The following is a glossary of the most popular business, legal, and accounting terms:
Account: A separate record of an asset, liability, income, or expense of a business.
Accounting: The process for recording, summarizing, and interpreting business financial records.
Accounting method: The method of recording income and expenses for a business; can be either ac¬crual method or cash method.
Accounting period: A specific time period covered by the financial statements of a business.
Accounting system: The specific system of record-keeping used to set up the accounting records of a business. See also single-entry accounting or double-entry accounting.
Accounts payable: Money owed by a business to another for goods or services purchased on credit. Money that the business intends to pay to another.
Accounts receivable: Money owed to the business by another for goods or services sold on credit. Money that the business expects to receive.
Accrual method: Accounting method in which all income and expenses are counted when earned or incurred regardless of when the actual cash is received or paid.
Accrued expenses: Expenses that have been incurred but have not yet been paid.
Accrued income: Income that has been earned but has not yet been received.
ACRS: Accelerated Cost Recovery System. Generally, a method of depreciation used for assets pur¬chased between 1980 and 1987.
Agent: A person who is authorized to act on behalf of another. A corporation acts only through its agents, whether they are directors, employees, or officers.
Aging: The method used to determine how long accounts receivable have been owed to a business.
Amend: To alter or change.
Articles of Incorporation: The charter of the corporation, the public filing with a state that requests that the corporation be allowed to exist. Along with the Corporate Bylaws, they provide details of the organiza¬tion and structure of the business. They must be consistent with the laws of the state of incorporation.
Assets: Everything a business owns, including amounts of money that are owed to the business.
Assumed name: A name, other than the corporation’s legal name as shown on the Articles of Incorpora¬tion, under which a corporation will conduct business. Most states require registration of the fictitious name if a company desires to conduct business under an assumed name. The corporation’s legal name is not an assumed name.
Authorized stock: The number of shares of stock that a corporation is allowed to issue as stated in the Articles of Incorporation. All authorized shares need not be issued.
Balance sheet: The business financial statement that depicts the financial status of the business on a specific date by summarizing the assets and liabilities of the business.
Balance sheet accounts: Asset and liability accounts used to prepare business balance sheets.
Balance sheet equation: Assets = Liabilities + Equity, or Equity = Assets – Liabilities.
Board of directors: The group with control of the general supervision of the corporation. They are elected by the shareholders and the directors, in turn, appoint the officers of the corporation.
Bookkeeping: The actual process of recording the figures in accounting records.
Business corporation laws: For each individual state, these provide the legal framework for the opera¬tion of corporations. The Articles of Incorporation and the Bylaws of a corporation must adhere to the specifics of state law.
Business liabilities: Business debts. Also the value of the owner’s equity in his or her business.
Bylaws: The internal rules that govern the management of the corporation. They contain the procedures for holding meetings, appointments, elections and other management matters. If these conflict with the Articles of Incorporation, the provision in the Articles will be controlling.
C-corporation: A business entity owned by shareholders that is not an S-corporation. Subject to double taxation, unlike S-corporations.
Calendar year: Year consisting of 12 consecutive months ending on December 31st.
Capital: Initially, the actual money or property that shareholders transfer to the corporation to allow it to operate. Once in operation, capital also consists of accumulated profits. The net worth of the corpora¬tion, the owner’s equity in a business, and/or the ownership value of the business.
Capital expense: An expense for the purchase of a fixed asset; an asset with a useful life of over one year. Generally, must be depreciated rather than deducted as a business expense.
Capital stock: See authorized stock.
Capital surplus: Corporation owner’s equity. See also retained capital.
Cash: All currency, coins, and checks that a business has on hand or in a bank account.
Cash method: Accounting method in which income and expenses are not counted until the actual cash is received or paid.
Cash out: Cash paid out for business purposes, such as a refund.
Certificate of Incorporation: See Articles of Incorporation. Note, however, that some states will issue a Certificate of Incorporation after the filing of the Articles of Incorporation.
Chart of Accounts: A listing of the types and numbers of the various accounts that a business uses for its accounting records.
Check register: A running record of checks written, deposits made, and other transactions for a bank account.
Close corporation: Corporation with less than 50 shareholders that has elected to be treated as a close corporation. Not all states have close corporation statutes. (For information regarding close corporations, please consult a competent attorney.)
Closely held corporation: Not a specific state-sanctioned type of corporation, but rather a designation of any corporation in which the stock is held by a small group of people or entities and is not publicly traded.
Common stock: The standard stock of a corporation that includes the right to vote the shares and the right to proportionate dividends. See also preferred stock.
Consent Resolution: Any resolution signed by all of the directors or shareholders of a corporation authorizing an action, without the necessity of a meeting.
Corporate record book: Contains all the corporate records (except accounting records).
Corporate stock transfer book: Record of the issuance and transfer of stock certificates.
Corporation: A business entity owned by shareholders; can be a C-corporation or an S-corporation.
Cost basis: Total cost to a business of a fixed asset.
Cost of goods sold: The amount that a business has paid for the inventory that it has sold during a spe¬cific period. Calculated by adding beginning inventory and additions to inventory and then deducting the ending inventory value.
Credit: In double-entry accounting, an increase in liability or income accounts or a decrease in asset or expense accounts.
Cumulative voting: A voting right of shareholders that allows votes for directors to be spread among the various nominees. This right protects the voting strength of minority shareholders. The amount of votes in cumulative voting is based on the number of shares held times the number of director positions to be voted on. The shareholder can then allocate the total cumulative votes in any manner.
Current assets: Cash and any other assets that can be converted to cash or consumed by the business within one year.
Current debt: Debt that will normally be paid within one year.
Current liabilities: Debts of a business that must be paid within one year.
Current ratio: A method of determining the liquidity of a business. Calculated by dividing current assets by current liabilities.
Debit: In double-entry accounting, a decrease in liability or income accounts or an increase in asset or expense accounts.
Debt: The amount that a business owes to another. Also known as “liability.”
Debt ratio: A method of determining the indebtedness of a business. Calculated by dividing total li¬abilities by total assets.
Depreciation: Cost of fixed asset deductible proportionately over time.
Dissolution: Methods by which a corporation concludes its business and liquidates. Dissolutions may be involuntary because of bankruptcy or credit problems or voluntary on the initiation of the directors or shareholders of a corporation.
Dividend: A distribution of money or property paid by the corporation to a shareholder based on the amount of shares held. A proportionate share of the net profits of a business that the board of directors has determined should be paid out to shareholders, rather than held as retained earnings. Dividends must be paid out of the corporation’s net earnings and profits. The board of directors has the authority to declare or withhold dividends based on sound business discretion.
Domestic corporation: A corporation is a domestic corporation in the state in which it is incorporated. See also foreign corporation.
Double-entry accounting: An accounting system under which each transaction is recorded twice: as a credit and as a debit. A very difficult system of accounting to learn and understand.
Equity: Any debt that a business owes. It is owner’s equity if owed to the business owners and liabilities if owed to others.
Expenses: The costs to a business of producing its income. Any money that it has paid or will pay out during a certain period
FEIN: Federal Identification Number, used for tax purposes.
FICA: Federal Insurance Contributions Act. Taxes withheld from employees and paid by employers for Social Security and Medicare.
Fictitious name: See assumed name.
FIFO: First-in, first-out method of accounting for inventory. The inventory value is based on the cost of the latest items purchased.
Financial statements: Reports that summarize the finances of a business; generally a profit and loss statement and a balance sheet.
Fiscal year: A 12-month accounting period used by a business.
Fiscal-year reporting: For income tax purposes, reporting business taxes for any 12-month period that does not end on December 31 of each year.
Fixed assets: Assets of a business that will not be sold or consumed within one year. Generally, fixed assets (other than land) must be depreciated.
Foreign corporation: A corporation is referred to as a foreign corporation in all states other than the one in which it is actually incorporated. In order to conduct active business affairs in a different state, a foreign corporation must be registered with the other state for the authority to transact business and it must pay an annual fee for this privilege.
FUTA: Federal Unemployment Tax Act. Federal business unemployment taxes.
General journal: In double-entry accounting, used to record all of the transactions of a business in chronological order. Transactions are then posted (or transferred) to the appropriate accounts in the general ledger.
General ledger: In double-entry accounting, the central listing of all accounts of a business.
Gross pay: The total amount of an employee’s compensation before the deduction of any taxes or benefits.
Gross profit: Gross sales minus the cost of goods sold.
Gross sales: The total amount received for goods and services during an accounting period.
Gross wages: The total amount of an employee’s compensation before the deduction of any taxes or benefits.
Income: Any money that a business has received or will receive during a certain period.
Income statement: Financial statement that shows the income and expenses for a business. Also referred to as an “operating statement” or “profit and loss statement.”
Incorporator: The person who signs the Articles of Incorporation. Usually a person, but some states allow a corporation or partnership to be an incorporator.
Indemnify: To reimburse or compensate. Directors and officers of corporations are often reimbursed or indemnified for all the expenses they may have incurred in incorporating.
Initial capital: The money or property that an owner or owners contribute to starting a business.
Intangible personal property: Generally, property not attached to land that you cannot hold or touch (for example: copyrights, business goodwill, etc.).
Inventory: Goods that are held by a business for sale to customers.
Invoice: A bill for the sale of goods or services that is sent to the buyer.
Issued shares: The number of authorized shares of stock that are actually transferred to shareholders of the corporation. Also referred to as outstanding shares. See also treasury shares.
Ledgers: The accounting books for a business. Generally, refers to the entire set of accounts for a business.
Liabilities: The debts of a business.
LIFO: Last-in, first-out method of valuing inventory. Total value is based on the cost of the earliest items purchased.
Liquidity: The ability of a company to convert its assets to cash and meet its obligations with that cash.
Long-term assets: The assets of a business that will be held for over one year. Those assets of a busi¬ness that are subject to depreciation (except for land).
Long-term debts: Debts that will not be paid off in one year.
Long-term liabilities: The debts of a business that will not be due for over one year.
Long-term loans payable: Money due on a loan more than one year in the future.
Long-term notes payable: Money due more than one year in the future.
MACRS: Modified accelerated cost recovery system. A method of depreciation for use with assets purchased after January 1, 1987.
Managers: In a limited liability company, those persons selected by the members of the company to handle the management functions of the company. Managers of limited liability companies may or may not be members/owners of the company. Managers are roughly analogous to the officers of a corporation.
Members: In a limited liability company, those persons who have ownership interests (equivalent to shareholders in a corporation). Most states allow single-member limited liability companies.
Minutes: A written record of the activities of a meeting.
Net income: The amount of money that a business has after deducting the cost of goods sold and the cost of all expenses. Also referred to as “net profit.”
Net loss: The amount by which a business has expenses and costs of goods sold greater than income.
Net pay: The amount of compensation that an employee actually will be paid after the deductions for taxes and benefits.
Net profit: The amount by which a business has income greater than expenses and cost of goods sold. Also referred to as “net income.”
Net sales: The value of sales after deducting the cost of goods sold from gross sales.
Net wages: The amount of compensation that an employee will actually be paid after the deductions for taxes and benefits.
Net worth: The value of the owner’s share in a business. The value of a business determined by deduct¬ing the debts of a business from the assets of a business. Also referred to as “owner’s equity.”
No-par value: Shares of stock that have no specific face value. The board of directors can assign a value to the shares for sale and can then allocate a portion of the sales price to the paid-in-capital account.
Nontaxable income: Income that is not subject to any state or local sales tax.
Not-for-profit corporation: A corporation formed under state law that exists for a socially worthwhile purpose. Profits are not distributed but retained and used for corporate purposes. May be tax-exempt. Also referred to as “nonprofit.”
Officers: Manage the daily operations of a corporation. Generally consists of a president, vice president, secretary, and treasurer. Appointed by the board of directors.
Operating margin: Net sales divided by gross sales. The actual profit on goods sold, before deductions for expenses.
Operating statement: Financial statement that shows the income and expenses for a business. Also referred to as “income statement” or “profit and loss statement.”
Owner’s equity: The value of an owner’s share in a business. Also referred to as “capital.”
Par value: The face value assigned to shares of stock. Par-value stock must be sold for at least the stated value, but can be sold for more than the par value.
Partnership: An unincorporated business entity that is owed by two or more persons.
Payee: Person or business to whom a payment is made.
Payor: Person or business that makes a payment.
Perpetual duration: Existence of a corporation forever.
Personal property: All business property other than land and the buildings that are attached to the land.
Petty cash: Cash that a business has on hand for payment of minor expenses when use of a business check is not convenient. Not to be used for handling sales revenue.
Petty cash fund: A cash fund. Considered part of cash on hand.
Petty cash register: The sheet for recording petty cash transactions.
Physical inventory: The actual process of counting and valuing the inventory on hand at the end of an accounting period.
Piercing the corporate veil: A legal decision that allows a court to ignore the corporate entity and reach the assets of the shareholders, directors, or officers.
Plant assets: Long-term assets of a business. Those business assets that are subject to depreciation (other than land).
Posting: In double-entry accounting, the process of transferring data from journals to ledgers.
Pre-paid expenses: Expenses that are paid for before they are used (for example: insurance, rent, etc.).
Preemptive rights: A shareholder right that allows shareholders the opportunity to maintain their per¬centage of ownership of the corporation in the event that additional shares are offered for sale.
Preferred stock: Generally, stock that provides the shareholder with a preferential payment of dividends, but does not carry voting rights.
Profit and loss statement: Financial statement that shows the income and expenses for a business. Also referred to as an “income statement” or “operating statement.”
Proxy: A written shareholder authorization to vote shares on behalf of another. Directors may never vote by proxy (except in some close corporations).
Quorum: The required number of persons necessary to officially conduct business at a meeting. Gener¬ally, a majority of the shareholders or directors constitutes a quorum.
Real property: Land and any buildings or improvements that are attached to the land.
Reconciliation: The process of bringing a bank statement into agreement with the business check register.
Recovery period: Specific time period for dividing up the cost into proportionate amounts.
Registered agent: The person designated in the Articles of Incorporation who will be available to receive service of process (summons, subpoena, etc.) on behalf of the corporation. A corporation must always have a registered agent.
Registered office: The actual physical location of the registered agent. Need not be the actual principal place of business of the corporation.
Resolution: A formal decision that has been adopted by either the shareholders or the board of directors of a corporation.
Retail price: The price for which a product is sold to the public.
Retained capital: Corporation owner’s equity. See also capital surplus.
Retained earnings: In a corporation, the portion of the annual profits of a business that are kept and reinvested in the business, rather than paid to shareholders in the form of dividends.
Revenue: Income that a business brings in from the sale of goods or services or from investments.
S-corporation: A type of business corporation in which all of the expenses and profits are passed through to its shareholders to be accounted for at tax time individually in the manner of partnerships. A specific IRS designation that allows a corporation to be taxed similarly to a partnership, yet retain limited liability for its shareholders.
Salary: Fixed weekly, monthly, or annual compensation for an employee.
Sales: Money brought into a business from the sale of goods or services.
Sales income: Revenue derived from selling a product of some type
Salvage value: The value of an asset after it has been fully depreciated.
Service income: Income derived from performing a service for someone.
Service of process: To accept subpoenas or summonses for a corporation.
Shareholder’s equity: In a corporation, the owner’s equity of a business divided by the number of outstanding shares.
Shareholders: Owners of issued stock of a corporation and, therefore, owners of an interest in the corporation. They elect the board of directors and vote on major corporate issues.
Short-term loans payable: Money due on a loan within one year.
Short-term notes payable: Money due within one year.
Single-entry accounting: A business recordkeeping system that generally tracks only income and expense accounts. Used generally by small businesses, it is much easier to use and understand than double-entry accounting.
Sole proprietorship: An unincorporated business entity in which one person owns the entire com¬pany.
Stock transfer book: The ledger book (or sheets) in which the registered owners of shares in the cor¬poration are recorded.
Straight-line depreciation: Spreads the deductible amount equally over the recovery period.
Supplies: Materials used in conducting the day-to-day affairs of a business (as opposed to raw materials used in manufacturing).
Tangible personal property: Property not attached to land that you can hold and touch (for example:machinery, furniture, equipment).
Taxes payable: Total of all taxes due but not yet paid.
Treasury shares: Shares of stock that were issued, but later reacquired by the corporation and not canceled. May be issued as dividends to shareholders. They are issued, but not outstanding for terms of voting and quorums.
Trial balance: In double-entry accounting, a listing of all the balances in the general ledger in order to show that debits and credits balance.
Wages: Hourly compensation paid to employees, as opposed to salary.
Wages payable: Total of all wages and salaries due to employees but not yet paid out.
Wholesale price: The cost to a business of goods purchased for later sale to the public.
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