Dictionary

The cash basis is one of the two principal recognized methods of accounting. It must be used by all taxpayers who do not keep books. It is elective as to all other taxpayers (except corporations, certain partnerships, and tax-exempt trusts); however, it may not be used if inventories are necessary in order to reflect income. On the cash basis, income is reported only as it is received, in money or other property having a fair market value, and expenses are deductible only in the year they are paid.

A discount offered by suppliers for payment received within a specified period of time.

Assets that are easily convertible into known amounts of cash.

A draft on the issuing bank's own funds.

Although deduction for a loss generally is confined to a loss connected with a trade or business or a transaction entered into for profit, the law also allows deduction of a casualty loss for all types of assets, including personal assets such as a home, jewelry, clothing, etc. Theft, although not strictly a casualty, is in the same category for income tax deduction purposes. Personal casualty losses are deductible only to the extent that each such loss exceeds $100 per occurrence in 2016 and that the aggregate excess is greater than 10 percent of adjusted gross income.

An independent accountant who provides accounting services to the public for a fee.

An independent bookkeeper who provides bookkeeping services to the public for a fee.

Document that notifies the proper departments of a change in the employee's rate of remuneration.

A list of the accounts used by a business to record its financial transactions.

A written order signed by an authorized person instructing a bank to pay a specific sum of money to a designated person or business.

Withholding of union dues from employees' wages by the employer.

See Dependent-care expense.

Organized in the order in which the events occur.

A claim for refund must be made by a taxpayer entitled to get back part or all of the tax paid. The claim may be made on the tax return or, in the case of individual or corporate income taxes, may be made on Form 1040X or 1120X. In other cases, refund claims should be made on amended returns or Form 843.

The term claim of right is used in the Code in connection with money or their property received as income which the recipient holds under a claim of right, but which the recipient is required to restore in whole or in part to the payer in a later year because it develops that the recipient did not have an unrestricted right to such property. If the amount restored exceeds $3,000, Code Sec. 1341 provides some relief, by means of a tax limitation in the year of restoration, from the requirement that the restored amount must be deducted in the year of restoration and may not reduce the income of the prior year. The right to the money or other property means a just and legal claim to hold, use, or enjoy it, or to convey or donate it.

A means of identifying each account as an asset, liability, or owner's equity.

A format by which revenues and expenses on the income statement, and assets and liabilities on the balance sheet, are divided into groups of similar accounts and a subtotal is given for each group.

Journal entries that transfer the results of operations (net income or net loss) to owner's equity and reduce the revenue, expense, and drawing account balances to zero.

Bonds secured by the pledge of securities, such as stocks or bonds of other companies.

A note issued by one party that orders another party to pay a specified sum on a specified date.

Stated percentage of revenue paid an employee who transacts a piece of business or performs a service.

A method of paying employees according to a percentage of net sales.

Equity account used to record par, or stated, value of shares to be issued as the result of the declaration of a stock dividend.

The general class of stock issued when no other class of stock is authorized; each share carries the same rights and privileges as every other share. Even if preferred stock is issued, common stock will also be issued.

The state existing when the employer has the right to control both what work will be done and how it will be done.

Financial statements with items expressed as percentages of a base amount.

Property owned by husband and wife in community, each sharing equally in the income therefrom.

Financial statements presented side by side for two or more years.

See Individual earnings record.

A complex trust is one which permits accumulation of current income, provides for charitable contributions or distributes principal during the taxable year. For tax purposes, it is to be distinguished from a simple trust.

A journal entry with more than one debit or credit.

An intangible asset; written programs that instruct a computer's hardware to do certain tasks.

A basic framework developed by the FASB to provide conceptual guidelines for financial accounting and statements; the most important topics are explanations of qualitative features of financial statements, basic assumptions underlying statements, basic accounting principles, and modifying constraints.

Some entities are not tax paying. They pass through their income (loss) to owners (beneficiaries). A partnership is an example of a conduit. Partnerships do not pay taxes; they merely report the partnership's taxable income or losses. The income (loss) flows directly to the partners. However, partnerships do compute partnership taxable income. Other types of conduits are grantor trusts and S corporations.

A consent dividend is not a dividend actually paid by a corporation. It is merely represented by signed consents by a stockholder to be taxed as if the stockholder has really received the amount of the distribution stated in the consent. It is used in order to avoid the imposition of the accumulated earnings tax and the personal holding company tax in cases where this tax might otherwise be imposed and the company does not wish to make an actual distribution.

If alternative treatments of items are of equal validity, the conservatism constraint suggests that the alternative resulting in lowest profit should be used.

Affiliated corporations may file one consolidated return, eliminating intercompany transactions, instead of filing separate returns.

In determining the percentage of stock ownership of a stockholder in a corporation, in order to find whether the stockholder controls the corporation or to make other tests of ownership, the Code in several instances provides that the stockholder will be constructively regarded as the owner of shares of stock held by certain other persons. For example, the rule is applied in disallowing a loss on sales between certain related persons.

A taxpayer on the cash basis is taxed on income only as it is received. However, if the income was unreservedly subject to the taxpayer's demand and the taxpayer could have received it but chose not to do so, it is regarded as having been constructively received and is taxable. Interest on a bank deposit is a good example.

Remunerations that are credited to the account of, or set apart for, an employee so that they may be drawn upon at any time, even though they are not actually possessed by the employee.

Method of recording time on time cards in which the day is divided into one 24-hour period, with time running from 12 midnight to 12 midnight.

An item that can become a liability if certain things happen.

An account with a normal balance that is opposite that of a related account.

An asset account with a credit balance, which is contrary to the normal balance of an asset account.

An account with a debit balance, which is contrary to the normal balance for a revenue account.

Quarterly tax return filed with the state by the employer that provides a summary of the wages paid during the period and shows the computation of the tax or contribution.

A contribution to capital denotes the money or the property contributed to a corporation by either a stockholder or a nonstockholder. Where a stockholder advances money to a corporation, the tax question on insolvency of the corporation is whether the money was advanced as a loan or as a capital contribution. If it is a capital contribution, the stockholder may not deduct a nonbusiness bad debt. When a nonstockholder makes a contribution to a corporation, such as payments by a city to a manufacturer for moving its factory to the city, the contribution is not income to the corporation. The basis of property as contributed (or property purchased with money contributions) is zero. If money is contributed and as property is purchased with it, the basis of the corporation's assets is reduced.

Contributions usually means gifts made to charitable organizations. A contribution is deductible by both individuals and corporations, to a limited extent. In some cases, the word contributions is used in the Code in a different sense, but in those cases the meaning is apparent from the context.

An account that links a subsidiary ledger and the general ledger since its balance summarizes the balances of the accounts in the subsidiary ledger.

Controlled groups of corporations basically fall into two classifications: parent-subsidiary controlled groups and brother-sister controlled groups. A parent-subsidiary controlled group is one which one or more chains or corporations are connected through stock ownership with a common parent corporation. At least 80 percent of the voting power or stock value of each corporation in the group other than the parent is owned by one or more corporations in the group, and the common parent owns at least 80 percent of the voting power or stock value of one of the other corporations in the group. A brother-sister controlled group is a controlled group in which at least 80 percent of the voting power or stock value of two or more corporations is owned by the same five or fewer persons (individuals, estates, or trusts) and these persons own more than 50 percent of the voting power or stock value of each corporation.

Bonds that give the owner the right to convert the bonds into common stock under specified conditions.

Preferred stock that conveys the right to convert that stock to common stock after a specified date or during a period of time.

An intangible asset; an exclusive right granted by the federal government to produce, publish, and sell a literary or artistic work for a period equal to the creator's life plus 70 years.

A document issued by a state government that establishes a corporation.

A publicly or privately owned business entity that is separate from its owners and has a legal right to own property and do business in its own name; stockholders are not responsible for the debts or taxes of the business. For income tax purposes, the word corporation has a broader meaning than its customary one. It includes an association, joint stock company, and insurance company. All are taxed as if they were corporations, although insurance companies are subject to special rules and are taxed at special rates.

A journal entry made to correct an erroneous entry.

The purchase price paid for property, or the value at which it is taken into income (as in the case of services paid for in property). It is the amount most often applied against the amount realized from the sale of property in determining the profit or loss. It is also the figure most often used in determining the depreciation deduction. However, in special circumstances, where property is not acquired by purchase, there may be a special basis for a finding of gain or loss or depreciation.

See Depletion.

The actual cost to the business of the merchandise sold to customers.

This phrase is used only in reference to inventory valuations. Most taxpayers prefer to use cost or market, whichever is lower, as a basis for valuing their inventories since this method affords an opportunity to take advantage of a drop in the market so that profits can be reduced accordingly before disposition of the goods. If cost only is used, a drop in the market cannot affect the income until the merchandise is sold. Either method ((a) cost, or (b) cost or market, whichever is lower)) is acceptable, but either one, once adopted, must be followed unless a permission to change is obtained.

If accounting concepts suggest a particular accounting treatment for an item but it appears that the theoretically correct treatment would require an unreasonable amount of work, the accountant may analyze the benefits and costs of the preferred treatment to see if the benefit gained from its adoption is justified by the cost.

Unregistered bonds that have coupons attached for each interest payment; also called bearer bonds.

An entry on the right side of an account.

A note verifying that a customer's account is being reduced by the amount of a sales return or sales allowance plus any sales tax that may have been involved.

Terms for payment on credit by buyer to seller.

One to whom money is owed.

A credit against the tax, or a tax credit, is an amount that is subtracted from the income tax liability of a taxpayer in a given taxable year. The tax credit differs from a deduction in that the credit is subtracted from the tax itself, resulting in a dollar-for-dollar reduction in the tax liability; the deduction is subtracted from either gross income or adjusted gross income, resulting in a reduction in the amount of income subject to tax. A nonrefundable credit is one that cannot be refunded to the extent that it exceeds the income tax of the current year (e.g., the investment credit). A refundable credit can be refunded to the extent that it exceeds tax liability (e.g., the earned income credit).

Where tax is overpaid for any year, it ordinarily will be refunded by the IRS if the taxpayer owes no tax for any other year. If the taxpayer does owe a tax, the overpayment is credited against the tax that is due the government, and any balance is refunded. Credits and refunds may be allowed only within specified periods if, within such periods, a claim for refund or credit is filed.

Stock that conveys to its owners the right to receive the preference dividend for the current year and any prior years in which the preference dividend was not paid before common stockholders receive any dividends.

Assets consisting of cash, items that normally will be converted into cash within one year, or items that will be used up within one year.

Debts that must be paid within one year.

A relationship between current assets and current liabilities that provides a measure of a firm's ability to pay its current debts (current ratio = current assets ÷ current liabilities).

Any property or service the value of which is so small that accounting for it would be unreasonable or impractical.

A dealer, as referred to in income tax law, is one who sells to customers in the ordinary course of a trade or business.

The Code uses the phrase death benefit to exclude from gross income life insurance proceeds payable by reason of death.

Unsecured bonds backed only by a corporation's general credit.

An entry on the left side of an account.

A form that explains any deduction, other than a check, from a checking account.

The date on which the board of directors declares a dividend.

An accelerated method of depreciation in which an asset's book value at the beginning of a year is multiplied by a constant percentage (equal to double the straight-line rate) to determine depreciation for the year.

Amounts representing expenditures or amounts of such personal exemptions for which deduction is allowed from the amount of gross income reported. They are to be distinguished from exclusions from gross income, which are not taken into income at all. Deductions are taken from gross income to arrive at adjusted gross income.

See Prepaid expenses.

See Unearned income.

The amount of taxes that will be payable in the future as a result of the difference between taxable income and income for financial statement purposes in the current year and in past years.

The amount by which the actual tax (as it should have been computed) exceeds the amount shown on the return, if any, plus any amounts previously assessed as a deficiency and minus any rebates.

A retirement plan that provides future benefits based solely on the amount paid by each employee and employer into the account, plus investment gains.

A dependent is one of certain specified relatives for whom the taxpayer provides over half of the support for the calendar year. Nonrelatives living as members of the taxpayer's household are also treated as dependents if the support test is met.

A credit against tax is allowed for employment-related expenses paid by an individual to enable him or her to be gainfully employed. Taxpayers with adjusted gross incomes of $15,000 or less are allowed a credit equal to 35 percent of employment-related expenses. For taxpayers with adjusted gross incomes of over $15,000 through $43,000, the credit is reduced by one percentage point for each $2,000 of adjusted gross income, or fraction thereof, above $15,000. For taxpayers with adjusted gross incomes of over $43,000, the credit is 20 percent of employment-related expenses. The maximum amount of employment-related expenses to which the credit can apply is $3,000 if one child or dependent is involved and $6,000 if two or more are involved.

Allocating the cost of a natural resource to expense over the period in which the resource produces revenue.

A deposit that is recorded in the general journal but that reaches the bank too late to be shown on the monthly bank statement.

A form prepared to record the deposit of cash or checks to a bank account.

Allocation of the cost of a long-term asset to operations during its expected useful life.

A devise is a gift of real property by will. In the income tax law, the term is used mainly in connection with determining the basis of property so acquired. Basis of property acquired by devise is the value at the date of death of the descendant, or at the alternate valuation date if elected for estate tax purposes. A devise is excluded from gross income for federal income tax purposes.

A method of recording uncollectible account losses as they occur.

A means of reporting sources and uses of cash under which all revenue and expenses reported on the income statement appear in the operating section of the statement of cash flows and show the cash received or paid out for each type of transaction.

Payments to employees who are absent from their jobs because of illness, accident, or disease not arising out of their employment.

See Tax credit for the elderly.

The excess of the face value over the price received by the corporation for a bond.

Deducting the interest from the principal on a note payable or receivable in advance.

A bonus not agreed on, announced, or promised before payment.