California Community Colleges
Business Curriculum Development Team
Accounting Terms and Definitions
TERM DEFINITION
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Term Description
Absorption costing A costing method that includes all manufacturing costs — direct materials,
direct labor, and both variable and fixed manufacturing overhead — in unit
product costs. This term is synonymous with Full cost or Full absorption cost .
Accelerated cost A system of accelerated depreciation for tax purposes introduced in 1981
recovery system (ACRS, (ACRS) and modified starting in 1987 (MACRS); it prescribes depreciation
MACRS) rates by asset classification for assets acquired after 1980
Accelerated Any depreciation method under which the amounts of depreciation expense
depreciation method taken in the early years of an asset's life are larger than the amounts expensed
in the later years.
Account A record of the additions, deductions, and balances of individual assets,
liabilities, permanent owners' equity, owner drawings, revenues, and expenses.
Account analysis A method for analyzing cost behavior in which each account under
consideration is classified as either variable or fixed based on the analyst's
prior knowledge of how the cost in the account behaves.
Accounting The process of recording, classifying, reporting, and interpreting the financial
data of an organization. The purpose is to provide financial information that is
useful in making economic decisions.
Accounting and A category of the business person's knowledge base that includes the ability to
auditing knowledge construct accounting data, as well as the ability to use this data to make
decisions, to exercise judgments, to evaluate risks, and to solve problems.
Accounting controls Internal procedures that help (1) produce accurate and reliable financial data
and (2) safeguard assets.
Accounting cycle Steps that a company completes during each accounting period to record,
analyze, and report the monetary information from its transactions.
Accounting entity An economic unit that has identifiable boundaries and that is the focus for the
accumulation and reporting of financial information.
Accounting equation An expression of the equivalency of the economic resources and the claims
upon those resources of a specific entity.
Accounting period Time span for which a company reports its revenues and expenses.
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Accounting system Process used to identify, measure, record, and retain information about a
company's activities so that the company can prepare its financial statements.
Accounts Documents used to record and retain the monetary information from a
company's transactions.
Accounts payable Amounts owed to suppliers for credit purchases.
Accounts payable Setting and following policies for authorizing and making purchases and for
management processing credit purchases.
Accounts payable Contains the individual accounts of all the suppliers that sell to the company
subsidiary file on credit. Also called Accounts payable subsidiary ledger .
Accounts receivable Amounts owed by customers to the company.
Accounts receivable A procedure that uses an aging schedule to determine the year-end balance
aging method needed in the Allowance for Uncollectible Accounts account.
Accounts receivable Setting and following policies for granting credit and processing credit sales.
management
Accounts receivable Contains the individual accounts of all the customers that purchase from the
subsidiary file company on credit. Also called Accounts receivable subsidiary ledger .
Accounts receivable Net credit sales divided by average accounts receivable. Provides a rough
turnover measure of how many times a company's accounts receivable have been turned
into cash during the year.
Accruals An amount unaccounted for, yet still owed at the year end. The amount needs
to be estimated and then added to the expenses thus reducing profit. The same
amount is also added to Accounts Payable as a current liability.
Accrual accounting Recording revenues and related expense transactions in the same accounting
period that goods or services are provided, regardless of when cash is received
or paid.
Accrued expense An adjustment for an expense that is incurred by a company during the
accounting period but not paid or recorded.
Accrued liabilities An adjustment for short-term obligations (other than accounts payable) that a
company owes at the end of an accounting period and that result from the
company's operating activities during the period.
Accrued revenue An adjustment for revenue earned by a company during the accounting period
but neither collected nor recorded.
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Accrued salaries The amount of salaries that a company owes its employees on the balance
sheet date but not recorded by the regular payroll system.
Accrued taxes Taxes that a company owes but has not paid at the balance sheet date.
Accumulated Total amount of depreciation expense recorded over the life of an asset to date.
depreciation Accumulated depreciation is recorded as a contra-asset.
Accrual-basis Accounting procedures whereby revenues are recorded when they are earned
accounting and expenses are recorded in the period in which they help generate revenues.
Acid test (Quick) ratio Quick assets divided by current liabilities. Test of short-term debt paying
ability without having to rely on inventory and other non-liquid assets.
Action analysis report A report showing what costs have been assigned to a cost object, such as a
product or customer, and how difficult it would be to adjust the cost if there is
a change in activity.
Activity An event that causes the consumption of overhead resources in an
organization.
Activity base A measure of whatever causes the incurrence of a variable cost.
Activity based costing System which allocates factory overhead to units of production. First allocate
(ABC) factory overhead costs to activity pools. Then assigns costs in the activity pools
to jobs based on the relative number of activities needed to complete each job.
Activity based A management approach that focuses on managing activities as a way of
management (ABM) eliminating waste and reducing delays and defects.
Activity cost pool A "bucket" in which costs are accumulated that relate to a single activity
measure in the activity-based costing system.
Activity measure An allocation base in an activity-based costing system; ideally, a measure of
the amount of activity that drives the costs in an activity cost pool.
Activity pool Grouping of related activities involving factory overhead.
Additional income tax An assessment by taxing authorities for an increased income tax payment; if
assessment contested by the taxpayer, it will be disclosed as a contingent liability by the
company that is assessed the additional tax.
Additional paid-in Difference between the selling price of common stock and its par value in each
capital stock transaction.
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Adjusted trial balance A list of general ledger accounts and their balances prepared to prove the
equality of the debit and credit balances in a company's general ledger accounts
after the adjusting entries have been made.
Adjusting entries Journal entries that a company makes at the end of its accounting period to
bring the company's revenue and expense account balances up-to-date and to
show the correct ending balances in its asset and liability accounts.
Administrative costs All executive, organizational, and clerical costs associated with the general
management of an organization rather than with manufacturing, marketing, or
selling.
After-tax benefit The amount of net cash inflow realized from a taxable cash receipt after
income tax effects have been considered. The amount is determined by
multiplying the taxable cash receipt by (1 - Tax rate).
After-tax cost The amount of net cash outflow resulting from a tax-deductible cash expense
after income tax effects have been considered. The amount is determined by
multiplying the tax-deductible cash expense by (1 - Tax rate).
Aging schedule An analysis that shows how long customers' accounts receivable balances have
remained unpaid.
Allocation base A measure of activity such as direct labor hours or machine hours that is used
to assign costs to cost objects.
Allowance for A contra asset account with a normal credit balance shown on the balance
Uncollectible Accounts sheet as a deduction from accounts receivable or reflect the expected realizable
amount of accounts receivable.
Allowance method An accounting procedure whereby the amount of uncollectible accounts
expense is estimated and recorded in the period in which the related credit
sales occur.
Amortization The periodic writing off of an account balance to expense; usually refers to the
writing off of an intangible asset.
Annuity A series, or stream, of identical cash flows.
Annuity A pattern of cash flows in which equal amounts are spaced equally over a
number of periods.
Applications programs Computer software that directs the processing of data, including accounting
data, through a computer system
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Articles of A document prepared by persons organizing a corporation in the United States
incorporation that sets forth the structure and purpose of the corporation and specifics
regarding the stock to be issued.
Asset turnover Net sales divided by average of total assets.
Assets The economic resources owned by a business that can be usefully expressed in
money terms.
Authorized stock The maximum number of shares in a class of stock that a corporation may
issue.
Average collection Measure of the average number of days taken to collect an account receivable.
period
Average collection Determined by dividing 365 days by accounts receivable turnover.
period
Average sale period Measure of the average number of days taken to sell the inventory.
Avoidable cost A cost that can be eliminated (in whole or in part) by choosing one alternative
over another in a decision making situation. The term is synonymous with
relevant cost and differential cost .
Bad debts Trade receivables that are unlikely to be collectible.
Balance sheet A financial statement showing an entity's assets, liabilities, and owner's equity
at a specific date; sometimes called a statement of financial position.
Balanced scorecard An integrated set of performance measures that is derived from and supports
the organization's strategy.
Bank reconciliation A procedure or analysis explaining the various items-such as deposits in
transit, checks outstanding, bank charges, and errors-that lead to differences
between the balance shown on a bank statement and the related Cash account
in the general ledger.
Batch-level activities Activities that are performed each time a batch of goods is handled or
processed, regardless of how many units are in a batch. The amount of
resource consumed depends on the number of batches run rather than on the
number of units in the batch.
Bearer One of the terms that may be used to designate the payee on a promissory note;
means the note is payable to whoever holds the note.
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Benchmarking A study of organizations that are among the best in the world at performing a
particular task.
Betterments Capital expenditures that improve the quality of services rendered by a plant
asset but do not necessarily extend its useful life.
Bill of materials A document that shows the type and quantity of each major item of materials
required to make a product.
Bond A long-term debt instrument that pays interest periodically and a principle
amount at maturity. Bonds may incorporate a wide variety of provisions
regarding security, method of paying interest, and maturity and retirement
provisions.
Book value per share Measures the amount that would be distributed to holders of each share of
common stock if all assets were sold at their balance sheet carrying amounts
and if all creditors were paid off.
Borrowing at a discount When a firm borrows money from a financial institution at a discount, the firm
signs a note payable to the financial institution. The face amount of the note
equals its maturity value, and the cash proceeds equal the maturity value less
the discount charged by the financial institution.
Bottleneck A machine or some other part of a process that limits the total output of the
entire system.
Break-even point The level of sales at which profit is zero. The break-even point can also be
defined as the point where total sales equals total expenses or as the point
where total contribution margin equals total fixed expenses.
Budget A detailed plan for the future, usually expressed in formal quantitative terms.
Budget committee A group of key management people who are responsible for overall policy
matters relating to the budget program and for coordinating the preparation of
the budget.
Budget variance A measure of the difference between the actual fixed overhead costs incurred
during the period and budgeted fixed overhead costs as contained in the
flexible budget.
Business process A series of steps that are followed in order to carry out some task in a business.
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Capital budgeting The process of planning significant outlays on projects that have long term
implications such as the purchase of new equipment or the introduction of a
new product.
Capital expenditures Expenditures that increase the book value of long-term assets.
Capital lease A lease that transfers to the lessee substantially all of the benefits and risks
related to ownership of property. The lessee records the leased property as an
asset and establishes a liability for the lease obligation.
Capitalization of A process that adds interest to an asset's initial cost if a period of time is
interest required to prepare the asset for use.
Cash An asset category representing the amount of a firm's paper money, coins,
checks, money orders, and demand deposits with financial institutions.
Cash budget A detailed plan showing how cash resources will be acquired and used over
some specific time period.
Cash disbursements A special journal used to record all transactions involving payment of cash.
journal
Cash discount An amount, often 2% of the purchase price, that a buyer may deduct from the
purchase price for paying within the discount period.
Cash equivalents Short term, highly liquid investments such as Treasury bills, commercial
paper, and money market funds that are made solely for the purpose of
generating a return on funds that are temporarily idle.
Cash receipts journal A special journal used to record all transactions involving receipt of cash.
Cash Short and Over An account that contains the amounts by which actual daily cash collections
differ from the amounts recorded as being collected.
Cash-basis accounting Accounting procedures whereby revenues are recorded when cash is received
from operating activities and expenses are recorded when cash payments
related to operating activities are made.
Certificate of deposit An investment security available at financial institutions generally offering a
(CD) fixed rate of return for a specified period of time.
Certified Public A level of professional recognition obtained by achieving certain education
Accountant and experience requirements as determined by each state.
Check register A special journal used in place of cash disbursements journal when the
voucher system is used; a record of all checks written in payment of vouchers.
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Chief Financial Officer The highest finance and accounting executive. Responsibilities include
preparing financial statements for external users, providing relevant data for
planning and control activities, while providing other top managers with
advice for most major decisions.
Classified financial Financial statements that separate accounts into various categories to aid in the
statements interpretation of the financial data.
Closing procedures A step in the accounting cycle in which the balances of all temporary accounts
are transferred to the owner's capital account or the Retained Earnings account,
leaving the temporary accounts with zero balances.
Commitments A contractual arrangement by which both parties to the contract still have acts
to perform.
Committed fixed costs Those fixed costs that are difficult to adjust and that relate to the investment in
facilities, equipment, and the basic organizational structure of a firm.
Common costs Costs incurred to support a number of costing objects but which cannot be
traced to them individually.
Common fixed cost A fixed cost that supports more than one business segment, but is not traceable
in whole or in part to any one of the business segments.
Common stock Basic ownership class of corporate capital stock, carrying the rights to vote,
share in earnings, participate in future stock issues, and share in liquidation
proceeds after prior claims have been settled.
Common-size A statement that shows the items appearing on it in percentage form as well as
statements in dollar form. On the income statement, the percentages are based on total
sales revenue; on the balance sheet, the percentages are based on total assets.
Compensating balance A minimum amount that a financial institution requires a firm to maintain in
its account as part of a borrowing arrangement.
Completed contract A point-of-sale (that is, completion of the contract) revenue recognition
method method for long-term contracts.
Complex capital A corporate capital structure containing one or more potentially dilutive
structure securities. Complex capital structures normally require a dual presentation of
earnings per share.
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Compound interest The process of paying interest on interest in an investment.
Computer service A company that provides various computing services to clients.
bureau
Computer systems A system that utilizes computer to process data.
Conceptual framework A cohesive set of interrelated objectives and fundamentals for external
financial reporting developed by the FASB.
Conservatism An accounting principle stating that judgmental determinations should tend
toward understatement rather than overstatement of net assets and income.
Consistency An accounting principle stating that, unless otherwise disclosed, accounting
reports should be prepared on a basis consistent with the preceding period.
Constant dollar An accounting process that adjusts financial data for changes in the general
accounting purchasing power of the dollar.
Constraint A limitation under which a company must operate, such as limited available
machine time or raw materials, that restricts the company's ability to satisfy
demand.
Contingency A possible future event; significant contingent liabilities must be disclosed in
the notes to the financial statements.
Contingent liability A potential obligation, the eventual occurrence of which usually depends on
some future event beyond the control of the firm. Contingent liabilities may
originate with such things as lawsuits, credit guarantees, and contested income
tax assessments.
Continuous budget A 12-month budget that rolls forward one month as the current month is
completed.
Contra account An account related to, and deducted from, another account when financial
statements are prepared or when book values are computed.
Contribution approach An income statement format that is geared to cost behavior in that costs are
separated into variable and fixed categories rather than being separated
according to the functions of production, sales, and administration.
Contribution margin The amount remaining from sales revenues after all variable expenses have
been deducted.
Contribution margin A method of computing the break-even point in which the fixed expenses are
method divided by the contribution margin per unit.
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Contribution margin The contribution margin as a percentage of total sales.
ratio (CM ratio)
Control The process of instituting procedures and then obtaining feedback to increase
the likelihood that the objectives set down at the planning stage are attained
and that all parts of the organization are working together toward that goal.
Control account A general ledger account, the balance of which reflects the aggregate balance
of many related subsidiary accounts. Most firms maintain such records for
credit customers, creditors, and inventory.
Controller The highest ranking manager in charge of the accounting department in an
organization. It is sometimes spelled Comptroller, but is still pronounced as
Controller.
Controlling Ensuring that the plan is actually carried out and is appropriately modified as
circumstances change.
Conversion cost Direct labor cost plus manufacturing overhead.
Copyright An exclusive right that protects an owner against the unauthorized
reproduction of a specific written work or artwork
Corporation A legal entity created under the laws of a state or the federal government.
Owners of a corporation receive shares of stock as evidence of their
ownership.
Cost behavior The way in which a cost reacts or responds to changes in the level of business
activity.
Cost center A business segment whose manager has control over cost but has no control
over revenue or the use of investment funds.
Cost driver A factor that causes overhead costs to be incurred.
A method of accounting by a parent company for investments in subsidiary
companies by which the parent company maintains the investment in
Cost method subsidiary account at its initial cost.
Cost object Anything for which cost data are desired and maintained.
Cost of capital The average rate of return a company must pay to its long-term creditors and
shareholders for the use of their funds.
Cost of goods The manufacturing costs (including material, labor, and overhead) associated
manufactured with the goods that were finished during the period.
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Cost of goods sold The cost of merchandise sold to customers during the accounting period. It is
calculated by adding the beginning inventory and net cost of purchases and
deducting the ending inventory.
Cost principle An accounting guideline stating that assets are initially recorded at the amounts
paid to acquire the assets.
Cost reconciliation The part of a department's production report that shows total costs to be
accounted for during a period and how those costs are assigned.
Cost recovery method A revenue recognition method for installment transactions that treats all cash
collections as a return of cost until all costs are recovered; the remaining cash
collections are considered all gross profit.
Cost structure The relative proportion of fixed, variable, and mixed costs found within an
organization.
Cost-plus pricing A pricing method in which a predetermined markup is applied to a cost base to
determine the target selling price.
Cost-volume-profit The relations between revenues, costs, and level of activity in an organization
(CVP) graph presented in graphic form.
Credit (entry) An entry on the right side (or in the credit column) of any account.
Credit card fee A fee charged retailers for credit card services provided by financial
institutions. The fee is usually stated as a percentage of credit card sales.
Credit guarantee A guarantee of another company's debt by cosigning a note payable; a
guarantor's contingent liability that is usually disclosed in a balance sheet
footnote.
Credit memorandum A form used by a seller to notify a customer of a reduction in the amount owed
by the customer.
Credit period The period of time a buyer has to pay for goods or services received on
account.
Cross-subsidization Improper assignment of costs among a company's segments; also called cost
distortion .
Current assets Cash and other assets that will be converted into cash or used up within the
normal operating cycle of the business or one year, whichever is longer.
Current cost accounting A system of accounting the reflects assets and expenses at their current
replacement amounts.
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Current liabilities Liabilities that must be settled within the normal operating cycle of the
business or one year, whichever is longer.
Current ratio Ratio of current assets to current liabilities. Test of short-term debt paying
ability.
Current ratio A firm's current assets divided by its current liabilities.
Curvilinear costs A relationship between cost and activity that is a curve rather than a straight
line.
Customer-level activities Activities that are carried out to support customers but that are not related to
any specific product.
Cycle time See Throughput Time.
Days' sales in inventory A ratio computed as 365/(Inventory Turnover) that indicates the number of
days it takes to sell a firm's average inventory.
Debit (entry) An entry on the left side (or in the debit column) of any account.
Debt to equity ratio A measure of the amount of assets being provided by creditors for each dollar
of assets being provided by the stockholders.
Decentralization The delegation of decision-making authority throughout an organization by
providing managers at various operating levels with the authority to make key
decisions relating to their area of responsibility.
Decentralized An organization in which decision making is not confined to a few top
organization executives but rather is spread throughout the organization.
Deferrals Adjustments that allocate various assets and revenues received in advance to
the proper accounting periods as expenses and revenues.
Deferred revenue A liability representing revenues received in advance. Also called unearned
revenue.
A liability representing the estimated future income taxes payable resulting
from an existing temporary difference between an asset's book value and its
Deferred tax liability tax basis.
Deflation A decrease in the general level of prices for goods and services.
Degree of operating A measure, at a given level of sales, of how a percentage change in sales
leverage volume will affect profits. The degree of operating leverage is computed by
dividing contribution margin by net operating income.
Delivery cycle time The amount of time required from receipt of an order from a customer to
shipment of the completed goods.
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Denominator activity The activity figure used to compute the predetermined overhead rate.
Dependent variable A variable that reacts or responds to some causal factor. Total cost is the
dependent variable, as represented by the letter Y , in the equation Y=a+bX .
Depletion The allocation of the cost of natural resources to the units extracted from the
ground or, in case of timberland, the board feet of timber cut.
Deposits in transit Cash deposits made to a bank account near the end of a month that do not
appear on that month's bank statement.
Depreciation The decline in the economic potential of plant assets originating from wear,
deterioration, and obsolescence
Depreciation accounting The process of allocating the cost of certain long term assets to expense in a
rational and systematic manner over the time period benefiting from their use.
Depreciation tax shield A reduction in tax that results from depreciation deductions. The reduction in
tax is computed by multiplying the depreciation deduction by the tax rate.
Differential cost A cost that differs between alternatives in a decision making situation. The
term is synonymous with avoidable cost and relevant cost . Also see
Incremental cost .
Differential revenue The difference in revenue between any two alternatives.
Direct cost A cost that can be easily and conveniently traced to a specified cost object.
Direct costing Another term for Variable costing.
Direct exchange Transactions involving only noncurrent balance sheet accounts. For example, a
transactions company might issue common stock that is directly exchanged for property.
Direct labor Those factory labor costs that can be traced to individual units of product. Also
called touch labor.
Direct labor budget A detailed plan showing labor requirements over some specific time period.
Direct materials Those materials that become an integral part of a finished product and can be
conveniently traced into it.
Direct materials budget A detailed plan showing the amount of raw materials that must be purchased
during a period to meet both production and inventory needs.
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Direct method (cash A method of computing the cash provided by operating activities in which the
flow statement) income statement is reconstructed on a cash basis from top to bottom.
Direct method (cost The allocation of all of a service department's costs directly to operating
allocation ) departments without recognizing services provided to other service
departments.
Direct write-off method An accounting procedure whereby the amount of uncollectible accounts
expense is not recorded until specific uncollectible amounts are identified.
Directing and Mobilizing people to carry out plans and run routine operations.
motivating
Divisions of a business that have been sold or written off and that no longer
Discontinued operations are maintained by the business.
Discount on Notes A contra account to notes payable.
Payable
Discount period The number of days beyond the related sales invoice date during which
payment entitles the buyer to deduct any cash discount offered.
Discount rate The rate of return that is used to find the present value of a future cash flow.
Discounting (1) The process of finding the present value of a future cash flow.
Discounting (2) The exchanging of notes receivable and notes payable for cash at a financial
institution when the cash received (the proceeds) is less than the note's
maturity value.
Discounts lost An account reflecting the amount of cash discounts available but not taken.
This account is used with the net price method.
Discretionary fixed costs Those fixed costs that arise from annual decisions by management to spend in
certain fixed cost areas, such as advertising and research.
Dividend A distribution of assets (usually cash) or stock from a corporation to its
stockholders.
Dividend payout ratio The percentage of a company's earnings being paid out in dividends. The rest
are being reinvested internally.
Dividend yield Annual dividends per share divided by the market price per share.
Dividend yield ratio Shows the rate of return being provided by a stock in terms of cash dividends.
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Donated capital The amount received by a corporation from the donation of assets or the
donation of the corporation's own stock.
Double declining- An accelerated depreciation method that allocates depreciation expense to each
balance method year by applying a constant percentage to the declining book value of the
asset.
Double-entry system A method of accounting that recognizes the duality of a transaction such that
the analysis results in a recording of equal amounts of debits and credits.
Drawing account A temporary owners' equity account used to accumulate owner withdrawals
from the business.
Duration driver A measure of the amount of time required to perform an activity.
Earning process The entire productive effort put forth by an entity to generate and collect
revenue. Normally, this process should be substantially complete before
revenue is recorded.
Earnings per share The amount of the company's net income earned by each common share of
stock (whether or not paid as dividends). Tends to have an effect on the market
price per share, as reflected in the price earnings ratio.
Ease of adjustment Costs are color coded depending on how easily the cost could be adjusted to
codes changes in activity. As activity changes "Green" costs adjust automatically,
"Yellow" costs could be adjusted, but it is not automatic, "Red" costs are very
difficult to adjust.
Economic Value Added A concept similar to residual income in which a variety of adjustments may be
(EVA) made to GAAP financial statements for performance evaluation purposes.
Effective interest rate Maturity value of the note multiplied by the stated discount rate divided by the
(discounted note) cash proceeds from the note.
Effective rate The current rate of interest in the market for a bond or other debt instrument.
When issued, a bond is priced to yield the market rate of interest at the date of
issuance.
Elasticity This term is synonymous with Price elasticity of demand.
Electronic funds A system for transferring funds among parties electronically, without the need
transfer (EFT) for paper checks.
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Employee's A form used by employees to claim income tax withholding allowances.
Withholding Allowance
Certificate (Form W-4)
Ending finished goods A budget showing the dollar amount of cost expected to appear on the balance
inventory budget sheet for unsold units at the end of a period.
Engineering approach A detailed analysis of cost behavior based on an individual engineer's
evaluation of the inputs that are required to carry out a particular activity and
of the prices of those inputs.
Equation method A method of computing the break-even point that relies on the equation Sales
= Variable expenses + Fixed expenses + Profits.
Equity method A method of accounting by a parent company for investments in subsidiary
companies by which the parent's share of subsidiary income or loss is
periodically recorded in the parent company accounts.
Equivalent units The number of partially completed units times their percentage of completion
with respect to a particular cost. Equivalent units are the number of complete
whole units one could obtain from the materials or effort contained in partially
completed units.
Equivalent units of The units transferred to the next department (or to finished goods) during the
production (Weighted- period plus the equivalent units in the department's ending work in process
Average method) inventory.
Equivalent units of The units transferred to the next department (or to finished goods) during the
production (FIFO period plus the equivalent units in the department's ending work in process
method) inventory, less work done in previous periods to produce the beginning work
in process inventory.
Ethics An area of inquiry dealing with the values, rules, and justifications that govern
one's way of life.
Exchange rate The price, in terms of one currency, at which one unit of another currency may
be bought or sold.
Expenses Decreases in owners' equity incurred by a firm in the process of earning
revenues.
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Extraordinary items Transactions and events that are unusual in nature and occur infrequently.
Gains and losses on such items are shown separately, net of tax effects, on the
income statement.
Extraordinary repairs Expenditures that extend a plant asset's useful life beyond the original
estimate.
Face value The amount of principal to be repaid at maturity. Also called par value.
Fair Labor Standards An act establishing minimum wage, overtime pay, and equal pay standards for
Act employees and setting the necessary record-keeping requirements for
employers.
FAQ Frequently Asked Question
Federal Unemployment A federal tax levied against employers to help finance administration of the
Taxes (FUTA) various unemployment compensation programs operated by the states.
Feedback Accounting and other reports that help managers monitor performance and
focus on problems and/or opportunities that might otherwise go unnoticed.
FICA Tax Federal Insurance Contributions Act tax; under this act, the income of an
individual is taxed to support the national Social Security program providing
retirement income, medical care, and death benefits. Employers pay a
matching amount of tax on their eligible employees.
FIFO See First in, first out
FIFO method A method of accounting for cost flows in a process costing system in which
equivalent units and unit costs relate only to work done during the current
period.
Financial accounting The phase of accounting concerned with providing information to
stockholders, creditors, and others outside the organization.
Financial leverage Acquiring assets with funds that have been obtained from creditors of from
preferred stockholders at a fixed rate of return.
Financial reporting A component of the conceptual framework that specifies that financial
objectives statements should provide information (1) useful for investment and credit
decisions, (2) helpful in assessing an entity's ability to generate future cash
flows, and (3) about an entity's resources,, and the effects causing changes in
these items.
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Financial statement A part of the conceptual framework that identifies the significant components-
elements such as assets, liabilities, owners' equity, revenues, and expenses-used to put
financial statements together.
Financial statements A group of reports that indicate the financial condition of an organization.
Usually consists of a Statement of Income, Balance Sheet, Statement of
Owner's Equity, and Statement of Cash Flows.
Financing activities All transactions (other than payment of interest) involving borrowing from
creditors or repaying creditors as well as transactions with the company's
owners (except stock dividends and stock splits).
Finished goods Units of product that have been completed but have not yet been sent to
customers.
First in, first out (FIFO) An inventory pricing method that assumes that the oldest (earliest purchased)
goods on hand are sold first, resulting in an ending inventory priced at the most
recent acquisition costs.
First-stage allocation The process by which overhead costs are assigned to activity cost pools in an
activity-based costing system.
Fiscal year The annual accounting period used by a business firm.
Fixed assets An alternate label for plant assets; may also be called property, plant, and
equipment.
Fixed cost A cost that remains constant, in total, regardless of changes in the level of
activity within the relevant range. If a fixed cost is expressed on a per unit
basis, it varies inversely with the level of activity.
Fixed manufacturing The portion of the fixed manufacturing overhead cost of a period that goes into
overhead cost deferred inventory under the absorption costing method as a result of production
in inventory exceeding sales.
Fixed manufacturing The portion of the fixed manufacturing overhead cost of a prior period that
overhead cost released becomes an expense of the current period under the absorption costing method
from inventory as a result of sales exceeding production.
Flexible budget A budget that is designed to cover a range of activity and that can be used to
develop budgeted costs at any point within that range to compare to actual
costs incurred.
Foreign currency A transaction whose terms are fixed in the amount of foreign currency to be
transaction paid or received.
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Foreign exchange gain A gain or loss arising from a change in exchange rates before a foreign
or loss currency transaction is settled.
Franchise Generally, an exclusive right to operate or sell a specific brand of products in a
given geographical area.
Full cost See Absorption costing .
Full disclosure An accounting principle stipulating the disclosure of all facts necessary to
make financial statements useful to readers.
Fully diluted earnings An earning per share presentation for corporations with complex capital
per share structures that assumes all dilutive securities are converted into common stock.
Future value The value at some specific time in the future, of a sum of money held today,
after adding interest that will be earned if the sum were to be invested at a
specified rate of interest.
GAAP See Generally accepted accounting principles
General journal A journal with enough flexibility so that any type of business transaction may
be recorded in it.
General ledger A grouping of all of an entity's accounts that are used to prepare the basic
financial statements.
General partnership A partnership in which one class of partner limits its liability for losses to the
amount of the limited partners' investment; there must be at least one general
partner in a limited partnership.
Generally accepted A group of standards or guides that are used in preparing financial accounting
accounting principles reports.
(GAAP)
Going concern concept An accounting guideline that assumes, in the absence of evidence to the
contrary, that a business entity will continue to operate indefinitely and will
not be sold or liquidated.
Goodwill The value that derives from a firm's ability to earn more that a normal rate of
return on the fair market value of its identifiable net assets. Goodwill is only
recognized when an entity is acquired for a price that exceeds the value of its
assets.
Gross margin Gross profit as expressed as a percentage of sales. A broad measure of
percentage profitability.
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Gross price method of An accounting procedure by which purchases are recorded at invoice price.
recording purchases When discounts are taken, the amount of the discount is recorded in the
Purchases Discounts account.
Gross profit method A procedure for estimating the cost of an inventory by subtracting an estimated
cost of goods sold amount from the cost of goods available for sale.
Gross profit on sales The excess of the sales price over the net delivered cost of the product sold.
Also called gross margin
Gross profit percentage Gross profit divided by net sales.
High-low method A method of separating a mixed cost into its fixed and variable elements by
analyzing the change in cost between the high and low levels of activity.
Horizontal analysis A side-by-side comparison of two or more accounting periods financial
statements.
http Hypertext Transfer Protocol is the format used to organize information sent on
the WWW.
Ideal standards Standards that allow for no machine breakdowns or other work interruptions
and that require peak efficiency at all times.
Income statement A financial statement reporting an entity's revenues and expenses for a period
of time.
Incremental analysis An analytical approach that focuses only on those items of revenue, cost, and
volume that will change as a result of a decision.
Incremental cost An increase in cost between two alternatives. Also see Differential cost.
Independent variable A variable that acts as a causal factor; activity is the independent variable, as
represented by the letter X in the equation Y=a+bX .
Indirect cost A cost that cannot be easily and conveniently traced to a specified cost object.
Indirect labor The labor costs of janitors, supervisors, materials handlers, and other factory
workers that can not be conveniently traced directly to particular products.
Indirect materials Small items of material such as glue and nails. These items may become an
integral part of a finished product but are traceable to the product only at great
cost or inconvenience.
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Indirect method A method of computing the cash provided by operating activities that starts
with net income and adjusts it to a cash basis. It is also known as the
reconciliation method .
Individual Earnings A detailed record maintained by an employer for each employee that shows
Records gross earnings, overtime premiums, all amounts withheld, payroll tax data, and
net earnings paid.
Inflation An increase in the general level of prices for goods and services.
In-house computer A computer operated on site for a single company.
Installment accounts The accounts receivable or payable for which payments or collections are
routinely scheduled over extended periods, such as 24 or 36 months.
Installment method A method of revenue recognition for installment transactions that treats each
cash collection as part return of cost and part gross profit.
Intangible assets A term applied to a group of long-term assets, including patents, copyrights,
franchises, trademarks, and goodwill, that benefit an entity but do not have
physical substance.
Interdepartmental Services provided between service departments. Also see Reciprocal services .
services
Interim financial Financial statements covering periods within a firm's fiscal year or prepared at
statements a date other than the fiscal year-end.
Internal auditing An appraisal activity of a firm's operations conducted by a firm's own internal
audit staff to determine whether management's financial and operating policies
are being properly implemented.
Internal control The policies and procedures established by a firm to provide reasonable
structure assurance that specific entity objectives will be achieved.
Internal rate of return The discount rate at which the net present value of an investment project is
zero; thus, the internal rate of return is the rate of return promised by a project
over its useful life.
International A set of accounting guidelines that is acceptable for financial statements that
accounting principles will be presented and used in different countries.
Inventoriable costs Same as Product costs .
Inventory Merchandise owned by a company and held for resale to customers in the
ordinary course of business or goods to be used in the manufacturing process.
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Inventory turnover Measure of how many times the company's inventory has been sold during the
year.
Investing activities Transactions that involve acquiring or disposing of noncurrent assets.
Investment center A business segment whose manager has control over cost, revenue, and the use
of investment funds.
Invoice A document used in business transactions that sets forth the precise terms
regarding date, customer, vendor, quantities, prices, and freight and credit
terms of a transaction.
Invoice register A special journal, sometimes called a purchases journal , in which all
acquisitions on account or chronologically recorded.
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Sources:
Cunningham, B.M., Nikolai, L.A., & Bazley, J.D. (2004) Accounting: Information for Business Decisions (2nd ed.).Mason, Ohio: Sou
Garrison, R.H., & Noreen, E.W. (2003). Managerial Accounting (10th ed.). New York, McGraw-Hill Irwin.
Assets = Liabilities + Owner's Equity.
$1,000,000 in sales / ($95,000 beginning A/R + $86,000 ending A/R / 2) = 10.9 times per year.
(Cash + Marketable securities + Current receivables) / Current liabilities
The total cost of X-ray film in a hospital will increase as the number of X-rays taken increases. Therefore, the number of X
ABC is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity
365 days / Accounts receivable turnover
365 days / Inventory turnover
The set-up time to properly configure and calibrate a machine to process a batch of parts.
Common stockholders' equity (Total stockholders equity - Preferred stock) / Average number of common shares outstand
The wage cost of the pilot of a 747 airliner is a common cost of all of the passengers on the aircraft. Without the pilot, ther
As volume increases costs can be "Fixed", "Variable", or "Semi-Variable'".
Cost drivers can include items such as machine hours, beds occupied, computer time, or flight hours.
Examples of possible cost objects are products, product lines, customers, jobs, and organizational subunits such as depa
Current assets / Current liabilities
Total liabilities / Average stockholders' equity
Examples of direct costs include direct material and direct labor.
The wages of a "final assembler" might be a direct labor cost needed to make a printer.
Glass is a direct cost of material in manufacturing ready-to-install windows.
Dividends per share / Earnings per share
Dividends per share / Stock's market price per share
(Net income - Preferred dividends) / Average number of common shares outstanding
600 units which are 75%
complete = 450 Equivalent units.
Gross profit / Sales
Cost of goods sold / Average inventory {Where Average inventory = (beginning + ending inventory) / 2}
Individual inputs used to complete each job (such as materials, engineering time, set-up costs, etc.) are recorded. Overhe
All overheads in the winding department might be allocated to product based on machine hours needed for each job, while
A company estimates that for the current year total manufacturing overheads will be three times the cost of total direct lab
The cost of preparing the weekly payroll for all employees.
Estimated total utility costs for the year might be part of an overhead cost pool which is applied to product as a multiplier o
Market price per share / Earnings per share
(Net income - Preferred dividends) / Average common stockholders' equity
{Net income + [Interest expense x (1 - Tax rate)]} / Average total assets
Examples include a product line, a sales territory, a division, or a department.
If a company has product that was damaged during manufacture, the costs associated with producing it are sunk costs an
This may, or may not, be the same as the time card or time sheet used for payroll.
Earnings before interest expense and income taxes / Interest expense
If total overhead costs for a period were accurately estimated, a predetermined rate of $X of overhead might be applied to
For a printer, paper is usually a variable cost since it increases in direct proportion to the volume of printing.
Current assets - Current liabilities
cisions (2nd ed.).Mason, Ohio: South-Western.
ses. Therefore, the number of X-rays is an activity base for explaining the total cost of X-ray film.
ns that potentially affect capacity and therefore fixed costs.
ber of common shares outstanding
e aircraft. Without the pilot, there would be no flight and no passengers. But no part of the pilot's wage is caused by any on e passenger takin
zational subunits such as departments or divisions of a company.
nventory) / 2}
osts, etc.) are recorded. Overheads are applied to the job based on the predetermined overhead rate for each input.
hours needed for each job, while the overheads incurred in the sorting department may be allocated to product based on direct labor hours in
times the cost of total direct labor. Therefore, overhead costs allocated to a job will be direct labor costs used on a job (allocation base) multi
plied to product as a multiplier on actual machine hours. But, if electricity rates drop unexpectedly, more costs might be applied to product tha
h producing it are sunk costs and should not influence a decision on whether to throw the item away.
of overhead might be applied to each unit. But, if fewer units than planned were produced, overhead applied to those units would be less tha
olume of printing.
caused by any on e passenger taking the flight.
oduct based on direct labor hours incurred.
used on a job (allocation base) multiplied by 3.
osts might be applied to product than is incurred.
ied to those units would be less than the costs incurred.
Calculation of equivalent units (Weighted Average Method).
Final Assembly Department Materials Conversion
Units transferred to Finished Goods 8,000 8,000
Work in process, Dec. 31
600 units at 75% complete 450
600 units at 40% complete 240
Equivalent units of production 8,450 8,240
Note: Work done in prior periods to produce beginning inventory is ignored.
When finished click on "Terms"
Calculation of equivalent units (FIFO Method).
Assume beginning inventory consists of 200 units that were 55% and 30%
complete with respect to material and conversion costs respectively.
Final Assembly Department Materials Conversion
Work in process, Dec.1
200 units x (100% - 55%) 90
200 units x (100% - 30%) 140
Units started and completed in Dec. 7,800 7,800
Work in process, Dec. 31
600 units at 75% complete 450
600 units at 40% complete 240
Equivalent units of production 8,340 8,180
When finished click on "Terms"
MACRS Depreciation Table
Class of Property Items Included
Tractor units, racehorses over two years
3-year property
old, and horses over 12 years old when
Automobiles, taxis, buses, trucks,
5-year property
computers and peripheral equipment,
Office furniture and fixtures, and any
7-year property
property that has not been designated as
Vessels, barges, tugs, similar water
10-year property
transportation equipment, single-purpose
Depreciable improvements to land such
15-year property
as shrubbery, fences, roads, and bridges.
Farm buildings that are not agricultural or
20-year property
horticultural structures.
Residential rental property.
27.5-year property
Nonresidential real estate, including
39-year property
home offices. (Note: the value of land
When finished click on "Terms"