The Entrepreneur’S Dictionary of Business and Financial Terms

Copyright © 2014 by Khwaja Masoom.

ISBN:        Hardcover        978-1-4828-9583-4

Softcover         978-1-4828-9582-7

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Contents

A

B

C

D

E

F

G

H

I

J

K

L

M

N

O

P

Q

R

S

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U

V

W

X

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FOREWORD

During my academic years, it was impossible to find a single source book that included a comprehensive list of business and financial terminologies and their meanings. I had to rely on a number of different sources then and also throughout my professional career. The dictionaries in business field is merely restricted to a number of specific subjects or created for certain textbooks. Therefore students as well as professionals have to rely on multiple sources to gain the meanings of words they need in their day-to-day work. The aim of compiling a single source dictionary, which you are currently holding, is because of the needs I felt for academics and entrepreneurs in this field. This dictionary is compiled from many strong and modern sources and addresses a wide range of business, financial and accounting terminologies. It is targeted for business, commerce and economics students and can also be handy for professionals and entrepreneurs who need to find just the right meaning for the words they are looking for. It is designed as a friendly interface and easy reference method much similar to an oxford language dictionary. The choice of words and sentences in explanations are chosen to suit a basic and advanced understanding and that will be usable by all users.

This dictionary was compiled and carefully constructed during four years and is a first of its kind to be used as a single source reference to students and professionals in the field of business. I will be grateful to receive your feedback in improving the contents of this dictionary and provide improved editions in future versions. Join us also on Facebook (www.facebook.com/Entrepreneurs.Dictionary) to share your comments and ideas.

AAA: See Accumulated Adjustment Account.

A&E: Can mean either Appropriation & Expense or Analysis & Evaluation.

A&G: Administrative & General.

A&M: Additions and Maintenance.

A&P: Administrative and Personnel.

AAT: In Great Britain, it is Association of Accounting Technicians.

ABA: Accredited Business Accountant or Accredited Business Advisor. It is a national credential conferred by Accreditation Council for Accountancy and Taxation to professionals who specialize in supporting the financial needs of individuals and small to medium sized businesses. ABA is the only nationally recognized alternative to the CPA. Most accredited individuals do not perform audits. Generally, they are small business owners themselves. In addition to general accounting work, CPAs are also heavily schooled in performing audits; however, only a small fraction of America’s businesses require an audit. In general, a CPA has majored in accounting, passed the CPA examination and is licensed to perform audits. An ABA has majored in accounting, passed the ABA comprehensive examination and in most states is not licensed to perform audits.

Abacus: (1) Instrument of ancient origin used to perform arithmetic calculations by sliding counters along rods or in grooves. (2) Semi-annual accounting research journal (founded in 1965) published by the Sydney University Press, edited by the University of Sydney, Department of Accounting. The subject matter covers all areas of accounting including international accounting.

Abandonment: Voluntary surrender of property, owned or leased, without naming a successor as owner or tenant. The property will generally revert to a person holding a prior interest or, in cases where no owner is apparent, to the state.

Abandonment Option: The option of terminating an investment earlier than originally planned.

Abatement: Complete removal of an amount due, (usually referring to a tax abatement, a penalty abatement or an interest abatement within a governing agency.) In general, it is the reduction or lessening. In law, it is the termination or suspension of a lawsuit. For example, an abatement of taxes is a tax decrease or rebate.

ABC: See Activity-Based Costing.

ABC Method: Inventory management method that categorizes items in terms of importance. Thus, more emphasis is placed on higher dollar value items (As) than on lesser dollar value items (Bs), while the least important items (Cs) receive the least time and attention. Inventory should be analyzed frequently when using the ABC method. The procedure for ABC analysis follows: (a) Separate finished goods into types (chairs of different models, and so on); separate raw materials into types (screws, nuts, and so on). (b) Calculate the annual dollar usage for each type of inventory (multiply the unit cost by the expected future annual usage). (c) Rank each inventory type from highest to lowest, based on annual dollar usage. (d) Classify the inventory as A-the top 20%; B-the next 30%; and C-the last 50% of dollars usage, respectively. (e) Tag the inventory with its appropriate ABC classification and record, those classifications in the item inventory master records.

ABM: See Activity Based Management.

Abnormal Expense: See Extraordinary Items.

Abnormal Gain: See Normal Loss.

Abnormal Items: See Extraordinary Items.

Abnormal Loss: See Normal Loss.

Abnormal Returns: Part of the return that is not due to systematic influences (market wide influences). In other words, abnormal returns are above those predicted by the market movement alone. Related: Excess Returns. Or it is the difference between the actual return and that is expected to result from market movements (normal return).

Abnormal Spoilage: Spoilage that is recognized as a loss when discovered. Normal spoilage is inherent in the manufacturing process and is unavoidable in the short run. Abnormal spoilage is spoilage beyond the normal spoilage rate. It is controllable because it is a result of inefficiency. It is not a cost of good production, but rather it is a loss for the period. Costs are assigned to the spoiled units and then credited to work-in-progress inventory and debited to a Joss account. Abnormal Spoilage is spoilage that is not part of everyday operations. It occurs for reasons such as the following: out-of-control manufacturing processes, unusual machine breakdowns, and unexpected electrical outages that result in a number of spoiled units. Some abnormal spoilage is considered avoidable; that is, if managers monitor processes and maintain machinery appropriately, little spoilage will occur. To highlight these types of problems so that they can be monitored, abnormal spoilage is recorded in a Loss from Abnormal Spoilage Account in the general ledger and is not included in the job costing inventory accounts (work in process, finished goods, and cost of goods sold).

Above Full Employment Equilibrium: A situation in which macroeconomic equilibrium occurs at a level of real GDP above long-run aggregate supply.

Above the Line: This term can be applied to many aspects of accounting. It means transactions, assets etc., that are associated with the everyday running of a business. See Below the Line. For the individual, is a term derived from a solid bold line on Form 1040 and 1040A above the line for adjusted gross income. Items above the line prior to coming to adjusted gross income, for example, can include: IRA contributions, half of the self-employment tax, self-employed health insurance deduction, Keogh retirement plan and self-employed SEP deduction, penalty on early withdrawal of savings, and alimony paid. A taxpayer can take deductions above the line and still claim the standard deduction. In accounting, denotes revenue and expense items that enter fully and directly into the calculation of periodic net income, in contrast to below the line items that affect capital accounts directly and net income only indirectly.

Absolute Advantage: The situation that exists when a given amount of resources can produce more of some product in one country than in another.

Absolute Change: A numerical change in an empirical value e.g. cost of goods was reduced by $9.00.

Absolute Poverty: When only a subsistence level is attained. When only the minimum levels of food, clothing and shelter can be met.

Absolute Priority: Rule in bankruptcy proceedings whereby senior creditors are required to be paid in full before junior creditors receive any payment.

Absorb: (1) To incorporate or assimilate amounts in an account in a way in which the first firm or entity loses its identity and is absorbed within the second firm or entity. Examples include the sequential transfer of expenditure account amounts to work-in-progress, finished goods, and cost of sales. (2) To distribute or spread costs by the process of appropriation or allocation. (3) Is to assimilate, transfer or incorporate amounts in an account or a group of accounts in a manner in which the first entity loses its identity and is absorbed within the second entity. For example, see Absorption Costing.

Absorbed Costs: Incorporates both variable and fixed costs.

Absorption: See Absorb.

Absorption Costing: Method in which the costs of manufacturing, variable and fixed, are treated as product costs, the non-manufacturing costs (i.e., administrative and selling expenses) are classified as period costs. Absorption costing for inventory valuation is required for external reporting.

[A comparison between absorption and direct costing follows:

Absorption Costing

1. Required for outside reporting 2. Includes fixed overhead as an inventoriable cost. 3. Stresses gross profit. 4. Has a higher net income when production exceeds sales

Variable Costing

1. Not accepted for outside reporting 2. Does not include fixed overhead as an inventoriable cost. 3. Stresses contribution margin. 4. Has a higher net income when sales exceed production]

Absorption Variance: The variance from budgeted absorption costing of manufactured product and the actual cost of the manufactured product.

ACAS: A body which mediates where conflict exists in business.

ACAT: Accreditation Council for Accountancy and Taxation. Is a national organization established in 1973 as a non-profit independent testing, accrediting and monitoring organization. The Council seeks to identify professionals in independent practice who specialize in providing financial, accounting and taxation services to individuals and small to mid-size businesses. Professionals receive accreditation through examination and/or coursework and maintain accreditation through commitment to a significant program of continuing professional education and adherence to the Council’s Code of Ethics and Rules of Professional Conduct.

ACB: Normally refers to ‘adjusted cost base.’

Accelerated Cost Recovery System (ACRS): Schedule of depreciation rates allowed for tax purposes.

Accelerated Depreciation: A method recognizing high, amounts of depreciation in the earlier years and lower amounts in the later years of a fixed asset’s life. Or the allocation of the cost of a plant asset to expense in an accelerated manner. This means that the amount of depreciation in the earlier years of an asset’s life is greater than the straight-line amount, but will be less in the later years. In total the amount of depreciation over the life of the asset will be the same as straight-line depreciation. The difference between accelerated and straight-line is the timing of the depreciation. For profitable companies, the use of accelerated depreciation on the income tax return will mean smaller cash payments for income taxes in the earlier years and higher cash payments for income taxes in later years.

Acceleration Clause: A clause (often in mortgages or other loans) where some action will occur ahead of schedule as a result of some other action. For example, an acceleration clause in a loan may mean that the full amount is due immediately if the debtor misses two monthly payments in a row.

Acceleration Hypothesis: The hypothesis that when national income is held above potential, the persistent inflationary gap will cause inflation to accelerate, and when national income is held below potential, the persistent recessionary gap will cause inflation to decelerate.

Accelerationist Theory: The theory that unemployment can only be reduced below the natural level at the cost of accelerating inflation.

Accelerator: The level of investment depends upon the rate of growth of demand. A given percentage change in demand may require a larger percentage change in investment. The accelerator shows by how much the rate of growth of investment exceeds the rate of growth of demand (and of output).

Accelerator Theory: The level of investment depends the rate of change of national income, and a result tends to be subject to be substantial fluctuations.

Acceptance: A drawee’s promise to pay either a Time Draft or Sight Draft. Normally, the acceptor signs his/her name after writing accepted (or some other words indicating acceptance) on the bill along with the date. That acceptance effectively makes the bill a promissory note, i.e. the acceptor is the maker and the drawer is the endorser.

Acceptance Sampling: Is sampling to determine whether internal control compliance is greater than or less than the tolerable deviation rate.

Accidential Means Death Benefit: An option in an insurance policy where the payment is a multiple (frequently double) the policy face amount in the case of death by accidential means. Death must usually result from the accidential means within a certain time period (usually 90 days).

Accommodation Endorsement: (1) the guarantee given by one legal entity to induce a lender to grant a loan to another legal entity. (2) A banking practice where one bank endorses the acceptances of another bank, for a fee, qualifying them for purchase in the acceptance market.

Account: (1) The detailed record of a particular asset, liability, owners’ equity, revenue or expense. A section in a ledger devoted to a single aspect of a business (e.g. a Bank account, Wages account, Office expenses account). (2) A record in the general ledger that is used to collect and store similar information. For example, a company will have a Cash account in which every transaction involving cash is recorded. A company selling merchandise on credit will record these sales in a Sales account and in an Accounts Receivable account.

Accountable Plan: An accountable plan is any reimbursement or other expense allowance arrangement of an employer that meets all of the following requirements (therefore excluding it from gross w-2 earned income and tax): (i) It provides reimbursements advances or allowances including per diem and meals, to employees for any job related deductible business expense; (ii) Employees must be able to substantiate expenses covered in the plan; (iii) Employee must return any excess advances or payments.

Account Aging: Usually refers to the methods of tracking past due accounts in accounts receivable based on the dates the charges were incurred. Account aging can also be used in accounts payable, to a lesser degree, to monitor payment history to suppliers. See also Aging of Accounts.

Account Analysis: A way to measure cost behavior. It selects a volume-related cost driver and classifies each account from the accounting records as a fixed or variable cost. The cost accountant then looks at each cost account balance and estimates either the variable cost per unit of cost driver activity or the periodic fixed cost.

Accountant: A person who performs accounting services. Accountants prepare financial statements and tax returns, audit financial records, and develop financial plans. They work in private accounting (e.g., for a corporation), public accounting (e.g., for a CPA firm), not-for-profit accounting (e.g., for a governmental agency). Accountants often specialize in a particular area such as taxes, cost accounting, auditing, and management advisory services. A book keeper is distinguished from an accountant as one who employs lesser professional skills. The bookkeeping function is primarily one of recording transactions in the journal and posting to the ledger.

Accountant’s Opinion: If an independent certified public accountant is requested to audit a company’s books, he will issue a opinion as to the condition of the financial statements. There are several degrees of opinion from clean to adverse. A clean opinion doesn’t mean that every number is correct, only that the financials fairly represent the position of the company. An adverse opinion means the financials don’t represent the position of the company. A disclaimer means the auditor can’t (for any number of reasons) express an opinion on the statements.

Accountants’ Report: Formal document that communicates an independent accountant’s: (i) expression of limited assurance on financial statements as a result of performing inquiry and analytic procedures (Review Report); (ii) results of procedures performed (Agreed-Upon Procedures Report); (iii) non-expression of opinion or any form of assurance on a presentation in the form of financial statements information that is the representation of management (Compilation Report); or (iv) an opinion on an assertion made by management in accordance with the Statements on Standards for Attestation Engagements (Attestation Report). An accountants’ report does not result from the performance of an audit. (See Auditors’ Report)

Account Balance: The amount remaining in an account after all additions and deductions have been made up to the current date.

Account Classification Method: Also called Account Analysis, is a cost estimation method that requires a study of an account in the general ledger. The experienced analysts use the account information as well as their own judgment to determine how costs will behave in the future.

Account Current: A running or continued account between two or more parties, or a statement of the particulars of such an account.

Account Distribution: The process by which debits and credits are identified to the correct accounts.

Account Group: In accounting, is a designation of a group of accounts of like type (for example: accounts receivable and fixed assets).

Accounting: Process of recording, measuring, interpreting, and communicating financial data. The accountant prepares financial statements to reflect financial condition and operating performance. Also, the accounting practitioner renders personal accounting services to clients such as preparing personal financial statements and tax planning. It is a system for collecting, summarizing, analyzing and reporting, in monetary terms, information about an organization primarily for management purposes. Some requirements are established by law or directives of state and federal agencies.

Accounting Change: Change in (i) An accounting principle; (ii) An accounting estimate; or (iii) the reporting entity that necessitates disclosure and explanation in published financial reports.

Accounting Concepts: Are the basic underlying assumptions that are adhered to in the preparation of financial statements, i.e., these include the assumptions of accruals, going concern, consistency and prudence.

Accounting Controls: Methods and procedures intended to safeguard assets, authorize transactions, and ensure the accuracy of financial records.

Accounting Convention: Methods or procedures employed generally by accounting practitioners. They are based on custom and are subject to change as new developments arise. The accountant in performing the reporting function should follow existing accounting conventions that apply to the given situation.

Accounting Cost: The value of an economic resource used up in production.

Accounting Cycle: This covers everything from opening the books at the start of the year to closing them at the end. In other words, everything you need to do in one accounting year accounting wise.

Accounting Data: Includes journals, ledgers and other records, such as spreadsheets, that support financial statements. It may be in computer readable form or on paper.

Accounting Diversity: The recognition that many diverse national and international accounting standards exist in the world.

Accounting Earnings: Earnings of a firm as reported on its income statement.

Accounting Entity: An organization, institution or being that has its own existence for legal or tax purposes. An accounting entity is often an organization with an existence separate from its individual members, for example, a corporation, partnership, trust, etc. See also Accounting Entity Assumption. Business or other economic unit (including subdivisions) being accounted for separately. A system of accounts is kept for the entity. An accounting entity is isolated so that recording and reporting for it are possible. Examples of accounting entities are corporations, partnerships, trusts, and industry segments. A distinction should be made between an accounting entity and a legal entity. For example, a proprietor’s accounting entity might be the business whereas the legal entity would include personal assets. Also, in the corporate environment, affiliated companies can be differently organized for legal and accounting purposes (e.g., industry segments).

Accounting Entity Assumption: States that a business is a separate legal entity from the owner. In the accounts the business’ monetary transactions are recorded only.

Accounting Equation: Assets = liabilities + owner’s equity. An expression of the relationship between the major categories of accounts on the organization’s balance sheet. A mathematical expression of the statement all assets are supplied by debt or by the owners. This also reflects the double entry nature of accounting. When you deposit cash in the bank from the owner’s investment, to keep the balance sheet balance, you have to increase an Asset (cash) and increase Proprietorship (owner’s equity).

Accounting Estimate: An approximation of a financial statement element. Estimates are included in historical financial statements because some amounts are uncertain pending outcome of future events and relevant data about events that have occurred cannot be accumulated on a timely, cost-effective basis.

Accounting Event: When the assets and liabilities of a business increase/decrease or when there are changes in owner’s equity. Transaction entered in the accounting records of a business. It can be an external transaction-that is, one with an outsider, such as recording a sale. It can also refer to an internal transaction such as making an adjusting entry (e.g., expense or revenue accrual).

Accounting Exposure: The change in the value of a firm’s foreign currency denominated accounts due to a change in exchange rates.

Accounting Income: The income derived through historical accrual based accounting. Income = the change in net assets occurring during the period excluding transactions with owners; i.e. transaction based.

Accounting Information Systems: Information systems that record and report business transactions, the flow of funds through an organizations, and produce financial statements. This provides information for the planning and control of business operations, as well as for legal and historical record keeping.

Accounting Insolvency: Total liabilities exceed total assets. A firm with a negative net worth is insolvent on the books.

Accounting Liquidity: The ease and quickness with which assets can be converted to cash.

Accounting Measurement and Disclosure: The concepts of measurement and information disclosure required for decision making.

Accounting Method: Any number of approaches for calculating the income of an entity. Usually applied to the general means of recognizing income and expenses, e.g., cash or accrual. But it can also apply to method of keeping inventories, etc.

Accounting Net Income Flows: The amounts reported on the income statement. Because of accrual accounting the net income flows will be different from the cash flow.

Accounting Package/Software: Usually, is a commercially available software program or suite that, with little customization, will satisfy the accounting system needs of the purchasing entity.

Accounting Period: Is the time period for which accounts are prepared, usually one year.

Accounting Principles: Rules and guidelines of accounting. They determine such matters as the measurement of assets, the timing of revenue recognition, and the accrual of expenses. The ground rules for financial reporting are referred to as generally accepted accounting principles (GAAP). An example of an accounting principle is accrual.

Accounting Principles Board (APB): This group preceded the current Financial Accounting Standards Board (FASB). The APB members served in a part-time capacity to determine the accounting standards from 1962 to 1973. The accounting rules established by the APB were titled Opinions and remain as part of the generally accepted accounting principles (unless superseded by standards issued by the FASB).

Accounting Procedure: Similar to accounting method, but applied to more routine issues. For example, the method of computing depreciation, handling small capital expenditures.

Accounting Profit: The difference between total revenues and total explicit costs.

Accounting Rate of Return: Is a method of computing the profitability where the total cash inflow over the life of the project is reduced by expenses. This amount is divided by the estimated life of the project to arrive at an annual return. That’s divided by the investment’s cost. The result is an average rate of return. See Discounted Cash Flow.

Accounting Ratio: Usually is the comparing of two or more sets of accounting data. Often this is done by dividing or in some other way manipulating one f item on the financial statement by another. Ratios help with the interpretation of financial statements by focusing on specific relationships.

Accounting Research Bulletin (ARB): These pronouncements were issued by the Committee on Accounting Procedures of the American Institute of Certified Public Accountants during the years 1953 to 1959. They were and are part of the generally accepted accounting principles unless superseded by pronouncements of the APB or FASB.

Accounting Software: Programs used to maintain books of account on computers. The software can be used to record transactions, maintain account balances, and prepare financial statements and reports. Many different accounting software packages exist, and the right package must be selected given the client’s circumstances and needs. An accounting software package typically contains numerous integrated modules (for example, spreadsheet and word processing abilities). Some modules are used to account for the general ledger, accounts receivable, accounts payable, payroll, inventory, and fixed assets.

Accounting Standard: For public accountants and accountants generally, is a mode of conduct, imposed by custom, law, professional body. The term contrasts with accounting policy in that the latter is formulated and is observed within a particular enterprise.

Accounting Standards Board (ASB): Makes, improves, amends and withdraws accounting standards. Many of ASBs specialize in the various fields or sectors of accounting.

Accounting System: Methods, procedures, and standards followed in accumulating, classifying, recording, and reporting business events and transactions. The accounting system includes the formal records and original source data. Regulatory requirements may exist on how a particular accounting system is to be maintained (e.g., insurance company).

Accounting Theory: Tries to describe the role of accounting and is composed of four types of accounting theory: classical inductive theories, income theories, decision usefulness theories, and information economics/agency theories: a. Classical inductive theories are attempts to find the principles on which current accounting processes are based; b. Income theories try to identify the real profit of an organization; c. Decision usefulness theories attempt to describe accounting as a process of providing the relevant information to the relevant decision makers; and, d. The information economics/agency theories of accounting see accounting information as a good to be traded between rational agents each acting in their own self-interest.

Accounting Timing Difference: The effect that a differed accounting event would have on the financials if taken into consideration e.g., the release of a deferred tax asset to the income statement as a deferred tax expense (i.e. the reversal of an accounting timing difference).

Accounting Treatment: The methods, processes and decisions as to any given accounting decision as to how a transaction is to be or is handled in compliance to GAAP and all applicable statutes.

Account Manager: An FIS user assigned to manage the activity in an account. The account manager is responsible for reviewing and approving financial transactions charged or credited to their account.

Account Number: A 7-digit number used in the Financial Information System to identify each revenue (income), expenditure (expense) or balance sheet account authorized in the accounting records. Account numbers are assigned by, and unique to, the organization to which they belong. The characters used have no significance to the FIS system.

Account Payable: Amount owed to a creditor for delivered goods or completed services.

Account Receivable: Claim against a debtor for an uncollected amount, generally from a completed transaction of sales or services rendered.

Account Reviewer: Someone assigned to review transactions on an account and certify the validity of all charges and credits.

Accounts Payable: Money owed to suppliers. This current liability account will show the amount a company owes for items or services purchased on credit and for which there was not a promissory note. This account is often referred to as trade payables (as opposed to notes payable, interest payable, etc.) it is A liability arising when a vendor provides goods or services that are not immediately paid for and where the liability is not formalized in writing but backed by the reputation and credit worthiness of the debtor. When a business using the accrual basis of accounting purchases goods or services the company reports an expense and an account payable. When payment is made the account payable is reduced.

Accounts Payable Ledger: A subsidiary ledger which holds the accounts of a business’s suppliers. A single control account is held in the nominal ledger which shows the total balance of all the accounts in the purchase ledger.

Accounts Payable to Sales: Measures the speed with which a company pays vendors relative to sales. Numbers higher than typical industry ratios suggest that the company is using suppliers assets (cash owed) to fund operations.

Accounts Receivable: Money owed by customers. An account in the General Ledger which contains the overall balance of the Sales Ledger. Net—The combined amount of the debit balance in the current asset account Accounts Receivable and the credit balance in the contra asset account Allowance for Doubtful Accounts. The difference between the balances in these two accounts is an approximation of the amount of the accounts receivable that is likely to turn to cash (be collected).

Accounts Receivable Financing: Financing where the company’s accounts receivable are used as collateral. This type of financing is usually short-term in nature.

Accounts Receivable Ledger: A subsidiary ledger which holds the accounts of a business’s customers. A single control account is held in the General Ledger which shows the total balance of all the accounts in the sales ledger.

Accounts Receivable Reserve: A reserve against bad debt. See also Reserve and Reserve Accounts.

Accounts Receivable Turnover: The ratio of net credit sales to average accounts receivable, which is a measure of how quickly customers pay their bills.

Accounts Receivable Turnover Ratio: The financial ratio which indicates the speed at which a company collects its accounts receivable. If a company’s turnover is 10, this means the company’s accounts receivable are turning over 10 times per year. It indicates that the company, on average, is collecting its receivables in 36.5 days (365 days per year divided by 10).

Accretion: (1) growth in assets through mergers, acquisitions, and internal expansion. Examples are timber, livestock, nursery stock, and aging of wine. (2) Adjustment of the difference between the face value of a bond and the price of the bond bought at an original discount.

Accretive: If a company acquires another and says the deal is ‘accretive to earnings’, it means that the resulting PE ratio (price/earnings) of the acquired company is less than the acquiring company. Example: Company ‘A’ has an earning per share (EPS) of $1. The current share price is $10. This gives a P/E ratio of 10 (current share price is 10 times the EPS). Company ‘B’ has made a net profit for the year of $20,000. If company ‘A’ values ‘B’ at, say, $180,000 (P/E ratio=9 [180,000 valuation/20,000 profit]) then the deal is accretive because company ‘A’ is effectively increasing its EPS (because it now has more shares and it paid less for them compared with its own share price). (See Dilutive )

Accrual: The recognition of when expenses when incurred or revenue when earned or regardless of when the actual cash is received or paid. The fiscal recording of items pertaining to a current period which would not have appeared on the General Ledger until a future period in the normal course of payment or receipt of the items. If during the course of a business certain charges are incurred but no invoice is received then these charges are referred to as accruals (they ‘accrue’ or increase in value). A typical example is interest payable on a loan where you have not yet received a bank statement. These items (or an estimate of their value) should still be included in the profit & loss account. When the real invoice is received, an adjustment can be made to correct the estimate. Accruals can also apply to the income side.

Accrual Accounting: Under this method of accounting, income is recognized when earned, whether or not collected, and expenses are recognized when events have occurred that determine that a liability exists and the amount of the liability can be ascertained with reasonable accuracy. For example, at December 31 you ship a customer 100 widgets. You have to record the income in that year, even though you won’t get paid until the following year. If you were buying the widgets, you could accrue the expense in the tax year you ordered them. There are some special rules for tax purposes and there can be a significant divergence between recognition of income and expenses for tax and financial accounting purposes.

Accrual Basis of Accounting: The accounting method under which revenues are recognized on the income statement when they are earned (rather than when the cash is received). The balance sheet is also affected at the time of the revenues by either an increase in Cash (if the service or sale was for cash), an increase in Accounts Receivable (if the service was performed on credit), or a decrease in Unearned Revenues (if the service was performed after the customer had paid in advance for the service).Under the accrual basis of accounting, expenses are matched with revenues on the income statement when the expenses expire or title has transferred to the buyer, rather than at the time when expenses are paid. The balance sheet is also affected at the time of the expense by a decrease in Cash (if the expense was paid for when it incurred), an increase in Accounts Payable (if the expense will be paid in the future), or a decrease in Prepaid Expenses (if the expense was paid in advance). It is wherein revenue and expenses are recorded in the period in which they are earned or incurred regardless of whether cash is received or disbursed in that period. This is the accounting basis that generally is required to be used in order to conform to generally accepted accounting principles (GAAP) in preparing financial statements for external users.

Accrual Bond: A bond on which interest accrues, but is not paid to the investor during the time of accrual. The amount of accrued interest is added to the remaining principal of the bond and is paid at maturity.

Accrual Concept: See Accrual Basis Of Accounting.

Accrual Method of Accounting: See Accrual Basis Of Accounting.

Accruals: See Accrual-Type Adjusting Entry.

Accrual Type Adjusting Entry: An adjusting entry made at the end of the accounting period in order to report (i) Revenues that have been earned but not yet entered into the accounting records, (ii) Expenses that have been incurred but have not yet been entered into the accounting records, (iii) Revenues already recorded that involve more than the current accounting period, (iv) Expenses already recorded that involve more than the current accounting period.

Accrue: To report a revenue or expense that has occurred, but has not yet been entered in the accounting records as of the end of the accounting period. Or To record an item in the accounting books when using the accrual method of accounting. For example, you accrue income when the customer signs a contract, even though you won’t receive any cash at that time. When you accrue an item of income or expense can depend on a number of factors including the entity’s procedures. IRS requirements here frequently diverge from accounting rules.

Accrued Assets: Assets from revenues earned but not yet received.

Accrued Expense: An expense that has occurred but the transaction has not been entered in the accounting records. Accordingly an adjusting entry is made to debit the appropriate expense account and to credit a liability account such as Accrued Expenses Payable or Accounts Payable.

Accrued Expenses Payable: A liability account that reflects the estimated amount a company owes for expenses that occurred, but have not yet been paid nor recorded through a routine transaction.

Accrued Future Service Benefit: The portion of a participant’s pension retirement benefit that relates to the participant’s period of service credited after the effective date of the plan but before a specified current date.

Accrued Income: This refers to income earned during an accounting period but not paid by the end of that period.

Accrued Interest: Interest earned but not paid since the last due date.

Accrued Inventory: Functions as a clearing account to establish a liability for inventory physically received into the warehouse, but for which a vendor invoice had not yet arrived.

Accrued Liability: Liabilities which are incurred, but for which payment is not yet made, during a given accounting period. Some examples in a manufacturing environment would be: wages, taxes, suppliers/vendors, etc.

Accrued Payroll: A liability arising from employees’ salary expense that has been incurred but not paid.

Accrued Revenue: Income that has been earned (by the sale of goods or performance of services) but not yet received as of the end of the accounting period.

Accumulated Adjustment Account (AAA): Means an account of the S corporation which is adjusted for the S period in a manner similar to the adjustments under § 1367 (except that no adjustment shall be made for income (and related expenses) which is exempt from tax under title 26 and the phrase (but not below) shall be disregarded in § 1367(b)(2)(A)) and no adjustment shall be made for Federal taxes attributable to any taxable year in which the corporation was a C corporation.

Accumulated Amortization: The cumulative charges against the intangible assets of a company over the expected useful life of the assets.

Accumulated Benefit Obligation (ABO): An approximate measure of the liability of a plan in the event of a termination at the date the calculation is performed. Related: Projected Benefit Obligation.

Accumulated Deficit: The term used in place of retained earnings when a corporation has a negative (debit) balance in its account Retained Earnings.

Accumulated Depletion: The cumulative amount of depletion expense pertaining to the natural resources shown on the balance sheet. The account has a credit balance and will be reported on balance sheet as a contra asset.

Accumulated Depreciation: The amount of a long term asset’s cost that has been allocated to Depreciation Expense since the time that the asset was acquired. Accumulated Depreciation is a long-term contra asset account (an asset account with a credit balance) that is reported on the balance sheet under the heading Property, Plant, and Equipment. It is the cumulative charges against the fixed assets of a company for wear and tear or obsolescence.

Accumulated Depreciation Account: This is an account held in the nominal ledger which holds the depreciation of a fixed asset until the end of the asset’s useful life (either because it has been scrapped or sold). It is credited each year with that year’s depreciation, hence the balance increases (i.e. accumulates) over a period of time. Each fixed asset will have its own accumulated depreciation account.

Accumulated Depreciation—Buildings: This is a contra long-term asset account which is credited for the depreciation associated with Buildings. Since it is a balance sheet account, the accumulated depreciation account balance does not close at the end of each year; therefore, its credit balance will increase each year. However, its balance cannot become greater than the cost of the buildings. When the credit balance in Accumulated Depreciation—Buildings is netted with the cost in the Buildings account, the result is the book value or carrying value of the buildings. Depreciation Expense—Buildings is the income statement account that is debited when Accumulated Depreciation—Buildings is credited.

Accumulated Depreciation—Equipment: The contra asset account which accumulates the amount of Depreciation Expense taken on Equipment since the equipment was acquired. As a contra asset account it will have a credit balance.

Accumulated Depreciation—Land Improvements: This account is a contra long-term asset account which is credited for the depreciation associated with land improvements. As an asset account, the accumulated depreciation account balance does not close at the end of each year; therefore, its credit balance will increase each year. However, its balance cannot become greater than the cost shown in the Land Improvements account. When the credit balance in Accumulated Depreciation—Land Improvements is netted with the cost of land improvements, the result is the book value or carrying value of the land improvements. Depreciation Expense—Land Improvements is the income statement account that is debited when Accumulated Depreciation—Land Improvements is credited.

Accumulated Dividends: With respect to life insurance, dividends not distributed by the insurance company but left to accumulate with interest.

Accumulated Interest: Interest not paid currently that is added to the balance owing.

Accumulated Other Comprehensive Income: A separate line within stockholders’ equity that reports the corporation’s cumulative income that has not been reported as part of net income on the corporation’s income statement. The items that would be included in this line involve the income or loss involving foreign currency transactions, hedges, pension liabilities, and the unrealized gains and losses on certain investments.

Accumulation: (1) cumulative retained profit. (2) Investment of a fixed dollar amount regularly and reinvestment of dividends and capital gains. (3) Process of compounding. (4) Periodic addition of interests to the principal amount.

Accuracy: Correctness of an accounting item (e.g. account balance, invoice, financial statement); also called Accurate Presentation. The concept refers to an accounting objective that the item fully reflects and valuates the set of facts involved, including all economic implications of the underlying transactions and events.

ACH: Automated Clearing House.

Acid Test Ratio: Similar to the current ratio but excludes, stocks from current assets. Also called the Quick Ratio, the ratio of current assets minus inventories, accruals, and prepaid items to current liabilities.

Acknowledgement of Indebtedness: A written recognition of debt that is enforceable in law, e.g. memorandum check, bank draft, or loan contract.

ACMA: An acronym for Associate Chartered Management Accountant.

Acquiree: A firm that is being acquired.

Acquirer: A firm or individual that is acquiring something.

Acquisition: One company taking over controlling interest in another company. See also Merger and Pooling of Interests.

Acquisition Cost: The amount, net of both trade and cash discounts, paid for property, plus transportation costs and ancillary costs.

Acquisition of Assets: A merger or consolidation in which an acquirer purchases the selling firm’s assets.

Acquisition of Stock: A merger or consolidation in which an acquirer purchases the acquiree’s stock.

ACR: Accounts Receivable.

Active: A market in which there is much trading.

Active Balances: Money held for transactions and precautionary purposes.

Active Participation: Involvement in a rental real estate activity making management decisions.

Active Portfolio Strategy: A strategy that uses available information and forecasting techniques to seek a better performance than a portfolio that is simply diversified broadly. Related: Passive Portfolio Strategy

Activity: For the passive activity rules, it’s the integral economic unit for measuring a taxpayer’s level of participation in a trade or business. One location can have more than one business activity. For example, you might have an S corporation that sells computers at retail and does typesetting working out of the same location. The two may be separate activities. On the other hand, two or more related businesses can also be combined into one activity.

Activity Accounting: The collection of financial or operational performance information about significant activities in an enterprise.

Activity Based Costing (ABC): A two-stage procedure used to assign overhead costs to products or services produced. In the first stage, significant activities are identified, and overhead costs are assigned to activity cost pools in accordance with the way resources are consumed by the activities. In the second stage, the overhead costs are allocated from each activity cost pool to each product line in proportion to the amount of the cost driver consumed by the product line. This system of costing identifies the various different activities performed in a firm and uses a variety of cost drivers (volume and non-volume based cost drivers) to assign overhead costs (or indirect costs) to products. ABC recognizes that there is a causal relationship of cost drivers with the firm’s activities.

Activity Based Management (ABM): Approach to the management of activities within business processes as the route to continuously improve both the value received by customers and the profit earned by providing this value. Causes of activities are identified, measured, and used along with other activity information for performance evaluation; emphasis is on the reduction or elimination of non-value-adding activities. ABM draws on ABC data as a major source for information. (ABM) converts Activity Based Costing (ABC) into a system to manage an organization. Activity Based Management not only focuses on product, service, customer, channel costing, it also emphasizes: cost drivers (root cause analysis), action plans to improve to achieve strategic objectives, and, performance measures for activities and processes.

Activity Drivers: In activity based costing (ABC), activity costs are assigned to outputs using activity drivers. Activity drivers assign activity costs to outputs based on individual outputs’ consumption or demand for activities.

Activity Ratio: Any accounting ratio that measures a firm’s ability to convert different accounts within their balance sheets into cash or sales.

Act of State Doctrine: This doctrine says that a nation is sovereign within its own borders and its domestic actions may not be questioned in the courts of another nation.

Actual Cost: The amount paid for an asset; not its retail value, market value or insurance value. Expenditure required buying or producing an item. The actual cost of a purchased item includes the list price (net of discount plus delivery and storage. The actual cost to manufacture a product is the total of direct material, direct labor, and factory overhead.

Actual GDP: The Gross Domestic Product that the economy in fact produces.

Actual Growth: The percentage annual increase in national output actually produced.

Actuals: Jargon used when speaking of an actual number experienced through some point in time as opposed to a number that is budgeted or projected into the future, e.g., year-to-date sales, expenses, product produced, etc. It’s the physical commodity underlying a futures contract.

Actuarial Method: Means the method of allocating payments made on a debt between the amount financed and the finance or other charges where the payment is applied first to the accumulated finance or other charges and any remainder is subtracted from, or any deficiency is added to the unpaid balance of the amount financed.

Actuarial Science: Applies mathematical and statistical methods to finance and insurance, particularly to the assessment of risk. Actuaries are professionals who are qualified in this field.

ADA: Among others, is Americans with Disabilities Act of 1990.

Adaptive Expectations Hypothesis: The theory that people base their expectations of inflation on past inflation rates.

Adaptors: Individuals who tend to solve problems using existing or slightly modified approaches than those used in the past by the business.

Added Value: The difference between the selling price of a product or service and the cost of inputs such as materials and components.

Add-Ins/Ons: (1) refers to when an item is designed or intended for use in conjunction with another item, e.g. accessories to a vehicle in a purchase order. (2) Can also refer to accessory computer software program that extends the capabilities or performance of an existing application.

Additional Hedge: A protection against borrower fallout risk in the mortgage pipeline.

Additional Paid in Capital: Amounts paid for stock in excess of its Par Value or Stated Value. Also, other amounts paid by stockholders and charged to Equity Accounts other than Capital Stock.

Add on Interest: Interest that isn’t paid by the debtor, but added to the principal amount.

ADEA: Age Discrimination in Employment Act of 1967.

Adequate Disclosure: Comprehensive and clear disclosure in the body of financial statements, footnotes, or supplemental schedules so that readers of a company’s financial position and operating results can make proper investment and credit decisions.

ADF: In invoicing, it is After Deducting Freight.

Ad Hoc: Normally is used to mean the being concerned with a specific end or goal, often set up with quite limited planning e.g., a ad hoc committee established to handle a specific problem.

ADI: In invoicing, is After Date of Invoice.

Adjunct Account: Is an account that is used to accumulates either/or subtractions or additions to another account. Thus the original account may retain its main and specific identity. Examples include accounts like accumulated depreciation, which is a reduction to the fixed asset.

Adjustable Peg: A system in which exchange rates are fixed in the short term but are occasionally changed in response to persistent payments imbalances.

Adjustable Rate Preferred Stock (ARPS): Publicly traded issues that may be collateralized by mortgages and MBSs.

Adjusted Basis: After a taxpayer’s basis in property is determined, it must be adjusted upward to include any additions of capital to the property and reduced by any returns of capital to the taxpayer. Additions might include improvements to the property and subtractions may include depreciation or depletion. A taxpayer’s adjusted basis in property is deducted from the amount realized to find the gain or loss on sale or disposition. It is used for determining depreciation and gain or loss on the disposition of an asset. Your adjusted basis in an asset is your beginning basis (see Basis, below), decreased by depreciation, depletion or any Sec. 179 expense taken or increased by capital additions. For example, you purchase a machine for $10,000 (your basis) and take a Sec. 179 expense deduction of $1,000 and depreciation of $2,000 in the first year. At the end of the year your adjusted basis is $7,000. Note. Even professionals often say basis when they really mean adjusted basis.

Adjusted Earnings Per Share: A non-GAAP financial measure of earnings per share. Dependent upon the entity, it may or may not include what would normally be included in a GAAP sanctioned earnings per share calculation.

Adjusted Gross Income: Gross income reduced by business and other specified expenses of individual taxpayers. The amount of adjusted gross income affects the extent to which medical expenses, non business casualty and theft losses and charitable contributions may be deductible. It is also an important figure in the basis of many other individual planning issues as well as a key line item on the IRS form 1040 and required state forms. Also known as AGI, it’s your individual income before personal exemptions or standard or itemized deductions. It’s the total of wages, interest, dividends, capital gains (or up to $3,000 in losses), profit or loss from real estate or pass-through entities (e.g., S corporation), pension income and certain other items less contributions to an IRA or Keogh plan, one-half of any self—employment income, and health insurance for self-employed individuals, and certain other deductions.

Adjusted Present Value (APV): The net present value analysis of an asset if financed solely by equity (present value of un-levered cash flows), plus the present value of any financing decisions (levered cash flows). In other words, the various tax shields provided by the deductibility of interest and the benefits of other investment tax credits are calculated separately. This analysis is often used for highly leveraged transactions such as a leverage buy-out.

Adjusted Trial Balance: A listing of the general ledger accounts and their account balances at a point in time after the adjusting entries have been posted. The grand total of the accounts with debit balances should equal the grand total of the accounts with credit balances.

Adjusting Entries: Special accounting entries that must be made when you close the books at the end of an accounting period. Adjusting entries are necessary to update your accounts for items that are not recorded in your daily transactions. Adjusting entries—are needed to correctly match revenue and expenses to the correct financial year. Some transactions that are entered have attributed the revenue and expenses to the wrong financial year.

Adjusting Journal Entry: An accounting entry made into a subsidiary ledger called the General journal to account for a periods changes, omissions or other financial data required to be reported in the books but not usually posted to the journals used for typical period transactions (the cash receipts journal, cash disbursements journal, the payroll journal, sales journal and so on) the entry is posted to the general ledger accounts directly and usually will be numbered itself, dated and have an explanation. Example: AJE# 1 12-31-2003, debit Cash in bank $1,000. Credit interest income $1,000, to record interest income on business bank account at year end, not recorded in cash receipts journal but credited by the bank. (Cross-reference bank reconciliation and account where it was found)

Adjustment: Can be either: (1) an increase or decrease to an account resulting from Adjusting Entries; or, (2) changing an account balance due to some event, e.g., adjustment of an account due to the return of merchandise for credit. Adjustments may include: Prepayments (Deferrals)—cash paid before consumption. Prepaid expenses—for expenses paid in cash and recorded as assets before they are used. Unearned revenue—for revenues received in cash and recorded as liabilities before they are earned.

Administrative Expenses: Administrative expenses are part of the operating expenses (along with selling expenses). Administrative expenses include expenses associated with the general administration of the business. Examples include the salaries and fringe benefits of the company president, human resource personnel, accounting, information technology, the depreciation expense for equipment and space used in administration, as well as supplies, utilities, etc. Under the accrual basis of accounting, administrative expenses appear on the income statement for the period in which they occurred (not the period in which they were paid).

Administered Price: A price set by the conscious decision of a seller rather than the impersonal market forces.

Administrative/Administration Cost: See Indirect Cost.

Administrative Dissolution: The dissolution of a corporation by the Secretary of State or similar state authority as a result of the corporation’s failure to file corporate tax returns, file an annual report, maintain a registered agent, etc.

Administrative Pricing Rules: IRS rules used to allocate income on export sales to a foreign sales corporation.

Administrative Services Only: Where one party provides only administrative or clerical services to an employee benefit plan. (Typically the employer is the administrator.) Another party acts as the trustee.

Admitted Assets: Assets whose values are permitted by state law to be included in the annual statement.

Admitted Value: See Admitted Assets.

ADR: American Depository Receipts.

ADSCR: Average Debt Service Coverage Ratio.

Ad Valorem Tariffs: Tariffs levied as a percentage of the price of the import.

Ad Valorem Tax: A tax on a good or service whose amount depends on the value of the good or service.

Advance: An amount paid before it is earned, e.g. payment ahead of actual expenditures or phase completion of a construction project.

Advance Commitment: A promise to sell an asset before the seller has lined up purchase of the asset. This seller can offset risk by purchasing a futures contract to fix the sales price.

Advanced Accounting: Covers accounting operations, patterns, merger of public holding companies, foreign currency operations, changing financial statement prepared in foreign and local currencies. Advanced accounting also includes a variety of advanced financial accounting issues such as lease contracts, pension funds, end of service severance payments, etc.

Advanced Corporation Tax: (ACT—UK only—no longer in use): This is corporation tax paid in advance when a limited company issues a dividend. ACT is then deducted from the total corporation tax due when it has been calculated at year end. ACT was abolished in April 1999. See Corporation Tax.

Advance End Date: Indicates the date at which an advance should be covered by another voucher/document.

Adverse: An audit opinion that the financial statements as a whole are not in conformity with U.S. GAAP.

Adverse Opinion: Expression of an opinion in an Auditors’ Report which states that Financial Statements do not fairly present the financial position, results of operations and cash flows in conformity with Generally Accepted Accounting Principles (GAAP). The auditor will issue an adverse opinion when there is an existence of a material weakness on the effectiveness of internal control over financial reporting.

Adverse Selection: Self-selection, within a single risk category, of persons of above-average risk. Adverse selection is a situation in which market participation is a negative signal.

Advertising Elasticity of Demand: The responsiveness demand to a change in advertising expenditure.

Advertising Expense: Advertising Expense is the income statement account which reports the dollar amount of ads run during the period shown in the income statement. Advertising Expense will be reported under selling expenses on the income statement.

Advertising Media: The various means by which advertisements can be communicated to the public.

Advertising Sales Ratio: Advertising expenditure expressed as a % of sales

Advice Note: A written piece of information e.g. about the shipping status of the goods.

Advising Bank: A bank in the exporter’s country handling a letter of credit.

Advisory Services: A consulting service in which the CPA develops the findings, conclusions, and recommendations presented for client decision-making. This differs from attestation, where the CPA expresses a conclusion about a written assertion of another.

AFE: An acronym for Authorization for Expenditure or Average Funds Employed.

Affiliate: A relationship between two companies when one company owns substantial interest, but less than a majority of the voting stock of another company, or when two companies are both subsidiaries of a third company.

Affiliated Company: Company, or other organization related through common ownership, common control of management or owners, or through some other control mechanism, such as a long-term LEASE.

Affirmative Covenant: A bond covenant that specifies certain actions the firm must take.

After Acquired Clause: A clause in a mortgage or similar loan document that provides that any mortgageable property acquired after the mortgage is signed will be considered additional security for the loan.

After Tax: The result after subtracting the income tax associated with a given amount. For example, if a corporation has a gain of $100,000 before tax, and its income tax rate is 30%, its after-tax gain is $70,000. If a corporation has a loss of $30,000 before tax, and its income tax rate is 30%, its after-tax loss is $21,000.

After Tax Profit Margin: The ratio of net income to net sales.

After Tax Real Rate of Return: Money after-tax rate of return minus the inflation rate.

AFUDC: Accumulated Funds Used During Construction or Allowance for Funds Used During Construction.

Aged Trial Balance: Alphabetically lists accounts receivable with outstanding balances. It displays one balance for every account by age and is typically produced only once on demand to check receivable details against other reports.

Agency: Relationship between two individuals where one is a principal and the other is an agent representing the principal in transactions with other parties. For example, a trust officer in a bank can engage in activities on behalf of clients.

Agency Bank: A form of organization commonly used by foreign banks to enter the U.S. market. An agency bank cannot accept deposits or extend loans in its own name; it acts as agent for the parent bank.

Agency Basis: A means of compensating the broker of a program trade solely on the basis of commission established through bids submitted by various brokerage firms. Agency incentive arrangement. A means of compensating the broker of a program trade using benchmark prices for issues to be traded in determining commissions or fees.

Agency Costs: The incremental costs of having an Agent make decisions for a principal.

Agency Cost View: The argument that specifies that the various agency costs create a complex environment in which total agency costs are at a minimum with some, but less than 100%, debt financing.

Agency Fund: Fund consisting of assets where the