The cash basis is one of the two principal recognized methods of accounting. It must be used by all taxpayers who do not keep books. It is elective as to all other taxpayers (except corporations, certain partnerships, and tax-exempt trusts); however, it may not be used if inventories are necessary in order to reflect income. On the cash basis, income is reported only as it is received, in money or other property having a fair market value, and expenses are deductible only in the year they are paid.
The owner of this small business decided to switch to the cash basis accounting method to better track daily income and expenses.
A discount offered by suppliers for payment received within a specified period of time.
I received a cash discount at the store because I paid with cash instead of using a credit card.
Assets that are easily convertible into known amounts of cash.
I invested a portion of my savings in cash equivalents, such as money market funds, to ensure a stable and easily accessible source of emergency funds.
A draft on the issuing bank's own funds.
I need to pay the rent, so I'll go to the bank to get a cashier's check.
Although deduction for a loss generally is confined to a loss connected with a trade or business or a transaction entered into for profit, the law also allows deduction of a casualty loss for all types of assets, including personal assets such as a home, jewelry, clothing, etc. Theft, although not strictly a casualty, is in the same category for income tax deduction purposes. Personal casualty losses are deductible only to the extent that each such loss exceeds $100 per occurrence in 2016 and that the aggregate excess is greater than 10 percent of adjusted gross income.
It looks like we suffered a casualty loss when our main warehouse burned down in a fire.
Certified Public Accountant (CPA)
An independent accountant who provides accounting services to the public for a fee.
After years of hard work and dedication, Sarah became a Certified Public Accountant and now manages the finances for a large corporation. Because of this license, she can now put "CPA" after her name.
Certified Public Bookkeeper (CPB)
An independent bookkeeper who provides bookkeeping services to the public for a fee.
After years of hard work and dedication, David became a Certified Public Bookkeeper and performs the bookkeeping for several small businesses. Because of this license, he can now put "CPB" after his name.
Change in payroll rate form
Document that notifies the proper departments of a change in the employee's rate of remuneration.
HR sent out a change in payroll rate form to all employees, indicating that their pay would increase by 3% starting in the next pay period.
Chart of accounts
A list of the accounts used by a business to record its financial transactions.
I used the chart of accounts to organize my business finances and keep track of all my expenses and income.
A written order signed by an authorized person instructing a bank to pay a specific sum of money to a designated person or business.
She went to the back to deposit a check.
Withholding of union dues from employees' wages by the employer.
Let's assign the accounting department the task of implementing a check-off system to ensure that all invoices are accurately processed and paid on time.
See Dependent-care expense.
I can't afford to take on any more freelance work because my child-care expenses are already through the roof.
Organized in the order in which the events occur.
In chronological order, the accounting team recorded the purchase of supplies on Monday, the sale of goods on Tuesday, and the receipt of payment on Wednesday.
Claim for refund
A claim for refund must be made by a taxpayer entitled to get back part or all of the tax paid. The claim may be made on the tax return or, in the case of individual or corporate income taxes, may be made on Form 1040X or 1120X. In other cases, refund claims should be made on amended returns or Form 843.
After realizing I had been overcharged for my purchase, I filed a claim for refund with the store's customer service department.
Claim of right
The term claim of right is used in the Code in connection with money or their property received as income which the recipient holds under a claim of right, but which the recipient is required to restore in whole or in part to the payer in a later year because it develops that the recipient did not have an unrestricted right to such property. If the amount restored exceeds $3,000, Code Sec. 1341 provides some relief, by means of a tax limitation in the year of restoration, from the requirement that the restored amount must be deducted in the year of restoration and may not reduce the income of the prior year. The right to the money or other property means a just and legal claim to hold, use, or enjoy it, or to convey or donate it.
Our employees have a claim of right to receive payment for their services because we provide consulting services to clients.
A means of identifying each account as an asset, liability, or owner's equity.
In accounting, the classification of expenses into categories such as operating, administrative, or sales allows for a better understanding of the company's financial performance.
Classified financial statement
A format by which revenues and expenses on the income statement, and assets and liabilities on the balance sheet, are divided into groups of similar accounts and a subtotal is given for each group.
I think that we should release our classified financial statement to a select group of investors, and keep it confidential from the general public.
Journal entries that transfer the results of operations (net income or net loss) to owner's equity and reduce the revenue, expense, and drawing account balances to zero.
The accountant made closing entries in the company's general ledger to reflect the end of the fiscal year.
Collateral trust bonds
Bonds secured by the pledge of securities, such as stocks or bonds of other companies.
This company issued collateral trust bonds as a means of securing additional funding for their expansion project.
A note issued by one party that orders another party to pay a specified sum on a specified date.
The company's commercial draft for the quarter was reviewed and approved by the board of directors before it was submitted for payment to our suppliers.
Stated percentage of revenue paid an employee who transacts a piece of business or performs a service.
She gets a commission for each car she sells.
A method of paying employees according to a percentage of net sales.
They have hired a sales representative on a commission basis, meaning that they would receive a percentage of each sale they made.
Common Stock Dividend Distributable account
Equity account used to record par, or stated, value of shares to be issued as the result of the declaration of a stock dividend.
The Common Stock Dividend Distributable account shows that we have $50,000 available to distribute as dividends to our shareholders.
The general class of stock issued when no other class of stock is authorized; each share carries the same rights and privileges as every other share. Even if preferred stock is issued, common stock will also be issued.
Some day our company will issue 10,000 shares of common stock to our shareholders.
The state existing when the employer has the right to control both what work will be done and how it will be done.
After living together for seven years, Sarah and John decided to formalize their common-law relationship with a commitment ceremony.
Financial statements with items expressed as percentages of a base amount.
Our company's common-size statements for the past three years show that our operating expenses have consistently accounted for around 60% of our total revenue.
Property owned by husband and wife in community, each sharing equally in the income therefrom.
After the divorce, the couple had to split their community property, including their house and bank accounts, equally.
Financial statements presented side by side for two or more years.
According to the comparative statements from last year, our company's net income has increased by 20% due to improved cost management and higher sales revenue.
See Individual earnings record.
The compensation record for the month of June showed that John received a salary of $5,000 and a bonus of $2,000 for his outstanding performance.
A complex trust is one which permits accumulation of current income, provides for charitable contributions or distributes principal during the taxable year. For tax purposes, it is to be distinguished from a simple trust.
The complex trust structure of the company made it difficult to accurately track and allocate assets and liabilities.
A journal entry with more than one debit or credit.
The compound entry in the company's accounting records included both a debit to the inventory account and a credit to the cost of goods sold account.
An intangible asset; written programs that instruct a computer's hardware to do certain tasks.
I'm updating my computer software to the latest version to improve my computer's performance.
A basic framework developed by the FASB to provide conceptual guidelines for financial accounting and statements; the most important topics are explanations of qualitative features of financial statements, basic assumptions underlying statements, basic accounting principles, and modifying constraints.
The conceptual framework is the foundation of our accounting principles and helps guide our decision making process when preparing financial statements.
Some entities are not tax paying. They pass through their income (loss) to owners (beneficiaries). A partnership is an example of a conduit. Partnerships do not pay taxes; they merely report the partnership's taxable income or losses. The income (loss) flows directly to the partners. However, partnerships do compute partnership taxable income. Other types of conduits are grantor trusts and S corporations.
We use conduits to channel our investments into tax-exempt organizations and benefit from the tax-free income.
A consent dividend is not a dividend actually paid by a corporation. It is merely represented by signed consents by a stockholder to be taxed as if the stockholder has really received the amount of the distribution stated in the consent. It is used in order to avoid the imposition of the accumulated earnings tax and the personal holding company tax in cases where this tax might otherwise be imposed and the company does not wish to make an actual distribution.
The board of directors has approved a consent dividend of $0.50 per share to be paid out to shareholders at the end of the fiscal year.
If alternative treatments of items are of equal validity, the conservatism constraint suggests that the alternative resulting in lowest profit should be used.
In accordance with the principle of conservatism, we have chosen to conservatively estimate the value of our inventory rather than overstating it, as it is better to understate profits than to overstate them.
Affiliated corporations may file one consolidated return, eliminating intercompany transactions, instead of filing separate returns.
The company filed a consolidated return for the year, which included the financial information for all of its subsidiary companies.
Constructive ownership of stock
In determining the percentage of stock ownership of a stockholder in a corporation, in order to find whether the stockholder controls the corporation or to make other tests of ownership, the Code in several instances provides that the stockholder will be constructively regarded as the owner of shares of stock held by certain other persons. For example, the rule is applied in disallowing a loss on sales between certain related persons.
The constructive ownership of stock refers to an individual's indirect ownership of shares through a third party, such as a spouse or a trust.
Constructive receipt doctrine
A taxpayer on the cash basis is taxed on income only as it is received. However, if the income was unreservedly subject to the taxpayer's demand and the taxpayer could have received it but chose not to do so, it is regarded as having been constructively received and is taxable. Interest on a bank deposit is a good example.
According to the constructive receipt doctrine, the company must record the revenue as soon as it is made available to the company, even if the payment has not yet been physically received.
Remunerations that are credited to the account of, or set apart for, an employee so that they may be drawn upon at any time, even though they are not actually possessed by the employee.
I was constructively paid for my overtime hours by receiving additional vacation time instead of monetary compensation.
Method of recording time on time cards in which the day is divided into one 24-hour period, with time running from 12 midnight to 12 midnight.
Our company abides by the continental system. But now that I'm thinking about it, I'm not sure of a company that doesn't.
An item that can become a liability if certain things happen.
Our small business has a contingent liability of $50,000 for a potential lawsuit that has not yet been filed against us.
An account with a normal balance that is opposite that of a related account.
The company's contra account for accounts receivable decreased significantly this quarter due to a high number of customer payments.
Contra asset account
An asset account with a credit balance, which is contrary to the normal balance of an asset account.
We recorded a loss on the sale of equipment as a credit in the contra asset account. This reduced the balance of the fixed assets account on the balance sheet.
Contra revenue account
An account with a debit balance, which is contrary to the normal balance for a revenue account.
Our contra revenue account increased significantly this quarter due to the sale of discounted products.
Quarterly tax return filed with the state by the employer that provides a summary of the wages paid during the period and shows the computation of the tax or contribution.
I just received the contribution report for the charity event and it looks like we raised over $50,000.
Contribution to capital
A contribution to capital denotes the money or the property contributed to a corporation by either a stockholder or a nonstockholder. Where a stockholder advances money to a corporation, the tax question on insolvency of the corporation is whether the money was advanced as a loan or as a capital contribution. If it is a capital contribution, the stockholder may not deduct a nonbusiness bad debt. When a nonstockholder makes a contribution to a corporation, such as payments by a city to a manufacturer for moving its factory to the city, the contribution is not income to the corporation. The basis of property as contributed (or property purchased with money contributions) is zero. If money is contributed and as property is purchased with it, the basis of the corporation's assets is reduced.
As a shareholder in the company, I made a contribution to capital by investing a significant amount of money into the business.
Contributions usually means gifts made to charitable organizations. A contribution is deductible by both individuals and corporations, to a limited extent. In some cases, the word contributions is used in the Code in a different sense, but in those cases the meaning is apparent from the context.
The mayor made many positive contributions to a local charity organization.
An account that links a subsidiary ledger and the general ledger since its balance summarizes the balances of the accounts in the subsidiary ledger.
We need to make sure that the control account for the marketing budget is accurate and up-to-date before submitting it to the finance team.
Controlled corporate groups
Controlled groups of corporations basically fall into two classifications: parent-subsidiary controlled groups and brother-sister controlled groups. A parent-subsidiary controlled group is one which one or more chains or corporations are connected through stock ownership with a common parent corporation. At least 80 percent of the voting power or stock value of each corporation in the group other than the parent is owned by one or more corporations in the group, and the common parent owns at least 80 percent of the voting power or stock value of one of the other corporations in the group. A brother-sister controlled group is a controlled group in which at least 80 percent of the voting power or stock value of two or more corporations is owned by the same five or fewer persons (individuals, estates, or trusts) and these persons own more than 50 percent of the voting power or stock value of each corporation.
The controlled corporate groups have been successful in expanding their operations into new markets.
Bonds that give the owner the right to convert the bonds into common stock under specified conditions.
Exxon Mobil Corp. issued a convertible bond with a $1,000 face value that pays 4% interest. The bond has a maturity of 10 years and a convertible ratio of 100 shares for every convertible bond.
Convertible preferred stock
Preferred stock that conveys the right to convert that stock to common stock after a specified date or during a period of time.
The company issued 500,000 shares of convertible preferred stock to raise additional capital for expansion.
An intangible asset; an exclusive right granted by the federal government to produce, publish, and sell a literary or artistic work for a period equal to the creator's life plus 70 years.
The copyright date is 2001.
A document issued by a state government that establishes a corporation.
The Corporate charter was filed with the Kansas state secretary.
A publicly or privately owned business entity that is separate from its owners and has a legal right to own property and do business in its own name; stockholders are not responsible for the debts or taxes of the business. For income tax purposes, the word corporation has a broader meaning than its customary one. It includes an association, joint stock company, and insurance company. All are taxed as if they were corporations, although insurance companies are subject to special rules and are taxed at special rates.
He works as a consultant for several large corporations.
A journal entry made to correct an erroneous entry.
I noticed an error in our accounting records and have spent the afternoon making correcting entries.
The purchase price paid for property, or the value at which it is taken into income (as in the case of services paid for in property). It is the amount most often applied against the amount realized from the sale of property in determining the profit or loss. It is also the figure most often used in determining the depreciation deduction. However, in special circumstances, where property is not acquired by purchase, there may be a special basis for a finding of gain or loss or depreciation.
The average cost of raising a family has increased dramatically.
Company B stated that it used the cost depletion method and provided the an explanation for a 23% decrease in depletion expense for its fiscal year 2021.
Cost of goods sold
The actual cost to the business of the merchandise sold to customers.
If we buy 711 units but our inventory rises by 83 units, then the cost of 628 units is the cost of goods sold
Cost or market, whichever is lower
This phrase is used only in reference to inventory valuations. Most taxpayers prefer to use cost or market, whichever is lower, as a basis for valuing their inventories since this method affords an opportunity to take advantage of a drop in the market so that profits can be reduced accordingly before disposition of the goods. If cost only is used, a drop in the market cannot affect the income until the merchandise is sold. Either method ((a) cost, or (b) cost or market, whichever is lower)) is acceptable, but either one, once adopted, must be followed unless a permission to change is obtained.
We will sell our inventory at cost or market value, whichever is lower, to ensure we are maximizing our profits.
If accounting concepts suggest a particular accounting treatment for an item but it appears that the theoretically correct treatment would require an unreasonable amount of work, the accountant may analyze the benefits and costs of the preferred treatment to see if the benefit gained from its adoption is justified by the cost.
Before making a decision on whether or not to invest in a new project, we need to conduct a cost-benefit test to determine if the potential benefits outweigh the costs.
Unregistered bonds that have coupons attached for each interest payment; also called bearer bonds.
I just bought some coupon bonds as a safer investment option for my retirement fund.
An entry on the right side of an account.
A credit of $50 was added to their account.
A note verifying that a customer's account is being reduced by the amount of a sales return or sales allowance plus any sales tax that may have been involved.
I just received a credit memorandum from my bank showing that they had credited my account for the overpayment I made on my last statement.
Terms for payment on credit by buyer to seller.
Did you make sure to read the credit terms?
One to whom money is owed.
She owes thousands of dollars to the creditor.
Credits against tax
A credit against the tax, or a tax credit, is an amount that is subtracted from the income tax liability of a taxpayer in a given taxable year. The tax credit differs from a deduction in that the credit is subtracted from the tax itself, resulting in a dollar-for-dollar reduction in the tax liability; the deduction is subtracted from either gross income or adjusted gross income, resulting in a reduction in the amount of income subject to tax. A nonrefundable credit is one that cannot be refunded to the extent that it exceeds the income tax of the current year (e.g., the investment credit). A refundable credit can be refunded to the extent that it exceeds tax liability (e.g., the earned income credit).
I received credits against tax on my tax return for charitable donations I made during the year.
Credits or refunds
Where tax is overpaid for any year, it ordinarily will be refunded by the IRS if the taxpayer owes no tax for any other year. If the taxpayer does owe a tax, the overpayment is credited against the tax that is due the government, and any balance is refunded. Credits and refunds may be allowed only within specified periods if, within such periods, a claim for refund or credit is filed.
I am not satisfied with my purchase and would like to request either credits or refunds.
Cumulative preferred stock
Stock that conveys to its owners the right to receive the preference dividend for the current year and any prior years in which the preference dividend was not paid before common stockholders receive any dividends.
The company issued 500 shares of cumulative preferred stock to its top investors as a reward for their loyalty and support.
Assets consisting of cash, items that normally will be converted into cash within one year, or items that will be used up within one year.
The company's current assets, including cash, accounts receivable, and inventory, totaled $500,000.
Debts that must be paid within one year.
One of the items listed on the company's balance sheet is "current liabilities," which includes short-term debts and other financial obligations that need to be paid within the next year.
A relationship between current assets and current liabilities that provides a measure of a firm's ability to pay its current debts (current ratio = current assets ÷ current liabilities).
The company's current ratio is 2:1, which means they have twice as many current assets as current liabilities.
De minimis fringe benefit
Any property or service the value of which is so small that accounting for it would be unreasonable or impractical.
My company provides employees with a de minimis fringe benefit by allowing them to use the office gym for free during their lunch breaks.
A dealer, as referred to in income tax law, is one who sells to customers in the ordinary course of a trade or business.
The dealer sold the company 500 shares of stock at a price of $50 per share.
The Code uses the phrase death benefit to exclude from gross income life insurance proceeds payable by reason of death.
Permanent life insurance includes companies offering whole and universal life policies, which include savings element and death benefit.
Unsecured bonds backed only by a corporation's general credit.
Finances from yesterday's debenture sale will be used for the company’s large expansion.
An entry on the left side of an account.
I forgot to enter some of the debits in my bank account register.
A form that explains any deduction, other than a check, from a checking account.
Her company received a debit memorandum for the overpayment on the invoice from last month.
The date on which the board of directors declares a dividend.
The declaration date for the company's dividends was set for June 15th, as stated in the annual report.
An accelerated method of depreciation in which an asset's book value at the beginning of a year is multiplied by a constant percentage (equal to double the straight-line rate) to determine depreciation for the year.
The company implemented the Declining-balance method for calculating depreciation of their office equipment, which resulted in a higher expense in the first year and gradually decreasing expenses in the following years.
Deductions from gross income
Amounts representing expenditures or amounts of such personal exemptions for which deduction is allowed from the amount of gross income reported. They are to be distinguished from exclusions from gross income, which are not taken into income at all. Deductions are taken from gross income to arrive at adjusted gross income.
After calculating his deductions from gross income, Sam realized he would have to pay less in taxes this year.
See Prepaid expenses.
The company decided to postpone paying for the new software until next quarter due to the high deferred expenses on their budget.
See Unearned income.
She was excited to receive her deferred income from her employer, which allowed her to save up for a down payment on a house.
Deferred income taxes
The amount of taxes that will be payable in the future as a result of the difference between taxable income and income for financial statement purposes in the current year and in past years.
The company has a large deferred income tax liability due to the difference between their taxable income and their financial statement income.
The amount by which the actual tax (as it should have been computed) exceeds the amount shown on the return, if any, plus any amounts previously assessed as a deficiency and minus any rebates.
The company's deficiency in accounting practices resulted in a significant loss of profits.
Defined contribution plan
A retirement plan that provides future benefits based solely on the amount paid by each employee and employer into the account, plus investment gains.
I am considering enrolling in my company's defined contribution plan because it would allow me to contribute a certain amount of money to my retirement account each month.
A dependent is one of certain specified relatives for whom the taxpayer provides over half of the support for the calendar year. Nonrelatives living as members of the taxpayer's household are also treated as dependents if the support test is met.
Do you have any dependents?
A credit against tax is allowed for employment-related expenses paid by an individual to enable him or her to be gainfully employed. Taxpayers with adjusted gross incomes of $15,000 or less are allowed a credit equal to 35 percent of employment-related expenses. For taxpayers with adjusted gross incomes of over $15,000 through $43,000, the credit is reduced by one percentage point for each $2,000 of adjusted gross income, or fraction thereof, above $15,000. For taxpayers with adjusted gross incomes of over $43,000, the credit is 20 percent of employment-related expenses. The maximum amount of employment-related expenses to which the credit can apply is $3,000 if one child or dependent is involved and $6,000 if two or more are involved.
I can't afford to pay for my dependent-care expenses this month because I had to pay for an unexpected car repair.
Allocating the cost of a natural resource to expense over the period in which the resource produces revenue.
We completely depleted our life savings when we bought our new house.
Deposit in transit
A deposit that is recorded in the general journal but that reaches the bank too late to be shown on the monthly bank statement.
I made a deposit at the bank yesterday, but it hasn't shown up on my account yet. The bank told me it's a deposit in transit, so it should be available for me to use in a few days.
A form prepared to record the deposit of cash or checks to a bank account.
I filled out the deposit slip and placed it, along with the cash and checks, into the night drop at the bank.
Allocation of the cost of a long-term asset to operations during its expected useful life.
The value of the house has depreciated greatly.
A devise is a gift of real property by will. In the income tax law, the term is used mainly in connection with determining the basis of property so acquired. Basis of property acquired by devise is the value at the date of death of the descendant, or at the alternate valuation date if elected for estate tax purposes. A devise is excluded from gross income for federal income tax purposes.
Their grandfather's will gave them a devise of 30,000 acres in Wyoming.
Direct charge-off method
A method of recording uncollectible account losses as they occur.
The company decided to use the direct charge-off method for the uncollectible accounts receivable, resulting in a reduction of net income for the year.
A means of reporting sources and uses of cash under which all revenue and expenses reported on the income statement appear in the operating section of the statement of cash flows and show the cash received or paid out for each type of transaction.
The direct method of accounting involves recording transactions directly into the income and expense accounts as they occur, rather than using an indirect method such as the accrual method.
Payments to employees who are absent from their jobs because of illness, accident, or disease not arising out of their employment.
Our company offers disability benefits to our employees through our group insurance plan, which is reflected in our accounting records as a benefit expense.
Disability income exclusion
See Tax credit for the elderly.
According to IRS regulations, the disability income exclusion allows an individual to exclude up to $10,000 of their disability income from their taxable income for the tax year.
Discount on bonds payable
The excess of the face value over the price received by the corporation for a bond.
The company recorded a discount on bonds payable in their financial statements for the quarter due to the current market rate being lower than the original issuance rate of the bonds.
Deducting the interest from the principal on a note payable or receivable in advance.
Car dealers are heavily discounting last year's unsold models.
A bonus not agreed on, announced, or promised before payment.
After working hard all year, our boss surprised us with a discretionary bonus of $500.