Accounting Definitions
Accelerated Depreciation
Any method
of depreciation used for accounting or income tax purposes that allow greater
deductions in the earlier years of the life of an asset.
Accounting Method
In terms of
taxation, the method by which income and expenses are determined for taxation
purposes
Accounting Period
In
general, the time period reflected by a set of financial statements.
Accounting Rate of Return - ARR
ARR
provides a quick estimate of a project's worth over its useful life. ARR is
derived by finding profits before taxes and interest.
Accounts Payable - AP
Accounts
payable are debts that must be paid off within a given period of time in order
to avoid default. For example, at the corporate level, AP refers to short-term
debt payments to suppliers and banks. Payables are not limited to
corporations. At the household level, people are also subject to bill payment
for goods or services provided to them by creditors. For example, the phone
company, the gas company and the cable company are types of
creditors. Each one of these creditors provide a service first and then
bills the customer after the fact. The payable is essentially a
short-term IOU from a customer to the creditor.
Each demands payment for goods or services rendered and must be paid accordingly. If people or companies don't pay their bills, they are considered to be in default.
Each demands payment for goods or services rendered and must be paid accordingly. If people or companies don't pay their bills, they are considered to be in default.
Accounts Receivable - AR
Money owed
by customers (individuals or corporations) to another entity in exchange
for goods or services that have been delivered or used, but not yet paid
for. Receivables usually come in the form of operating lines of
credit and are usually due within a relatively short time period, ranging from
a few days to a year. On a public company's balance sheet, accounts
receivable is often recorded as an asset because this represents a legal
obligation for the customer to remit cash for its short-term debts
Accrual Accounting
The need
for this method arose out of the increasing complexity of business
transactions and a desire for more accurate financial information. Selling
on credit and projects that provide revenue streams over a long period of
time affect the company's financial condition at the point of the
transaction. Therefore, it makes sense that such events should also be
reflected on the financial statements during the same reporting period that
these transactions occur.
For example, when a company sells a TV to a customer who uses a credit card, cash and accrual methods will view the event differently. The revenue generated by the sale of the TV will only be recognized by the cash method when the money is received by the company. If the TV is purchased on credit, this revenue might not be recognized until next month or next year.
Accrual accounting, however, says that the cash method isn't accurate because it is likely, if not certain, that the company will receive the cash at some point in the future because the sale has been made. Therefore, the accrual accounting method instead recognizes the TV sale at the point at which the customer takes ownership of the TV. Even though cash isn't yet in the bank, the sale is booked to an account known in accounting lingo as "accounts receivable," increasing the seller's revenue.
For example, when a company sells a TV to a customer who uses a credit card, cash and accrual methods will view the event differently. The revenue generated by the sale of the TV will only be recognized by the cash method when the money is received by the company. If the TV is purchased on credit, this revenue might not be recognized until next month or next year.
Accrual accounting, however, says that the cash method isn't accurate because it is likely, if not certain, that the company will receive the cash at some point in the future because the sale has been made. Therefore, the accrual accounting method instead recognizes the TV sale at the point at which the customer takes ownership of the TV. Even though cash isn't yet in the bank, the sale is booked to an account known in accounting lingo as "accounts receivable," increasing the seller's revenue.
Accrued Expense
Accrued
expenses are the opposite of prepaid expenses. Firms will typically incur
periodic expenses such as wages, interest and taxes. Even though they are to be
paid at some future date, they are indicated on the firm's balance
sheet from when the firm can reasonably expect their payment, until the
time they are paid. An example would be accruing interest that is building up
on a bank loan.
Accrued Income
For
example, assume that a company is expected to complete services for
another company once per month for six consecutive months, but that under
the terms of the contract, it will not receive monetary payment for these
services until the end of the six-month period. The company performing the
services can accrue a percentage of the income earned after each month,
even though physical payment will not take place until after the six-month
period.
Actuarial Analysis
The
analysis of an investment's risk done by an actuary A highly educated
actuary will use statistics and historical data in an attempt to measure the
risk of a particular investment.
Actuary
A
professional statistician working for an insurance company. They evaluate your
application and medical records to project how long you will live.
Ad Valorem Tax
The phrase
ad valorem is Latin for "according to value". In the case of
municipal property taxes, property owners have their property assessed on a
periodic basis by a public tax assessor. The assessed value of the property is
then used to compute an annual tax, which is levied on the owner by his or
her municipality. Ad valorem taxes are incurred through ownership of an
asset, in contrast to transactional taxes such as sales taxes, which
are incurred only at the time of transaction.
Alternative Minimum Tax - AMT
A tax
calculation that adds certain tax preference items back into adjusted gross
income. If AMT is higher than the regular tax liability for the year the
regular tax and the amount by which the AMT exceeds the regular tax are
paid. AMT is designed to prevent taxpayers from escaping their fair share
of tax liability by using certain tax breaks.
Amortization
The paying
off of debt in regular installments over a period of time.2. The deduction of
capital expenses over a specific period of time (usually over the asset's
life). More specifically, this method measures the consumption
of the value of intangible assets, such as a patent or a
copyright.
Suppose
XYZ Biotech spent $30 million dollars on a piece of medical equipment and
that the patent on the equipment lasts 15 years, this would mean
that $2 million would be recorded each year as an amortization
expense. While amortization and depreciation are often used
interchangeably, technically this is an incorrect practice because amortization
refers to intangible assets and depreciation refers to tangible
assets.
Appraiser
A
practitioner who has the knowledge and expertise necessary to estimate the
value of an asset, or the likelihood of an event occurring, and the cost of
such an occurrence. Ideally, an appraiser acts independently of the buying and
selling parties in a transaction in order to arrive at the fair value of
an asset without bias
Arbitrage
The
simultaneous purchase and sale of an asset in order to profit from a difference
in the price. This usually takes place on different exchanges or marketplaces. Also
known as a "risk less profit". Here's an example of
arbitrage: Say a domestic stock also trades on a foreign exchange in
another country, where it hasn't adjusted for the constantly changing
exchange rate. A trader purchases the stock where it is undervalued and
short sells the stock where it is overvalued, thus profiting from the
difference. Arbitrage is recommended for experienced investors only.
Arbitration
An
informal hearing regarding a dispute. The dispute is judged by a group of
people (generally three) who have been selected by an impartial panel. Once a
decision has been reached, there is no further appeal process.
We frequently
hear this term when professional sports teams are negotiating contracts with
their athletes. Typically, one party aims unrealistically high and the other
one aims really low, and the settlement occurs somewhere in the middle.
Assessor
A local
government official who determines the value of a property for taxation
purposes.
Asset Management Company - AMC
A company
that invests its clients' pooled fund into securities that match its
declared financial objectives. Asset management companies provide investors
with more diversification and investing options than they would have by
themselves.Mutual funds, hedge funds and pension plans are all run by
asset management companies. These companies earn income by charging
service fees to their clients.
AMCs offer their
clients more diversification because they have a larger pool of resources
than the individual investor. Pooling assets together and paying out
proportional returns allows investors to avoid minimum investment requirements
often required when purchasing
securities on
their own, as well as the ability to invest in a larger set of
securities with a smaller investment.
Asset-Backed Commercial Paper
A
short-term investment vehicle with a maturity that is typically between 90
and 180 days. The security itself is typically issued by a bank or
other financial institution. The notes are backed by physical assets such
as trade receivables, and are generally used for short-term
financing needs.
Attrition
The
reduction in staff and employees in a company through normal means, such
as retirement and resignation. This is natural in any business and industry.
Auction Market
A market
in which buyers enter competitive bids and sellers enter competitive offers at
the same time. The price a stock is traded represents the highest price that a
buyer is willing to pay and the lowest price that a seller is willing to sell
at. Matching bids and offers are then paired together and the orders are
executed.
Authorized Stock
The
maximum number of shares that a corporation is legally permitted to issue, as
specified in its articles of incorporation.
This figure is
usually listed in the capital accounts section of the balance sheet.
Also known as "authorized shares" or "authorized capital stock".
Also known as "authorized shares" or "authorized capital stock".
Average-Cost Method
A costing
method by which the value of a pool of assets or expenses is assumed
to be equal to the average cost of the assets or expenses in the
pool.
