Explore the terminology you will encounter as a CPA.
Method that records greater depreciation than straight-line depreciation in the early years and less depreciation than straight-line in the later years of an asset's holding period. (See straight-line depreciation.)
Formal record that represents, in words, money or other unit of measurement, certain resources, claims to such resources, transactions or other events that result in changes to those resources and claims.
Amount owed to a creditor for delivered goods or completed services.
Claim against a debtor for an uncollected amount, generally from a completed transaction of sales or services rendered.
Individual who measures and reports economic events to help managers, investors, tax authorities and others in making smart financial decisions. CPAs (Certified Public Accountants) are qualified accountants who have passed the Uniform Certified Public Accountant Examination and have met additional state education and experience requirements.
Formal document that communicates an independent accountant's: (1) expression of limited assurance on financial statements as a result of performing inquiry and analytic procedures (Review Report); (2) results of procedures performed (Agreed-Upon Procedures Report); (3) non-expression of opinion or any form of assurance on a presentation in the form of financial statements information that is the representation of management (Compilation Report); or (4) an opinion on an assertion made by management in accordance with the Statements on Standards for Attestation Engagements (Attestation Report). An accountant's report does not result from the performance of an audit. (See auditor's report.)
Recording and reporting of financial transactions, including the origination of the transaction, its recognition, processing, and summarization in the financial statements.
Change in (1) an accounting principle; (2) an accounting estimate; or (3) the reporting entity that necessitates disclosure and explanation in published financial reports.
Senior technical committee of the American Institute of Certified Public Accountants (AICPA) which issued pronouncements on accounting principles from 1959-1973. The APB was replaced by the Financial Accounting Standards Board (FASB).
Method of accounting that recognizes revenue when earned, rather than when collected. Expenses are recognized when incurred rather than when paid.
Total depreciation pertaining to an asset or group of assets from the time the assets were placed in services until the date of the financial statement or tax return. This total is the contra account to the related asset account.
Amounts paid for stock in excess of its par value or stated value. Also, other amounts paid by stockholders and charged to equity accounts other than capital stock.
Expression of an opinion in an auditor's report which states that financial statements do not fairly present the financial position, results of operations and cash flows in conformity with generally accepted accounting principles (GAAP).
Company, or other organization related through common ownership, common control of management or owners, or through some other control mechanism, such as a long-term lease.
The American Institute of Certified Public Accountants is the national, professional organization for all Certified Public Accountants. Its mission is to provide members with the resources, information, and leadership that enable them to provide valuable services in the highest professional manner to benefit the public as well as employers and clients. In fulfilling its mission, the AICPA works with state CPA organizations and gives priority to those areas where public reliance on CPA skills is most significant.
Person who evaluates and interprets public company financial statements.
Substantive tests of financial information which examine relationships among data as a means of obtaining evidence. Such procedures include: (1) comparison of financial information with information of comparable prior periods; (2) comparison of financial information with anticipated results (e.g., forecasts); (3) study of relationships between elements of financial information that should conform to predictable patterns based on the entity's experience; (4) comparison of financial information with industry norms.
Report to the stockholders of a company which includes the company's annual, audited balance sheet and related statements of earnings, stockholders' or owners' equity and cash flows, as well as other financial and business information.
Series of payments, usually payable at specified time intervals.
The inspection of a business or other organization’s accounting records and procedures. Done by a trained accountant from within the organization (internal audit) or by an outsider (independent audit) for the purpose of verifying the accuracy and completeness of the records.
Agreement between a CPA firm and its client to perform an audit.
Written communication issued by an independent certified public accountant (CPA) describing the character of his or her work and the degree of responsibility taken. An auditor's report includes a statement that the audit was conducted in accordance with generally accepted auditing standards (GAAS), which require that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, as well as a statement that the auditor believes the audit provides a reasonable basis for his or her opinion. (See accountant's report.)
Sum of debit entries minus the sum of credit entries in an account. If positive, the difference is called a debit balance; if negative, a credit balance.
Basic financial statement, usually accompanied by appropriate disclosures that describe the basis of accounting used in its preparation and presentation of a specified date, the entity's assets, liabilities and the equity of its owners. Also known as statement of financial condition.
Legal process, governed by federal statute, whereby the debts of an insolvent person are liquidated after being satisfied to the greatest extent possible by the debtor's assets. During bankruptcy, the debtor's assets are held and managed by a court-appointed trustee.
The largest public accounting firms: Deloitte & Touche, Ernst & Young, KPMG, and PricewaterhouseCoopers.
One type of long-term promissory note, frequently issued to the public as a security regulated under federal securities laws or state blue sky laws. Bonds can either be registered in the owner's name or are issued as bearer instruments.
Financial plan that serves as an estimate of future cost, revenues or both.
Assets intended to further production. The amount invested in a proprietorship, partnership, or corporation by its owners.
Portion of the total gain recognized on the sale or exchange of a noninventory asset which is not taxed as ordinary income. Capital gains have historically been taxed at a lower rate than ordinary income.
Ownership shares of a corporation authorized by its articles of incorporation. The money value assigned to a corporation's issued shares. The balance sheet account with the aggregate amount of the par value or stated value of all stock issued by a corporation.
Expenditure identified with goods or services acquired and measured by the amount of cash paid or the market value of other property, capital stock, or services surrendered. Expenditures that are written off during two or more accounting periods.
Interest cost incurred during the time necessary to bring an asset to the condition and location for its intended use and included as part of the historical cost of acquiring the asset.
Method of bookkeeping by which revenues and expenditures are recorded when they are received and paid. (See other comprehensive basis of accounting.)
Net of cash receipts and cash disbursements relating to a particular activity during a specified accounting period.
Sudden property loss caused by theft, accident, or natural causes.
Individual who is trained to develop and implement financial plans for individuals, businesses, and organizations, utilizing knowledge of income and estate tax, investments, risk-management analysis and retirement planning. CFPs are certified after completing a series of requirements that include education, experience, ethics and an exam. CFPs are not regulated by a governmental authority.
A specialist who is educated and trained in the detection and deterrence of a wide variety of white-collar crimes such as identity theft, fraud and embezzlement. CFEs gather evidence, take statements, write reports and assist in investigating fraud in its varied forms. CFEs are employed by most major corporations and government agencies, and others provide consulting and investigative services. Certified Fraud Examiners come from various professions, including auditors, CPAs, fraud investigators, loss prevention specialists, attorneys, educators and criminologists. A CPA with the CFE (Certified Fraud Examiner) designation is a certified public accountant who specializes in fraud examination. Having dual certification increases one's credibility, earning potential and career possibilities due to, in part, increased demand in the marketplace and the rise in financial crimes. By earning the CFE credential as a CPA, you'll show prospective employers that you exemplify the highest moral and ethical standards of the profession and you have the ability to conduct complete, efficient, thorough and ethical fraud investigations.
An international certification awarded by the Institute of Internal Auditors (IIA) that reflects competence in the principles and practices of internal auditing.
An accreditation conferred by the Institute of Management Accountants that indicates the designee has passed an examination and attained certain levels of education and experience in the practice of accounting in the private sector.
A CPA is an accountant who has satisfied the educational, experience and examination requirements of his or her jurisdiction necessary to be certified as a public accountant. CPAs audit financial statements of both publicly and privately held companies. They serve as consultants in many areas, including tax, accounting, and financial planning. They are well-respected strategic business advisors and decisionmakers. CPAs work for public accounting firms — small, medium and large; and for companies in business and industry. Their roles range from accountants to Controllers, to Chief Financial Officers for Fortune 500 companies, and advisors to small neighborhood businesses.
Financial statement comprising the accounts of two or more entities.
Capital stock having no preferences generally in terms of dividends, voting rights or distributions. (See preferred stock.)
Financial statement presentation in which the current amounts and the corresponding amounts for previous periods or dates also are shown.
Funds that a borrower must keep on deposit as required by a bank.
Presentation of financial statement data without the accountant's assurance as to conformity with generally accepted accounting principles (GAAP).
An investment strategy aimed at long-term capital appreciation with low risk; moderate; cautious; opposite of aggressive behavior; show possible losses but wait for actual profits. Concept which directs the least favorable effect on net income.
Accounting postulate which stipulates that, except as otherwise noted in the financial statement, the same accounting policies and procedures have been followed from period to period by an organization in the preparation and presentation of its financial statements.
Combined financial statements of a parent company and one or more of its subsidiaries as one economic unit.
Business combination of two or more entities that occurs when the entities transfer all of their net assets to a new entity created for that purpose. (See merger.)
Account considered to be an offset to another account. Generally established to reduce the other account to amounts that can be realized or collected.
Measure of risk that errors exceeding a tolerable amount will not be prevented or detected by an entity's internal controls.
Experienced accountant who directs internal accounting processes and procedures, including cost accounting.
Form of doing business pursuant to a charter granted by a state or federal government. Corporations typically are characterized by the issuance of freely transferable capital stock, perpetual life, centralized management, and limitation of owners' liability to the amount they invest in the business.
Procedures used for rationally classifying, recording, and allocating current or predicted costs that relate to a certain product or production process.
Arrangement in which one party borrows or takes possession in the present by promising to pay in the future.
Balance remaining after one of a series of bookkeeping entries. This amount represents a liability or income to the entity. (See balance.)
Party that loans money or other assets to another party.
Asset that one can reasonably expect to convert into cash, sell, or consume in operations within a single operating cycle, or within a year if more than one cycle is completed each year.
Obligation whose liquidation is expected to require the use of existing resources classified as current assets, or the creation of other current liabilities.
(1) Value of an asset at the present time as compared with the asset's historical cost. (2) In finance, the amount determined by discounting the future revenue stream of an asset using compound interest principles.
Entry on the left side of a double-entry bookkeeping system that represents the addition of an asset or expense or the reduction to a liability or revenue. (See credit.)
Balance remaining after one or a series of bookkeeping entries. This amount represents an asset or an expense of the entity. (See balance.)
Failure to meet any financial obligation. Default triggers a creditor's rights and remedies identified in the agreement and under the law.
Income received but not earned until all events have occurred. Deferred income is reflected as a liability.
Financial shortage that occurs when liabilities exceed assets.
Method of computing a deduction to account for a reduction in value of extractable natural resources.
Expense allowance made for wear and tear on an asset over its estimated useful life. (See accelerated depreciation and straight-line depreciation.)
Financial instruments whose value varies with the value of an underlying asset (such as a stock, bond, commodity or currency) or index such as interest rates. Financial instruments whose characteristics and value depend on the characterization of an underlying instrument or asset.
People with overall responsibility for a business, who act in accordance with the best interests of the corporation and its shareholders. The Directors elect the Officers (for example, President, Vice President, Secretary, Chief Financial Officer) to handle the corporation’s day-to-day affairs.
Payment by cash or check.
Process of divulging accounting information so that the content of financial statements is understood.
Reduction from the full amount of a price or debt.
Payment by a business entity to its owners of items such as cash assets, stocks, or earnings.
Method of recording financial transactions in which each transaction is entered in two or more accounts and involves two-way, self-balancing posting. Total debits must equal total credits.
(1) Procedures performed by underwriters in connection with the issuance of a securities exchange commission (SEC) registration statement. These procedures involve questions concerning the company and its business, products, competitive position, recent financial and other developments, and prospects. Also performed by others in connection with acquisitions and other transactions. (2) Requirement found in ethical codes that the person governed by the ethical rules exercise professional care in conducting his or her activities.
Wages, salaries, professional fees, and other amounts received as compensation for services rendered.
Residual interest in the assets of an entity that remains after deducting its liabilities. Also, the amount of a business' total assets less total liabilities. Also, the third section of a balance sheet, the other two being assets and liabilities.
Money or property put into the custody of a third party for delivery to a grantee, only after fulfillment of specified conditions.
Tax on the value of a decedent's taxable estate, typically defined as the decedent's assets less liabilities and certain expenses which may include funeral and administrative expenses.
The process of determining how one should hold the interests of various stakeholders, taking into account moral values/principles.
Income item which is excluded from a taxpayer's gross income by the internal revenue code or an administrative action. Common exclusions include gifts, inheritances, and death proceeds paid under a life insurance contract. Also known as excluded income.
Amount of a taxpayer's income that is not subject to tax. All individuals, trusts, and estates qualify for an exemption unless they are claimed as a dependent on another individual's tax return. Exemptions also are granted to taxpayers for their dependents.
Payment, either in cash, by assuming a liability, or by surrendering asset.
Reporting to stockholders and the public, as opposed to internal reporting for management's benefit.
Price at which property would change hands between a buyer and a seller without any compulsion to buy or sell, and both having reasonable knowledge of the relevant facts.
Person who is responsible for the administration of property owned by others. Corporate management is a fiduciary with respect to corporate assets which are beneficially owned by the stockholders and creditors. Similarly, a trustee is the fiduciary of a trust and partners owe fiduciary responsibility to each other and to their creditors.
Independent, private, non-government group which is authorized by the accounting profession to establish generally accepted accounting principles in the U.S.
Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity's financial position at a point in time and its results of operations for a period then ended.
Period of 12 consecutive months chosen by an entity as its accounting period which may or may not be a calendar year.
Any tangible asset with a life of more than one year used in an entity's operations.
Prospective financial statements that are an entity's expected financial position, results of operations, and cash flows.
Seizure of collateral by a creditor when default under a loan agreement occurs.
Provides for an accounting analysis that is suitable to a court of law which will form the basis for discussion, debate, and ultimately dispute resolution. Forensic accounting encompasses investigative accounting and litigation support. Forensic accountants utilize accounting, auditing, and investigative skills when conducting an investigation. Equally critical is the ability to respond immediately and to communicate financial information clearly and concisely in a courtroom setting.
Legal arrangement whereby the owner of a trade name, the franchiser, contracts with a party that wants to use the name on a non-exclusive basis to sell goods or services, the franchisee. Frequently, the franchise agreement grants strict supervisory powers to the franchiser over the franchisee which, nevertheless, is an independent business.
The use of one's occupation for personal enrichment through the deliberate misuse or misapplication of employing an organization's resources or assets. This can include the fraudulent conversion and obtaining of money or property by false pretenses.
Method of accounting and presentation whereby assets and liabilities are grouped according to the purpose for which they are to be used. Generally used by government entities and nonprofits. (See restricted fund and unrestricted fund.)
Recognized common set of accounting principles, standards, and procedures. This is a combination of accepted methods of doing accounting and authoritative standards set by policy boards.
Premium paid in the acquisition of an entity over the fair value of its identifiable tangible and intangible assets less liabilities assumed.
Premium paid in the acquisition of an entity over the fair value of its identifiable tangible and intangible assets less liabilities assumed.
Legal arrangement involving a promise by one person to perform the obligations of a second person to a third person, in the event the second person fails to perform.
Inflow of revenue during a period of time. (See net income.)
Summary of the effect of revenues and expenses over a period of time.
(1) For tax purposes, the concept of basis determines the proper amount of gain to report when an asset is sold. Basis is generally the cost paid for an asset plus the amounts paid to improve the asset less deductions taken against the asset, such as depreciation and amortization. (2) For accounting purposes, a consistent basis of accounting that uses income tax accounting rules while generally accepted accounting principles (GAAP) does not. (See other comprehensive basis of accounting.)
When an entity's liabilities exceed its assets.
One of the portions, usually equal, into which a debt is divided for payment at specified intervals over a fixed period.
Payment for the use or forbearance of money.
Process designed to provide reasonable assurance regarding achievement of various management objectives such as the reliability of financial reports.
Federal agency that administers the internal revenue code. The IRS is part of the United States Treasury Department.
Tangible property held for sale, or materials used in a production process to make a product.
Expenditure used to purchase goods or services that could produce a return to the investor.
When two or more persons or organizations gather capital to provide a product or service. Often carried out as a partnership.
Debt securities issued by companies with higher than normal credit risk. Considered "non-investment grade" bonds, these securities ordinarily yield a higher rate of interest to compensate for the additional risk.
Conditional bank commitment issued on behalf of a customer to pay a third party in accordance with certain terms and conditions. The two primary types are commercial letters of credit and standby letters of credit.
Debts or obligations owed by one entity (debtor) to another entity (creditor) payable in money, goods, or services.
Form of doing business combining limited liability for all owners (called members) with taxation as a partnership. An LLC is formed by filing articles of organization with an appropriate state official. Rules governing LLCs vary significantly from state to state.
General partnership which, via registration with an appropriate state authority, is able to enshroud all its partners in limited liability. Rules governing LLPs vary significantly from state to state.
Winding up an activity by distributing its assets to the appropriate parties and settling its debts.
A service that CPAs often provide to attorneys — e.g., expert testimony about the value of a business or other asset, forensic accounting (a partner stealing from his other partners, or a spouse understating his income in a matrimonial action). The lawyer hires the CPA to do the investigation and determine the amount of money stolen or understated.
Excess of expenditures over revenue for a period or activity. Also, for tax purposes, an excess of basis over the amount realized in a transaction. (See net income.)
Reporting designed to assist management in decision-making, planning, and control. Also known as Managerial Accounting.
A fundamental concept of basic accounting. In any one given accounting period, you should try to match the revenue you are reporting with the expenses it took to generate that revenue in the same time period, or over the periods in which you will be receiving benefits from that expenditure. A simple example is depreciation expense. If you buy a building that will last for many years, you don't write off the cost of that building all at once. Instead, you take depreciation deductions over the building's estimated useful life. Thus, you've "matched" the expense, or cost, of the building with the benefits it produces, over the course of the years it will be in service.
“Master of Business Administration” - master's degree in business administration. Prepares the holder for advanced professional occupations in businesses, as well as in colleges and universities as instructors of business administration and management.
Business combination that occurs when one entity directly acquires the assets and liabilities of one or more entities and no new corporation or entity is created. (See consolidation.)
Disguising illegally obtained funds so that they seem legal.
Legal instrument evidencing a security interest in assets, usually real estate. Mortgages serve as collateral for promissory notes.
The failure to use such care as a reasonably prudent and careful person would use under similar circumstances; it is the doing of some act which a person of ordinary prudence would not have done under similar circumstances or failure to do what a person of ordinary prudence would have done under similar circumstances. The term refers only to that legal delinquency which results whenever one fails to exhibit the care which one ought to exhibit, whether it be slight, ordinary, or great.
Excess of the value of securities owned, cash, receivables, and other assets over the liabilities of the company.
Excess or deficit of total revenues and gains compared with total expenses and losses for an accounting period. (See income and loss.)
Sales at gross invoice amounts less any adjustments for returns, allowances, or discounts taken.
Similar to equity, the excess of assets over liabilities.
An incorporated organization which exists for educational or charitable purposes, and from which its shareholders or trustees do not benefit financially. Also called nonprofits.
Period of time between the acquisition of goods and services involved in the manufacturing process and the final cash realization resulting from sales and subsequent collections.
Right to buy or sell something at a specified price during a specified time period.
Relationship between two or more persons based on a written, oral, or implied agreement whereby they agree to carry on a trade or business for profit and share the resulting profits. Unlike a corporation's shareholders, the partnership's general partners are liable for the debts of the partnership. (See general partnership, limited liability partnership, limited partnership.)
System that requires a continuous record of all receipts and withdrawals of each item of inventory.
(1) Excess amount paid for a bond over its face amount. (2) In insurance, the cost of specified coverage for a designated period of time.
Current value of a given future cash flow stream, discounted at a given rate.
Presentation of financial information that gives effect to an assumed event (e.g., merger).
Distribution of an expense, fund, or dividend proportionate with ownership.
Prospective financial statements that include one or more hypothetical assumptions.
Evidence of a debt with specific amount due and interest rate. The note may specify a maturity date or it may be payable on demand. The promissory note may or may not accompany other instruments such as a mortgage providing security for the payment thereof. (See demand loan.)
Forecast: Prospective financial statements that present, to the best of the responsible party's knowledge and belief, an entity's expected financial position, results of operations, and changes in financial position. A financial forecast is based on the responsible party's assumptions reflecting conditions it expects to exist and the course of action it expects to take. Projection: Prospective financial statements that present, to the best of the responsible party's knowledge and belief, given one or more hypothetical assumptions, an entity's expected financial position, results of operations, and changes in financial position.
Major part of the registration statement filed with the Securities and Exchange Commission (SEC) for public offerings. A prospectus generally describes securities or partnership interests to be issued and sold.
Document authorizing someone other than the shareholder to exercise the right to vote the stock owned by the shareholder.
Five-member board created by Sarbanes Oxley Act which has the authority to set and enforce auditing, attestation, quality control, and ethics (including independence) standards for public companies. It is also empowered to inspect the auditing operations of public accounting firms that audit public companies as well as impose disciplinary and remedial sanctions for violations of the board's rules, securities laws, and professional auditing standards.
Arrangement to provide funding to replace existing financing, the most common being a refinance of a home mortgage.
Research is a planned activity aimed at discovery of new knowledge with the hope of developing new or improved products and services. Development is the translation of research findings into a plan or design of new or improved products and services.
Ratio measure of the profits achieved by a firm through its basic operations. An indicator of management's general effectiveness and efficiency. The simplest version is the ratio of net income to total assets.
Sales of products, merchandise, and services; and earnings from interest, dividend, rents.
Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity's operating philosophy.
Concept in statutes and regulations whereby a person who meets listed requirements will be preserved from adverse legal action. Frequently, safe harbors are used where a legal requirement is somewhat ambiguous and carries a risk of punishment for an unintended violation.
An act designed to improve quality and transparency in financial reporting and independent audits and accounting services for public companies, to create a Public Company Accounting Oversight Board, to enhance the standard-setting process for accounting practices, to strengthen the independence of firms that audit public companies, to increase corporate responsibility and the usefulness of corporate financial disclosure, to protect the objectivity and independence of securities analysts, to improve Securities and Exchange Commission resources and oversight and for other purposes.
Financial and informational disclosures required by the SEC in order to comply with certain sections of the Securities Act of 1933 and the Securities and Exchange Act of 1934. Some of the more common filings that publicly owned companies must submit are the form 10-K, form 10-Q and form 8-K.
Any kind of transferable certificate of ownership including equity securities and debt securities.
Sale of an item before it is purchased. A person entering into a short sale believes the price of the item will decline between the date of the short sale and the date he or she must purchase the item to deliver the item under the terms of the short sale.
Special report is a term applied to auditors' reports issued in connection with various types of financial presentations, including financial statements that are prepared in conformity with a comprehensive basis of accounting other than generally accepted accounting principles; specified elements, accounts or items of a financial statement. Compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements. Financial presentations to comply with contractual agreements or regulatory provisions. Financial information presented in prescribed forms or schedules that require a prescribed form of auditors' reports.
Difference between two prices, usually a buying and selling price.
(1) Costs, excluding acquisition costs, incurred to bring a new unit into production. (2) Costs incurred to begin a business.
A statement of cash flows is one of the basic financial statements that is required as part of a complete set of financial statements prepared in conformity with generally accepted accounting principles. It categorizes net cash provided or used during a period as operating, investing and financing activities, and reconciles beginning and ending cash and cash equivalents.
Right to purchase or sell a specified number of shares of stock at specified prices and times.
Assets having a physical existence, such as cash, land, buildings, machinery, or claims on property, investments, or goods in process. (See intangible assets.)
Charge levied by a governmental unit on income, consumption, wealth, or other basis.
Process of instituting a charge against a legal entity's person, property or activity for the support of government. (For example, income taxes, sales taxes, duties and levies.) [See Tax]
Ancient legal practice where one person (the grantor) transfers the legal title to an asset, called the principle or corpus, to another person (the trustee), with specific instructions about how the corpus is to be managed and disposed.
Process of determining the worth of a company’s assets.
Deviation or difference between an estimated value and the actual value.
Investment company whose primary objective is capital growth. New assets invested largely in companies that are developing new ideas, products, or processes.
(VITA) IRS program designed to help low and moderate-income taxpayers complete their annual tax returns at no cost.
Amount withheld or deducted from employee salaries by the employer and paid by the employer, for the employee, to the proper authority.
Excess of current assets over current liabilities.
Written by the general accounting office, the yellow book sets forth standards to be followed in auditing the financial statements of entities that receive federal financial assistance. "Yellow Book" is the name given to "Government Auditing Standards" issued by the Comptroller General of the United States which contains standards for audits of government organizations, programs, activities and functions, and of government assistance received by contractors, not-for-profit organizations, and other non-government organizations.
Return on an investment an investor receives from dividends or interest expressed as a percentage of the cost of the security.