TAX ACCOUNTING: tax accounting is the accounting process that focuses on tax issues - including filing tax returns and planning for future tax responsibilities - as opposed to the preparation of financial statements. Tax accounting is a specialized field of accounting where accountants focus on the preparation of tax returns as well as tax planning for future taxable years. Principles of tax accounting differ from the UK's Generally Accepted Accounting Practices. Tax law varies immensely from country to country, as well as between different regions and even cities. Therefore it is important to consider having your accountant prepare or oversee your tax accounting records. It is the planning of business strategies based on tax consequences and avoidance.
401(k) plan: A tax-deferred retirement plan designed to encourage long-term retirement savings. Some companies provide contributions as an employee benefit.
ABILITY TO PAY: A concept of tax fairness that states that people with different amounts of wealth or different amounts of income should pay tax at different rates. Wealth includes assets such as houses, cars, stocks, bonds, and bank accounts. Income includes wages, interest and dividends, and other payments.
ACCELERATION: A contract clause that requires payment of the full amount of the debt owed if a payment is missed or another triggering event (such as bankruptcy of the debtor) occurs. This type of clause often appears in promissory notes or loan agreements.
ACCOUNT: A category that stores information on like items. There are assets, liabilities, capital accounts, revenues and expenses.
ACCOUNTING: Recording and summarizing business transactions to provide useful information.
ACCOUNTING CYCLE: Transactions occur, are recorded, are summarized, and then put into the form of financial statements.
ACCOUNTS PAYABLE: Amount owed, generally to suppliers.
ACCOUNTING PERIOD: The period for which the financial statements are prepared.
ACCOUHTS RECEIVABLE: Amounts the business is expecting from its customers based on credit sales that have already occurred.
ACCRUAL BASIS OF ACCOUTING: A system whereby revenue is recognized and recorded when earned (rather than when received) and expenses are recognized and recorded when incurred (rather than when paid).
ACCRUED EXPENSES: Expenses that have been incurred but not yet paid.
ACCUMULATED DEPRECIATION: The depreciation expense accumulated against the buildings and equipment on the books.
ADDENDUM: An attachment or exhibit to a written document, such as a contract.
ADDITIONAL PAID IN CAPITAL: Capital paid in by the owners in addition to that paid for capital stock.
ADJUSTED BASIS: The net cost of an asset after adjusting for various tax-related items.
ADJUSTED GROSS INCOME: Gross income reduced by certain amounts, such as a deductible IRA contribution or student loan interest
ADJUSTING ENTRY: A bookkeeping entry that does not arise from the cash receipts and disbursements. These entries are made at the end of the period for which the financial statement is prepared.
ADJUSTMENTS TO INCOME: Certain expenses which directly reduce your total income rather than relying on itemizing your deductions. Benefit, they help you even if you use the standard deduction.
ADVANCE EARNED INCOME CREDIT PAYMENT: Payments of part of your Earned Income Tax Credit received via your paycheck.
AGENT: A person granted the authority to act on behalf of another person or entity, known as the "principal." The actions and decisions of the agent can be binding on the principal.
AGING OF ACCOUNTS RECEIVABLE OR PAYABLE: Breaking the receivables or payables out into those due within 30 days, 60 days, 90 days, etc. Helpful for determining if they are being received or paid in a timely fashion.
ALIMONY: Money received or paid to a former spouse under a divorce decree or separation instrument.
ALLOCATIONS: In cost accounting, the method for assigning costs to products or departments.
ALLOWANCE FOR DOUBTFUL ACCOUNTS: A set-aside out of accounts receivable for amounts expected not to be received. Used in situations where a fairly uniform amount of credit sales are not collected. This allows a steady recognition of bad debts even when we don't know which receivables will not be collected. As receivables are determined to be uncollectible they are charged off against the allowance.
ALTERNATIVE MINIMUM TAX: A separate method for calculating your income taxes. You are responsible for paying the higher of the AMT or the regular tax. If your AMT tax is higher, you add the difference between the AMT and the regular tax on your 1040 line 44.
AMORTIZATION: The bookkeeping write-off of intangible assets over their useful life.
ANNUITY: A type of tax-deferred retirement plan.
APPEAL: To call for a review of an IRS or legal decision.
APPRECIATION: The increase in the value of an asset.
APPROPRIATED RETAINED EARNINGS: A set-aside of the retained earnings of a company for a particular purpose. This could be for a contingent liability such as a lawsuit, for expansion, or for any other purpose deemed appropriate by the management. It signifies retained earnings that are not available to be paid to the stockholder's in the form of dividends.
ARBITRATION: A form of alternative dispute resolution in which a neutral 3rd party (an arbitrator) considers the competing parties arguments/evidence and renders a decision or award. Arbitration can be binding or nonbinding.
ARCHER MSAs: Tax-deductible savings accounts to save for medical expenses.
AT RISK RULES: Losses from a business operation are limited to the amount of money you can actually lose in the business.
AT-WILL EMPLOYMENT: The policy allowing employers or employees to end an employment relationship at any time for any reason -- or for no reason at all. In some states, the law may place practical limits on this policy.
AUDITING: It is performance of specified procedures necessary for Certified Public Accountants to form an opinion as to whether the financial statements present fairly the operations of the business.
AUDITORĺS REPORT: The letter in which the CPA sets forth an opinion, along with the financial statements and notes to the financial statements.
AVERAGE DAYS IN RECEIVABLES: The number of days it generally takes to collect accounts receivable.
BALANCE SHEET: The financial statement that represents the assets, liabilities and capital position at a specific date.
BANKRUPTCY: A condition in which a business cannot meet its debt obligations and petitions a federal district court for either reorganization of its debts (Chapter 11) or liquidation of its assets (Chapter 7). In the action the property of a debtor is taken over by a receiver or trustee in bankruptcy for the benefit of the creditors. The action may be voluntary or involuntary.
BEGINNING INVENTORY: The items held for sale by the company, expressed at the lower of their cost or the market value.
BONDS: Securities issued by the U.S. government, corporations, federal agencies, or state or local municipalities. Bonds are sometimes further classified as follows:
1. Corporate Bonds - Debt instruments issued by corporations, as distinct from ones issued by a government agency, typically interest-bearing with a fixed maturity.
2. High-Yield Bonds - A bond that has a rating of BB or lower and pays a higher yield to compensate for the greater credit risk.
3. Long-Term Government Bonds - Securities issued by the US government and debt issues of federal agencies having a maturity of 10 years or more.
4. Mortgage-Backed Bonds - Securities backed by mortgages issued by FMLMC and FNMA or guaranteed by GNMA. Investors receive payments out of the interest and principal on the underlying mortgages.
5. Municipal Bonds - Debt obligation of a state or local government entity. The funds may support general government needs or fund special projects. The interest on these bonds is typically exempt from federal income taxes, and most state and local taxes.
BONUS: Compensation received by an employee for services performed. A bonus is given in addition to an employee's usual compensation.
BOOK VALUE: Historical cost of an asset less the depreciation accumulated against it.
BREACH OF CONTRACT: A violation of or failure to perform according to the terms and conditions of an agreement.
BUSINESS: A continuous and regular activity that has income or profit as its primary purpose.
BUSINESS ENTITIES: A group of people organized for some profitable or charitable purpose.
BUSINESS USE OF HOME: Employees who work out of their home or independent contractors with a home office may be able to deduct part of their household expenses on their tax return.
CAFETERIA PLAN: An employee benefit plan where employees use pretax salary or wages to create their own customized benefits package. Employees may be able to take cash (which becomes taxable) for unused credits or convert more pretax dollars to pay for more benefits. Also known as a flexible benefits plan.
CANCELLATION FEE: A fee for breaking a contract. Many cellular phone service contracts impose a cancellation fee for ending the contract before the end of its term.
CAPITAL: The owner's rights against the assets of the business...the owner's share.
CAPITAL EXPENDITURES: Business spending on additional plant equipment and inventory.
CAPITAL GAIN DISTRIBUTIONS: Distributions from a mutual fund of capital gains on investments they have sold off.
CAPITAL GAINS: A capital gain is the difference between what you paid for an investment and what you received when you sold that investment for more than your cost.
CAPITAL LEASE: A lease that actually represents the purchase of the asset. A lease is generally deemed a capital or financing lease when the item can be purchased at the end of the lease for 10% or less of the value.
CAPITAL LOSSES: A capital loss is the difference between what you paid for an investment and what you received when you sold that investment for less than your cost.
CAPITALIZE: Record as an asset rather than an expense. For example, labor is capitalized when it is direct labor incurred in the manufacture of inventory. It is recorded as part of the inventory...which is an asset.
CAPITAL STOCK: Stock purchased by the stockholders representing their ownership interest in the company.
CASH EQUIVALENTS: Investments of high liquidity and safety with a known market value and a very short-term maturity. Examples include Treasury bills and money market funds.
CASH BASIS OF ACCOUNTING: Revenue is recognized when received (rather than when earned) and expenses are recognized when paid (rather than when incurred).
CASH DISBURSEMENTS JOURNAL: A record in which cash disbursements (checks) are recorded.
CASH DISCOUNT: An incentive offered by the seller to encourage a buyer to pay within a stipulated time. For example, if the terms are 1%/10/net 30, the buyer may deduct 1 percent from the amount of the invoice (if paid with 10 days); otherwise the full amount is due within 30 days.
CASH FLOW: An accounting presentation showing how much of the cash generated by a business remains after both expenses (including interest) and principal repayment on loans are paid. A projected cash flow statement indicates whether the business will have cash to pay its expenses, loans, and make a profit. Cash flows can be calculated for any given period of time, normally done on a monthly basis or yearly basis.
CASH FLOW STATEMENT: Also called Statement of Cash flows, it indicates the sources and uses of cash flow by three categories: Operations, Investing and Financing. It is one of the three statements required by Generally Accepted Accounting Principles (GAAP).
CASH OVER OR SHORT: An account representing the difference between what cash should be based on recorded sales and expenses and the actual amount of cash. This is common in a retail, cash register situation. In fact, the absence of cash short can be a warning sign for embezzlement.
CERTIFICATES OF DEPOSIT: Interest-bearing debt instruments issued by banks with maturities from a few weeks to several years.
CERTIFIED PUBLIC ACCOUNTANT: A CPA is a professional accountant licensed by the state. Best for corporate accounting, tax audits, and business consulting.
CHART OF ACCOUNTS: The list of accounts used by a particular entity. These will include assets, liabilities, capital accounts, revenues and expenses.
CHILD TAX CREDIT: You may take a tax credit if you have dependent children.
CITIZEN OR RESIDENT TEST: Assuming all other dependency tests are met, the citizen or resident test allows taxpayers to claim a dependency exemption for persons who are U.S. citizens for some part of the year or who live in the United States, Canada, or Mexico for some part of the year.
CLOSING ENTRIES: Entries made at the end of the accounting period to close the temporary revenue and expense accounts to the capital section. Remember, Assets = Liabilities + Capital. Capital is increased by revenues and decreased by expenses. Another way to say the same thing, capital is increased by net income and decreased by net loss.
COLLATERAL: Something of value pledged to support the repayment of an obligation or loan. Examples include real estate and certificates of deposit.
COMMON LAW: Law made by judges in individual cases, rather than by the legislature.
COMMUNITY PROPERTY STATES: Married persons are considered to own their property, assets, and income jointly.
COMPULSORY PAYROLL TAX: An automatic tax collected from employers and employees to finance specific programs.
CONTRIBUTED CAPITAL: Capital contributed by the owners over and above what they paid for capital stock.
COPYRIGHT: An exclusive ownership interest in an artistic or literary work. The term "literary work" includes computer software and other information stored in electronic form. Copyright is often noted by the following example: "Copyrightę 2003 by Linda Keith CPA."
CORPORATION: A business entity that has a legal life separate from its owners. It provides its owners and shareholders with certain rights and privileges, including protection from personal liability, if proper steps are followed. Corporations may take a number of forms, depending on the goals and objectives of the founders. Types include C, S and nonprofit corporations. Corporations are regarded as "persons" in the eyes of the law and may thus sue and be sued, own property, borrow money and hire employees.
CORRECTIVE DISTRIBUTIONS: If you contribute more money to your 401k or IRA than you were supposed to, the plan administrator will send you a check for your excess contributions.
COST OF GOODS SOLD: The cost of the inventory sold ...including raw materials, direct labor and overhead for a manufacturing company.
CREDIT ACCOUNTS: The right side of an accounting transaction. "Debits are next to the window ...credits next to the door." Liabilities and capital run credit balances on the balance sheet. Revenue runs a credit balance.
CREDIT RATING: A formal evaluation of an individual or a company´s credit history and capability of repaying debt.
CREDIT SCORE: A statistical summary of the individual pieces of information on a credit report. A credit score predicts how likely it is that a company or individual will repay debts. Lenders use credit scores to determine whether to extend credit and at what interest rate. Also called a risk score.
C CORPORATION: A corporation where the entity is taxed separately from its owners under subchapter C of the Internal Revenue Code.
DAMAGES: A cash compensation ordered by a court or arbitrator to offset losses or suffering caused by another´s fault or negligence. Damages are a typical request made of a court or arbitrator when persons sue for breach of contract or tort.
DAYS IN INVENTORY: The number of days it generally takes to sell an item that has been added to inventory.
DAYS IN RECEIVABLES: The number of days it generally takes to collect accounts receivable.
DOING BUSINESS AS: A situation in which a business owner operates a company under a different name than the one under which it is incorporated. The owner typically must file a fictitious name statement or similar document with the appropriate county or state agency.
DEBENTURE: Debt instrument evidencing the holder's right to receive interest and principal installments from the debtor.
DEBIT: The left side of an accounting transaction. "Debits are next to the window ...credits next to the door." Assets run a debit balance as do expenses.
DEED OF TRUST: A document that, when properly delivered, transfers a security interest in real property.
DEFAULTS: The nonpayment of principal and/or interest on the due date as provided by the terms and conditions of a promissory note or loan agreement.
DEFERRED EXPENSE: A prepayment on an expense, recorded as an asset until such time as the expense actually occurs. It is an asset because you have a right to a refund unless you incur the expense.
DEFERRED INCOME TAXES: The income taxes that should be paid according to the financial statements, even though using the tax rules, the taxable income is less than the income per books. It represents a timing difference. Eventually, the taxes will have to be paid.
DEFERRED REVENUES: Cash received that the business has not earned yet. It is a liability until earned because if the business does not earn it the business will have to pay it back.
DEFICIT: A negative. When referencing the federal deficit, the result of the government taking in less money than it spends.
DEPENDENCY EXEMPTION: Amount that taxpayers can claim for their eligible dependents. Each exemption reduces the income subject to tax. The exemption amount is a set amount that changes from year to year.
DEPENDENT: A person, other than the taxpayer or spouse, who entitles the taxpayer to claim a dependency exemption. A dependent is someone you take care of. Claiming a person as a dependent on your tax return will increase your personal exemptions, and may help you qualify for other tax benefits. You can claim a dependent on your tax return if you meet five criteria.
DEPLETION: The bookkeeping write off of natural resources, representing the fact that they are being used up.
DEPRECIATION: The bookkeeping write-off of tangible assets such as buildings and equipment, to spread their acquisition cost over their useful life. Land is never depreciated.
DIRECT CHARGE-OFF: The write-off of bad debts as they actually occur, rather than regularly recognizing it through an allowance for bad debts. This is appropriate when bad debts are not frequent or are not very predictable.
DIRECT DEPOSIT: This allows tax refunds to be deposited directly to the taxpayer's bank account. Direct Deposit is a fast, simple, safe, secure way to get a tax refund. The taxpayer must have an established checking or savings account to qualify for Direct Deposit.
DIRECT TAX: A tax that cannot be shifted to others, such as the federal income tax.
DISABILITY BENEFITS: Benefits paid to an employee who cannot work because of disability, usually limited to what is not covered by workers compensation. Disability benefits are usually a percentage of the employee´s prior income and generally run for a limited time.
DISCLOSURE: Releasing your tax return information to a third-party. Disclosure may be authorized or unauthorized. Unauthorized disclosure is a crime.
DIVIDENDS: Payment to the stockholders out of retained earnings (the accumulated profits of the company).
DOUBLE-ENTRY SYSTEM: The debit and credit system of accounting that results in the accounts being in balance. Designed to avoid or catch errors.
EARNED INCOME: Includes wages, salaries, tips, includible in gross income, and net earnings from self-employment earnings.
EARNED INCOME CREDIT: A tax credit for certain people who work, meet certain requirements, and have earned income under a specified limit.