undergone a detailed AUDIT examination by an independent CERTIFIED PUBLIC ACCOUNTANT (CPA).


Unearned Income

Payments received for services which have not yet been performed.


Unlimited Liability

The responsibility of all the partners in a COMPANY for its DEBT.


Unrealized Profit (or Loss)

PROFIT or LOSS that has not become actual.


The process of determining the PRESENT VALUE of a BOND based on the current MARKET INTEREST RATE.


Value-Added Tax (VAT)

Consumption TAX levied on the VALUE added to a product at each stage of its manufacturing cycle as well as at the time of purchase by the ultimate consumer.


Variable Costs

Total costs that change in direct proportion to changes in productive output or any other measure of volume.


Variable Manufacturing Costs

Costs that increase or decrease in direct proportion to the number of units produced.


Variable Overhead

The portion of mixed or semi-variable overhead costs that changes proportionately with some measure of activity or output.



Deviation or difference between an estimated value and the actual value.



Deviation or difference between an estimated value and the actual value.


Payment for services of employees at an hourly rate.



Middleman or distributor who sells mainly to retailers, jobbers, other merchants, and industrial, commercial, and institutional users as distinguished from consumers.


Work in Progress

INVENTORY account consisting of partially completed goods awaiting completion and transfer to finished inventory.


Working Capital



Write Off