GLOSSARY OF ACCOUNTING TERMS

Accounts Payable Amounts owed by the business for purchases made on credit.

Amounts due to the business from customers for merchandise or services

Accounts Receivable
purchased on credit.
Expenses that the business has incurred for which it has not received, or
Accrued Expenses
will not receive, an invoice, and that have not yet been paid.

The total amount of depreciation expense recorded till date for the
Accumulated
company's fixed assets. On the balance sheet, this value is subtracted from
Depreciation the gross value of Property, Plant and Equipment to derive a net figure.

The amount actually paid to purchase an asset. This includes all costs
Acquisition Cost
associated with the purchase, such as installation, freight, and sales tax.
The recognition of part of an intangible asset's cost as an expense during
Amortization each year of its useful life. Items that are amortized include goodwill, start-
up expenses and purchased patents.
Anything that has future economic value. In addition to items such as cash
Asset
and equipment, assets can include intangibles such as goodwill.
Average Annual The expected annual return on an investment, including interest and
Return dividends, expressed as a percentage.
A method of inventory valuation whereby the total cost of all units bought
Average Cost
or produced is divided by the number of units.

Bad Debt Expense Losses for uncollectible accounts receivable.

A financial statement that lists the assets, liabilities, and equity of a
Balance Sheet
company at a certain point in time.

The value of an asset for accounting purposes. For assets where

depreciation is taken or reserves booked, this is often expressed as a net
Book Value
book value. The book value of a company is the excess of assets over
liabilities, which is equivalent to total owner's equity.

An analysis tool that models how revenue, expenses, and profit vary with
Breakeven Analysis changes in sales volume. Breakeven analysis estimates the sales volume
needed to cover fixed and variable expenses.
Breakeven Point The sales level at which revenues equal expenses (fixed and variable).
The process of determining and recording the expected financial results of
a future period, generally the next fiscal year. In some organizations
budgeting is limited to financial items that are shown on the income
statement, while in others the budgeting process produces the three major
statements (Income Statement, Balance Sheet, and Cash Flow Statement).
Budgeting After the target time period begins, the budgeting process frequently
includes tracking actual financial figures against the forecast as well. There
is considerable overlap between the activities of budgeting and forecasting.
Budgeting usually involves a more detailed account structure and a finer
time scale than forecasting, which typically covers between three and
seven years of higher-level projections.

Compiled by Tushar Kataria for SIP 2009

 A long-term lease of property, plant, or equipment in which the lessee
acquires essentially all the risks and benefits associated with the ownership
Capital Lease of the leased item. Because it most closely resembles the financing of an
asset purchase, a capital lease is treated as a long-term debt rather than as
a rental.
Cash Flow A financial report that expresses a company's performance in terms of cash
Statement generated and used.
A term used to refer to a financial statement in which all items are
expressed as percentages of another item in the statement. For example, a
Common-Sized
common-sized balance sheet might show all values as a percentage of total
assets.
Accounts, such as Accumulated Depreciation, that offset a related
Contra Accounts account, usually an asset. The contra account is subtracted from the
related account to arrive at the net book value.
Contribution The difference between revenue and the associated variable costs. This is
Margin an important concept in breakeven analysis.
Cost of Goods Sold All the costs associated with the goods or services that were sold during a
(COGS) specified accounting period, including materials, labor, and overhead.
Cost of
Sales/Services COGS-sales and distribution expenses
(COS)
A set of conditions agreed to in a formal debt agreement and designed to
Covenants protect the lender's interests. Covenants may include restrictions on
debt/equity ratio, working capital, or dividend payments. See also
management goals.
Assets those are convertible to cash within one year in the normal course
Current Assets of business. This usually includes cash, accounts receivable, inventory,
and prepaid expenses.
Obligations that will come due within a year from the current date. These
Current Liabilities usually include accounts payable, accrued expenses, and the portion of
long-term obligations due within one year. See also non-current liabilities.
Current assets divided by current liabilities. This ratio is a measure of a
Current Ratio
company's ability to meet its financial obligations in a timely manner.

Days Payable The number of days a business takes to pay its accounts payable, on
Outstanding (DPO) average. Also called Creditors Turnover Period/Creditors Velocity.
Days Sales The number of days a business takes to collect on its accounts receivable,
Outstanding (DSO) on average. Also called Debtors Turnover Period/Debtors Velocity.
A form of liability that represents money borrowed from banks or other
Debt
institutions.
The ratio of total debt to owners' equity, used as a measure of leverage and
Debt to Equity Ratio
ability to repay obligations.
The ratio of total debt to tangible equity, used as a measure of leverage
Debt to Tangible
and solvency. Typical values for this ratio vary from one industry to
Equity Ratio another. Lower values for the ratio represent a better financial condition.

Compiled by Tushar Kataria for SIP 2009

 A liability that arises when a customer pays for goods or services before
delivery is complete. For example, a one-year service contract billed in
Deferred Revenue
advance. Under accrual accounting, revenue must be booked when the
obligation is fulfilled, not when cash is paid or received.
The recognition of part of an asset's cost as an expense during each year of
its useful life. There are several acceptable methods for calculating this
Depreciation expense, including straight-line depreciation and various accelerated
methods, double-declining balance, straight-line method, and sum of the
years' digits.
Expenses, such as labor, overhead, and materials, that vary in direct
Direct Costs
proportion to units produced or services rendered.
Wages paid for activities directly related to production of units sold or
services delivered, considered part of cost of sales. This does not include
Direct Labor
management and administrative salaries, which are treated as operating
expenses or overhead. Also referred to simply as labor.
A method of recording accelerated depreciation. Also called the 200
percent declining balance method, this system applies twice the annual
straight-line rate to the under-coated balance of the asset's depreciable cost
Double Declining
each year of the asset's useful life. For example, if the asset has a
Balance (DDB) depreciable value of Rs. 1,000,000 and a useful life of five years, the
double-declining balance method would record Rs. 400,000 of
depreciation the first year, Rs. 240,000 the second year, and so on.

Net income before income tax expense and interest expense. This is a
Earnings Before
popular measure for comparing the earning power of companies, because
Interest and Taxes
it eliminates the impact of capital structure and effective tax rates, two
(EBIT) non-operating factors.
Earnings Per Share Net income divided by the number of outstanding shares of common stock
(EPS) and equivalents.
Net income before income tax expense, interest expense, depreciation, and
EBIT/DA
amortization.
Technical measures that analysts use to forecast events in economic
Economic Indicators systems. For example, Gross Domestic Product and Consumer Price
Index.
A general term for various technical measures of profit in which
adjustments are made to the traditional accounting definition of Net
Economic Profit
Income. Such adjustments are typically made in order to better estimate
the future value of a business.
Also known as Net worth or Owners' equity. Equity is the net value of a
Equity
company's total assets, less its total liabilities.

A method of inventory valuation whereby the goods first purchased or

First In First Out manufactured are considered the first ones sold. During periods of
(FIFO) inflation, the FIFO method shows inflated profits compared to the last in,
first out (LIFO) method.
The 12-month period, not necessarily coinciding with the calendar year,
Fiscal Year chosen to constitute a single year for external financial reporting and
taxes.
Compiled by Tushar Kataria for SIP 2009
 The ratio of net Property, Plant and Equipment book value to tangible
equity, used as a type of efficiency ratio. Typical values for this ratio vary
Fixed Assets to
from one industry to another. Higher values for the ratio represent a more
Tangible Equity capital-intensive company, which may be good or bad depending on the
Ratio industry and how well the assets are being used to generate revenues.

Expenses that are assumed not to vary with sales volume within the
expected range of sales volumes, such as rent or administrative costs. This
Fixed Costs
is an important concept in breakeven analysis and in distinguishing
between gross margin and contribution margin. See also Variable Costs.
Financial forecasting is the process of estimating future financial
performance. The projected financial performance of a business is
measured by using pro-forma financial statements as well as other
indicators such as trend analysis, ratio analysis, and return on equity.
Forecasting Forecasting often takes a higher-level viewpoint than the related activity of
budgeting. In broader terms, forecasting can also refer to estimates of
broad economic activity in a country, industry, or financial area. For
instance, analysts and economists release forecasts of where interest rates
or stock market prices might go in the future.

The accounting term for amounts paid for assets over and above their fair
market value. Goodwill arises, for example, when a company purchases
another business and pays a price higher than the value of the acquired
Goodwill
assets alone. Goodwill theoretically represents the value of the business's
name, reputation, and customer relations, which increase the true value of
the business beyond the value of its assets alone.
Net Sales less cost of sales (including both fixed and variable costs), often
Gross Margin
expressed as a percentage of sales. Also referred to as Gross Profit.
The total of amounts received (sales for cash) and amounts expected (sales
on credit) in return for products sold or services rendered during the given
Gross Sales
time period. Gross sales reflect sales at invoice values, before sales
discounts and credit card fees.

A financial report that shows a company's performance over a specified

Income Statement period of time by subtracting expenses from revenue to obtain net income.
Also known as a profit and loss statement (P&L) or an earnings report.
Levies on the income of a business imposed by federal and state
Income Tax Expense governments. This expense appears on the income statement simply as
Taxes.
A long-term asset that represents a financial, legal, or accounting concept
rather than a physical item. Examples of intangible assets include:
Goodwill, the value of a patent, copyright, or trademark, the value of a
franchise or operating rights. Under accounting rules, an intangible asset
Intangible Asset
must have a useful life greater than one year, and a portion of its value
must be amortized over time as an expense. Near the end of the useful life
of an intangible asset, when its remaining life is less than one year, the
asset must still be classified as a long-term asset.
Goods purchased or manufactured by a business and held for production
Inventory
or sale. Inventory is often subdivided into raw materials, work in progress,

Compiled by Tushar Kataria for SIP 2009

 and finished goods.
Inventory Turns/ The ratio of annual cost of sales to inventory, commonly used as a rough
Inventory Turnover measure of inventory management efficiency. Also known as Inventory
Ratio Turnover Ratio.
The expenditure of cash to create additional capital. Investment can be in
Investment income-producing vehicles such as stocks and bonds, or more risk-oriented
ventures such as the purchase of another company.

A method of inventory valuation whereby the goods most recently

Last In First Out purchased or manufactured are considered the first ones sold. In periods of
(LIFO) rising prices, the LIFO method shows a lower profit than the first in, first
out (FIFO) method.
A long-term contract granting use of real estate, equipment or other fixed
assets in exchange for payment. All leases entered in the Property, Plant
Lease
and Equipment Detail are considered capital leases; operating leases
should be entered as expenses in the Expenses Detail.
The relationship between debt and equity. A company is considered
Leverage
highly leveraged if its levels of debt are high compared to its equity.
Obligations used to fund the operations of a business, including bank
Liabilities
loans, accounts payable and accrued expenses.
Line of Credit The amount of short-term credit available to a business from banks.
A company's ability to generate cash in a timely manner in order to meet
Liquidity
its obligations, often measured by the quick ratio or the current ratio.
London Interbank The interest rate used among the most creditworthy international banks
Offered Rate for large loans in Eurodollars. LIBOR is an important reference number,
(LIBOR) because loans to businesses can be tied to it on a percentage basis.
Any asset that has an economic life greater than one year. Liquid items
such as cash are considered to be current or short-term assets. Under
Long-Term Asset accounting rules, intangible assets must always be classified as long-term
assets, even if their remaining life is less than one year.
Liabilities that represent money borrowed from banks or other lenders to
Long-Term fund the ongoing operations of a business and that will not come due
Borrowing within one year.

The price at which an asset would pass from an informed and willing
Market Value seller to an informed and willing buyer, assuming that goodwill played no
role in the transaction.
Marketable Securities that can readily be converted into cash, including government
Securities securities, bankers' acceptances, and commercial paper.
A long-term debt instrument for the purchase of property by which the
Mortgage
borrower uses the property itself for collateral.

Net Book Value The acquisition cost of an asset less any accumulated depreciation.
Net Cash Provided On a cash flow statement, net income plus non-cash transactions and the
By Operations net amount of changes in operating assets and liabilities.
Net Income Total revenues minus total expenses, including taxes and depreciation, for

Compiled by Tushar Kataria for SIP 2009

 a specified time. Also known as profit, net profit, or net earnings.
Total revenues minus total expenses except the income tax expense, for a
Net Income Before specified time. Also known as pretax income.
Taxes

A measure of a project's future value in present value terms. Future

Net Present Value income and expenses are summed and then discounted using a required
(NPV) rate of return to adjust for the time value of money. Net present value is,
theoretically, the best method for evaluating projects.
Non-Operating Expenses not related to the ongoing operations of a company. For
Expense example, interest expense, one-time events, and taxes.
Non-Operating Income not related to the ongoing operations of a company. For example,
Income interest income and sale of fixed assets.

All expenses related to the ongoing operations of a company, including

research and development, sales and marketing, and administrative
Operating Expenses
expenses. Any costs directly attributable to producing goods or services are
not included. See also Cost of Sales.

Sales revenue minus cost of sales and operating expenses. Similar to

earnings before interest and taxes, operating income is examined when the
Operating Income
earnings of the core business are analyzed. Also referred to as operating
profit, operating earnings, and income from operations.

A type of lease, normally involving equipment, classified as a rental not as

Operating Lease a purchase over time. An operating lease must be shown as an expense in
the Expenses Detail, unlike a capital lease, which is treated as a long-term
debt.
Expenses due to activities outside the normal operations of the business,
Other Expenses
for example, loss from foreign exchange and loss from investments.
Income due to activities outside the normal operations of the business, for
Other Income
example, dividends from investments and gain from foreign exchange.
Liabilities other than debt, line of credit, and accounts payable, for
Other Liabilities
example, deferred taxes, accrued expenses, and customer deposits.
Expenses incurred in operating a business, such as rent, executive salaries,
and insurance, those are not directly related to the manufacture of a
Overhead product or delivery of a service. A portion of overhead can be attributed to
cost of sales, usually on a percentage basis; the remainder is considered an
operating expense.

The stated value of a share of stock. Par is usually a minimal value (such
Par Value
as Rs. 10) and bears no relation to the market value of the shares.
A term for expenses recorded in the period in which they occur regardless
of whether or not they pertain to a prior or later period. R&D and
Period Expenses advertising expenditures are examples of costs that benefit future periods
but must be treated as period expenses according to Generally Accepted
Accounting Principles (GAAP).
Services, goods, and intangibles paid for prior to the period in which they
Prepaid Expenses provide benefit. Prepaid expenses are accounted for as assets until their
benefit is realized.
Compiled by Tushar Kataria for SIP 2009
 Price/Earnings The market value of a company's stock divided by net income. Also, the
Ratio (P-E) market price per share divided by EPS.
The interest rate that banks charge to their most creditworthy customers.
Prime Rate The prime rate is an important reference number, because loans to
companies are often tied to it on a percentage basis.
A set of financial statements and other schedules that show projected
Pro-Forma results for a future period. They are called pro-forma financial statements
Financial because they have the form of financial statements, but are not prepared
Statements from actual operating results. The three major financial statements are the
Income Statement, Balance Sheet, and Cash Flow Statement

Current assets, excluding inventory and prepaid expenses, divided by

current liabilities. Also known as the acid test ratio. Like the current ratio,
the quick ratio is used as a measure of a company's liquidity. It helps
Quick Ratio estimate a company's ability to meet its current obligations using assets
that can easily be converted into cash. Although typical ratios vary from
one industry and company size to another, financial authorities
recommend that the Quick Ratio should be 1.0 or greater.

Net profits kept within a business in the Owners' Equity account after
Retained Earnings
stock dividends are paid.
Net income for a time period divided by total assets. This ratio is often
used to measure profitability or the efficiency with which assets are being
Return on Assets employed. Higher values for this ratio indicate better financial
(ROA) performance. The specific value obtained for a business should be
evaluated in relation to the returns that can be obtained from alternative
investments of capital.
Net income for a time period divided by tangible equity. This ratio is
sometimes used to measure profitability or the efficiency with which the
owners' financial investments are being employed. The value of intangible
assets such as goodwill is excluded from this ratio in order to better reflect
Return on Tangible
actual operating profitability. Higher values for this ratio indicate better
Equity financial performance. The specific value obtained for a business should
be evaluated in relation to the returns that can be obtained from alternative
investments of capital. An alternate form of this ratio can also be
computed using pre-tax income instead of net income.
Return on Equity Net income divided by equity. This ratio is often used as a measure of the
(ROE) return on funds invested in a business.

The scrap value of an asset. Acquisition cost minus salvage value yields
Salvage Value
the total amount that an asset is depreciated over its useful life.
Liabilities that represent money borrowed from banks or other institutions
Short-Term
to fund the ongoing operations of a business that will come due within one
Borrowing year.
A company's ability to satisfy its obligations to creditors when they are
due. A company is "technically insolvent" if it has enough assets to pay
Solvency
creditors, but cannot liquidate them quickly enough to meet payment
deadlines.
Straight-Line The simplest form of depreciation, in which an equal expense is recorded
Compiled by Tushar Kataria for SIP 2009
 Method in each year of an asset's useful life. For example, if the asset has a
purchase price of $1,200,000, a useful life of four years and a salvage value
of $200,000, straight-line depreciation would record $250,000 of
depreciation each year.
A method of recording accelerated depreciation. Also called the sum-of-
digits method, it allows the depreciation of an asset based on an inverted
Sum of the Years' scale of the total digits of the asset's useful life. For example, if the useful
Digits (SYD) life is four years, the years' digits (1, 2, 3, and 4) are summed to produce
ten, and 4/10ths of the asset's depreciable cost is recognized as an expense
the first year, 3/10ths the second year, and so on.

An asset that represents a physical object such as land, furniture, and

buildings. Under accounting rules, a tangible asset must have a useful life
greater than one year, and must be used in business operations rather than
being held for resale. The following types of assets are not considered to be
Tangible Asset tangible assets: items held for resale, which are considered to be inventory,
cash and other liquid assets which are considered as current assets, and
abstract assets such as goodwill, which are intangible assets.

Trade Discount Discounts that a business gives to credit customers who pay within a
(Prompt Payment specified period of time; also called sales discounts. On an income
Discounts) statement, this amount is subtracted from Gross Sales to yield Net Sales.

An estimate of the period of time over which an asset will be of use to a

Useful Life company. Along with acquisition cost and salvage value, this measure is
used to calculate the amount that the asset is depreciated each year.

The net amount of current assets and current liabilities. This is equivalent
Working Capital
to a company's liquid assets.

A bankruptcy predictor based on the formula derived by Dr. Edward

Altman. According to the Altman model, a Z-Score of 3.0 or higher
indicates that the company is most likely safe based on the financial data;
Z-Score a score below 1.8 means that the firm is probably headed for bankruptcy.
In studies, the Z-Score has been shown to have 90% accuracy of prediction
of bankruptcy in the first year of the forecast, and 80% accuracy in the
second year.
 

Compiled by Tushar Kataria for SIP 2009