Dictionary

A situation that occurs when the asset is determined to have a market value or a value in use less than its book value.

The company's impairment loss on its investments in the oil and gas sector amounted to $5 million.

Taxpayers cannot sell property under a deferred payment contract in which no interest or unrealistically low interest is charged and realize all capital gains or increased capital gains on the sale. Unstated or imputed interest is taxable to the seller as ordinary interest income.

The imputed interest on the company's debt was calculated as 5% of the outstanding balance.

The incentive stock option is a statutory employee stock option. No income tax consequences result from the grant or exercise of such an option, and, if holding and other requirements are met, gain on eventual sale of the employer's stock will be long-term capital gain.

The company offered an incentive stock option to its employees as a means to incentivize them to increase their productivity and contribute to the company's success.

Income, in its broad sense, is the gain derived from capital, labor, or both. It is distinguishable from the capital itself. Ordinarily, for income tax purposes, the word income is not used alone. It is used in conjunction with such descriptive terms as gross income, taxable income, and adjusted gross income, all of which are defined herein.

Any income from investments must be reported.

A special owner's equity account that is sued only in the closing process to summarize the results of operations.

The Income Summary account showed a profit of $10,000 for the year.

All income from U.S. sources which is effectively connected with the conduct of a trade or business in the United States is taxed to nonresident aliens and foreign corporations at the same rates as apply to U.S. citizens and domestic corporations. Investment and other fixed or determinable periodical income (interest dividends, rents, wages, etc.) of a nonresident alien is taxed at a flat 30 percent rate, whether or not the recipent engages in a trade or business in the United States, so long as such income is not effectively connected if it is derived from assets used in, or held for use in, the United States, and if the activities of the U.S. business are a material factor in the realization of the income.

Income effectively connected to a trade or business in the United States is subject to taxation at the same rate as domestic income.

A formal report of business operations covering a specific period of time; also called a profit and loss statement or a statement of income and expenses.

The company released its income statement for the year, showing a profit of $500,000.

Levy on the earnings of most employees that is deducted from their gross pay.

I am trying to calculate my income tax for the year.

A method of recording the trade-in of an asset for income tax purposes. It does not permit a gain or loss to be recognized on the transaction.

I chose to use the income tax method for calculating my quarterly payments to the IRS because it seemed like the most accurate way to determine my tax liability.

Income-shifting is the transfer of income from one family member to another who is subject to a lower tax rate or the selection of a form of business that decreases the tax liability for its owners.

The company's income-shifting strategies allowed them to significantly lower their tax burden by transferring income to lower tax brackets.

One who is paid by a company to carry out a specific task or job but is not under the direct supervision or control of the company. Also, a person who follows an independent trade, business, or profession where services are offered to the public.

I hired an independent contractor to design my company's website, rather than hiring a full-time employee.

A means of reporting cash generated from operating activities by treating net income as the primary source of cash in the operating section of the statement of cash flows and adjusting that amount for changes in current assets and liabilities associated with the net income, noncash transactions, and other items.

The accountant used the indirect method to calculate the company's net income for the year.

Any individual may contribute 100 percent of earned income, up to $5,500 a year, to an IRA ($11,000 on a joint return, i.e. $5,500 per spouse). Taxpayers over age 50 are allowed to contribute an additional $1,000. The contributions are deductible from gross income, except for individuals who participate in a qualified deferred compensation plan with AGI over a certain level ($61,000 in 2016, and for joint filers, $98,000 in 2016. The investment grows tax-deferred, but all withdrawals constitute gross income. A 10 percent penalty on gross income is levied on pre-age 59 1/2 withdrawals, except on account of disability, death, first-time home purchases (up to $10,000), insurance premiums for the unemployed, deductible medical expenses, as well as withdrawals in the shape of annuities. Withdrawals must start with respect to the year the participant reaches age 70 1/2. An IRA may receive tax-deferred rollovers from other qualified plans, including other IRAs. Distributions from IRAs are not subject to withholding.

I have an Individual Retirement Account that I contribute to every month in order to save for my retirement.

An employee record that contains information needed to compute earnings and complete tax reports.

I need to check my individual earnings record to see how much I have made this year.

Applied to determine if the FLSA covers an employee. The test is that the employee either engages in interstate commerce or produces goods for such commerce.

The company's individual employee coverage for health insurance is calculated based on their salary and number of dependents.

Financial ratios and percentages reflecting averages for similar companies.

According to industry averages, the average profit margin for a bookkeeping company is around 15%.

In a few limited cases, the unusual operating characteristics of an industry, usually based on risk, special accounting principles, and procedures, have been developed; these may not conform completely with GAAP for other industries.

The company's decision to outsource their manufacturing was limited by industry practice constraints, as it was expected that they would produce their products in-house.

Forms upon which an employer reports compensation paid to individuals who are not employees.

Information returns are the forms that businesses and organizations must file with the IRS to report certain types of payments made during the tax year.

As distinguished from a bequest or devise, an inheritance is property acquired through laws of descent and distribution from a person who dies without leaving a will. Property so acquired takes as its basis, for gain or loss on later disposition or for depreciation, the fair market value of the property at the date of death of the decedent from whom it is acquired. An inheritance of property does not give rise to taxable income, but the income from an inheritance does. And if the inheritance is of income from property, such income is taxable.

He left sizable inheritances to his children.

The installment method of reporting income allows the profit on an installment sale to be taxed over the period that payments are received. The amount taxed in any year is equal to the payments received times the gross profit ratio (the total gross profit divided by the total contract price). However, the entire amount of any gain recaptured under Code Sec. 1245 or 1250 is reported in the year of sale regardless of whether any payment is received in that first year. Use of the installment method is mandatory unless the taxpayer elects not to report on the installment method.

I will be paying for my new car using the installment method, where I will make monthly payments until the balance is paid off.

Assets that lack a physical substance, such as goodwill, patents, copyrights, and computer software, although software has, in a sense, a physical attribute.

Intangible assets such as patents, trademarks, and copyrights are often overlooked when evaluating a company's value.

A trust created during the lifetime of the person setting up the trust.

I recently set up an inter vivos trust for my children in case anything were to happen to me, so that they would have financial security.

The study of accounting principles used by different countries.

Our company recently hired an international accounting firm to help us navigate the complexities of global financial reporting standards.

To understand and explain the meaning and importance of something (such as financial statements).

We need someone to interpret these results for us.

An individual who works in more than one state.

As an interstate employee, it is important for me to accurately track my expenses and report them to my employer in accordance with accounting guidelines.

One not having a will; a person who dies without a will is said to die intestate.

However, if a person dies and a will is not found within six months, the intestate succession laws decide which family members will inherit the estate.

A detailed list of articles of property. In the true accounting sense, and for income tax purposes, it refers only to a list of articles comprising stock in trade--articles held for sale to customers in the regular course of a trade or business. The cost of goods sold during the year is determined by adding to the inventory at the beginning of the year the purchases made during the year and subtracting from this sum the inventory at the close of the year.

The dealer keeps a large inventory of used cars and trucks.

A form used to list the volume and type of goods a firm has in stock.

I need to update the inventory sheet to reflect the new stock we received yesterday.

The number of times inventory is purchased and sold during the accounting period (inventory turnover = cost of goods sold ÷ average inventory).

The company's inventory turnover rate was high this year. This indicated that they were able to sell their products quickly and efficiently.

Study done by a consumer reporting agency on a job applicant or current employee concerning the individual's character, general reputation, and mode of living.

I am currently conducting an investigative consumer report on our company's accounting practices to ensure that all financial transactions are being accurately recorded and reported.

Transactions that involve the acquisition or disposal of long-term assets.

One of the primary investing activities that our company engages in is the purchase of real estate properties as long-term investments.

An involuntary conversion of property results when property is destroyed in whole or in part, stolen, seized, requisitioned or condemned (or where there is a threat or imminence of requisition or condemnation) and, as a result, the property is converted into money or other similar property, through insurance proceeds, condemnation awards, etc. The law has special provisions on involuntary conversion only where the conversion results in gain--that is, where the amount recovered exceeds the cost or other basis of the property converted. The law permits the nonrecognition of gain on such an involuntary conversion.

The company experienced an involuntary conversion when their warehouse was destroyed in a fire, resulting in the loss of inventory and the need to replace it with new inventory at a higher cost.

Certain expenses of a personal nature that are specifically allowed as deductions. Included in this group are: moving expenses, medical expenses, state and local income taxes, property taxes, mortgage interest, charitable contributions, personal casualty losses, and miscellaneous employee expenses.

For our tax return, we will need to itemize deductions, including charitable donations and mortgage interest, to determine our total deductible expenses.

See Surviving spouse.

My husband and I filed a joint return this year because it allows us to combine our income and potentially receive a larger refund.

Where property is held in the names of two or more persons with the title passing from the first joint tenant to die to the other joint tenant (or joint tenants) upon death.

The joint tenancy account was opened by Aba and Radley, with equal rights to access and control the funds.

An enterprise participated in by associates acting together, there being a community of interests and each associate having a right to participate in its control or management. For income tax purposes, a joint venture is treated in all respects as a partnership, not taxable in its own capacity, but regarded as a taxpayer for the purpose of computing its taxable income, which is distributable among the associates in the proportions agreed upon. Such distributive shares are reported by the associates on their individual income tax returns.

Yazmin's company entered into a joint venture with another firm to develop a new product line, which resulted in a 50-50 split of profits and losses.

The record of original entry.

I've been keeping a journal for this company for several years.

Transactions recorded in the accounting system of a business.

I recorded the journal entries for the month of June, including the purchase of inventory, the payment of salaries, and the sale of goods to customers.

Recording transactions in a journal.

Our accountant, Aneta, completed the journalizing of all transactions for the month in the general ledger.

See Self-employed individual's retirement plan.

She implemented a Keogh plan for her company's employees to contribute towards their retirement savings.

A key employee includes an officer of the employer earning more than a specified amount, any one of the 10 employees owning the largest interests in the employer, a 5 percent owner of the employer, or a 1 percent owner who is paid more than $170,000 per year.

As the key employee in our accounting department, it is important for you to understand the company's financial policies and procedures.

A method of inventory costing that assumes that the most recently purchased merchandise is sold first.

We use the Last In, First Out method in our accounting process to ensure that the most recently purchased inventory is sold first.

The record of final entry.

On the personal side of the ledger, many of us will almost certainly need to drive less, eat less meat and fly less often.

A disposition of personal property by will.

She left us a legacy of a million dollars.

Purchasing a business by acquiring the stock and obligating the business to pay the debt incurred.

The company decided to finance their acquisition through a leveraged buyout, using debt to fund a majority of the purchase price and using the company's assets as collateral.

Using borrowed funds to earn a profit greater than the interest that must be paid on the borrowing.

The company wants to leverage its brands more effectively.

Debts or obligations of a business.

The company is trying to limit its liability in this case.

The U.S. Treasury Department, as part of its tax collection machinery, has a legal claim to the property of a taxpayer whose taxes are delinquent or overdue. Assessment of tax, demand, and refusal or neglect to pay control the creation and the effective date of the lien. Sometimes the lien will attach to property in the possession of a third-person transferee or fiduciary. Sometimes a creditor or other nontaxpayer, as well as the government, may assert a claim to the same property. The question of priorities must then be settled.

The company has a lien for taxes on their property because they failed to pay their property taxes on time.

See Statute of Limitations.

They have placed a limitation on the amount of time we have available.

Provides limited liability to the owners, who can elect to have the profits taxed at the LLC level or on their individual tax returns.

Many people form a corporation, Limited Liability Company or Limited Partnership to protect their investment assets and to limit personal liability.

A partnership that provides limited liability for all partners.

LLPs generally include partnerships among physicians, attorneys, accountants, architects, licensed financial advisers, veterinarians and undertakers.

A member of a partnership whose liability is limited to his or her investment in the partnership.

As a limited partner in the accounting firm, John's liability was limited to the amount he invested in the partnership.

A partnership having one or more limited partners.

The accounting firm is considering converting to a limited partnership in order to better protect the personal assets of its partners.

Termination of a business by distributing all assets and discontinuing the business.

The owners were ordered to liquidate the company and pay their creditors.

Complete liquidation of a corporation is the winding up of its affairs by the settling of its accounts, the paying of all debts, the collecting of assets and the turning of the remainder over to the shareholders in exchange for their stock. Complete liquidation precedes dissolution of the corporation and is not entirely synonymous with it. A partial liquidation is a calling in of a part of the stock, with or without cessation of a part of the corporate activities. Special rules apply to the sale by a corporation of its assets as a step in liquidation, and to the treatment of liquidation distributions received by the shareholders.

The liquidation of corporation resulted in the distribution of remaining assets to shareholders and the dissolution of the company.

Value of assets to be applied to preferred stock, usually par value or an amount in excess of par value, if the corporation is liquidated.

The company's assets were sold at their liquidation value after the bankruptcy proceedings were finalized.

The ease with which an item can be converted into cash.

In order to determine the company's liquidity, we will need to review its current assets and liabilities on the balance sheet.

An established retail price.

The list price for the new software is $500, but we are offering a 20% discount for early adopters, bringing the final price down to $400.

Long-term capital gains and losses are gains and losses on the sale or exchange of capital assets that have been held for more than 12 months. A net long-term capital gain or loss is the excess of gains over losses, or vice versa. An excess of net long-term capital gains over net short-term capital losses is taxed as ordinary income to corporations.

Our company experienced a long-term capital gain on the sale of our real estate assets, but a long-term capital loss on the sale of our stocks.

Debts of a business that are due more than one year in the future.

Our company has a large amount of long-term liabilities on our balance sheet due to the financing of a new factory expansion project.

The block of time, consisting of four quarters beginning July 1 of the second preceding year and ending June 30 of the prior year, used to determine if an employer is a monthly or a semiweekly depositor.

Our accounting team will be reviewing the financial statements for the past three years to determine if any discrepancies exist within the lookback period.

The disposition of an asset for less than its book value.

The company's losses for the year were higher than expected.

The principle by which inventory is reported at either its original cost or its replacement cost, whichever is lower.

According to the lower of cost or market rule, if the market value of inventory decreases below its original cost, the company must adjust the value of the inventory to the lower market value in order to accurately reflect its financial position.

Services designed to help clients improve their information systems or their business performance.

Our company recently hired management advisory services to help us improve our financial planning and decision-making processes.

Accounting work carried on by an accountant employed by a single business in industry.

The managerial accounting team was responsible for creating the budget and analyzing the financial performance of the company.

A business that sells goods that it has produced.

My uncle owns a manufacturing business that produces automotive parts for major car companies.

Price reduction below the original markon.

This is a message to all employees. Please, markdown all seasonal goods immediately after the holidays.

The interest rate a corporation is willing to pay and investors are willing to accept at the current time.

The market interest rate for a 30-year fixed mortgage is currently 3.25%.

The price the business would pay to buy an item of inventory through usual channels in usual quantities.

The market price of a pound of apples at the farmer's market was $3.50.

The price per share at which stock is bought and sold.

The market value of the company's stock rose significantly after the announcement of a new product line.

The difference between the cost and the initial retail price of merchandise.

The markon for the new inventory items is 5% higher than the previous quarter's markon.

A price increase above the original markon.

The retail markup on their products is 25 percent.

The concept that revenues and the costs incurred in earning those revenues should be matched in the appropriate accounting periods.

The matching principle states that expenses should be recorded in the same period as the related revenue, in order to accurately reflect the profitability of a company.

In some cases where an accounting item is deemed too small to affect a user's decisions, the "required" accounting may be ignored.

The materiality constraint for our financial statements is set at $500,000, meaning any transactions or events with an impact less than that amount do not need to be disclosed.

The total amount (principal plus interest) payable when a note comes due.

The maturity value of the bond was higher than expected, due to the favorable market conditions.

A tax levied on employees and employers to provide medical care for the employee and the employee's spouse after each has reached age 65.

I had to pay additional medicare tax on my income this year.

An informational entry in the general journal.

I made a memorandum entry in my planner to remind myself to attend the meeting at 10 am tomorrow.

The stock of goods a merchandising business keeps on hand.

The store owner reviewed the merchandise inventory and discovered that they were low on several popular items.

A business that sells goods purchased for resale.

I recently started my own merchandising business, selling custom-designed t-shirts and hats online.

A statutory merger (that is, one effected under the laws of the state) is a reorganization for income tax purposes, upon which no gain or loss is recognized under the conditions specified in the Code. A merger is the union of two or more corporations into one, the others giving up their existence and transferring all of their properties and liabilities to the one continuing corporation. It is distinguishable from a consolidation, which is the transfer of two or more corporations into a new corporation, the transferring corporations giving up their existence.

The law firm announced its $50 million merger with one of its competitors.

See experience rating.

We use merit rating in our accounting department to allows us to fairly evaluate and reward employees based on their job performance and contributions to the company.

See Experience rating system.

The company implemented a merit rating system in order to fairly distribute employee bonuses based on their performance.

See Alternative minimum tax.

The minimum tax for our company this year is $5,000, which must be paid by the end of the fiscal year.

Stock ownership of 20 percent or less in a corporation which is at least 80 percent owned by another corporation.

The company's financial statements showed that the minority interest in the joint venture was valued at $500,000.

A book in which accurate and complete records of all meetings of stockholders and directors are kept.

The company secretary recorded the minutes of the board meeting in the minute book for future reference.

See Accelerated Cost Recovery System (ACRS)

His company decided to adopt the Modified Accelerated Cost Recovery System for its tax planning purposes to take advantage of the accelerated depreciation of its assets.

It is assumed that only those items and events that can be measured in monetary terms are included in the financial statements. An inherent part of this assumption is that the monetary unit is stable. Thus, assets purchased one year may be combined in the accounts with those purchased in other years even though the dollars used in each year actually may have different purchasing power.

Under the monetary unit assumption, we assume that the value of money remains stable over time and we use it as a consistent measurement for recording financial transactions.

One who reported employment taxes of $50,000 or less for the four quarters in the lookback period.

As a monthly depositor, you will be required to make a minimum deposit of $500 each month into your account to maintain the agreed upon interest rate.

A long-term debt created when a note is given as part of the purchase price for land or buildings.

I am considering applying for a mortgage loan to purchase my first home.

If two or more persons who would otherwise be entitled to an exemption for a dependent together furnish more than one-half of a dependent's support, anyone who furnishes more than 10 percent of the support is entitled to the exemption if all the others who furnish more than 10 percent of the support file written declarations that they will not claim an exemption for the individual supported for that taxable year.

After much negotiation, the two sides finally reached a multiple support agreement in which both parties agreed to contribute funding and resources to the project.

A type of income statement on which several subtotals are computed before the net income is calculated.

The company's multiple-step income statement showed a net income of $100,000 after deducting the cost of goods sold, operating expenses, and taxes.

The characteristic of a partnership by which each partner is empowered to act as an agent for the partnership, binding the firm by his or her acts.

In our business partnership, we have a mutual agency agreement in which we both have the authority to make decisions and take action on behalf of the company.

Those whose reserve accounts have been charged for more benefits paid out than contributions paid in to the fund.

The negative-balance employers failed to pay their employees on time, resulting in a negative balance in their bank accounts.

For income tax purposes, there is a penalty of 5 percent of the underpayment if any part of an underpayment of tax is due to negligence or intentional disregard of rules and Regulations, but without intent to defraud. Negligence is a lack of the reasonable care and caution expected of a prudent person.

The company was charged with negligence in the manufacturing of the defective tires.

A financial instrument whose ownership can be transferred to another person or business.

The terms of the contract are negotiable.

A financial document containing a promise or order to pay that meets all requirements of the Uniform Commercial Code in order to be transferable to another party.

The seller accepted the buyer's offer of $500 for the antique vase, provided that the payment was made by a negotiable instrument, such as a cashier's check or money order.

A net operating loss is limited substantially to a net loss incurred in the operation of a trade or business, although a casualty loss or a loss from a sale of a business asset is included within its scope. A net operating loss may be carried back two years against the income of those two years to the earliest year first. Any unused portion of such loss may be carried forward past the taxable year for 20 years.

Due to a decrease in sales and an increase in expenses, our company incurred a net operating loss this quarter.

The cost of an asset minus its accumulated depreciation, depletion, or amortization, also known as book value.

The net book value of the company's assets was $500,000, but their market value was significantly higher.

The result of an excess of revenue over expenses.

After accounting for all expenses, the company's net income for the quarter was $50,000.

The worksheet line immediately following the column totals on which net income (or net loss) is recorded in two places: the Income Statement section and the Balance Sheet section.

After reviewing our financial statements, it was clear that the net income line had increased significantly from the previous year, indicating a successful year for the company.