Accounting Glossary L-R
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Accounting Terminology Guide L-R A | B |C |D |E | F | G| H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | Y | Z Last in, First out (LIFO) - ACCOUNTING method of valuing inventory under which the costs of the last goods acquired are the first costs charged to expense. Commonly known as LIFO. Lease - Conveyance of land, buildings, equipment or other ASSETS from one person (LESSOR) to another (LESSEE) for a specific period of time for monetary or other consideration, usually in the form of rent. Leasehold - Property INTEREST a LESSEE owns in the leased property. Ledger - Any book of accounts containing the summaries of debit and credit entries. Lessee - Person or entity that has the right to use property under the terms of a LEASE. Lessor - Owner of property, the temporary use of which is transferred to another (LESSEE) under the terms of a LEASE. Letter of Credit - Conditional bank commitment issued on behalf of a customer to pay a third party in accordance with certain terms and conditions. The two primary types are commercial letters of credit and standby letters of credit. Leveraged Buy Out - Acquisition of a controlling INTEREST in a company in a transaction financed by the issuance of DEBT instruments by the acquired entity. Leveraged Lease - Transaction under which the LESSOR borrows funds to acquire property which is leased to a third party. The property and lease rentals are security for the LESSOR'S indebtedness. Liability - DEBTS or obligations owed by one entity (DEBTOR) to another entity (CREDITOR) payable in money, goods, or services. LIFO - See LAST IN, FIRST OUT. Limited Liability Company (LLC) - Form of doing business combining limited liability for all owners (called members) with taxation as a PARTNERSHIP. An LLC is formed by filing ARTICLES OF ORGANIZATION with an appropriate state official. Rules governing LLCs vary significantly from state to state. Limited Liability Partnership (LLP) - GENERAL PARTNERSHIP which, via registration with an appropriate state authority, is able to enshroud all its partners in limited liability. Rules governing LLPs vary significantly from state to state. Limited Partnership - PARTNERSHIP in which one or more partners, but not all, have limited liability to creditors of the partnership. Liquid Assets - Cash, cash equivalents, and marketable SECURITIES. Liquidation - Winding up an activity by distributing its ASSETS to the appropriate parties and settling its DEBTS. Litigation Support/Dispute Resolution - A service that CPAs often provide to attorneys - e.g., expert testimony about the value of a business or other asset, forensic accounting (a partner stealing from his other partners, or a spouse understating his income in a matrimonial action). The lawyer hires the CPA to do the investigation and determine the amount of money stolen or understated. LLC - See LIMITED LIABILITY COMPANY. LLP - See LIMITED LIABILITY PARTNERSHIP. Long-Term Debt - DEBT with a maturity of more than one year from the current date. Loss - Excess of EXPENDITURES over REVENUE for a period or activity. Also, for tax purposes, an excess of basis over the amount realized in a transaction. (See NET INCOME.) Lower of
Cost or Market - Valuing ASSETS for financial reporting purposes.
Ordinarily, "cost" is the purchase price of the asset and "market"
refers to its current replacement cost. GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) requires that certain assets (e.g., INVENTORIES)
be carried at the lower of cost or market. Management Accounting - Reporting designed to assist management in decision-making, planning, and control. Also known as Managerial Accounting. Management Discussion and Analysis (MD&A) - SEC requirement in financial reporting for an explanation by management of significant changes in operations, ASSETS, and LIQUIDITY. Management's Report - Management is required to include in its annual report its assessment of the effectiveness of the company's internal control over financial reporting in addition to its audited financial statements as of the end of the most recent fiscal year. Managerial Accounting - See MANAGEMENT ACCOUNTING. Margin - Excess of selling price over the unit cost. Mark-to-Market - Method of valuing ASSETS that results in adjustment of an asset's carrying amount to its market value. Marketable Securities - Stocks and other negotiable instruments which can be easily bought and sold on either listed exchanges or over-the-counter markets. Matching Principle - A fundamental concept of basic accounting. In any one given accounting period, you should try to match the revenue you are reporting with the expenses it took to generate that revenue in the same time period, or over the periods in which you will be receiving benefits from that expenditure. A simple example is depreciation expense. If you buy a building that will last for many years, you don't write off the cost of that building all at once. Instead, you take depreciation deductions over the building's estimated useful life. Thus, you've "matched" the expense, or cost, of the building with the benefits it produces, over the course of the years it will be in service. Material Weakness - A significant deficiency or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Materiality - Magnitude of an omission or misstatements of ACCOUNTING information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would change or be influenced. MD&A - See MANAGEMENT DISCUSSION AND ANALYSIS. Merger - BUSINESS COMBINATION that occurs when one entity directly acquires the ASSETS and LIABILITIES of one or more entities and no new corporation or entity is created. (See CONSOLIDATION.) Monetary Items - Definite fixed amounts stated in terms of dollars, either by law or by contract agreement. Mortgage - Legal instrument evidencing a security interest in ASSETS, usually real estate.Mortgages serve as COLLATERAL for PROMISSORY NOTES. Municipal Bond - BOND issued by a government or public body, the INTEREST on which is typically exempt from federal taxation. Matching Principle - A fundamental rule f baxic accounting. In any one given accounting period, you should try to match the revenue you are reporting with the expenses it took. Mutual Fund
- Investment company which generally offers its shares to the general
public and invests the proceeds in a diversified portfolio of SECURITIES.
(See CLOSED-END MUTUAL FUND and OPEN-END MUTUAL FUND.) NASBA - See NATIONAL ASSOCIATION OF STATE BOARDS OF ACCOUNTANCY. National Association of State Boards of Accountancy - serves as a forum for the 54 State Boards of Accountancy, which administer the uniform CPA examination, license Certified Public Accountants and regulate the practice of public accountancy in the United States. Negative Assurance - Report issued by an ACCOUNTANT based on limited procedures that states that nothing has come to the accountant's attention to indicate that the financial information is not fairly presented. Negligence - The omission to do something which a reasonable man, guided by those ordinary considerations which ordinarily regulate human affairs, would do, or the doing of something which a reasonable and prudent man would not do. Negligence is the failure to use such care as a reasonably prudent and careful person would use under similar circumstances; it is the doing of some act which a person of ordinary prudence would not have done under similar circumstances or failure to do what a person of ordinary prudence would have done under similar circumstances. The term refers only to that legal delinquency which results whenever a man fails to exhibit the care which he ought to exhibit, whether it be slight, ordinary, or great. It is characterized chiefly by inadvertence, thoughtlessness, inattention, and the like, while "wantonness" or "recklessness" is characterized by willfulness. The law of negligence is founded on reasonable conduct or reasonable care under all circumstances of particular care. Doctrine of negligence rests on duty of every person to exercise due care in his conduct toward others from which injury may result. Net Assets - Excess of the value of SECURITIES owned, cash, receivables, and other ASSETS over the LIABILITIES of the company. Net Income - Excess or DEFICIT of total REVENUES and GAINS compared with total expenses and losses for an ACCOUNTING period. (See INCOME and LOSS.) Net Lease - In addition to the rental payment, the LESSEE assumes all property charges such as taxes, insurance, and maintenance. Net Sales - Sales at gross invoice amounts less any adjustments for returns, allowances, or discounts taken. Net Worth - Similar to EQUITY, the excess of ASSETS over LIABILITIES. Non-for-Profit Organization/Tax-Exempt Organization - An incorporated organization which exists for educational or charitable purposes, and from which its shareholders or trustees do not benefit financially. Also called not-for-profit organization. Non Routine Transactions - Activities that occur only periodically, the data involved are generally not part of the routine flow of transactions. No-Par Stock - Stock authorized to be issued but for which no PAR VALUE is set in the ARTICLES OF INCORPORATION. A STATED VALUE is set by the BOARD OF DIRECTORS on the issuance of this type of stock. No-Par Value - Stock or bond that does not have a specific value indicated. (See STATED VALUE.) Notional
- Value assigned to ASSETS or LIABILITIES that is not based on cost
or market (e.g., the value of a service not yet rendered). Objectivity - Emphasizing or expressing the nature of reality as it is apart from personal reflection or feelings; independence of mind. Obligations - Any amount which may require payment by an entity at a future time. OCBOA - See OTHER COMPREHENSIVE BASIS OF ACCOUNTING. OPEB - See OTHER POST-RETIREMENT EMPLOYEE BENEFIT. Open-End Mutual Fund - MUTUAL FUND that does not have a fixed number of shares outstanding, offers new shares to the public, and buys back outstanding shares at market value. Operating Agreement - Agreement, usually a written document, that sets out the rules by which a LIMITED LIABILITY COMPANY (LLC) is to be operated. It is the LLC equivalent of corporate BYLAWS or a PARTNERSHIP agreement. Operating Cycle - Period of time between the acquisition of goods and services involved in the manufacturing process and the final cash realization resulting from sales and subsequent collections. Option - Right to buy or sell something at a specified price during a specified time period. Ordinary Income - One of two classes of income (the other being CAPITAL GAINS) taxed under the INTERNAL REVENUE CODE. Historically, ordinary income is taxed at a higher rate than capital gains. Other Comprehensive Basis of Accounting (OCBOA) - Consistent accounting basis other than GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) used for financial reporting. Examples include an INCOME TAX BASIS or a CASH BASIS. Other Post-Retirement
Employee Benefit (OPEB) - All post-retirement benefits other
than pensions, provided by employers to employees. Paid in Capital - Portion of the stockholders' EQUITY which was paid in by the stockholders, as opposed to CAPITAL arising from profitable operations. Parent Company - Company that has a controlling interest in the COMMON STOCK of another. Partnership - Relationship between two or more persons based on a written, oral, or implied agreement whereby they agree to carry on a trade or business for profit and share the resulting profits. Unlike a CORPORATION'S shareholders, the partnership's general partners are liable for the DEBTS of the partnership. (See GENERAL PARTNERSHIP, LIMITED LIABILITY PARTNERSHIP, LIMITED PARTNERSHIP.) Par Value - Amount per share set in the ARTICLES OF INCORPORATION of a CORPORATION to be entered in the CAPITAL STOCKS account where it is left permanently and signifies a cushion of EQUITY capital for the protection of CREDITORS. Passive Activity Loss - LOSS generated from activities involved in the conduct of a trade or business in which the taxpayer does not materially participate. PCAOB - Public Corporation Accounting Oversight Board, a private-sector, non-profit corporation, created by the Sarbanes-Oxley Act of 2002, to oversee the auditors of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports. Peer Review - Process by which an accounting firm's practice is evaluated for compliance with professional standards. The objective is achieved through the performance of an independent review by one's peers. Pension - Retirement plan offered by an employer for the benefit of an employee, usually at retirement, through a TRUSTEE who controls the plan ASSETS. (See EMPLOYEE BENEFIT PLAN.) Perpetual Inventory - System that requires a continuous record of all receipts and withdrawals of each item of INVENTORY. Personal Financial Planning - Process for arriving at a comprehensive plan to solve an individual's personal, business, and financial problems and concerns. Personal Financial Specialist (PFS) - CERTIFIED PUBLIC ACCOUNTANT who specializes in PERSONAL FINANCIAL PLANNING and completes a series of requirements that include education, experience, ethics and an exam. Personal Financial Statements - FINANCIAL STATEMENTS prepared for an individual or family to show financial status. Personal Property - Movable property that is not affixed to the land (REAL PROPERTY). Personal property includes tangible items such as cash, cars and computers, as well as intangible items, such as royalties, patents and copyrights. Phantom Income - Income reported on a TAX BASIS for which no cash or financial benefit is realized. Pledged Asset - ASSET placed in a TRUST and used as COLLATERAL for a DEBT. Pooling of Interest - Used to account for the acquisition of another company when the acquiring company exchanges its voting COMMON STOCK for the voting common stock of the acquired company when certain criteria are met. Post-Retirement Benefits - PENSIONS, health care, life insurance and other benefits that are provided by an employer to retirees, their dependents, or survivors. Preferred Stock - Type of CAPITAL STOCK that carries certain preferences over COMMON STOCK, such as a prior claim on DIVIDENDS and ASSETS. Premium - (1) Excess amount paid for a BOND over its face amount. (2) In insurance, the cost of specified coverage for a designated period of time. Prepaid Expense - Cost incurred to acquire economically useful goods or services that are expected to be consumed in the revenue-earning process within the operating cycle. Present Value - CURRENT VALUE of a given future cash flow stream, discounted at a given rate. Preventive Controls - These have the objective of preventing errors or fraud from occurring in the first place that could result in a misstatement of the financial statements. Prime Rate - Rate of interest charged by major U.S. banks on loans made to their preferred customers. Principal - Face amount of a SECURITY, exclusive of any PREMIUM or INTEREST. The basis for INTEREST computations. Private Placement - Sales of SECURITIES not involving a PUBLIC OFFERING and exempt from registration pursuant to certain EXEMPTIONS. Privilege - A right or immunity granted as a peculiar benefit advantage. Privity - An interest in a transaction, contract or legal action to which one is not a party, arising out of a relationship to one of the parties. Profit Sharing Plan - DEFINED CONTRIBUTION PLAN characterized by the setting aside of a portion of an entity's profits in participant's accounts. (See EMPLOYEE BENEFIT PLAN.) Pro Forma - Presentation of financial information that gives effect to an assumed event (e.g., MERGER). Projection - Prospective FINANCIAL STATEMENTS that include one or more hypothetical assumptions. Promissory Note - Evidence of a DEBT with specific amount due and interest rate. The note may specify a maturity date or it may be payable on demand. The promissory note may or may not accompany other instruments such as a MORTGAGE providing security for the payment thereof. (See DEMAND LOAN.) Proprietorship - Business owned by an individual without the limited liability protection of a CORPORATION or a LIMITED LIABILITY COMPANY (LLC). Also known as sole proprietorship. Pro Rata - Distribution of an expense, fund, or DIVIDEND proportionate with ownership. Prospective Financial Information (forecast and projection) - Forecast: Prospective financial statements that present, to the best of the responsible party's knowledge and belief, an entity's expected financial position, results of operations, and changes in financial position. A financial forecast is based on the responsible party's assumptions reflecting conditions it expects to exist and the course of action it expects to take. Projection: Prospective financial statements that present, to the best of the responsible party's knowledge and belief, given one or more hypothetical assumptions, an entity's expected financial position, results of operations, and changes in financial position. Prospectus - Major part of the registration statement filed with the SECURITIES AND EXCHANGE COMMISSION (SEC) for PUBLIC OFFERINGS. A prospectus generally describes SECURITIES or partnership interests to be issued and sold. Proxy - Document authorizing someone other than the shareholder to exercise the right to vote the stock owned by the shareholder. Public Offering - Offering shares to the public. Generally done through SEC filings. Public Oversight Board (POB) - The POB is an independent oversight board, composed of public members, which monitors and evaluates peer reviews conducted by the SEC Practice Section (SECPS) of the AICPA's Division for CPA Firms as well as other activities of the SECPS. Purchase Method of Accounting - ACCOUNTING for a MERGER by adding the acquired company's ASSETS at the price paid for them to the acquiring company's assets. Push-Down
Accounting - Method of ACCOUNTING in which the values that arise
from an acquisition are transferred or "pushed down" to the accounts
of an acquired company. Qualified Opinion - AUDIT opinion that states, except for the effect of a matter to which a qualification relates, the FINANCIAL STATEMENTS are fairly presented in accordance with GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP). The auditor is required to qualify when there is a scope limitation. Quasi-Reorganization
- Type of reorganization in which, with shareholder approval,
the management revalues ASSETS and eliminates the DEFICIT (increased
by asset devaluations if any) by charging it to other EQUITY accounts
without the creation of a new corporate entity or without court
intervention. R&D - See RESEARCH AND DEVELOPMENT. ROI - See RETURN ON INVESTMENT. Ratio Analysis - Comparison of actual or projected data for a particular company to other data for that company or industry in order to analyze trends or relationships. Real Estate Investment Trust (REIT) - Investor-owned TRUST which invests in real estate and, instead of paying income tax on its income, reports to each of its owners his or her pro rata share of its income for inclusion on their income tax returns. This unique trust arrangement is specifically provided for in the INTERNAL REVENUE CODE. Real Property - Land and improvements, including buildings and PERSONAL PROPERTY, that is permanently attached to the land or customarily transferred with the land. Reasonable Assurance - Management's assessment of the effectiveness of internal control over financial reporting is expressed at the level of reasonable assurance. It includes the understanding that there is a remote likelihood that material misstatements will not be prevented or detected on a timely basis. It is a high level of assurance. Receivables - Amounts of money due from customers or other DEBTORS. Reconciliation - Comparison of two numbers to demonstrate the basis for the difference between them. Redemption Value - Price to be paid by an ENTITY to retire its BONDS or PREFERRED STOCK. Red Herring - "Pre-release" PROSPECTUS offering. An announcement of a future issuance of SECURITIES, given restricted circulation during the waiting period of 20 days or other specified period between the filing of a registration statement with the SEC and the effective date of the statement. A red herring is not an offer to sell or the solicitation of an offer to buy. Refinancing Agreement - Arrangement to provide funding to replace existing financing, the most common being a refinance of a home MORTGAGE. Reinsurance - Process by which an insurance company obtains insurance on its insurance claims with other insurers in order to spread the risk. REIT - See REAL ESTATE INVESTMENT TRUST. Related Party Transaction - Business or other transaction between persons who do not have an arm's-length relationship (e.g., a relationship with independent, competing interests). The most common is between family members or controlled entities. For tax purposes, these types of transactions are generally subject to a greater level of scrutiny. Relevant Assertions - Assertions that have a meaningful bearing on whether the account is fairly stated. Report Release Date - The date the company's financial statements are issued. Repos - See REPURCHASE AGREEMENT. Repurchase Agreement (Repos) - Agreement whereby an institution purchases SECURITIES under a stipulation that the seller will repurchase the securities within a certain time period at a certain price. Research and Development (R&D) - Research is a planned activity aimed at discovery of new knowledge with the hope of developing new or improved products and services. Development is the translation of research findings into a plan or design of new or improved products and services. Reserve - ACCOUNT used to earmark a portion of EQUITY or fund balance to indicate that it is not available for expenditure. An obsolete term in the United States. More commonly used in Europe. Restricted Assets - Cash or other ASSETS whose use in whole or in part is restricted for specific purposes bound by virtue of contracted agreements. Restricted Fund - Fund established to account for assets whose income must be used for purposes established by donors or grantors of such ASSETS. (See FUND ACCOUNTING and UNRESTRICTED FUNDS.) Restructuring - Reorganization within an entity. Restructuring may occur in the form of changing the components of CAPITAL, renegotiating the terms of DEBT agreements, etc. Retained Earnings - Accumulated undistributed earnings of a company retained for future needs or for future distribution to its owners. Return on Investment (ROI) - Ratio measure of the profits achieved by a firm through its basic operations. An indicator of management's general effectiveness and efficiency. The simplest version is the ratio of NET INCOME to total ASSETS. Revenue Recognition - Method of determining whether or not income has met the conditions of being earned and realized or is realizable. Revenues - Sales of products, merchandise, and services; and earnings from INTEREST, DIVIDEND, rents. Review - Accounting service that provides some assurance as to the reliability of financial information. In a review, a CERTIFIED PUBLIC ACCOUNTANT (CPA) does not conduct an examination under GENERALLY ACCEPTED AUDITING STANDARDS (GAAS). Review Engagement - Agreement between a CERTIFIED PUBLIC ACCOUNTANT (CPA) and his or her client to perform a review. (See ACCOUNTANTS' REPORT.) Review Report - See ACCOUNTANTS' REPORT. Right to Setoff - DEBTOR'S legal right, to discharge all or a portion of the DEBT owed to another party by applying against the debt an amount that the other party owes to the debtor. Risk Management - Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity's operating philosophy. Routine Transactions
- Recurring financial activities reflected in the accounting
records in the normal course of business. copyright: New York State Society of Certified Public Accountants website, www.nysscpa.org
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