Dictionary

A depreciation method that assigns assets periods of cost recovery based on specific IRS criteria. Since 1986, the Modified Accelerated Cost Recovery System (MACRS) has been far more prevalent.

A method of depreciating asset cost that allocates greater amounts of depreciation to an asset's early years of useful life.

The difference between the amounts recorded on the two sides of an account.

A balance sheet that lists assets on the left and liabilities and owner's equity on the right (see Report form balance sheet).

The process by which financial information about a business is recorded, classified, summarized, interpreted, and communicated to owners, managers, and other interested parties.

The source of authoritative U.S. GAAP.

Changes to Accounting Standards Codification are communicated through Accounting Standards Update covering approximately 90 topics.

A series of steps performed during each accounting period to classify, record, and summarize data for a business and to produce needed financial information.

A taxpayer's accounting method is the basis of accounting by which records are kept. Usually, either the cash basis or the accrual basis is used. Special methods of reporting income, such as the installment basis are variations of these two methods.

An accounting period is the 12-month period on the basis of which the taxpayer's records are kept. If no books are kept or if no other period is specified, the accounting period is the calendar year. If the books are kept on the basis of a 12-month period ending with a month other than December, the accounting period is a fiscal year. A special 52-53-week accounting period is also recognized for income tax purposes.

A process designed to accumulate, classify, and summarize financial data.

Written records of the assets, liabilities, and owner's equity of a business.

Amounts a business must pay in the future.

A subsidiary ledger that contains a separate account for each creditor.

Claims for future collection from customers.

A subsidiary ledger that contains credit customer accounts.

A measure of the speed with which sales on account are collected; the ratio of net credit sales to average receivables.

A system of accounting by which all revenues and expenses are matched and reported on financial statements for the applicable period, regardless of when the cash related to the transaction is received or paid.

Expense items that relate to the current period but have not yet been paid and do not yet appear in the accounting records.

Income that has been earned but not yet received and recorded.

The accumulated adjustments account consists of post-1982 accumulated gross income less deductible expenses and prior distributions allocable to the account of an S corporation.

This additional tax is imposed on a corporation that permits its earnings to accumulate, instead of being distributed, in order to avoid payment of tax on dividends by individual stockholders.

A measure of immediate liquidity; the ratio of quick assets to current liabilities.

The basis for gain or loss and the basis for depreciation, etc. are explained under Basis. After such a basis is determined, it must be adjusted (a) for captial items that increase it and (b) for deductions that decrease it, such as depreciation, depletion, etc.

Adjusted gross income is gross income reduced by trade or business expenses of individual taxpayers, expenses for property held for production of rents or royalties, and certain loss adjustments. The amount of the adjusted gross income affects the extent to which medical expenses, nonbusiness casualty and theft losses, and charitable contributions may be deducted.

Journal entries made to update accounts for items that were not recorded during the accounting period.

See Adjusting entries.

Like an executor, the administrator manages the estate of a person who dies intestate or whose named executor fails to act.

See Controlled corporate groups.

A taxpayer who has attained the age of 65 before the close of the tax year is allowed an additional standard deduction amount of $1,250 in 2016 if married; $1,550 in 2016 if unmarried.

Classifying accounts receivable balances according to how long they have been outstanding.

In a legal sense, alimony is support payment made after a divorce or legal separation. In some respects, the income tax law definition is broader. It includes payments made under a decree of divorce or separate maintenance, under a decree for support if a wife is separated from her husband, or under a written separation agreement executed by the husband and wife if the wife is separated from her husband and they file separate returns. Alimony payments that meet certain tests are deductible by the payer and are income to the applicant.

See Accrual basis.

A method of recording uncollectible accounts that estimates losses from uncollectible accounts and charges them to expense in the period when the sales are recorded.

Alternative minimum tax rules have been devised to ensure that at least a minimum amount of income tax is paid by corporate and high-income noncorporate taxpayers (including estates and trusts) who reap large tax savings by making use of certain tax deductions and exemptions. A taxpayer's AMT for a tax year is the excess of the tentative minimum tax over the regluar tax and must be paid in addition to year-end tax liability. The tentative minimum tax is determined by multiplying the excess of a taxpayer's alternative minimum taxable income over an exemption amount by 26 percent for adjusted gross income up to $186,300 and 28 percent for AGI in excess of $186,300 (20 percent for corporate taxpayers), and then reducing the product by the taxpayer's alternative minimum tax foreign tax credit. AMTI is computed by taking taxable income (including unrelated business taxable income, real estate investment trust taxable income, life insurance company taxable income, or any other income base used to calculate regular tax liability), adding or subtracting special adjustments, and adding tax preference items.

The process of periodically transferring the acquisition cost of intangible assets with estimated useful lives to an expense account.

The term amount realized is given a special meaning in finding gain or loss on a sale or exchange of property. The realized gain or loss is the difference between the amount realized and the adjusted basis of the asset. The amount realized is the sum of the money and the fair market value of other property received.

A procedure whereby a taxpayer estimates from the income received during a portion of a year what the income for the entire year will be if income continues to be received at the same rate. This process is used in computing the tax on short-period returns and also for avoiding the penalty for underpayment of estimated taxes.

Method of determining amount of income taxes to be withheld by multiplying the wages for one payroll period by the number of periods in the year, determining the annual amount of withholding required on the total wages, and dividing the annual withholding by the number of payroll periods.

A periodic payment, whether for a period certain or for one or more lives. Under the general rule for taxing an annuity, the taxpayer's investment in the contract is usually divided by the number of payments expected, and that portion of each payment is nontaxable. The remainder of each payment is taxable as received. The Internal Revenue Service provides tables for computing tax-free portions of annuity receipts.

Employers with 50 or more full-time employees during the previous year.

Personnel record which gives the applicant an opportunity to provide complete information as to personal qualifications, training, and experience.

A formal declaration of an intention to restrict dividends.

See Partnership agreement.

The Commissioner of IRS places the amount of unpaid tax on a list for collection, in effect a charge against the taxpayer on the books of the government. Before any additional tax may be assessed, the Commissioner must send a notice of deficiency and cannot assess the tax before allowing the taxpayer to file a petition with the Tax Court.

A measure of the effective use of assets in making sales; the ratio of net sales to total assets.

Property owned by a business.

The principle that income is taxed to the individual who earned it, even if the right to the income has been transferred to another prior to recognition.

A body of persons who unite for some special business or purpose, the body itself being invested with some, but not full, corporate rights and powers. For income tax purposes, an association is taxed in the same manner as a corporation.

A chain of references that makes it possible to trace information, locate errors, and prevent fraud.

The review of financial statements to assess their fairness and adherence to generally accepted accounting principles.

An independent accountant's review of a firm's financial statements.

The number of shares authorized for issue by the corporate charter.

The ratio of 365 days to the accounts receivable turnover; also called the number of days' sales in receivables.

A method of inventory costing using the average cost of units of an item available for sale during the period to arrive at cost of the ending inventory.

Amount of income tax withheld by payers of taxable interest, dividends, and certain other payments made to payees who have failed to furnish the payers with correct identification numbers.

Whether or not it relates to a business transaction, a bad debt can be deducted in the year in which it becomes uncollectible. If a business debt is partially uncollectible, a portion may be charged off. A nonbusiness bad debt is treated in the same way as a short-term capital loss. A debt that arises from the performance of services or the selling of goods by a cash-basis taxpayer may not be deducted if the income from the services or the profit from the sale has not previously been reported as income. However, a bad debt that arises from the lending of money is deductible, subject to the above-mentioned limitation on a nonbusiness bad debt.

A ledger account form that shows the balance of the account after each entry is posted.

A formal report of a business's financial condition on a certain date; reports the assets, liabilities, and owner's equity of the business.

A check written by a bank that orders another bank to pay the stated amount to a specific party.

A statement that accounts for all differences between the balance on the bank statement and the book balance of cash.

A 360-day period used to calculate interest on a note.

The term Basis, for income tax purposes, is used mainly in connection with determining the amount of gain or loss on a sale of property or in computing depreciation. It represents the cost of the property to the taxpayer, actually or constructively, but it has a broader meaning than the term cost. The basis (adjusted) of property is deducted from the amount realized to determine the realized gain or loss on its sale. If the property was acquired by the taxpayer through a purchase, the basis is its cost, except in special circumstances such as in the conversion of the property from personal to rental or other business purposes, in which case the basis for loss and for depreciation may be different from the basis for gain. If the property was acquired as gift property, inherited property, property received in an exchange, etc. then special rules for finding basis apply.

A gift by will of personal property. The law provides a special basis for finding gain or loss or depreciation in the case of property acquired by bequest. The basis is then the value of the property at the date of the testator's death. If a bequest is of money to be paid at intervals, then to the extent that it is paid out of income from property, it is taxable income to the recipient.

A business document that lists goods accepted for transportation.

Every two weeks.

A signature of the payee written on the back of the check that transfers ownership of the check without specifying to whom or for what purpose.

An additional standard deduction amount of $1,250 is allowed for an elderly or blind individual who is married or who is a surviving spouse. An additional $1,550 is allowed for a single individual or for a head of household who is elderly or blind. Thus, a married couple, each of whom is both elderly and blind receives an extra $5,000 ($1,250 x 4) standard deduction.

A bond contract.

Costs incurred in issuing bonds, such as legal and accounting fees and printing costs.

When a bond is paid and the liability is removed from the company's balance sheet.

A fund established to accumulate assets to pay off bonds when they mature.

The process by which employees are investigated by an insurance company that will insure the business against losses through employee theft or mishandling of funds.

Long-term debt instruments that are written promises to repay the principal at a future date; interest is due at a fixed rate payable over the life of the bond.

That portion of an asset's original cost that has not yet been depreciated.

Boot is cash or other property added to an exchange or other transaction in order to make the value of the traded goods equal. Cash boot is allowed to be part of a nonmonetary exchange under U.S. Generally Accepted Accounting Principles.

See Trade name.

A point at which revenue equals expenses.

Cost of operating a business that is deductible by the employer for federal income tax purposes.

When a transaction occurs it must be grounded in a business purpose other than tax avoidance. Tax avoidance is not a proper motive for being in business.

A financial event that changes the resources of a firm.

The guidelines for conducting a corporation's business affairs.

A Cafeteria Plan is a reimbursement plan governed by IRS Section 125 which allows employees to contribute a certain amount of their gross income to a designated account or accounts before taxes are calculated.

A period of 12 months beginning January 1 and ending December 31. It is the most widely used accounting period. It must be used by a taxpayer who does not keep a regular set of books on a different accounting period.

The amount the corporation must pay for the bond when it is called.

Bonds that allow the issuing corporation to require the holder to surrender the bonds for payment before their maturity date.

Stock that gives the issuing corporation the right to repurchase the preferred shares from the stockholders at a specific price.

A check paid by the bank on which it was drawn.

Financial investment in a business; equity.

The term capital asset in income tax law generally means all business and nonbusiness assets with the following exceptions: inventory, depreciable personal and real property, certain works created through personal efforts, business accounts and notes receivable, and certain U.S. publications.

An expenditure that is made for assets of a more or less permanent nature-those with a useful life of more than one year. Such an expenditure may not be deducted in the year made, even though made in connection with a trade or business.

Capital gain is an increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on income taxes.

Losses from the sale or exchange of a capital asset. The excess of capital losses over capital gains is called a net capital loss. A corporation may deduct a capital loss of any taxable year in the year only to the extent of capital gain. The excess of losses may be carried back three years and carried forward five years, but only as an offset against capital gains of such later years. If there are no such capital gains, the deduction is lost. In the case of an individual, short-term and long-term capital losses are combined for purposes of offsetting up to $3,000 of ordinary income annually. Excess losses may be carried forward indefinitely.

A subsidiary ledger that contains a record of each stockholder's purchases, transfers, and current balance of shares owned; also called stockholders' ledger.

A record of stock transfers used for posting to the stockholders' ledger.

All costs recorded as part of an asset's costs.

Income tax carrybacks include the net operating loss carryback, the capital loss carryback (for corporations only), the foreign tax credit carryback, and the general business credit carryback. The first two are applied against income and the last two are credits agains tax.

This accounting term denotes an expense for idle or nonproductive property that is incurred for the purpose of carrying the property. The income tax law permits a taxpayer to capitalize instead of deducting currently as an expense taxes and interest chargeable to unimproved and unproductive real property. Also, a taxpayer can capitalize otherwise deductible expenses incurred during the period of construction or improvement of realy property, and taxes and interest directly related to machinery and equipment purchased, up to the date they are put to productive use. In addition, if the finance or service charge on an installment purchase of personal property is separately stated but the actual interest charge cannot be ascertained, such as charge is referred to as a carrying charge. And a portion of the charge is deductible as interest under a special formula.

The balance of the Bonds Payable account plus the Premium on Bonds Payable account minus the Discount on Bonds Payable account; also called book value of bonds.

An account used to record any discrepancies between the amount of currency and coins in the cash register and the amount shown on the audit tape.