- ACCOUNTING CONTROL
- Procedures used to assure accuracy in the record keeping function. Controls exist to make certain source data placed in the system are proper and correct.
- ACCOUNTING CYCLE
- Series of steps in recording an accounting event from the time a transition occurs to its reflection in the financial statements; also called bookkeeping cycle. The order of the steps in the accounting cycle are; recording in the journal, posting to the ledger, preparing a trial balance, and preparing the financial statements.
- ACCOUNTANT
- One who performs accounting services. Accountants prepare financial statements and tax returns, audit financial records, and develop financial plans. They work in private accounting, public accounting, not-for-profit accounting. Accountants often specialize in a particular area such as taxes, cost accounting, auditing, and management advisory services.
- ACCOUNTING PROCEDURE
- Method or technique used to uncover, record, or summarize financial data in the preparation of financial statements.
- ACCOUNTING PROFITS
- Difference between the total revenue and the cost of producing goods or services.
- ACCOUNTING RECORDS
- Various journals (e.g., cash receipts journal, general journal), ledgers (e.g., general ledger, subsidiary ledger), and the sources of information for these formal records such as sales invoices, checks, vouchers, and written agreements.
- ACCOUNTING RESEARCH BULLETINS (ARB)
- Publications containing recommended accounting procedures.While the Bulletins were not binding on American Institute of CPAs members, the SECURITIES AND EXCHANGE COMMISSION (SEC) typically required their use by corporations under their jurisdiction.The Bulletins were issued by the COMMITTEE ON ACCOUNTING PROCEDURE of the AICPA.The Committee was replaced by the ACCOUNTING PRINCIPLES BOARD (APB) IN 1959.
- ACCOUNTING SOFTWARE
- Programs used to maintain books of account on computers. The software can be used to record transactions, maintain account balances, and prepare financial statements and reports. Many different accounting software packages exist, and the right package must be selected given the client’s circumstances and needs. An accounting software package typically contains numerous integrated modules (for example, spreadsheet and work processing abilities).Some modules are used to account for the general ledger, accounts receivable, accounts payable, payroll, inventory, and fixed assets. Reviews of accounting software packages can be found in the JOURNAL OF ACCOUNTANCY, PC Magazine, and Computers in Accounting, among other journals.
- ACCOUNTING STANDARD
- Conduct to be followed by accountants as formulated by an authoritative body (e.g., AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA) or law. See also ACCOUNTING PRINCIPLES.
- ACCOUNTING STANDARDS COMMITTEE
- Committee with members from six accounting bodies in the United Kingdom and Ireland who draft and approve Statement of Standard Accounting Practice.
- ACCOUNTING SYSTEM
- Methods, procedures, and standards followed in accumulating, classifying, recording, and reporting business events and transactions. The accounting system includes the formal records and original source data. Regulatory requirements may exist on how a particular accounting system is to be maintained (e.g., insurance company).
- ACCOUNTING TRENDS AND TECHNIQUES
- Annual publication of the AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA) containing a survey of the accounting and disclosure characteristics of corporate annual reports. It gives examples representative of financial reporting by 600 sampled companies (e.g., their treatment of leases and business combinations). Financial statistics are also given.
- ACCOUNTING PRINCIPLES BOARD (APB)
- Former authoritative body of the AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA).It issued pronouncements on accounting principles until 1973.Of the 31 APB opinions, several were instrumental in improving the theory and practice of significant areas of accounting.The APB was replaced by the FINANCIAL ACCOUNTING STANDARDS BOARD (FASB).
- ACCOUNTING REVIEW
- The publication of the AMERICAN ACCOUNTING ASSOCIATION (AAA) covering all aspects of accounting of a scholarly nature. Many articles deal with hypothesis testing and empirical work. It is published four times a year.
- ACCOUNTING SERIES RELEASES (ASRS)
- Issued by the SECURITIES AND EXCHANGE COMMISSION (SEC) as official accounting pronouncements.Releases include accounting requirements, disclosure mandates, auditing policies, and Commission activities regarding CPA firms filing financial statements with the SEC for publicly traded companies.The Accounting Series Releases are now codified as Financial Reporting Releases (FRRs).
- ACCOUNTING STANDARDS EXECUTIVE COMMITTEE (AccSEC)
- Committee whose members prepare Statements of Position on accounting issues not acted upon by the FASB. Since 1978, its promulgation functions have been integrated with those of the FASB.
- ACCOUNTING VALUATION
- Valuation of assets in accounting. Correct valuation is important. If, for example, an asset is valued incorrectly, it is impossible to draw accurate conclusions about a firm’s liquidity or its value in liquidation. Valuation is usually made in accordance with GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP).
- ACCOUNTS PAYABLE
- Obligations to pay for goods or services that have been acquired on open account from suppliers.Accounts payable is a current liability in the balance sheet.
- ACCOUNTS RECEIVABLE
- Amount due the company on account from customers who have bought merchandise or received services.Accounts receivable are presented as a current asset in the balance sheet.See also ACCOUNTS RECEIVABLE TURNOVER; AGING OF ACCOUNTS.
- ACCOUNTS RECEIVABLE DISCOUNTED
- Obligation assigned or sold with recourse. See also ASSIGNMENT OF ACCOUNTS RECEIVABLE; FACTORING.
- ACTIVITY LEVEL
- Description of how an activity is used by a cost object or other activity.Some activity levels describe the cost object that uses the activity and the nature of this use. These levels include activities that are traceable to the product (i.e., unit-level, batch-level, and product-level costs), to the customer (customer-level costs), to a market (market-level costs), to a distribution channel (channel-level costs), and to a project, such as a research and development project (project-level costs).
- ACTIVITY SEQUENCE – SENSITIVE
- Calculation of time-based process costs taking into consideration the sequential relationships among activities.
- ACTUAL COST
- Expenditure required to buy or produce an item.The actual cost of a purchased item includes the list price (net of discounts) plus delivery and storage.The actual cost to manufacture a product is the total of direct material, direct labor, and factory overhead.
- ACTUARIAL
- Relating to analyses involving compound interest and/or statistics.It is usually associated with computations involved in insurance probability estimates.See also ACTUARY.
- ACTUARIAL BASIS OF ACCOUNTING
- Used in computing the amount of contributions to be made periodically to a pension fund.Total contributions plus the accumulated earnings on it must equal the required payments to be made out of the fund.Factors that must be considered are the length of time over which each contribution is to be held and the return on investment.A “Trust Fund” for a public employee retirement system is an example of a fund set up on an actuarial basis.
- ACTUARIAL COST METHOD
- Technique used by actuaries to determine the periodic employer contribution to the pension plan; also called actuarial funding method. It is used to measure pension expense and related funding. Two general approaches are usually considered when selecting an actuarial funding method, the cost approach and benefit approach. The cost approach projects an estimated total retirement benefit and then determines the level cost that will be adequate (including expected interest) to furnish total benefit at retirement.The benefit approach determines the amount of pension benefits attributable to service to date and then determines the present value of these benefits.See also ACTUARIAL GAINS, LOSSES.
- ACTUARIAL GAINS, LOSSES
- Difference between estimates and actual experience in a pension plan.For example, if the actual interest rate earned on pension assets exceeds the estimated rate, an actuarial gain results.Actuarial gains and losses are deferred and amortized to pension expense of future periods.The amortization of the actuarial gain will reduce pension expense.Actuarial gains and losses applicable to a single event not related to the pension plan and not in the ordinary course of business are recognized immediately in earnings.Examples are plant closing and segment disposal.See also ACTUARIAL COST METHOD.
- ACTYART
- Practitioner involved in mathematical computations and analyses of insurance probability estimates.
- ADDITIONAL PAID-IN CAPITAL
- Excess received from stockholders over PAR VALUE or STATED VALUE of the stock issued; also called contributed capital in excess of par.For example, if 1000 shares of $10 par value common stock is issued at a price of $12 per share, the additional paid-in capital is $2000 (1000 shares X $2). Additional paid-in capital is shown in the STOCKHOLDERS’ EQUITY selection of the balance sheet.
- ADEQUATE DISCLOSURE
- Comprehensive and clear disclosure in the body of financial statements, FOOTNOTES, or supplemental schedules so that readers of a company’s financial position and operating results can make proper investment and credit decisions.
- ADJUNCT ACCOUNT
- One that accumulates either additions or subtractions to another account.Thus the original account may retain its identity. Examples include premiums on bonds payable, which is a contra account to bonds payable; and accumulated depreciation, which is an offset to the fixed asset.
- ADJUSTED BASIS
- Value used as a starting point to compute depreciation or gain on the disposition of fixed assets for tax purposes. The adjusted basis is similar to the concept of BOOK VALUE.It is the taxpayer’s basis at the time of acquisition – usually cost – increased or decreased by certain required modifications such as capital improvements.
- ADJUSTED GROSS INCOME (AGI)
- Federal tax term applying to the difference between the gross income of the taxpayer and adjustments to income.Adjustments to income include deductions for IRA and Keogh pension plans.Adjusted gross income is the basis for determining the eligibility and limitations of other components in calculating the taxpayer’s tax, such as for medical expenses (7.5% of AGI) and miscellaneous expenses (2% of AGI).
- APPRAISAL METHOD OF DEPRECIATION
- Method in which depreciation expense charged to a period is the difference between the beginning and end-of-period appraised value of the asset if the appraised value has decreased.If not, there is no depreciation expense for that period. This method is not generally recognized as an acceptable method.
- APPRECIATION
- Increase in the value of an asset.The asset may be real estate or a security.For example, an individual sold 100 shares of XYZ company’s stock for $105 per share that he bought 10 years ago for $25 per share.The amount of appreciation was $8,000 = ($105 - $25) X 100 shares.
- APPROPRIATED RETAINED EARNINGS
- Term used when setting aside UNAPPROPRIATED RETAINED EARNINGS, thus making them unavailable for dividends.These appropriations might be used, for example, for plant expansion, sinking fund, and contingencies.When the appropriation is no longer needed, it is reversed.
- APPROPRIATION
- 1.Authorization of a governmental unit to spend money within specified restrictions such as amount, time period, and objective. There must be prior approval for such expenditure. 2.Distribution of net income to various accounts. 3.Allocation of retained earnings for a designated purpose such as for plant expansion. See also APPROPRIATED RETAINED EARNINGS.
- APPROPRIATION ACCOUNT
- In GOVERNMENT ACCOUNTING, account of an agency that is credited when the appropriation has been authorized.It is reduced by expenditures during the period. When a budget is adopted by the governmental unit, the entry is to debit estimated revenues, credit appropriations, and debit or credit fund balance for the difference.
- ARBITRAGE
- Profiting from price differences when the same asset is traded in different markets. For example, an arbitrageur simultaneously buys one contract of silver in the Chicago market and sells one contract of silver at a different price in the New York market, locking in a profit if the selling price is higher than the buying price.It is also the process of selling overvalued and buying undervalued assets so as to bring about an equilibrium where all assets are properly valued.
- ARREARS
- Past due payments or other liabilities.An example is cumulative preferred stock dividends that have been declared but have not been paid following their payment dates.(Common dividends cannot be paid as long as cumulative preferred dividends are in arrears.)
- ARTICLES OF INCORPORATION
- Formal documents prepared by individuals wishing to establish a corporation in the United States. They must file these documents with the authorities in the state in which the corporation wishes to reside. One copy is returned, after being reviewed, and, together with the Certificate of Incorporation, becomes the corporation’s charter formally recognizing the corporation as a business entity entitled to begin business operations.Rules governing the company’s internal management are set forth in its bylaws.
- ARTICLES OF PARTNERSHIP
- Formal document drawn up by partners indicating significant and important aspects of the partnership.Items included are capital contributions, profit and loss ratios, name of the enterprise, duration of relationship, and individual duties.
- ARTICULATE
- To describe interrelationship between elements of any operating financial statements that have a common basis.
- ARTIFICIAL INTELLIGENCE (AI)
- Umbrella terminology for several main categories of research.They include natural language systems, visual and voice recognition systems, robotic systems, and EXPERT SYSTEMS.Artificial intelligence generally is the attempt to build machines that think, as well as the study of mental faculties through the use of computational models.A reasoning process is involved with self – correction.Significant data are evaluated and relevant relationships, such as the determination of a warranty reserve, uncovered.The computer learns which kind of answers are reasonable and which are not. Artificial intelligence performs complicated strategies that compute the best or worst way to achieve a task or avoid an undesirable result.An example of an application is in tax planning involving tax shelter options given the client’s financial position.
- ASCII (AMERICAN STANDARD CODE FOR INFORMATION INTERCHANGE)
- Computer term.The code converts a character into a binary number used by most microcomputers and information services (online databases) so that different makes of microcomputers may be able to communicate with each other.
- ASSEMBLY LANGUAGE
- Intermediate-level computer language that is less complex to use than a machine language.Assembly languages use abbreviations or mnemonic codes to replace the 0s and 1s of machine language (A for “add,” C for “compare,” and MP for “multiply”).A translator is required to convert the assembly language program into machine language that can be executed by the computer.This translator is the assembly program.
- ASSUMPTIONS UNDERLYING COST-VOLUME-PROFIT (CVP) ANALYSIS
- Assumptions that limit the usefulness of the basic BREAK EVEN and COST-VOLUME PROFITS (CVP) models.They are: (1) The behavior of both sales revenue and expenses is linear throughout the entire relevant range of activity; (2) There is only one product or service or a constant SALES MIX; (3) Inventories do not change significantly from period to period; (4) Volume is the only factor affecting sales and expenses.
- ASSURANCE SERVICES
- A CPA’s examination of a contract, financial statement item (e.g., inventory), Web site, or loan terms being satisfied to provide assurance as to correctness or appropriateness. The engagement letter signed by the client must clearly specify what assurance is being provided.
- AT PAR
- Price that is the same as the FACE VALUE, or nominal amount, of a security.Bonds with a face value of $1000 that are bought or sold for $1000 are traded at par.If they sell for more than $1000 they would be traded at a PREMIUM; if less, at a DISCOUNT.
- AT-RISK RULES
- Tax term.A taxpayer can deduct losses for tax purposes only to the degree of risk. At-risk amounts are restricted to the cash investment and the debt for which the taxpayer is personally liable. Assume an individual incurs losses from real estate activities of $40,000.If the cash investment and personal debt incurred were $35,000, the most that could be deducted as losses is $35,000.Note there is an expansion of the at-risk amounts to real estate only to include certain nonrecourse loans from qualified lenders.
- ATTEST
- Formal statement by an auditor after thorough examination and consideration, as to whether financial statements fairly present financial position and operating results.With an attest, the public accountant provides as objective evaluation to aid financial statement users.
- ATTEST FUNCTION
- Activity of the CERTIFIED PUBLIC ACCOUNTATN (CPA) in performing audit procedures.The accountant examines, tests, and verifies the accuracy of client accounting data as a basis for forming an audit opinion.In doing so, appropriate sampling of data is made. It is the process of an independent review of a company’s financial statements including the rendering of an AUDIT REPORT.
- ATTORNEY’S LETTER
- Letter sent by the CERTIFIED PUBLIC ACCOUNTANT (CPA) to the client’s lawyer to verify litigation information provided by management.The auditor is concerned that management has not revealed all lawsuits and claims.The auditor must assess the impact the contingencies may have on the client’s financial position.This includes the possibility of the client losing the suit and suffering damages.The attorney’s letter is a major audit procedure.
- ATTRIBUTE SAMPLING
- Statistical procedure used to study the characteristics of a population.Attribute is a qualitative characteristic that a unit of a population either possesses or does not possess.For example, an account receivable is either past due or not; proper authorization for a payment either exists or does not.Thus the population under consideration is composed of two mutually exclusive classes – units possessing the attribute and units not possessing it.The statistical procedure used to estimate the occurrence of a particular attribute in a population is referred to as attribute sampling.This technique can be used by the auditor to substantiate such accounting populations as cash receipts, cash payments, payrolls, sales, and entries posted to the wrong account.In this analysis, the auditor usually determines the expected occurrence rate and the upper precision limit.The occurrence rate equals the percentage of the population having the attribute. Precision is the magnitude of deviation of a sample value from the population parameter being estimated. Attribute sampling is particularly valuable in estimating the extent of compliance, such as the effectiveness of accounting controls using tests of transactions.Tables are used to determine sample size based on the desired confidence level, upper precision limit, and the expected rate of occurrence.Note that when analyzing a sample, the auditor may test for several different attributes.The exact definitions of attributes and occurrences should be contained in the working papers. See also VARIABLES SAMPLING.
- ATTRIBUTION
- Used in situations where the tax law assigns to one taxpayer the ownership interest of another taxpayer; also called constructive ownership.For example, under the law a father is considered to own constructively all stock actually owned by his son.
- AUDIT
- 1.Financial audit – examination of a client’s accounting records by an independent certified public accountant to formulate an AUDIT OPINION. The auditor must follow GENERALLY ACCEPTED AUDITING PROCEDURES (GAAP).Source documents are examined to substantiate legitimacy of transactions.A careful evaluation of INTERNAL CONTROL is necessary. 2.INTERNAL AUDIT – investigation of the company’s procedures and operations by the INTERNAL AUDITOR to assure that they conform to corporate policy. 3.MANAGEMENT AUDIT – evaluation of management’s efficiency. 4.COMPLIANCE AUDIT – ascertainment of the firm’s compliance with specified rules and regulations such as the Sarbanes – Oxley Act.
- AUDITABILITY
- Environment in which the auditor performs the ATTEST FUNCTION. Consideration is given to such factors as the condition of the records and the cooperation of the client’s accounting staff.The accounting records must allow for sufficient evidence gathering.There must exist a good system of INTERNAL CONTROL.Management must also be honest and have no intention of perpetrating FRAUD.
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