Accounting, Business Studies and Economics Dictionary
A priori - Literally, at a prior time or in advance; that which is prior to actual experience.
Abacus - 1. instrument of ancient origin used to perform arithmetic calculations by sliding counters along rods or in grooves. Or) 2. semi-annual accounting research journal (founded in 1965) published by the Sydney University Press, edited by the University of Sydney, Department of Accounting. The subject matter covers all areas of accounting including international accounting.
Abandonment - Voluntary surrender of property, owned or leased, without naming a successor as owner or tenant. The property will generally revert to a person holding a prior interest or, in cases where no owner is apparent, to the state.
ABC method - Inventory management method that categorizes items in terms of importance. Thus, more emphasis is placed on higher dollar value items (As) than on lesser dollar value items (Bs), while the least important items (Cs) receive the least time and attention. Inventory should be analyzed frequently when using the ABC method. The procedure for ABC analysis follows: (1) Separate finished goods into types (chairs of different models, and so on); separate raw materials into types (screws, nuts, and so on). (2) Calculate the annual dollar usage for each type of inventory (multiply the unit cost by the expected future annual usage). (3) Rank each inventory type from highest to lowest, based on annual dollar usage. (4) Classify the inventory as A-the top 20%; B-the next 30%; and C-the last 50% of dollars usage, respectively. (5) Tag the inventory with its appropriate ABC classification and record those classifications in the item inventory master records.
Abnormal returns - The difference between the actual return and that is expected i.e ‘normal return’.
Abnormal spoilage - Spoilage that is recognized as a loss when discovered. Normal spoilage is inherent in the manufacturing process and is unavoidable in the short run. Abnormal spoilage is spoilage beyond the normal spoilage rate. It is controllable because it is a result of inefficiency. It is not a cost of good production, but rather it is a loss for the period. Costs are assigned to the spoiled units and then credited to work in progress inventory and debited to a loss account.
Absolute advantage - The situation that exists when a given amount of resources can produce more of some product in one country than in another.
Absorb - 1. to incorporate or assimilate amounts in an account in a way in which the first firm or entity loses its identity and is absorbed within the second firm or entity. Examples include the sequential transfer of expenditure account amounts to work in progress, finished goods, and cost of sales. Or) 2. to distribute or spread costs by the process of appropriation or allocation.
Absorption costing - Method in which the costs of manufacturing, variable and fixed costs, are treated as product costs, the non-manufacturing costs (i.e, administrative and selling expenses) are classified as period costs. Absorption costing for inventory valuation is required for external reporting.
A comparison between absorption and direct costing follows:
ACAS (Advisory, Conciliation and Arbitration Service) – A body which mediates where conflict exists in business.
Acceleration hypothesis - The hypothesis that when national income is held above potential, the persistent inflationary gap will cause inflation to accelerate, and when national income is held below potential, the persistent recessionary gap will cause inflation to decelerate.
Accelerator - The level of investment depends upon the rate of growth of demand. A given percentage change in demand may require a larger percentage change in investment. The accelerator shows by how much the rate of growth of investment exceeds the rate of growth of demand (and of output).
Accountant - One who performs accounting services. Accountants prepare financial statements and tax returns, audit financial records, and develop financial plans. They work in private accounting (e.g., for a corporation), public accounting (e.g., for a CPA. firm), not-for-profit accounting (e.g., for a governmental agency). Accountants often specialise in a particular area such as taxes, cost accounting, auditing, and management advisory services. A book keeper is distinguished from an accountant as one who employs lesser professional skills. The bookkeeping function is primarily one of recording transactions in the journal and posting to the. ledger
Accounting - 1. Umbrella term encompassing the multitude of disciplines including auditing, taxation, financial statement analysis, and management accounting. Accounting-related functions include financial accounting ,cost accounting , not-for-profit accounting, and financial planning. Or 2. Process of recording, measuring, interpreting, and communicating financial data. The accountant prepares financial statements to reflect financial condition and operating performance. Also, the accounting practitioner renders personal accounting services to clients such as preparing personal financial statements and tax planning.
Accounting concepts - Are the basic underlying assumptions that are adhered to in the preparation of financial statements, i.e., theses include the assumptions of accruals, going concern, consistency and prudence.
Accounting convention - Methods or procedures employed generally by accounting practitioners. They are based on custom and are subject to change as new developments arise. The accountant in performing the reporting function should follow existing accounting conventions that apply to the given situation.
Accounting entity - Business or other economic unit (including subdivisions) being accounted for separately. A system of accounts is kept for the entity. An accounting entity is isolated so that recording and reporting for it are possible. Examples of accounting entities are corporations, partnerships, trusts, and industry segments. A distinction should be made between an accounting entity and a legal entity. For example, a proprietor's accounting entity might be the business whereas the legal entity would include personal assets. Also, in the corporate environment, affiliated companies can be differently organised for legal and accounting purposes (e.g., industry segments).
Accounting event - Transaction entered in the accounting records of a business. It can be an external transaction that is, one with an outsider, such as recording a sale. It can also refer to an internal transaction such as making an adjusting entry (e.g., expense or revenue accrual).
Accounting principles - Rules and guidelines of accounting. They determine such matters as the measurement of assets, the timing of revenue recognition, and the accrual of expenses. The ground rules for financial reporting are referred to as generally accepted accounting principles (GAAP). An example of an accounting principle is accrual.
Accounting ratio - Usually is the comparing of two or more sets of accounting data. Often this is done by dividing or in some other way manipulating one f item on the financial statement by another. Ratios help with the interpretation of financial statements by focusing on specific relationships.
Accounting software - Programs used to maintain books of account on computers. The software can be used to record transactions, maintain account balances, and prepare financial statements and reports. Many different accounting software packages exist, and the right package must be selected given the client's circumstances and needs. An accounting software package typically contains numerous integrated modules (for example, spreadsheet and word processing abilities). Some modules are used to account for the general ledger, accounts receivable, accounts payable, payroll, inventory, and fixed assets.
Accounting system - Methods, procedures, and standards followed in accumulating, classifying, recording, and reporting business events and transactions. The accounting system includes the formal records and original source data. Regulatory requirements may exist on how a particular accounting system is to be maintained (e.g., insurance company).
Accounts payable ledger- A subsidiary ledger in which a summary of money owed to the business suppliers is kept. The general ledger will just of the total of all outstanding amounts recorded in the subsidiary ledgers.
Accretion - 1, growth in assets through mergers, acquisitions, and internal expansion. Examples are timber, livestock, nursery stock, and aging of wine. Or 2. adjustment of the difference between the face value of a bond and the price of the bond bought at an original discount.
Accrual method of accounting - This method of accounting is required under law in most countries. It means that revenue and expenses must be recorded in the fiscal year that the activity takes place. This gives rise to the need to make adjusting entries. i.e. net profit is the difference between revenues and the expenses incurred in generating those revenues.
Accruals- If during the course of a business certain charges are incurred but no invoice is received then these charges are referred to as accruals (they 'accrue' or increase in value). A typical example is interest payable on a loan where you have not yet received a bank statement. These items (or an estimate of their value) should still be included in the profit and loss account. When the real invoice is received, an adjustment can be made to correct the estimate. Accruals can also apply to the income side.
Accumulated depreciation account- This is an account in general ledger which records the combined amount of depreciation that has been charged against that asset. When the value in this account is equal to the purchase price of the fixed asset the asset is said to have been written off. All fixed assets (except land) have their own accumulated depreciation account. Also referred to as PFD (provision for depreciation).
Accumulation - 1. cumulative retained earnings/profit. Or 2. investment of a fixed dollar amount regularly and reinvestment of dividends and capital gains. Or 3. process of compounding. Or 4. periodic addition of interests to the principal amount.
Accuracy - Correctness of an accounting item (e.g., account balance, invoice, financial statement); also called accurate presentation. The concept refers to an accounting objective that the item fully reflects and valuates the set of facts involved, including all economic implications of the underlying transactions and events.
Active Balances - Money held for transactions and precautionary purposes.
Activity based costing (ABC) - This system of costing identifies the various different activities performed in a firm and uses a variety of cost drivers (volume and non-volume based cost drivers) to assign overhead costs (or indirect costs) to products. ABC recognises that there is a causal relationship of cost drivers with the firms activities.
Activity based management (ABM) - Approach to the management of activities within business processes as the route to continuously improve both the value received by customers and the profit earned by providing this value. Causes of activities are identified, measured, and used along with other activity information for performance evaluation; emphasis is on the reduction or elimination of nonvalue-adding activities. ABM draws on ABC data as a major source for information.
Activity drivers - In activity based costing (ABC), activity costs are assigned to outputs using activity drivers. Activity drivers assign activity costs to outputs based on individual outputs’ consumption or demand for activities.
Actual cost - Expenditure required to buy or produce an item. The actual cost of a purchased item includes the list price (net of discount plus delivery and storage. The actual cost to manufacture a product the total of direct material, direct labour, and factory overhead.
Adaptors - Individuals who tend to solve problems using existing or slightly modified approaches than those used in the past by the business.
Add-ins/ons - 1. refers to when an item is designed or intended for use in conjunction with another item, e.g. accessories to a vehicle in a purchase order. Or 2. can also refer to accessory computer software program that extends the capabilities or performance of an existing application.
Adequate disclosure - Comprehensive and clear disclosure in the body of financial statements, footnotes, or supplemental schedules so that readers of a company's financial position and operating results can make proper investment and credit decisions.
Ad hoc - Normally is used to mean the being concerned with a specific end or goal, often set up with quite limited planning e.g., a ad hoc committee established to handle a specific problem.
Adjunct account - Is an that is used to accumulates either/or subtractions or additions to another account. Thus the original account may retain its main and specific identity. Examples include accounts like accumulated depreciation, which is a reduction to the fixed asset.
Adjusting entries - Are needed to correctly match revenue and expenses to the correct fiscal year. Some transactions that are entered have attributed the revenue and expenses to the wrong fiscal year.
Adjustments may include:
Pre-payments (Deferrals) – cash paid before consumption
Adjustment - may be either: 1. an decrease or increase to an account resulting from using adjusting entries. Or 2. may also refer to when an account balance is changed due to some event, e.g., adjustment of an account due to the return of merchandise for credit.
Administered price -A price set by the conscious decision of a seller rather than the impersonal market forces.
Adverse opinion - Term used when an auditor reports that the company'sfinancial statements do not present fairly the financial position, results of operations, or changes in financial position or are not in conformity with GAAP.
Advertising media - The various means by which advertisements can be communicated to the public.
Affiliate – A relationship between two companies when one company owns substantial interest, but less than a majority of the voting stock of another company, or when two companies are both subsidiary company of a third company.
Agency - Relationship between two individuals where one is a principal and the other is an agent representing the principal in transactions with other parties. For example, a trust officer in a bank can engage in activities on behalf of clients.
Agent - An independent person or business that is appointed to deal with the sales and distribution of a product or range of products.
Agents - Decision makers, including households, firms, and government bodies.
Aggregate - The sum or total.
Aggregate demand - Total desired purchases by all the buyers of an economy's output. It consists of four elements, consumer spending (C), investment (I), government spending (G) and the expenditure on exports (X), less any expenditure on imports of goods and services (M): AD = C + I+ G + (X -M).
Aggregate demand (AD) curve - A curve showing the combinations of real national income and the price level that makes aggregate desired expenditure equal to national income; the curve thus relates the total amount of output that will be demanded to the price level of that output.
Agile manufacturing - A strategy which allows a business to react to rapidly changing conditions.
Aging of accounts - Classifying accounts by the time elapsed after the date of billing or the due date. The longer a customer's account remains uncollected or the longer inventory is held, the greater is its realisation risk. If a customer's account is past due, the company also has a opportunity cost of funds tied-up in the receivable that could be invested elsewhere for a return.
Agreed upon procedures - Applies to engagements relating to agreed-upon procedures to specified elements or accounts. Agreed-upon procedures is when the accountant is hired to issue a report of findings based on specified financial statement items. The users of the report agree upon the procedures to be conducted by the accountant that the user believes are suitable. The user takes responsibility for the adequacy of the procedures. In this engagement, the accountant does not express an opinion or negative assurance. Instead, the report should be in the form of procedures and findings. A representation letter is prepared that depends on the nature of the engagement and the specified users.
AIDA model - Simple way of planning an advert's design: it stands for attention, interest, desire, action.
Allocate - 1. spread a cost over two or more accounting periods usually based on time. An example is assigning the prepaid cost of a three-year insurance policy by one-third each year. Or 2. charge a cost or revenue to a number of departments, products, processes, or activities on some rational basis. For example, a cost may be assigned to divisions of a company based on sales. Or 3. distribute the cost associated with the acquisition of two or more items based on their relative fair market values. This relates to a lump sum purchase.
Allocation - The act of distributing by allotting or apportioning; distribution according to a plan, e.g., allocating costs is the assignment of costs to departments or products over various time periods, products, operations, or investments. See allocate.
Allocative efficiency - The situation that occurs when no resources are wasted - when no one can be made better off without making someone else worse off. Allocative efficiency in any activity is achieved where any reallocation would lead to a decline in net benefit. It is achieved where marginal benefit equals marginal cost. Private efficiency is achieved where marginal private benefit equals marginal private cost (ME = MC). Social efficiency is achieved where marginal social benefit equals marginal social cost (MSB = MSC)
Allowance -1. an acceptable reduction in quantity or quality such as normal spoilage in a manufacturing operation. Or 2. a reduction in the amount owed a supplier because of damaged goods received or delays encountered. Or 3. a valuation account reducing the cost of an asset such as the allowance to reduce marketable securities from cost to market value.
Allowance method - The allowance method results in a good matching of bad debt expense against sales. The journal entry at year-end to record anticipated uncollectibility of accounts receivablee is to debit bad debts and credit allowance for bad debts. When it is known that a customer will actually not pay the balance, because of bankruptcy, for example, the entry is to debit allowance for bad debts and credit accounts receivable. If for whatever reason the customer does pay at a later date, there is a recovery; reverse the last entry and make a second entry debiting cash and crediting accounts receivable. It should be noted that firms other than small financial institutions are required to use the direct write off method for tax purposes.
Ancillary - Normally is used to refer to something lesser or extra importance. An example of ancillary revenue would be revenue gained from the selling of products or services that are not considered to be primary to the businesses generation of revenue.
Annual general meeting (AGM) - A legal requirement for all companies; all shareholders may attend. They vote on who they want to be on the board of directors for the coming year and on other issues raised by the board or themselves.
Annualise - A statistical technique whereby figures covering a period of less than one year are extended to cover a 12-month period. The technique, to be accurate, must take seasonality (seasonal variations) into consideration.
Annualised hours contracts - A payment system based on a fixed number of hours to be worked each year. but a flexible number of hours each day, week or month.
Annual report - Evaluation prepared by companies at the end of the reporting year which might be either on a calendar or fiscal basis. Contained in the annual report are the company financial statements including footnotes., supplementary schedules, managements discussion of analysis and earnings, president's letter, audit report, and other explanatory data (e.g., research and marketing efforts) helpful in evaluating the entity's financial position and operating performance. The annual report is read by stockholders, potential investors, creditors, employees, regulatory bodies, and other interested financial statement users.
Annuity - In finance, is a series of fixed payments, usually over a fixed number of years; or for the lifetime of a person, in which case it would be called a life-contingent annuity or simply life annuity.
Anomaly - An exception from the common rule. It is something that is irregular and difficult to explain using existing theory or rules. Examples may include the fact that some small stocks to outperform large stocks on ocasion.
Ansoff matrix - A model which identifies growth strategies for businesses based on an analysis of their products and their markets
Apportion - To share out or divide according to a plan.
Appraisal – 1. evaluating the usefulness of the employee the business. Or 2. estimate of the value of an asset. An asset may be a piece of property, a collectible, or a precious metal. In the case of property, for example, an appraisal is made for the purposes of: (1) allocating the purchase price to the assets acquired (e.g., land, building, equipment); (2) determining the amount of hazard insurance to carry; (3) determining the value at death for estate tax purposes; and (4) determining a reasonable asking price in a sale. Or 2. activities such as inspection and testing of materials, in-process items, finished goods, and packaging.
Appreciation - The increase in the value of an asset in excess of its depreciable cost ( depreciation), which is due to economic, and other conditions, as distinguished from increases in value due to improvements or additions made to it. Or an increase in the value of a domestic currency in terms of other currencies.
Appropriate / Appropriation / Appropriated - Distribution of net income to different accounts and may also include the allocation of retained earnings for a specific or designated purpose, e.g. new equipment.
Appropriate technology - A technology which accords with the factor endowments of the country. Thus labour intensive technology would be appropriate in a labour abundant economy and capital intensive technology would be inappropriate.
Arm’s length transaction - Is when the transaction is conducted as though the parties to the transaction were unrelated, thereby avoiding any semblance or accusation of conflict of interest.
Arrears - Bills which should have been paid. For example, if you have forgotten to pay your last 3 months rent, then you are said to be 3 months in arrears on your rent.
Arrow's impossibility theorem - A mathematical result showing that, under certain assumed conditions, there is no scheme for aggregating individual preferences into a valid set of social preferences
Ask price - The term ask normally refers to the lowest price at which a trader will sell stock at any given time. The term bid refers to the highest price a trader will pay to purchase the stock. Traders make money on the difference between the bid price and the ask price. That difference is refereed to as the spread.
Asset- Anything of value that is owned by a business or in other words assets represent what a business owns or is due. Equipment, vehicles, buildings, creditors, money in the bank, cash are all examples of the assets of a business. Typical breakdown includes 'fixed assets', ' current assets' and 'non current assets ' ( fixed assets)'. Fixed refers to equipment, buildings, plant, vehicles etc. Current refers to cash, money in the bank, debtors etc.
Asset-based (asset-led) marketing - Where a business develops and markets products based on its main strengths.
Asset stripping - The selling off of profitable sections and closing down of loss making sections of business following an acquisition.
Asset turnover - A measure of the productivity of assets. This ratio measures the efficiency of corporate assets in generating revenue. A higher ratio is desired. What is considered a high ratio for one industry, however, may be considered a low ratio for another industry. If there is a low turnover, it may be an indication that the business should either utilize its assets in a more efficient manner or sell them. Asset turnover ratios can also be calculated for specific assets such as the ratios of sales to cash and sales to inventory. Higher ratios reflect favourably on the firm's ability to employ assets effectively.
At cost- The 'at cost' price usually refers to the price originally paid for something, as opposed to, say, the retail price.
ATM - Automatic teller machine.
At risk - Tax term. A taxpayer can deduct losses for tax purposes only to the degree of risk. At-risk amounts are restricted to the cash investment and the debt for which the taxpayer is personally liable. Assume an individual incurs losses from real estate activities of $40,000. If the cash investment and personal debt incurred were $35,000, the most that could be deducted as losses is $35,000. Note there is an expansion of the at-risk amounts to real estate only to include certain non-recourse loans from qualified lenders.
Attest - Formal statement by an auditor after thorough examination and consideration, as to whether financial statements fairly present financial position and operating results. With an attest, the public accountant provides an objective evaluation to aid financial statement users.
Attrition - Reduction in numbers usually as a result of resignation, retirement, or death.
Auction (market) – A trading market in which the buyers enter bids and sellers enter competitive offers at the same time. This, as different to the over-the-counter market, where the trades are negotiated. Some examples are the NYSE and AMEX.
Auditing evidence - Proof the auditor uses to substantiate a recorded item so that proper reliance may be placed on financial statement figures. Proof of accounting data includes examining source documents in support of a transaction. The degree to which evidence gathering is necessary partly depends on the quality of the client's internal control system. Also, the trend in an account should be looked at over time as a basis for determining the extent of testing required. For example, if travel expense went from 2% of sales last year to 25% of sales this year, this inconsistency requires close examination. Test checks of accounts and transactions are necessary. Evidence can be obtained through various means such as physical verification of inventory records or confirmation letters sent to verify recorded amounts of accounts receivable.
Auditor - An accountant usually certified by a national professional association of accountants, if one exists in the corporation’s country, or certified by another country's recognized national association of accountants. Corporations will often work with both internal auditors and external auditors.
Audit report - Is the signed, document which gives the results of the audit. Results of the audit may include the findings, and conclusions or opinions, also recommendations may be made.
Audit trail- A list of transactions in the order they occurred. A step-by-step record by which financial, business, and quality assurance data can be traced to its source. For example: checking the validity of an accounting entry through the step-by-step record by which accounting data can be traced to their source.
Autarky - A situation in which a country engages in no foreign trade.
Authority - The right to command a situation, a task or an activity.
Authorised capital stock - The maximum number of shares of common stock that can be issued under a company'sarticles of incorporation. Issued shares are normally less than the number of authorised share capital.
Autocratic leadership - A leadership style where the leader makes all decisions independently. The instructions and strategies are issued from above with little opportunity for contributions to decision-making from less senior employees .
Automatic teller machine (ATM) - An unattended machine (outside some banks) that dispenses money or allows an individual to conduct unassisted business transactions with the ATM when a personal coded card is used.
Automatic fiscal stabilisers - Tax revenues that rise and government expenditure that falls as national income rises. The more they change with income, the bigger the stabilising effect on national income.
Autonomous expenditure - In macroeconomics, elements of expenditure that do not vary systematically with other variables, such as national income and the interest rate, but are determined by forces outside of the theory.
Avoidable cost - Cost that will not be incurred if an activity is suspended; also called escapable cost. For example, it is the cost that can be saved by dropping a particular product line or department (e.g., salaries paid to employees working in a particular product line or department). All costs are avoidable, except (1) sunk costs and (2) costs that will continue regardless of the decision.
The problem is not that there are problems. The problem is expecting otherwise and thinking that having problems is a problem.