Dictionary

A depreciation method that assigns assets periods of cost recovery based on specific IRS criteria. Since 1986, the Modified Accelerated Cost Recovery System (MACRS) has been far more prevalent.

Under the Accelerated Cost Recovery System, the company was able to write off the cost of its new machinery much faster than under the previous depreciation schedule.

A method of depreciating asset cost that allocates greater amounts of depreciation to an asset's early years of useful life.

The company decided to use the accelerated method of depreciation for its new equipment in order to take advantage of the larger tax deductions in the early years of the asset's lifespan.

The difference between the amounts recorded on the two sides of an account.

Your account balance is $7,906.06.

A balance sheet that lists assets on the left and liabilities and owner's equity on the right (see Report form balance sheet).

The account form balance sheet listed all of the company's assets and liabilities, providing a snapshot of the firm's financial health.

The process by which financial information about a business is recorded, classified, summarized, interpreted, and communicated to owners, managers, and other interested parties.

My goal is to pursue a career in accounting.

The source of authoritative U.S. GAAP.

The accounting standard codification is a comprehensive system of accounting standards and guidance issued by the Financial Accounting Standards Board (FASB) in the United States. It is the primary source of authoritative guidance for financial accounting and reporting in the US, and it is widely recognized as the single source of authoritative, nongovernmental US GAAP.

Changes to Accounting Standards Codification are communicated through Accounting Standards Update covering approximately 90 topics.

The company's financial statements were not in compliance with the latest Accounting Standards Update, which resulted in a misstatement of their profits.

A series of steps performed during each accounting period to classify, record, and summarize data for a business and to produce needed financial information.

The accounting cycle began with the recording of financial transactions and ended with the preparation of financial statements.

A taxpayer's accounting method is the basis of accounting by which records are kept. Usually, either the cash basis or the accrual basis is used. Special methods of reporting income, such as the installment basis are variations of these two methods.

The company decided to switch to the accrual accounting method, which better reflects the true financial position of the business.

An accounting period is the 12-month period on the basis of which the taxpayer's records are kept. If no books are kept or if no other period is specified, the accounting period is the calendar year. If the books are kept on the basis of a 12-month period ending with a month other than December, the accounting period is a fiscal year. A special 52-53-week accounting period is also recognized for income tax purposes.

The company's accounting period runs from January 1st to December 31st, and all financial transactions during that time are recorded and reported in the annual financial statements.

A process designed to accumulate, classify, and summarize financial data.

The company implemented a new accounting system to improve the accuracy and efficiency of their financial record keeping.

Written records of the assets, liabilities, and owner's equity of a business.

His company has a couple different bank accounts.

Amounts a business must pay in the future.

The company's accounts payable department is responsible for managing and paying off all outstanding debts and invoices.

A subsidiary ledger that contains a separate account for each creditor.

The accounts payable ledger was used to keep track of all the outstanding bills and debts that the company owed to its vendors and suppliers.

Claims for future collection from customers.

The company's accounts receivable have been increasing over the past quarter, indicating that more customers are taking longer to pay their bills.

A subsidiary ledger that contains credit customer accounts.

The accounts receivable ledger is an important tool for tracking and managing the money that is owed to a company by its customers.

A measure of the speed with which sales on account are collected; the ratio of net credit sales to average receivables.

The company's accounts receivable turnover improved significantly after implementing a new credit and collections policy.

A system of accounting by which all revenues and expenses are matched and reported on financial statements for the applicable period, regardless of when the cash related to the transaction is received or paid.

Under the accrual basis of accounting, revenues and expenses are recognized when earned or incurred, regardless of when payment is received or made.

Expense items that relate to the current period but have not yet been paid and do not yet appear in the accounting records.

The company's financial statements showed that they had accrued expenses for employee benefits, which would be paid out in the following quarter.

Income that has been earned but not yet received and recorded.

The company had a large amount of accrued income on their balance sheet, which they planned to distribute to shareholders as a dividend at the end of the fiscal year.

The accumulated adjustments account consists of post-1982 accumulated gross income less deductible expenses and prior distributions allocable to the account of an S corporation.

The company's accumulated adjustments account showed a balance of $50,000, which included several one-time expenses and adjustments to the previous year's financial statements.

This additional tax is imposed on a corporation that permits its earnings to accumulate, instead of being distributed, in order to avoid payment of tax on dividends by individual stockholders.

The company had a large amount of accumulated earnings, which resulted in a significant accumulated earnings tax liability for the year.

A measure of immediate liquidity; the ratio of quick assets to current liabilities.

The company's acid-test ratio was very low, indicating that it might have difficulty meeting its short-term financial obligations.

The basis for gain or loss and the basis for depreciation, etc. are explained under Basis. After such a basis is determined, it must be adjusted (a) for captial items that increase it and (b) for deductions that decrease it, such as depreciation, depletion, etc.

After calculating the adjusted basis of the property, it was determined that the seller had made a significant profit from the sale.

Adjusted gross income is gross income reduced by trade or business expenses of individual taxpayers, expenses for property held for production of rents or royalties, and certain loss adjustments. The amount of the adjusted gross income affects the extent to which medical expenses, nonbusiness casualty and theft losses, and charitable contributions may be deducted.

After calculating all of her deductions and exemptions, Sarah's adjusted gross income was significantly lower than her total income, which allowed her to qualify for certain tax credits and benefits.

Journal entries made to update accounts for items that were not recorded during the accounting period.

I will be adjusting entries for the last accounting period today.

See Adjusting entries.

Have you been able to make those adjustments for the last accounting period?

Like an executor, the administrator manages the estate of a person who dies intestate or whose named executor fails to act.

Her eldest son will act as the administrator of the estate.

See Controlled corporate groups.

The affiliated corporate groups were able to pool their resources and negotiate better deals with suppliers due to their combined buying power.

A taxpayer who has attained the age of 65 before the close of the tax year is allowed an additional standard deduction amount of $1,250 in 2016 if married; $1,550 in 2016 if unmarried.

John decided to take the age 65 and older standard deduction on his tax return this year because he was eligible for the increased amount due to his age.

Classifying accounts receivable balances according to how long they have been outstanding.

The company conducted an aging of the accounts receivable to determine which invoices were past due and needed to be addressed.

In a legal sense, alimony is support payment made after a divorce or legal separation. In some respects, the income tax law definition is broader. It includes payments made under a decree of divorce or separate maintenance, under a decree for support if a wife is separated from her husband, or under a written separation agreement executed by the husband and wife if the wife is separated from her husband and they file separate returns. Alimony payments that meet certain tests are deductible by the payer and are income to the applicant.

After their divorce, the ex-wife received a monthly alimony payment from her husband to help support her financially.

See Accrual basis.

The company required all employees to take the all-event test to ensure they were prepared for any emergency situation that might arise.

A method of recording uncollectible accounts that estimates losses from uncollectible accounts and charges them to expense in the period when the sales are recorded.

The company has decided to use the allowance method to depreciate their fleet of delivery trucks, setting aside $2,000 per year for each truck to cover the cost of repairs and maintenance.

Alternative minimum tax rules have been devised to ensure that at least a minimum amount of income tax is paid by corporate and high-income noncorporate taxpayers (including estates and trusts) who reap large tax savings by making use of certain tax deductions and exemptions. A taxpayer's AMT for a tax year is the excess of the tentative minimum tax over the regluar tax and must be paid in addition to year-end tax liability. The tentative minimum tax is determined by multiplying the excess of a taxpayer's alternative minimum taxable income over an exemption amount by 26 percent for adjusted gross income up to $186,300 and 28 percent for AGI in excess of $186,300 (20 percent for corporate taxpayers), and then reducing the product by the taxpayer's alternative minimum tax foreign tax credit. AMTI is computed by taking taxable income (including unrelated business taxable income, real estate investment trust taxable income, life insurance company taxable income, or any other income base used to calculate regular tax liability), adding or subtracting special adjustments, and adding tax preference items.

The alternative minimum tax is a separate tax calculation that ensures that taxpayers with high income pay at least a minimum amount of tax, even if they have used exemptions and deductions to reduce their regular tax liability.

The process of periodically transferring the acquisition cost of intangible assets with estimated useful lives to an expense account.

We predict that our competition will make $1 billion of earnings before interest, taxes, depreciation and _amortization _this year. Fortunately, we are estimated to generate $2.5 billion.

The term amount realized is given a special meaning in finding gain or loss on a sale or exchange of property. The realized gain or loss is the difference between the amount realized and the adjusted basis of the asset. The amount realized is the sum of the money and the fair market value of other property received.

The amount realized from the sale of the house was much higher than the homeowners had expected, thanks to the hot real estate market.

A procedure whereby a taxpayer estimates from the income received during a portion of a year what the income for the entire year will be if income continues to be received at the same rate. This process is used in computing the tax on short-period returns and also for avoiding the penalty for underpayment of estimated taxes.

The rules for calculating the figures don’t allow companies to _annualize _most pay figures.

Method of determining amount of income taxes to be withheld by multiplying the wages for one payroll period by the number of periods in the year, determining the annual amount of withholding required on the total wages, and dividing the annual withholding by the number of payroll periods.

Our HR department is working on annualizing wages of the part-time employees by calculating their full-time equivalent salary based on the number of hours they worked over the course of the year.

A periodic payment, whether for a period certain or for one or more lives. Under the general rule for taxing an annuity, the taxpayer's investment in the contract is usually divided by the number of payments expected, and that portion of each payment is nontaxable. The remainder of each payment is taxable as received. The Internal Revenue Service provides tables for computing tax-free portions of annuity receipts.

Part of her retirement income will come from an annuity.

Employers with 50 or more full-time employees during the previous year.

As an Applicable Large Employer, her company is required to offer affordable health insurance to its full-time employees or face potential penalties under the Affordable Care Act.

Personnel record which gives the applicant an opportunity to provide complete information as to personal qualifications, training, and experience.

I filled out the application form for the job and submitted it along with my resume and cover letter.

A formal declaration of an intention to restrict dividends.

The board of directors voted to to work on an appropriation of retained earnings to fund the expansion of the manufacturing facility.

See Partnership agreement.

The articles of partnership outlined the responsibilities and profit-sharing arrangements for each member of the partnership.

The Commissioner of IRS places the amount of unpaid tax on a list for collection, in effect a charge against the taxpayer on the books of the government. Before any additional tax may be assessed, the Commissioner must send a notice of deficiency and cannot assess the tax before allowing the taxpayer to file a petition with the Tax Court.

The assessment of tax for my property was based on its market value and the local tax rate.

A measure of the effective use of assets in making sales; the ratio of net sales to total assets.

My company's asset turnover ratio improved significantly this year. This indicated that I'm efficiently using my assets to generate revenue.

Property owned by a business.

His company's assets included factories, offices, and a fleet of delivery trucks.

The principle that income is taxed to the individual who earned it, even if the right to the income has been transferred to another prior to recognition.

The company's natural assets include forests and farm land.

A body of persons who unite for some special business or purpose, the body itself being invested with some, but not full, corporate rights and powers. For income tax purposes, an association is taxed in the same manner as a corporation.

She was apart of an association of local business leaders.

A chain of references that makes it possible to trace information, locate errors, and prevent fraud.

The accounting department implemented an audit trail to track changes made to financial documents, ensuring the accuracy and integrity of their records.

The review of financial statements to assess their fairness and adherence to generally accepted accounting principles.

You will need all your records if the IRS decides to start auditing you.

An independent accountant's review of a firm's financial statements.

The auditor's report raised concerns about the company's financial controls and management practices, leading the board to initiate an internal investigation.

The number of shares authorized for issue by the corporate charter.

Company A's authorized capital stock is listed on the stock exchange, and shareholders are able to purchase shares in the company.

The ratio of 365 days to the accounts receivable turnover; also called the number of days' sales in receivables.

The average collection period increased from 30 days to 45 days, indicating a potential cash flow problem.

A method of inventory costing using the average cost of units of an item available for sale during the period to arrive at cost of the ending inventory.

We decided to use the average cost method to value our inventory, as we believed this method provided the most accurate representation of the goods' worth.

Amount of income tax withheld by payers of taxable interest, dividends, and certain other payments made to payees who have failed to furnish the payers with correct identification numbers.

Sir, in case you weren't aware, the IRS requires backup withholding for taxpayers who do not accurately report their tax information or who fail to provide their taxpayer identification number.

Whether or not it relates to a business transaction, a bad debt can be deducted in the year in which it becomes uncollectible. If a business debt is partially uncollectible, a portion may be charged off. A nonbusiness bad debt is treated in the same way as a short-term capital loss. A debt that arises from the performance of services or the selling of goods by a cash-basis taxpayer may not be deducted if the income from the services or the profit from the sale has not previously been reported as income. However, a bad debt that arises from the lending of money is deductible, subject to the above-mentioned limitation on a nonbusiness bad debt.

Her business' financial troubles were compounded by a high level of bad debt. This was due to many of her customer's defaulting on their loans.

A ledger account form that shows the balance of the account after each entry is posted.

The accountant carefully reviewed the balance ledger form to ensure that all transactions were accurately recorded and the company's assets and liabilities were properly balanced.

A formal report of a business's financial condition on a certain date; reports the assets, liabilities, and owner's equity of the business.

The company has $3 billion in cash and cash equivalents on its balance sheet.

A check written by a bank that orders another bank to pay the stated amount to a specific party.

I will pay for the new car with a bank draft from my checking account to ensure that the transaction is secure and reliable.

A statement that accounts for all differences between the balance on the bank statement and the book balance of cash.

I'm going to reconcile my bank statement with my checkbook to make sure there aren't any discrepancies. To do this, I'll use a bank reconciliation statement to compare my records with the bank's records.

A 360-day period used to calculate interest on a note.

After working a banker's year, Jane was ready for a vacation to relax and recharge before returning to the demanding schedule of the financial industry.

The term Basis, for income tax purposes, is used mainly in connection with determining the amount of gain or loss on a sale of property or in computing depreciation. It represents the cost of the property to the taxpayer, actually or constructively, but it has a broader meaning than the term cost. The basis (adjusted) of property is deducted from the amount realized to determine the realized gain or loss on its sale. If the property was acquired by the taxpayer through a purchase, the basis is its cost, except in special circumstances such as in the conversion of the property from personal to rental or other business purposes, in which case the basis for loss and for depreciation may be different from the basis for gain. If the property was acquired as gift property, inherited property, property received in an exchange, etc. then special rules for finding basis apply.

The difference between his asset’s tax basis and the sale price was determined when the business realized a capital gain or loss and when taxes were owed.

A gift by will of personal property. The law provides a special basis for finding gain or loss or depreciation in the case of property acquired by bequest. The basis is then the value of the property at the date of the testator's death. If a bequest is of money to be paid at intervals, then to the extent that it is paid out of income from property, it is taxable income to the recipient.

After his death, the wealthy businessman left a bequest in his will to fund a scholarship program for underprivileged students.

A business document that lists goods accepted for transportation.

I need to present the bill of lading to the customs officer before my shipment can be released from the port.

Every two weeks.

I get paid biweekly, meaning I receive a paycheck every other week.

A signature of the payee written on the back of the check that transfers ownership of the check without specifying to whom or for what purpose.

She signed the back of the check with a blank endorsement, allowing anyone in possession of the check to cash it.

An additional standard deduction amount of $1,250 is allowed for an elderly or blind individual who is married or who is a surviving spouse. An additional $1,550 is allowed for a single individual or for a head of household who is elderly or blind. Thus, a married couple, each of whom is both elderly and blind receives an extra $5,000 ($1,250 x 4) standard deduction.

Sarah was eligible for the blind and elderly deduction on her taxes because she is over 65 years old and has severe vision impairment.

A bond contract.

I hope you understand that the bond indenture outlines the terms of the loan, including the interest rate, payment schedule, and any collateral required by the issuer.

Costs incurred in issuing bonds, such as legal and accounting fees and printing costs.

If you want my advice, I would advice on deciding to issue bonds to raise capital for your expansion project. But the bond issue costs will end up being higher than expected due to the current market conditions.

When a bond is paid and the liability is removed from the company's balance sheet.

The company decided to retire their bond early due to the favorable market conditions, resulting in a significant financial gain.

A fund established to accumulate assets to pay off bonds when they mature.

The company decided to seek a bond sinking fund investment, which would allow them to gradually retire their outstanding debt over time.

The process by which employees are investigated by an insurance company that will insure the business against losses through employee theft or mishandling of funds.

Their bonding policy requires all employees handling financial transactions to undergo background checks and obtain a bond to protect against any potential losses due to fraud or embezzlement.

Long-term debt instruments that are written promises to repay the principal at a future date; interest is due at a fixed rate payable over the life of the bond.

We were just informed that our balance sheet shows that we had $500,000 in bonds payable, which we had issued to raise capital for expansion.

That portion of an asset's original cost that has not yet been depreciated.

The book value of the company's assets was listed at $5 million on the balance sheet, but the market value was significantly higher at $8 million.

Boot is cash or other property added to an exchange or other transaction in order to make the value of the traded goods equal. Cash boot is allowed to be part of a nonmonetary exchange under U.S. Generally Accepted Accounting Principles.

The company's accountant used the boot method to reconcile the discrepancies in the balance sheet by adjusting the asset and liability accounts.

See Trade name.

The brand name of the accounting firm was well-known all over the industry.

A point at which revenue equals expenses.

Somehow, the company was able to break even this quarter after several months of operating at a loss. All thanks to an increase in sales and reduction in expenses.

Cost of operating a business that is deductible by the employer for federal income tax purposes.

The business expenses for the year included expenses for office rent, employee salaries, and marketing campaigns.

When a transaction occurs it must be grounded in a business purpose other than tax avoidance. Tax avoidance is not a proper motive for being in business.

Our primary business purpose is to design and manufacture high-quality products for the home appliance industry.

A financial event that changes the resources of a firm.

A business transaction between the two companies was completed successfully, with both parties signing the contract and exchanging the agreed upon sum of money.

The guidelines for conducting a corporation's business affairs.

According to the bylaws of the homeowners' association, any changes to the community rules must be approved by a majority vote of the members.

A Cafeteria Plan is a reimbursement plan governed by IRS Section 125 which allows employees to contribute a certain amount of their gross income to a designated account or accounts before taxes are calculated.

Our _cafeteria plan _allows employees to choose from a variety of benefits such as health insurance, 401(k) contributions, and flexible spending accounts.

A period of 12 months beginning January 1 and ending December 31. It is the most widely used accounting period. It must be used by a taxpayer who does not keep a regular set of books on a different accounting period.

I've been working for this company for exactly one calendar year.

The amount the corporation must pay for the bond when it is called.

The call price for the stock was set at $50 per share.

Bonds that allow the issuing corporation to require the holder to surrender the bonds for payment before their maturity date.

We decided to invest in callable bonds because they offer a higher yield than traditional bonds and allow the issuer to retire the debt early if interest rates decrease.

Stock that gives the issuing corporation the right to repurchase the preferred shares from the stockholders at a specific price.

We're issuing callable preferred stock to our investors. This will allow them the option to sell their shares back to the company at a predetermined price.

A check paid by the bank on which it was drawn.

I went to the bank to get a copy of my canceled check for the rent payment I made last month.

Financial investment in a business; equity.

The capital that the company raised during their initial public offering allowed them to expand their operations and increase their profits.

The term capital asset in income tax law generally means all business and nonbusiness assets with the following exceptions: inventory, depreciable personal and real property, certain works created through personal efforts, business accounts and notes receivable, and certain U.S. publications.

The company invested in a new capital asset, a state-of-the-art production facility, in order to increase efficiency and profitability.

An expenditure that is made for assets of a more or less permanent nature-those with a useful life of more than one year. Such an expenditure may not be deducted in the year made, even though made in connection with a trade or business.

The company spent $500,000 on a new building, which was a significant capital expenditure that will provide long-term benefits.

Capital gain is an increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on income taxes.

I sold my stock portfolio and made a significant amount of money in capital gains.

Losses from the sale or exchange of a capital asset. The excess of capital losses over capital gains is called a net capital loss. A corporation may deduct a capital loss of any taxable year in the year only to the extent of capital gain. The excess of losses may be carried back three years and carried forward five years, but only as an offset against capital gains of such later years. If there are no such capital gains, the deduction is lost. In the case of an individual, short-term and long-term capital losses are combined for purposes of offsetting up to $3,000 of ordinary income annually. Excess losses may be carried forward indefinitely.

The company's capital losses were significant this quarter, causing their stock price to drop significantly.

A subsidiary ledger that contains a record of each stockholder's purchases, transfers, and current balance of shares owned; also called stockholders' ledger.

I need to update the capital stock ledger with the new shares that were recently issued.

A record of stock transfers used for posting to the stockholders' ledger.

I need to record the sale of 50 shares of XYZ Company in the capital stock transfer journal.

All costs recorded as part of an asset's costs.

The company incurred significant capitalized costs in the development of their new product line.

Income tax carrybacks include the net operating loss carryback, the capital loss carryback (for corporations only), the foreign tax credit carryback, and the general business credit carryback. The first two are applied against income and the last two are credits agains tax.

The carryback and carryover provisions in the new tax code allow individuals to carry over their excess tax credits or deductions to future tax years.

This accounting term denotes an expense for idle or nonproductive property that is incurred for the purpose of carrying the property. The income tax law permits a taxpayer to capitalize instead of deducting currently as an expense taxes and interest chargeable to unimproved and unproductive real property. Also, a taxpayer can capitalize otherwise deductible expenses incurred during the period of construction or improvement of realy property, and taxes and interest directly related to machinery and equipment purchased, up to the date they are put to productive use. In addition, if the finance or service charge on an installment purchase of personal property is separately stated but the actual interest charge cannot be ascertained, such as charge is referred to as a carrying charge. And a portion of the charge is deductible as interest under a special formula.

The carrying charge for the inventory was calculated to be $500 per month.

The balance of the Bonds Payable account plus the Premium on Bonds Payable account minus the Discount on Bonds Payable account; also called book value of bonds.

The company's carrying value of bonds was significantly higher than the market value, indicating a potential loss in value if they were to be sold.

An account used to record any discrepancies between the amount of currency and coins in the cash register and the amount shown on the audit tape.

The company's accounting department discovered that there was a discrepancy in the cash short or over account, indicating that there might have been some financial mismanagement.