Financial Terms Glossary

Financial Terms

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1099-DIV A statement of dividends paid, sent to IRS and taxpayer.
1099-INT A statement of interest paid, sent to IRS and taxpayer.
1099-OID Original Issue Discount statement, sent to IRS and taxpayer.
401(k) A type of retirement program sponsored by employers for their workers. Contributions deducted directly from your
pay check make it easy to save and can reduce your taxable income for that year. Earnings grow quickly because
they’re tax-deferred. Many employers also match the employee’s own contributions up to a set limit.
Accountant An individual trained and knowledgeable in the profession of accountancy.
Accounting
(Accountancy)
The function of compiling and providing financial information primarily by reports referred to as financial
statements. Accounting includes bookkeeping, systems design, analysis and interpretation of accounting
information.
Accounts Obligations to pay for goods or services that have been acquired on open accounts from suppliers. Accounts
Payable Payable is a current liability in the Balance Sheet.
Accounts
Receivable
Amounts due the company on account from customers who have bought merchandise or received services.
Accounts Receivable is a current asset in the Balance Sheet.
Accrual Basis The method of keeping accounts which shows all expenses incurred and income earned for a given period of
time, even though such expenses and income may not actually have been paid or received in cash during the
same period of time.
Accrued Expense An expense incurred, but not yet paid.
Accrued
Revenue
Revenue earned, but not yet collected.
Accumulated
Depreciation
An account to which estimated depreciation is added.
Adjustable Rate
Mortgage or
ARM.
A mortgage with an interest rate that may increase or decrease during the term of the loan, according to
determined margins with limits on increases or decreases (called “caps”).
Adjusted Entry An entry made in the general journal at the end of an accounting period to bring certain accounts up to date.
Adjusted Gross
Income (AGI)
A person’s entire income reduced by adjustments including a deduction for an IRA (Individual Retirement
Account), medical savings accounts, and alimony paid to an ex-spouse. Saving money now in an IRA for your
retirement (yes, even though it seems like a million years away) could be one of your smartest moves yet.
Agent A person authorized by another to act on their behalf. Thus, an agent can enter into contacts and other such legal
binding functions on behalf of another. Usually, the corporation’s officers act as corporate agents
Amortization Accounting or financial process of reducing an amount by periodic payments or write-downs. Refers to
liquidation, writing off or extinguishing of a debt over a period of time.
Annual Meeting
of Shareholders
Nearly all states require a corporation to hold an annual meeting of shareholders at which time directors are
elected and other corporate issues are voted on.
Annuity A sequence of equal payments, usually made at regular intervals of time.
Appreciation Increase in value. Often used with reference to an asset, such as land, building, stocks or bonds.
Articles of
Incorporation
(Certificate of
Incorporation or
Charter)
The articles are the primary legal document of a corporation; they serve as a corporation’s Constitution. The
articles are filed with the state government to begin corporate existence. The articles contain basic information on
the Corporation as required by state law.
Articles of
Organization
LLCs must file the articles with the proper state authorities to begin existence. The articles of organization are very
similar to a corporation’s articles of incorporation. Anything of value owned or controlled by a corporation or
Asset individual. An asset may be tangible or intangible.
Asset Allocation The division of holdings among different types of assets, such as bonds, domestic stocks, international stocks,
real estate, and cash.
Asset Class Securities which have similar features, such as cash (money market), bonds large cap stocks, small cap stocks,
and international stocks
Assumed Name A name under which a corporation conducts business that is not the legal name of the corporation as shown in its
articles of incorporation. If a corporation does business under an assumed name, it may be required to file
registration of the assumed name with the state. Also known as a Fictitious Business Name.
Authorized
Shares or Stock
The total number of shares a corporation is authorized to sell. This number is specified in the articles of
incorporation. All of the shares authorized need not be issued
Bad Debts Accounts receivable that are un-collectable Used in Accrual Method accounting.
Balance Amount arrived at by adding all debits and subtracting all credits. To ensure total debits equal the total credits.
Balance Sheet Statement, at a particular point In time, of the financial position of a business or organization-divided into three
parts: assets, liabilities and ownership (equity). Also known as Statement of Financial Position.
Bank Overdraft Balance of a bank account when funds withdrawn exceed funds deposited.
Bank
Reconciliation
Analysis that accounts for the difference between the balance shown on the bank statement and the balance
shown in the accounting records on a given date.
Bankrupt Legal status of a person/corporation who/which is unable to pay its debts as they become due and who/which
has made a transfer of property or of a right or interest in property to a trustee for the benefit of
creditors
Bankruptcy State of being bankrupt.
Beneficiary The recipient, typically a person, an organization, or a trust, of the proceeds of a life insurance policy when the
insured person dies
Benefits
Received
When people pay taxes according to the amount of government aid (benefits) they receive. Examples of benefits
the American public receives include (to name only a few): welfare, child care, Medicare, Medic aid. Some people
believe it’s only fair that people pay taxes based on the amount of government aid they receive
Bill of Lading Written document issued by the carrier of goods. Also, a receipt for goods and a contract to deliver goods.
Bond Essentially, a loan made to companies and government entitles who promise to pay interest at a specified rate
over a specified period of time, and repay the total loan amount at the end of the specified period
Book of Original
Entry
A journal in which transactions are recorded for the first time before summarizing and/or posting to ledger
accounts, for example, purchase journal, cash receipts journal, accounts payable journal, disbursements journal,
general journal and payroll journal. See General Journal and Journal.
Book Value (1) The current value of a fixed asset as shown by the records; the difference between the original cost of the
asset and the accumulated depreciation. (2) The difference between the accounts receivable and the allowance
for bad debts. (3) The value of a share of stock as shown by the corporate books.
Bookkeeping The recording of financial transactions electronically or manually. The record-keeping part of the accounting
process.
Broker A person who handles the transfer of a security from a seller to a buyer.
Budget An estimate of future income and expenditures.
Business Taxes Are you a budding entrepreneur? Just remember that businesses pay taxes to federal, state and local
governments. Businesses pay taxes on their profits. Businesses also pay unemployment insurance, worker’s
compensation, social security and Medicare insurance.
Bylaws Bylaws are the rules and regulations adopted by a corporation for its internal governance. It usually contains
provisions relating to shareholders, directors, officers and general corporate business. At the corporation’s initial
meeting the bylaws are adopted. Bylaws are a private document not filed with any state authority. Bylaws are
more flexible than the articles of incorporation because they are easier to amend.
Canceled Check A check that has cleared the bank and is returned to the depositor with his monthly statement.
Capital (or
Equity)
Interest of the owner in the business that is the difference between Assets & Liabilities. Also called Equity or
Networth. In a corporation, capital represents the stockholders’ equity
Capital Asset Assets, of either a tangible or intangible nature, owned or held by a business which are expected to be used or
held over several fiscal periods
Capital Gain Difference between an asset’s purchase price and its selling price, when the selling price is greater.
Capital Loss Difference between an asset’s purchase price and its selling price, when the purchase price is greater.
Capital Stock See Stock and Authorized stock
CAPS A limit on how much the interest rate can change either at each adjustment or during the life of the mortgage, e.g.,
“2/6” equates to 2% per year and 6% over life of loan.
Cash Basis A method of accounting in which no transactions are entered for income until cash is actually received, and no
entries are made for expenses until cash is actually paid
Certificate of
Authority
A document issued by the proper state authority to a foreign corporation granting the corporation the right to do
business in that state.
Certificate of
Deposit (CD)
Evidence that the holder has deposited at a financial institution a certain amount of money for a certain period of
time. By issuing a CD, a financial institution pledges to redeem the certificate at maturity and pay a certain rate of
interest for use of the deposited funds.
Certified Public
Accountant
A professional accountant who is a member of the American Institute of Certified Public Accountants. Designation
CPA.
Check Register A form of cash payments journal which is used to record deposits and expenditures in and out of a bank account.
Close
Corporation or
Closely Held
Corporation
A close corporation is a corporation that possesses the following traits: a small number of shareholders; no ready
market for the corporation’s stock; and substantial participation by the majority shareholders in the management
of the corporation. Some states have close corporation statutes.
Common Stock The primary stock of a corporation. This stock gives shareholders the right to participate in management of the
corporation and give the shareholder a proportionate share of the dividends.
Compound
Interest
Interest calculated on both the principal amount invested and the previously accumulated unpaid interest.
Consignee A person who receives goods that belong to someone else for future sale or other purpose. Although consignees
are not the owners of the goods, they are accountable for them.
Consignment Goods that are in the hands of someone other than the owner for future sale or other purpose.
Consignor The owner of goods that are in someone else’s hands for future sale or other purpose.
Consolidated
Financial
Statements
Financial statements that show the results of all operations under the parent company’s control, including those of
any subsidiaries
Controlling
Interest
Direct or indirect ownership of voting shares sufficient to elect the majority of the board of directors of a
corporation.
Corporate
Record Book
Maintaining the proper records is very important to assure limited liability to corporate shareholders. The
corporation should have a record book that contains a copy of the articles of incorporation, by laws, initial and
subsequent minutes of directors and shareholders meetings and a stock register
Corporation Legal entity formed under the authority of either provincial or federal statues usually formed to make a profit.
Liabilities of shareholders (owners) are generally limited to the amount of their investment. The name of a
corporation ends with Limited, Ltd., incorporated, Inc., Corporation or Corp
Credit Legal obligation to make repayment at a later date for goods, services or money obtained through the extension
of credit i.e., a promise to pay in the future. The cost of credit is usually referred to as a finance charge, interest or
time-price differential
Credit Entry recording an increase to a liability or owner’s equity or revenue, or a reduction to an asset or expense.
Credits are recorded in the right hand column of an account or a two-column book. Opposite of debit
Credit Bureau Clearinghouse of consumer credit information used by businesses to determine the credit.
Credit Note Issued by a seller to a purchaser to record the reduction of a bill because of an allowance, return or cancellation.
Opposite of an invoice.
Credits If you have a store credit, you can use the credit to purchase merchandise free of charge. If you have a tax credit,
your taxes are reduced by the amount of your credit. You can get tax credits for purposes such as child care
expenses and the earned income credit for low-income taxpayers
Cumulative
Voting
This method of voting is intended to create adequate representation of minority shareholders. Cumulative voting
allows shareholders to aggregate their votes in favor of fewer candidates than there are slots available.
Current Asset Unrestricted cash, or other asset that is expected to be converted into cash or consumed in the production of
income within a year
Current Liability Liability expected to be liquidated in a year.
Debit Entry recording an increase to an asset or expense or a reduction to a liability, revenue or owner’s equity. Debits
are recorded in the left-hand column of an account or a two-column book. Opposite of credit
Deficit A negative amount (debit balance) of retained earnings caused by cumulative losses and dividend distributions
exceeding cumulative net income.
Demand Loan Loan repayable upon demand of creditor.
Dependents A person who relies on someone else for financial support. Sound like a mooch? Not really. Think about it- most
“young adults” (under 21 years old) are supported by their parents. Is this you? If it is, your parents can claim an
exemption for you-their adorable dependent-if dependency tests are met
Depletion Gradual using up or consumption of a natural resource.
Depreciation Accounting process of allocating in a systematic manner the cost or other basic value of a tangible, long-lived
asset or group of assets over the useful life of the asset. See Amortization.
Direct Cost Costs identified with a specific unit of product (for example, clay in the production of flowerpots or tubing in the
production of bicycles)
Direct Deposit When you give the IRS the go-ahead, they’ll send your refund directly to your bank account. It’s the fastest way to
get your cash.
Direct Tax A direct tax cannot be shifted to others (unlike an indirect tax). A good example of a direct tax is the Federal
income tax. You just gotta pay it
Directors Directors are elected by the shareholders. They manage or direct the affairs of the corporation. Typically, the
directors make only major business decisions and monitor the activities of the officers.
Disposable
Income
An individual’s income after taxes.
Dissolution The termination of a corporation’s legal existence. Dissolution may be caused many ways including: failure to file
annual reports, failure to pay certain taxes, bankruptcy, or voluntary dissolution of the corporation by the
shareholders and directors
Distribution Amount paid to mutual fund investors for capital gains on sales of investments and for dividends received from
investments.
Dividend A distribution of money or property paid by the corporation to a shareholder. These distributions are subject to a
double tax; both the corporation and the dividend recipient must pay federal taxes on these earnings.
Domestic
Corporation
A Corporation is a domestic corporation in the state where it has incorporated.
Double Taxation Corporations are treated as a separate legal taxable entity for income tax purposes. Therefore, corporations pay
tax on their earnings. If corporate earnings are distributed to shareholders in the form of dividends, the
corporation does not receive the reasonable business expense deduction, and dividend income is taxed as
regular income to the shareholders. Thus, to the extent that earnings are distributed to shareholders as dividends,
there is a double tax on earnings at the corporate and shareholder level. S corporations and LLCs are
pass-through entities that are not subject to the double tax.
Earned Income In simple English: All the money you earn. This includes any wages, salaries, tips, net earnings (if you’re
self-employed), and any other income received for personal services. Add it all up, it’s all earned income
Earned Income
Credit
Low-income workers can file a tax return to get an earned income credit, even if no income tax was withheld from
the worker’s pay
Education IRA A tax-deferred savings and investment account for education expenses of children and grandchildren under 18.
Electronic Filing
(IRS e-file)
IRS e-file options allow you to file Federal income tax returns (and some state returns) through a tax professional,
through your home computer or even through your telephone. It may also be available in many other places in
your local community.
Employee Stock
Option Plan
(ESOP)
A qualified retirement plan which gives employees a stake in the company without investing employees’ funds.
Employee Stock
Purchase Plan
(ESPP)
A plan which permits employees to purchase company stock, usually at a discount.
Engagement
Letter
Written communication between an accountant and a client with respect to a professional engagement, outlining
the scope of the accountant’s responsibilities and arrangements agreed upon
Enrolled Agent An Enrolled Agent (EA) is a federally-authorized tax practitioner who has technical expertise in the field of taxation
and who is empowered by the U.S. Department of the Treasury to represent taxpayers before all administrative
levels of the Internal Revenue Service for audits, collections, and appeals.
Source: National Association of Enrolled Agents (NAEA)
Weblink to NAEA: www.naea.org
Equity The ownership of a shareholder in a corporation. See Capital.
Estate Real and personal property owned by a person at the time of death (real property is land and anything
permanently attached to it)
Excise Tax Excise taxes are taxes on the sale or use of certain products or transactions. So every time you make a telephone
call, buy a plane ticket, or ride in a car (to name but a few) you’ll be paying excise taxes
Exempt (From
Tax Liability)
Before a taxpayer pays taxes, he/she can claim a set amount of tax deductions for him/herself, a spouse and
eligible dependents. The total amount is subtracted from the adjusted gross income. Then the tax on the
remaining income is figured out
Exempt (From
Withholding)
Have you ever been exempt from taking an exam because your average was high enough? What a feeling! Well,
taxpayers can be exempt from paying a certain amount of federal income tax if they meet certain income, tax
liability, and dependency requirements. In fact, you could be exempt from having certain taxes taken out of your
paycheck. If you have a job, be smart and check into this
Expenditure Consumption of an asset or payment for an expense. Incurrence of a liability.
External Auditor An independent accountant engaged to determine if the financial statements of an entity represent the economic
events that occurred during the period audited. The external audit is for the shareholders/owners (rather than for
management)
F.O.B. Shipping term meaning “free on board” to inform the purchasers of the location at which they become responsible
for the shipping charges (for example, F.O.B. Toronto means the vendor pays the charges to Toronto’s freight
yard and the purchaser is responsible from there)
Fair Market Value The highest price available in an open and unrestricted market between informed, prudent parties, acting at arm’s
length and under no compulsion to transact expressed in terms of money or money’s worth
Family & Medical Federal law requiring businesses with 50 or more employees to offer at least 12 weeks of unpaid leave for
Leave Act (FMLA) personal health reasons, to provide medical care for immediate family members, or to care for a newborn or newly
adopted child
Federal Tax
Identification
Number
A number given to a corporation or other business entity by the federal government for tax purposes. Banks
generally require a tax identification number to open bank accounts.
FICA (Federal
Insurance
Contributions
Act)
The Federal Insurance Contributions Act (FICA) consists of both a Social Security (retirement) payroll tax and a
Medicare (hospital insurance) tax. The tax is levied on employers, employees, and certain self-employed
individuals.
Fiduciary A person who holds something in trust for another (often used to describe executors and administrators of estates
and trusts).
File A Return To file a return is to send in your completed tax forms, or return (“return” is the official term-use it, you’ll sound
smarter). All your tax information appears on the return, including income and tax liability.
Filing Status Your filing status determines your tax bracket and amount of taxes you must pay. Factors such as marital status
affect your filing status
Financial
Statements
Formal financial reports prepared from accounting records (for example, Profit & Loss Statement, Balance Sheet,
Statement of Retained Earnings).
Fiscal Year A period of one year for which financial statements are prepared that may or may not coincide with the calendar
year. Any twelve-month period used by a business as its accounting period.
Fixed Assets See Capital Assets
Fixed Rate A mortgage with an interest rate which does not increase or decrease during the term of the loan.
Flexible Benefits
Plan
A benefits plan which allows employees to choose from a range of taxable and non-taxable benefits, usually
including 401(k), health insurance, and flexible spending accounts
Flexible
Spending
Account (FSA)
A benefit program which allows money to be deducted from an employee’s wages or salary on a pre-tax basis, to
pay for qualifying health care and dependent care expenses.
Foreign
Corporation
A Corporation is referred to as a foreign corporation in all states except for the state where it is incorporated. If a
corporation conducts business in a state other than where it was incorporated, it must register for a certificate of
authority to transact business in the other state or possibly lose access to that state’s courts and face fines
Form 1040EZ This form is great if you’re single or married, don’t have any dependents. If your income is $50,000 or less and
your interest income is $400 or less — use this easy (get it, EZ) IRS form to file your return
Form W-2 By January 31 of each year — your employer (even if you don’t work there anymore) will provide you with a
statement of how much you earned in wages, tips and other compensation from the previous year. This form will
reflect state and federal taxes, social security, Medicare wages, and tips withheld. It also includes a lot of other
really important information you will need to file your return.
Form W-4
(Employee’s
Withholding
Allowance
Certificate)
If you have or had a part-time or summer job, you probably completed this form on your first day of work. This
form determines how much of your paycheck is withheld for federal income taxes.
Formal Tax
Legislation
Process
There are strict steps (that involve the President and Congress) that a proposed tax must pass through before it
becomes a law
Franchise Tax A tax imposed by the State for the privilege of carrying on business as a corporation or LLC. The value of the
franchise tax may be measured by amount of earnings, total value of capital or stock, or by amount of business
done.
GAAP Abbreviation for generally accepted accounting principles. Accounting principles that have been given formal
recognition or authoritative support.
GAAS Abbreviation for generally accepted auditing standards. Auditing standards that have been given formal
recognition or authoritative support.
General Journal Journal in which transactions are recorded for which specific journals are not provided (for example, adjustments
and corrections). In a small operation the general journal may be the only book of original entry.
General Ledger Ledger in which all the assets, liabilities, equity, revenue and expenses are posted and from which financial
statements are prepared.
Goodwill The difference between going-concern value and tangible asset value (tangible assets include identifiable
intangible assets having values that can be separately determined).
Gross Income This deals with all the money, goods and property you receive that must be included as taxable income. Fact:
people who use the barter system (exchanging non-monetary goods/services as payment) have to include
whatever they’ve bartered for as part of their gross income.
Holding
Company
A corporation that has no other function except owning other corporations.
Home Equity
Loan
Loan in which the lender allows the borrower to use the equity in his or her home as collateral for a line of credit or
revolving credit. The borrower may then obtain cash advances by using a credit card or checks up to some
predetermined limit.
Horizontal Equity Horizontal equity says that people in the same income groups should be taxed at the same rate. “Equals should
be taxed equally.”
Income Money or its equivalent, earned periodically by an individual, a corporation, etc., in return for goods or services
provided. Opposite of loss.
Income Disability
Benefits
Insurance which pays a monthly benefit to replace a percentage of earnings lost due to illness or injury resulting
from a covered accident.
Income
Statement
A financial statement summarizing revenues, expenses, gains and losses for a stated period of time. The Income
Statement is also known as Profit & Loss Statement, Statement of Earnings, Statement of Income or Statement of
Operations.
Income Tax These are taxes on income, both earned income (salaries, wages, tips, commissions) and unearned income
(interest from savings accounts, dividends if you hold stock). Individuals and businesses are subject to income
taxes.
Incorporated(Inc.) See Corporation
Incorporator The person or entity that prepares and files the articles of incorporation. Total Tax Solutions acts as an
Incorporator for many new companies.
Indemnify To reimburse or compensate. Directors and officers of corporations are often reimbursed or indemnified for all the
expenses they may have incurred during the incorporation process.
Indirect Tax You might not think you’re paying this tax, but you probably are. It’s the type of tax that can be shifted to others:
hence the name. For example: A company might have to pay a specific tax to the government, let’s say a fuel tax.
The company pays the tax but can increase the cost of their products so consumers are actually paying the tax
indirectly by paying more for the company’s products.
Individual
Retirement
Accounts (IRAs):
A tax-deferred product offered by banks, mutual funds and other companies. Under current law, a married couple
can put $4,000 ($2,000 each) into their own IRA each year in a wide range of savings accounts and investments.
Earnings are tax-deferred until you begin withdrawing the money (which you can start doing without penalty after
age 59 ½). Under current tax law, some people (depending on their income, marital status or other factors) can
deduct all or part of their IRA contributions, which reduces their taxes.
Informal Tax
Legislation
Process
Ever joined a book club? What about a study group? Well, if you’re interested, there are also informal tax
legislation meetings where individuals and interest groups get together to discuss tax issues. Once you become a
steady wage earner, these are meetings you probably won’t want to miss.
Insolvency When liabilities exceed assets. Also, the inability to pay debts when due. See Bankruptcy.
Installment A part of a sum of money or a debt to be paid at regular intervals, usually made up of principal and interest
combined.
Intangible Asset An asset without physical substance that has value due to rights resulting from its ownership and possession (for
example, goodwill, patents, trademarks).
Interest (1) “Interests” represent a member’s ownership of an LLC just as a partner has an interest in a partnership and
shareholders own stock in a corporation.
Interest (2) The cost of using money over time usually expressed as an annual percentage.
Interest Income You deposit your money into a savings account for a reason, right? So you can earn interest on your money.
People also earn interest from lending money to people. We’re not talking about you lending your buddy Dave a
couple bucks to buy lunch; we’re talking about lending lots of money so the interest really accumulates on the
loan. Well, add up all that interest you accumulate and there’s your interest income. Not to burst your bubble, but
that interest income is all fully taxable.
Internal Auditor An employee of an entity (for example, a corporation) who audits for management, providing valuable information
for decision-making concerning the effective operation of its business.
Internal Control A coordinated system of procedures and techniques designed to safeguard a company’s assets, to ensure the
accuracy of its accounting records, and to promote efficiency and adherence to prescribed policies
Inventory Items of tangible property held for sale. An Inventory is a detailed list of items and their values owned at a specific
point in time. Stock inventory would include raw materials for manufacture, materials partly processed and
finished products including items in transit for which title is held, but would not include items physically held for
which title belongs to others. Inventories may also be made of fixed assets, stationery and supplies, etc.
Investment Funds committed to acquire something tangible or intangible in order to receive a return, either in revenue or use.
Invoice Document for goods purchased or services rendered showing details such as quantities, prices, dates, shipping
details, order numbers, terms of sale, etc.
Joint Products Two or more goods having approximately the same economic value that are manufactured simultaneously from
the same raw material.
Journal A book of original entry in which financial transactions are recorded (for example, a purchase journal is a record of
purchase transactions).
Journal Entry An entry in any journal.
Keogh Accounts Similar to a 401(k), but for the self-employed.
Lease A legal contract conveying the use of property from the owner (lessor) to another (lessee) at a fixed rate, for a
stated length of time.
Leasehold
Improvements
Additions, improvements or alterations made to leased property by the lessee.
Ledger A book of final entry containing all the accounts of a business or all the accounts of a particular type (for example,
general ledger, accounts receivable ledger).
Liability The Liabilities of a business are the debts of a business. For example, if money is borrowed from a bank, there is a
liability to repay the loan. In this case, the borrower would be known as the debtor and the bank to which the debt
is owed would be called the creditor
Limited (Ltd.) See Corporation
Limited Liability
Company
A business entity formed upon filing articles of organization with the proper state authorities and paying all fees.
LLCs are a new entity in the United States, although the concept has long been used internationally. LLCs provide
limited liability to their members, and are taxed like a partnership, preventing double taxation. LLCs can be formed
in every state.
Limited
Partnership
A partnership with two classes of partners: Limited partners and one or more General partner. Limited partners
have no personal liability for debts of the limited partnership beyond the amounts invested
Liquid Asset An asset, such as cash, that can be readily converted into other types of assets or used to buy goods and
services or satisfy obligations
Liquidation The winding-up of an organization by settling with debtors, creditors and shareholders. Usually done by selling or
otherwise disposing of assets to pay off liabilities.
Liquidation Value The net amount realized on assets in the event of a liquidation.
Local Tax In addition to federal and state taxes, your local town or city may also need tax money to operate services such as
garbage pick-up, water treatment, and street-cleaning.
Long-Term
Health Care
Insurance
Coverage intended for elderly to provide for expenses related to long-term home health care or extended stays in
nursing homes.
Loss The excess of expenditures over revenues. Opposite of income/profit.
Lump-sum
distribution
A disbursement of the entire funds in an account, commonly paid when an employee retires or leaves a company,
potentially with tax consequences if not rolled over into another retirement plan or an IRA when taken prior to
retirement.
Management
Accounting
Accounting concerned with providing information to managers; that is, to those who are inside an organization
and who direct and control operations. Management Accounting includes cost accumulation for product costing,
budgeting and financial statement analysis.
Manager An LLC may be operated by a group of managers who act much like a board of directors. If an LLC is to be
controlled by mangers this fact must be stated in the articles of organization.
Market Value The highest price that an owner could realize in an open market transaction. See Fair Market Value.
Materiality A term used to describe the significance of financial statement information to decision makers. An item of
information is material if it is probable that its omission or misstatement would influence or change a decision.
Medicare The Medicare program funds the federal health program for people over 65. It helps out people at a time in their
lives when they may have health problems but may not have a lot of money.
Member A member is a person who is an owner of a Limited Liability Company. The members make the business decisions
of an LLC unless the articles of organization provide that the LLC will controlled by a manager or managers.
Merger Merger occurs when one corporation is taken over by another.
Minority Interest The equity of all shareholders who do not hold a controlling interest in a company.
Minutes A written record which details the events of the corporation. These records should be kept in the corporation’s
record book.
Money Market Financial markets in which short-term debt instruments such as Treasury bills, commercial paper and CD’s are
traded.
Name
Reservation
The name of a corporation or LLC must be distinguishable on the records of the state government. If the name is
not unique, the state will reject the articles of incorporation or articles of organization (for LLCs). A name can be
reserved, usually for 120 days, by applying with the proper state authorities and paying a fee.
Net Income Profit after all expenditures have been deducted from the revenue. See Profit.
Net Worth Excess of total assets over total liabilities as reported in a company’s balance sheet. See Capital (or Equity)
No-Par-Value
Stock
Stock with no minimum value. Most states allow no-par stock. If the stock is no-par stock then the amount of
stated capital is an arbitrary amount assigned by the board of directors. Further, the value of capital for franchise
tax purposes is determined by the state and this may result in higher franchise taxes in comparison with low
par-value stock.
Not-For-Profit
Corporation
A Corporation organized for some charitable, civil or other social purpose that does not entail the generation of
profits for shareholders. These corporations receive special tax treatment. Not-for-profit corporations must file
not-for-profit articles of incorporation with the state.
Note Payable
(Promissory
Note)
Written promise made by one individual to another to pay a specific amount on demand or by a definite date.
Note Receivable Written promise by another party to make payment to you at a specified date.
Officers Officers are people who are appointed by the directors. They manage the daily affairs of the corporation. A
Corporation’s officers usually consist of a president, vice-president, treasurer, and secretary. In most states, one
person can hold all of these positions.
Operating
Agreement
An agreement among the LLC members which govern the LLC operations and the rights of its members. It is
analogous to corporate bylaws
Options Marketable securities that provide for future exchange of cash and common shares contingent upon the option
owner’s choice
Organizational
Meeting
The initial meeting where the formation of the corporation is completed. At the organizational meeting a number of
initial tasks are completed such as: the articles of incorporation are ratified, the initial shares are issued, officers
are elected, bylaws approved, and a resolution authorizing the opening of bank accounts is passed. If the initial
directors are named in the articles of incorporation, they can hold the organizational meeting. If they are not
named, then the Incorporator holds the organizational meeting.
Overhead Fixed costs not directly applicable to the production of a -product (for example, costs of lighting and heating a
factory).
Owner’s Equity What the business is worth to the owner. See Capital and Equity.
Paid in Capital
Requirements
A few states require corporations to have a specified amount of paid in capital prior to starting business. These
states include CT, DC, SD, and TX and require that the company have $1,000 in paid in capital before starting
business.
Par-Value The stated minimum value of a share stock. Stock must be sold for at least this value or the owner of the stock
can face liability. With low par value stock or no par value stock this liability is minimized.
Parent Company
Partnership
A corporation that directly or indirectly owns a controlling interest in another corporation. See Subsidiary.Two or
more persons carrying on a business for profit, each partner having unlimited liability for the debts of the
partnership, except in a limited partnership in which some of the partners may have limited liability.
Pass-Through
Taxation
Income to the entity is not taxed. Instead the income is “passed through” to the individual shareholders or interest
holders. S corporations, Partnerships and LLCs are pass-through taxation entities.
Payable An obligation to pay a sum at a future date.
Payroll A record of wages or salaries paid or payable. The actual wages and salaries paid during a given period.
Payroll Taxes Your employer deducts a certain amount from your paycheck to pay for taxes. This tax money funds many finance
specific programs, including social security, health care and worker’s disability. These programs might not mean a
whole lot to you now, but you may likely benefit from them when you’re older. Check out
Pension Arrangement whereby an employer agrees to provide benefits to retired employees. A pension is paid out in a
series of regular payments or a lump sum of money to retired employees or their beneficiaries.
Personal Income
Tax
Everyone pays a tax on his/her yearly total amount of taxable income. Remember that the personal income tax is
not a tax on the taxpayers total income (the taxpayer can take deductions). Deductions are subtracted first from
the taxpayer’s income and then he/she pays the tax on the remaining amount.
Piercing the
Corporate Veil
If corporate formalities are not followed, it is possible that the corporate entity will not protect shareholders from
corporate debt. Keeping proper records and holding regular meetings help solve this possible problem.
Posting
Preemptive
Rights
Process whereby transactions are transferred from a journal to a general ledger or subsidiary ledger. Rights
delineated in the articles of incorporation granting shareholders the first opportunity to buy a new issue of stock in
proportion to their current equity. The shareholder has the right to buy the new issue of stock, but is not required
to make the purchase. If the shareholder elects not to exercise this right, the shares can be sold on the open
market.
Preferred Stock Stock that generally provides the shareholder with preferential payment of dividends but does not carry voting
rights.
Premium An amount paid for insurance.
Prepaid Asset created by payment for economic benefits that do not expire until a later time; as the benefit expires the
asset becomes an expense (for example, prepaid rent, prepaid insurance)
Principal The capital portion of a loan as opposed to interest.
Professional
Corporation
A Corporation that is organized for the purpose of engaging in a learned profession such as law, medicine or
architecture. Professional Corporations must file articles of incorporation with the state which meet the state’s
requirements for professional corporations.
Profit The excess of total revenue over total expenses for a period of time.
Progressive Tax This type of tax takes a larger percentage of income from higher income groups than from low-income groups. Is
this fair? Check out What is Fair?
Property Tax Proportional taxes take the same percentage of income from everyone regardless of how much (or little) a person
earns. This type of tax is not currently in use, but some feel it’s the way to go. What do you think? Check out What
is Fair?
Proportional Tax Proportional taxes take the same percentage of income from everyone regardless of how much (or little) a person
earns. This type of tax is not currently in use, but some feel it’s the way to go. What do you think? Check out What
is Fair?
Proxy If a shareholder can not attend a meeting, the shareholder is allowed to vote by proxy. A proxy grants another
individual the power to vote on their behalf.
Qualified
Retirement Plans
Plans such as 401(k)s, IRAs, etc., which are IRS approved for favorable tax treatment for contributions and
tax-deferred earnings.
Quorum The minimum attendance required to conduct business at a meeting. Usually, a quorum is achieved if a majority of
directors are present (for directors meetings) or outstanding shares are represented (for shareholder meetings).
The percentage needed for a quorum may be modified in the bylaws.
Ratio Relative size, expressed as the number of times one quantity is contained in another (for example, the ratio of
assets to liabilities of a company having total assets of $200,000 and liabilities of $150,000 would be $200,000 /
$150,000 = 1.33)
Receivable An amount to be received at a future date.
Refinancing Rescheduling of payments due, usually resulting in smaller payments over a longer period of time.
Refund When your employer deducts too much money from your paycheck, the government owes you that money back.
When they pay it, it’s called a refund.
Registered Agent The agent named in the articles of incorporation. The agent will receive service of process on the corporation and
other important documents. The agent must be named in the articles of incorporation.
Registered Office The office named in the articles of incorporation. The registered office must be where the registered agent is
located, and need not be the principal office or place of business of the corporation.
Regressive Tax This is the tax that takes a smaller percentage from those with high income than from those with lower income. Is
this fair? What do you think?
Required
Minimum
Distribution
Minimum distribution, based on life expectancy or the joint life expectancies of holder and beneficiary, that the
IRS rules must be withdrawn from IRAs, 401(k)s, etc. or be subject to penalties.
Resolution A resolution is a formal decision of the corporation that has been adopted by either the shareholders or the board
of directors.
Retained
Earnings
Cumulative net incomes of a corporation less losses and dividend distributions to shareholders (profits not
distributed).
Revenue Gross proceeds from sale of goods or services. Also, interest and dividends earned on investments. Revenue is a
source of income.
Review
Engagement
The un-audited review of financial statements of a business or organization by an independent accountant for the
purpose of determining the plausibility of the information reported on. A review includes making inquiries
concerning financial, operating and contractual information, applying analytical procedures and having
discussions with appropriate officials of the enterprise.
Review
Engagement
Report
The accountant’s report that prefaces un-audited financial statements and provides negative assurance that the
financial information conforms to generally accepted accounting principles.
Risk
Rollover
Possibility that the actual return on an investment will be less than its expected return.
Transfer of funds from one tax-deferred account to another without tax consequences, provided IRS rules are
followed.
Roth IRA Differing from a traditional IRA, contributions to a tax-deferred Roth IRA are not tax-deductible, but there is no tax
on withdrawals if the taxpayer is over 59 1/2 and the account has been open for five years.
S Corporation A small corporation which elects subchapter S tax treatment. This tax treatment allows the corporation to avoid
federal level taxation. Corporate Profits and Losses are passed through to the shareholders.
Sales Taxes You gotta have that new CD, but do you have enough cash? Don’t forget to add the sales tax to the price.
Depending on the state you live in, you pay an extra percentage of sales tax for items purchased.
Schedule Your class schedule essentially organizes your day, right? Taxpayers have to be organized too. They use certain
schedules (or forms) to itemize specific sources of income or specific expenses they claim should be deducted
from their taxes. It can pay to be organized! SOCIAL SECURITY
Security Collateral for a debt (for example, accounts receivable may be pledged as security for a loan). Security is a generic
term used to refer to a bond, share certificate or other medium or long-term investment evidencing debt or
ownership.
Self-Select Pin Does a paperless return sound good to you? If you choose the Self-Select Pin option, it’s magic. . . no paper to
mail!
SEP or SEP-IRA Generally following the rules for IRAs, a Simplified Employee Pension is a tax deferred retirement plan for
self-employed persons and for businesses with fewer than 25 employees.
Share An interest in a corporation. The total ownership of a corporation is divided into shares of stock. See Stock
Shareholder Any holder of one or more shares in a corporation. A shareholder usually has evidence that they are a shareholder.
This evidence is represented by a stock certificate.
Simple IRA The Savings Incentive Match Plan for Employees is a tax-deferred retirement plan for businesses with fewer than
100 employees and for self-employed persons which generally follows rules for traditional IRAs.
Social Security Social Security is America’s government-run retirement plan. One day, when you’re your grandparents’ age, you’ll
get the money back.
Sole
Proprietorship
A business carried on by the owner as an individual. The owner of a sole proprietorship is personally liable for all
business debts; thus, personal property could be taken to pay business debts. A Sole Proprietorship is an
unincorporated business wholly owned by one individual.
Spousal IRA A tax-deferred retirement account for spouses who do not work for pay which allows an employed taxpayer to
contribute $2,000 a year on behalf of a stay-at-home spouse, provided the couple files a joint return.
Standard
Deductions
Some taxpayers choose to take a standard amount instead of itemizing all of their deductions. This is a fixed
amount that is generally based on a person’s filing status.
State Taxes There are all kinds of taxes which are used to pay for all sorts of things. Some of our money goes to the Federal
government, which pays for services like Interstate highways, the armed forces, the FBI, and a lot more. Your
state also needs money for schools, roads, state troopers-to name just a few. At the end of the tax year, you will
need to send one form to the Federal government, and another to your state government.
Stated Capital The par value of shares multiplied by the number of shares outstanding. The amount of stated capital may affect
the ability to pay dividends.
Statement Summary of an account for a period of time (usually one month) showing invoices, credits and balance due. A
statement is provided to a customer by a supplier.
Statement of
Changes in
Financial Position
A financial statement showing the effect of operating, financing and investing activities effecting the cash position
of the company. Also known as Cash Flow Statement, Statement of Cash Flow, Statement of Operating,
Financing and Investing Activities, or Statement of Changes in Cash Resources.
Statement of
Earnings
See Income Statement
Statement of
Financial Position
See Balance Sheet.
Statement of
Retained
Earnings
A financial statement summarizing the changes in retained earnings for a stated period. Also known as Statement
of Changes in Capital Accounts or Statement of Changes in Retained Earnings and Reserves.
Stock Capital of a corporation that is divided into portions or shares. Stock refers to an equity or ownership interest in a
corporation. There may be several classes of stock in a corporation, each class divided into equal portions or
shares. Ownership of shares is demonstrated by stock certificates. See Share.
Stock Certificate A written instrument that shows ownership of shares in a corporation.
Stock Dividend A dividend paid by the issuance of shares of capital stock.
Stock Option The right to buy shares of capital stock at a stated price on or by a given date. A privilege often extended to
executives or employees of a company.
Stock Transfer
Book
A record book which lists the owners of shares of stock in a corporation.
Stockholder See shareholder.
Subsidiary A corporation controlled by another corporation that owns directly or indirectly an interest sufficient to elect a
majority of the board of directors. See Parent Company.
Tariff Duty Ever travel abroad and do a little duty-free shopping at the airport? You’re buying tax-free products. When you
buy that same product at your corner store (assuming it’s not a duty-free shop), you’re paying a tariff duty or tax
on the product.
Tax Avoidance Legal minimization of the impact of taxation.
Tax Basis The basis used for calculating capital gains or losses, it is the original cost paid for an investment, plus expense,
which must be reported to the IRS when the investment is sold.
Tax Credits The amount of money that tax payers can deduct directly from their taxes.
Tax Deductions The amount that a person or business can subtract from their taxable income. The more you can deduct, the less
you pay.
Tax Deferment Certain contributions and investment with earnings which are taxed at a later date.
Tax Evasion Illegal attempt to escape the impact of taxes.
Tax Exempt Pretty excited when you’re exempt from gym class? Taxpayers are pretty happy when they see there’s a part of
their total income on which no tax is imposed. That’s a tax exemption.
Tax Free Investments, such as municipal bonds, whose earnings are never taxed, but whose capital gains may be taxed if
investment is sold at a profit.
Tax Liability There’s no getting out of it- tax liability is the total amount of tax that a person must pay. Taxpayers pay this
through withholdings, estimated tax payments, and payments attached to their yearly tax forms.
Tax Shelter Investment to acquire something of value with the expectation it will produce income and reduce or defer taxes.
Tax Shift One lucky person or group is able to shift a tax that they’re supposed to pay to someone else.
Tax Witholdings There’s a portion that your employer takes from your (and other employees) paycheck to pay part or all of your
taxes.
Taxable Income Everything you earn that can be taxed.
Taxes Taxes are required payments of money to the government. This money is used to make your life better. You might
not even realize it, but tax money provides public goods and services for the community as a whole (think roads,
schools, law enforcement, public libraries, etc.). Show a little gratitude, pay your fair share.
Telefile The IRS knows that millions of people like you have simple tax returns, but some of them don’t have access to a
home computer. However, most people do have access to a touch-tone telephone. Telefile lets you use your tone
touch phone, but not a cell phone, to send tax information directly to an IRS computer. It’s free, simple, accurate
and secure. The IRS will send you the TeleFile package if you are eligible to participate. Check out IRS e-file using
Telefile. When you visit, be sure to check out the seven states that offer state TeleFile during the same call!
Tips Here’s a tip on receiving tips: If you earn more than $20 a month in tips, you must report the amount to your
employer. To keep track of your tips keep a daily “tips-earned log” where you write down the exact amount of tips
you earn each day. Share the monthly total with your employer who will make certain federal, state, and local
taxes are paid. Remember, it still pays to be nice . . . so don’t forget to smile. Publication 1244 contains forms for
daily record keeping of tips and for reporting tips to your employer. The freely available Adobe Acrobat Reader is
required to view this publication.
Title Legal right to ownership of property.
Transaction
Taxes
The sale of all goods and services have transaction taxes. These taxes can be a set percentage of a sales value or
a set amount of a physical quantity. What’s that all about? Let’s say you buy a CD-you pay a set amount in sales
tax, but when you fill up your tank with gas, you pay a tax per gallon.
Treasury Bills Debt obligations of the U.S. Government that mature in one year or less.
Treasury Shares Shares of stock that were issued and later acquired by the corporation.
Trial Balance Listing and totaling all balances in a ledger to verify that total debits equal total credits.
Trust Fiduciary relationship under which property is held by one person (a trustee) for the benefit of another (the
beneficiary).
Trust Fund Money, property or valuables legally held by a person or company for the benefit of another.
Trustee A person or company legally responsible for the property of another.
Ultra Vires Traditionally, the purpose of a corporation was closely spelled out in its articles of incorporation. If the corporation
acted beyond its described purposes these actions were unenforceable against the corporation or by the
corporation. However, most modern statutes allow corporate purposes to be any lawful activity. Therefore, the
importance of this doctrine has greatly diminished.
Unanimous
Written Consent
Nearly all states allow directors to act without a meeting if they each give their
consent
Valuation Day Date established by law as the basis of one method of valuation for the calculation of capital gains or losses for
income tax purposes.
Variance Difference between standard cost and actual cost. Also, the difference between an actual revenue or expense
item and the budget for that item (budget variance).
Vertical Equity Who said all taxpayers are created equal? Vertical equity states that people in different income groups should pay
different rates of taxes. Our current tax system is one of vertical equity.
Voluntary
Compliance
Your mom might order you to clean up your room. Well, the IRS doesn’t have time to tell every single taxpayer to
file taxes correctly and on time . . . there are millions of taxpayers in this country after all. This system relies on
citizens to report their income, calculate tax liability and file tax returns on time. Everyone’s gotta grow up
sometime. Check it out.
Volunteer Income
Tax Assistance
Available in most communities are Volunteer Income Tax Assistance (VITA) sites to help with tax return
preparation. People volunteer their time to help their neighbors. The service is free to those with limited or
moderate income people, non-English speaking, the elderly and the disabled. Some VITA sites even offer free
electronic filing. If you want to know more about a VITA site in your community or volunteering your time, call the
IRS at 1 800-829-1040. Check out IRS e-file.
Walk-In
Electronic Filing
If you need help preparing your taxes visit the Volunteer Income Tax Assistance (VITA) office nearest you. Many
VITA offices have IRS representatives who can help you fill out your forms and then transmit the information on
your forms electronically.
Withholding
(“Pay-As-You
-Earn” Taxation)
Your employer takes out a certain amount from your check for the government. You are credited for these taxes
when you file your return. This money is used to pay for your federal income taxes, federal social security, and
Medicare taxes, and state and local income taxes.
Withholding
Allowance
An allowance an individual claims on a W-4 Form. It is mainly used to assist an employer in calculating the amount
of income tax to withhold from an employee’s paycheck. The more allowances you wish to claim, the less income
tax will be withheld from your paycheck. You can claim one allowance for yourself, one for your spouse, and one
for each of your dependents.
Worker’s
Compensation
Insurance required by law which compensates employees who are injured on the job.
Write-off To transfer an item that was an asset to an expense account (for example, to transfer an uncollectable account
receivable to bad debts expense).
Yield Interest earned on a bond, or the dividend paid on a stock or mutual fund, usually expressed as a percentage.