Accounting Definitions

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.

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.

 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".

 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.