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401(k)A retirement account to which an eligible employee can contribute a certain amount of his or her pretax salary; earnings are tax-deferred. Some employers may match a stated percentage of employee 401(k) contributions. The reduced cost and liability of 401(k) plans appeal to employers.
403(b)A qualified retirement plan similar to the 401(k), available to employees of nonprofit and government organizations.
Account BalanceThe net of credits and debits for an account at the end of a reporting period.
Account ReconciliationThe process of ensuring that the beginning balance plus the sum of all entries on an account statement equals the ending balance. After deposits, interest received, and credits are added and automatic withdrawals, outstanding checks, negotiated checks, and account charges are subtracted, if the resulting balance equals the ending balance on the statement, the account is reconciled.
AccountantAn individual trained and knowledgeable in the profession of accountancy.
Accounting (Accountancy)The function of compiling and providing financial information primarily by reports referred to as financial statements. Accounting includes bookkeeping, systems design, analysis and interpretation of accounting information.
Accounts PayableObligations to pay for goods or services that have been acquired on open accounts from suppliers. Accounts Payable is a current liability in the Balance Sheet.
Accounts ReceivableAmounts due the company on account from customers who have bought merchandise or received services. Accounts Receivable is a current asset in the Balance Sheet.
Accrual BasisThe method of keeping accounts which shows all expenses incurred and income earned for a given period of time, even though such expenses and income may not actually have been paid or received in cash during the same period of time.
Accrued ExpenseAn expense incurred, but not yet paid.
Accrued RevenueRevenue earned, but not yet collected.
Accumulated DepreciationAn account to which estimated depreciation is added.
Active-Participant StatusA person who participates in a qualified pension, stock bonus, or profit-sharing plan, a qualified annuity plan, a tax-sheltered annuity (TSA) plan, a simplified employee pension plan, or a local, state, county, or federal retirement plan has active-participant status, as does his or her spouse.
ActuaryA person who analyzes probability and risk estimates for insurance contracts and retirement plans.
Adjustable Rate Mortgage (ARM)A mortgage with an interest rate that changes periodically based on a measure or an index, such as the rate on US Treasury bills or the average national mortgage rate. Borrowers assume a degree of risk in order to receive a lower rate at the beginning of an ARM.
Adjusted EntryAn entry made in the general journal at the end of an accounting period to bring certain accounts up to date.
Adjusted Gross Income (AGI)The amount of income subject to federal income taxes. To determine AGI, subtract deductions (e.g., business expenses or IRA contributions) from gross income (employment income, interest income, dividends, and capital gains).
AdvanceMoney received from an employer before it is actually earned.
AgentA person authorized by another to act on their behalf. Thus, an agent can enter into contracts and other such legal binding functions on behalf of another. Usually, the corporation’s officers act as corporate agents.
Aggressive Growth FundA mutual fund designed to maximize long-term capital growth, rather than dividend income, by investing in narrow market segments, small company stocks, and companies with high growth rates.
Allocation FormulaThe formula that governs employer contributions to employee profit-sharing plans and redistributes funds forfeited by employees who leave these plans.
Alternative Minimum Tax (AMT)A tax calculation designed to prevent taxpayers from escaping their fair share of tax liability by taking numerous tax breaks; it adds certain tax preference items back into adjusted gross income. If AMT liability is greater than regular tax liability, the taxpayer must pay the AMT amount.
American Stock Exchange (AMEX)A stock exchange located in downtown Manhattan, with the third highest trading volume in the U.S. Most trading on the AMEX consists of index options and shares of small to medium-sized companies.
AmortizationA way of measuring the consumption of the value of long-term assets like equipment or buildings. This process gradually eliminates a debt, loan, or mortgage over a period of time. It can also be used to deduct capital expenses over a period of time.
Annual Meeting of ShareholdersNearly all states require a corporation to hold an annual meeting of shareholders at which time directors are elected and other corporate issues are voted on.
Annual Percentage Rate (APR)The yearly cost of credit or a loan, expressed as a simple percentage. All consumer credit agreements and loans are legally required to disclose the APR.
Annual ReportA yearly statement that describes company management, operations, and financial information. The Securities and Exchange Commission (SEC) requires all corporations issuing registered stock to publish annual reports, which are sent to shareholders and also made available for public review.
AnnuitantThe person to whom an annuity is payable.
AnnuityA long-term contract sold by life insurance companies that guarantees fixed or variable payments to the purchaser at regular intervals. Payments are usually scheduled to begin at a future time, such as retirement. Some annuities provide tax-deferred earnings, often as part of retirement plans.
Annuity Cash RefundThe contract for an annuity offering income for life may include a death benefit for the total premiums paid. When the annuitant dies, the annuity cash refund will be the net sum of premiums paid minus the amount received in annuity payments.
Annuity CertainAn option in an annuity contract that allows the annuity owner to select a future level of income covering a specified number of years, generally 10 years. If the annuitant dies before the end of this period, the remaining obligation is transferred to a designated beneficiary.
Annuity Joint LifeAn annuity option for two or more individuals where payments cease at the death of the first annuitant.
Annuity Joint and SurvivorAn annuity option that provides payments for two designated annuitants. Upon the death of the first annuitant, the surviving annuitant receives prearranged, continued payments for life, based on a percentage received by the first annuitant.
Annuity Modified RefundIn a contributory retirement plan, the annuity beneficiary of a deceased retiree receives the accumulated balance of the pension fund, which is referred to as the annuity modified refund.
Annuity Payout OptionThe choice of how payments from an annuity will be received: as a fixed dollar amount, for a fixed period, or over the lifetime(s) of one or two annuitants.
Application FeeA fee to process a loan application.
AppraisalAn assessment of a property’s value by a qualified appraiser, based on information from recent sales of similar properties.
AppreciationIncrease in value. Often used with reference to an asset, such as land, building, stocks or bonds.
Articles of Incorporation (Certificate of Incorporation or Charter)The articles are the primary legal document of a corporation; they serve as a corporation’s constitution. The articles are filed with the state government to begin corporate existence. The articles contain basic information on the corporation as required by state law.
Articles of OrganizationLLCs must file the articles with the proper state authorities to begin existence. The articles of organization are very similar to a corporation’s articles of incorporation.
AssetAnything of value owned or controlled by a corporation or individual. An asset may be tangible or intangible.
Asset AllocationA process that divides investments among different asset classes, such as stocks, bonds, and cash, in order to reduce portfolio risk.
Asset ClassA specific category of assets or investments, such as cash, bonds, stocks, or real estate. Assets in the same class have similar characteristics and behave similarly in the marketplace.
AssignmentThe legal transfer of ownership of an asset to another person or entity.
Assumed NameA name under which a corporation conducts business that is not the legal name of the corporation as shown in its articles of incorporation. If a corporation does business under an assumed name, it may be required to file registration of the assumed name with the state. Also known as a Fictitious Business Name.
Authorized Shares or StockThe total number of shares a corporation is authorized to sell. This number is specified in the articles of incorporation. All of the shares authorized need not be issued.
Automatic ReinvestmentAutomatically depositing mutual fund dividends or capital gains back into an account to buy additional shares.
Bad DebtsAccounts receivable that are uncollectable used in accrual method accounting.
BalanceAmount arrived at by adding all debits and subtracting all credits to ensure total debits equal the total credits.
Balance SheetStatement, at a particular point in time, of the financial position of a business or organization. This is generally divided into three parts: assets, liabilities and ownership, or equity. Also known as Statement of Financial Position.
Balloon MortgageA type of mortgage with a final payment that is considerably larger than the preceding payments, typically used when borrowers anticipate receiving a large sum of cash to pay the balance or when they expect to refinance before the final payment.
Bank OverdraftBalance of a bank account when funds withdrawn exceed funds deposited.
Bank ReconciliationAnalysis that accounts for the difference between the balance shown on the bank statement and the balance shown in the accounting records on a given date.
BankruptLegal status of a person/corporation who/which is unable to pay its debts as they become due and who/which has made a transfer of property or of a right or interest in property to a trustee for the benefit of creditors.
BankruptcyThe state of being insolvent or unable to pay outstanding debt. Declaring bankruptcy is expensive, and it can have adverse effects on one’s credit in the future. These are some common ways to apply for bankruptcy:
BasisThe total original cost (including any additional outlays) of an equity investment or a piece of property. This is used by the Internal Revenue Service to compute taxable gain, profit, or appreciation.
Basis PointA measurement of variation in financial instruments, equal to .01%. For example, a yield that has increased from 8.97% to 9% has increased by 3 basis points.
Bear MarketAn extended period during which market prices decline. The opposite of a bull market.
BeneficiaryThe person or entity named in a will, life insurance policy, qualified retirement plan, or annuity who will receive benefits upon the death of the insured or the plan participant.
Benefits ReceivedWhen people pay taxes according to the amount of government aid (benefits) they receive. Examples of benefits the American public receives include (to name only a few): welfare, child care, Medicare and Medicaid. Some people believe it is only fair that people pay taxes based on the amount of government aid they receive.
BetaA measure of a security’s price volatility relative to an appropriate market index. For example, the S&P 500 index is considered to have a beta of 1; stocks with betas greater than 1 experience more price fluctuations than that index, while the prices of stocks with betas less than 1 fluctuate less often.
Bill of LadingWritten document issued by the carrier of goods. Also, a receipt for goods and a contract to deliver goods.
Blue-Chip StockThe common stock of a company with a reputation for quality and a long history of earnings growth and dividend payments, such as General Electric, IBM, or DuPont.
BondA debt security issued by a corporation, government, or governmental agency that obligates the issuer to pay interest at predetermined intervals and repay the principal at maturity. A bond’s face value is the amount of money the holder will receive when the bond matures. The face value does not change, but the bond’s market value may fluctuate before maturity.
Book Value(1) The current value of a fixed asset as shown by the records; the difference between the original cost of the asset and the accumulated depreciation. (2) The difference between the accounts receivable and the allowance for bad debts. (3) The value of a share of stock as shown by the corporate books.
Book of Original EntryA journal in which transactions are recorded for the first time before summarizing or posting to ledger accounts. For example, purchase journals, cash receipts journals, accounts payable journals, disbursements journals, general journals and payroll journals are all books of original entry. See General Journal and Journal.
BookkeepingThe recording of financial transactions electronically or manually. The record-keeping part of the accounting process.
BrokerA financial professional who facilitates the trading of services or property such as securities, real estate, insurance, or commodities.
BudgetA report of projected income and expenses for a given period.
Bull MarketAn extended period of rising security prices in financial markets. The opposite of a bear market.
Business SuccessionA plan for the future transfer of a business entity, involving legal, financial, tax, and family concerns.
Business TaxesA government levy on income for businesses.
Buy-Sell AgreementA contract that provides for the purchase of all outstanding shares from a business owner. Generally, such contracts allow for a different ownership structure in the future.
Buy-and-HoldAn investment strategy that advocates holding securities for the long term and ignoring short-term price fluctuations.
BylawsBylaws are the rules and regulations adopted by a corporation for its internal governance. It usually contains provisions relating to shareholders, directors, officers and general corporate business. At the corporation’s initial meeting the bylaws are adopted. Bylaws are a private document not filed with any state authority. Bylaws are more flexible than the articles of incorporation because they are easier to amend.
CAPSA limit on how much the interest rate can change either at each adjustment or during the life of the mortgage, e.g., “2/6” equates to 2% per year and 6% over life of loan.
Cafeteria Employee Benefit PlanA plan offering a variety of benefit options from which employees may choose, such as health insurance, life insurance, and retirement benefits.
Canceled CheckA check that has cleared the bank and is returned to the depositor with his monthly statement.
Capital (or Equity)Interest of the owner in the business that is the difference between Assets & Liabilities. Also called Equity or Net worth. In a corporation, capital represents the stockholders’ equity.
Capital AssetAssets, of either a tangible or intangible nature, owned or held by a business which are expected to be used or held over several fiscal periods.
Capital Gain / LossProfit or gain realized from the sale or exchange of a capital asset. The amount is determined by calculating the difference between an asset’s purchase and sale price.
Capital Gains DistributionA payment to shareholders of profits realized on the sale of an investment company’s securities.
Capital Gains TaxA tax on profits from the sale of securities or other assets.
Capital LossA decrease in the value of an investment or capital asset from its purchase price.
Capital StockSee Stock and Authorized stock.
Cash AdvanceAn instant loan against a line of credit. Interest is usually charged on cash advances from the date the advance is made until it is repaid. Issuers may also charge transaction fees.
Cash BasisAn accounting method that counts cash inflows or outflows when they are actually expended or received (as opposed to accrual basis).
Cash BudgetA budget used to quantify an immediate short-term cash flow.
Cash FlowThe aggregate of all cash inflows and outflows. This can be expressed as positive or negative cash flow.
Cash ManagementThe process of channeling cash into expenditures that enhance productivity.
Cash Surrender ValueThe amount the policy-owner receives when voluntarily terminating a cash value life insurance or annuity contract before its maturity or before the insured event occurs.
Casualty LossSudden and unexpected losses due to damage, destruction, fire or theft, for which one can be compensated by insurance contracts.
Certificate of AuthorityA document issued by the proper state authority to a foreign corporation granting the corporation the right to do business in that state.
Certificate of Deposit (CD)An agreement with a commercial bank in which funds are deposited at a fixed interest rate for a specified period of time. CDs are insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. There may be a penalty if funds are withdrawn before the CD reaches maturity.
Certified Public Accountant (CPA)A professional accountant who has received certification to practice accounting from a state board of examination and may also be a member of the American Institute of Certified Public Accountants or other various state CPA organizations.
Chapter 11A debtor (business, individual, or partnership) is declared bankrupt but is allowed reorganization to attempt debt repayment. Creditor approval is required. A separate taxable entity is created.
Chapter 13A debtor (individual or sole proprietor) is declared bankrupt but is allowed to retain estate related assets and restructure debt obligations for eventual payment. No creditor approval is required.
Chapter 7A debtor (individual) is declared bankrupt, and a court-appointed trustee initiates a liquidation process and a discharge of all eligible debts. The debtor has no financial sources to attempt a reorganization. A separate taxable entity is created.
CheckA written, signed, and dated instrument that allows for the transfer of money from a bank account to a payee.
Check RegisterA form of cash payments journal which is used to record deposits and expenditures in and out of a bank account.
ClaimA request for payment from an insurance policy.
Claims-Paying-Ability RatingAn assessment of an insurance company’s ability to pay claims.
Close Corporation or Closely Held CorporationA close corporation is a corporation that possesses the following traits: a small number of shareholders, no ready market for the corporation’s stock and substantial participation by the majority shareholders in the management of the corporation. Some states have close corporation statutes.
ClosingThe end of a trading session or the process of transferring real estate from a seller to a buyer.
Closing CostsCosts involved in transferring real estate from a seller to a buyer, over and above the price of the property. These can include charges for loan origination, discount points, appraisal, property survey, title search, title insurance, deed filing, credit reports, taxes, and legal services. Closing costs do not include points or the cost of private mortgage insurance (PMI).
Cloud on TitleA claim, lien, or right on real estate that requires a quitclaim deed to resolve the potential hindrance before the title can be transferred.
Combined Financial StatementA side-by-side accounting of balance and net worth statements for several affiliated business enterprises.
Commercial LoanA loan intended for short-term financing of a business, based on the creditworthiness of the business or owner and the prime lending rate.
Commercial PaperAn unsecured, short-term debt instrument used by corporations with high-quality debt ratings to fund short-term liabilities. Generally considered a safe investment.
CommissionThe fee charged by an agent or broker for facilitating a transaction.
CommitmentA written agreement specifying the terms and conditions of a mortgage.
Common StockA security that represents partial ownership or equity in a corporation. Holders of common stock are entitled to participate in the company’s stockholder meetings and vote for the board of directors.
Compound InterestInterest calculated on both the principal amount invested and the previously accumulated unpaid interest.
CompoundingA process in which income and gains on an investment are reinvested to grow further. When you earn compound interest, you earn interest on both the principal amount and the accumulated interest as it is earned.
ConsigneeA person who receives goods that belong to someone else for future sale or other purpose. Although consignees are not the owners of the goods, they are accountable for them.
ConsignmentGoods that are in the hands of someone other than the owner for future sale or other purpose.
ConsignorThe owner of goods that are in another person’s hands for future sale or other purpose.
Consolidated Financial StatementsFinancial statements that show the results of all operations under the parent company’s control, including those of any subsidiaries.
Construction Loan NoteA short-term obligation used to fund a construction project. In most cases, the issuers, such as a city government, will repay the note obligation by issuing a long-term bond.
Contingent BeneficiaryA secondary beneficiary who receives insurance benefits if the primary beneficiary revokes his or her status, is ineligible, or is deceased.
Contingent LiabilityAn obligation to pay if certain future events occur. This can also refer to a defined obligation for which the chances of payment are minimal.
Controlling InterestDirect or indirect ownership of voting shares sufficient to elect the majority of the board of directors of a corporation.
Convertible Term InsuranceAn insurance policy that allows the policyholder to convert the face amount of coverage in term insurance to an identical amount of whole life insurance.
Corporate BondA debt security issued by a corporation that obligates the issuer to pay interest periodically and repay the principal at maturity. Corporate bonds often have higher interest rates than government bonds due to possible default risk.
Corporate Record BookMaintaining the proper records is very important to assure limited liability to corporate shareholders. The corporation should have a record book that contains a copy of the articles of incorporation, bylaws, initial and subsequent minutes of directors and shareholders meetings and a stock register.
CorporationA group of people acting jointly for business and tax purposes who are able to incur debt and realize profit without immediate legal or taxable liabilities. A corporate entity allows its owners to attract outside capital by selling shares of ownership, protects the owners from liability beyond their investment outlay, provides for continuity of operations beyond the lives of the current owners and allows changes in ownership through the transfer of shares.
CorrectionA reverse movement in the price of a stock, bond, commodity, or index that brings it more in line with its underlying fundamental value.
CosignerAn individual who signs a loan or credit card agreement along with the principal applicant and assumes responsibility for the outstanding balance if the applicant defaults.
Covenant not to CompeteA clause in a contract that obligates one party to refrain from performing professional or business activities similar to those of the other party.
Coverdell Education Savings Account (Coverdell ESA)A federal program that allows parents to accumulate tax-free savings for a child’s college education, formerly called the Education IRA.
Credit (1)Legal obligation to make repayment at a later date for goods, services or money obtained through the extension of credit, or a promise to pay in the future. The cost of credit is usually referred to as a finance charge, interest or time-price differential
Credit (2)Entry recording an increase to a liability or owner’s equity or revenue, or a reduction to an asset or expense. Credits are recorded in the right hand column of an account or a two-column book. Opposite of debit.
Credit BureauClearinghouse of consumer credit information used by businesses to determine the credit
Credit HistoryA record of how a party has paid past debts.
Credit LineA revolving agreement that allows a person to borrow any amount up to a preapproved limit for purchases or cash advances. When the outstanding balance is paid off, credit again becomes available to fund new purchases or cash advances.
Credit NoteIssued by a seller to a purchaser to record the reduction of a bill because of an allowance, return or cancellation. Opposite of an invoice.
Credit RatingA formal assessment of an individual’s or a corporation’s ability to handle credit, based on the history of borrowing and repayment, as well as the availability of assets and the extent of liabilities.
CreditsIf you have a store credit, you can use the credit to purchase merchandise free of charge. If you have a tax credit, your taxes are reduced by the amount of your credit. You can get tax credits for purposes such as child care expenses and the earned income credit for low-income taxpayers.
Cumulative VotingCumulative voting allows shareholders to aggregate their votes in favor of fewer candidates than there are slots available. This method of voting is intended to create adequate representation for minority shareholders.
Current AssetUnrestricted cash, or any other asset that is expected to be converted into cash or consumed in the production of income within a year.
Current LiabilityLiability expected to be liquidated in a year.
DebitAn entry recording an increase to an asset or expense or a reduction to a liability, revenue or owner’s equity. Debits are recorded in the left-hand column of an account or a two-column book. Opposite of credit.
Debit CardA card issued by a bank that can be used to withdraw cash from an automated teller machine or to make purchases at merchant locations. Debit cards deduct funds from the checking or savings account linked to the card when they are used.
DebtA legal obligation to deliver a product, service or amount of money.
Debt-to-Equity RatioThe ratio that indicates a company’s ability to repay outstanding creditors. This also indicates the degree of leveraged money to improve the rate of return for shareholders.
Decreasing Term InsuranceA term insurance policy with a death benefit that decreases over time. This type of insurance is often used in conjunction with a mortgage or other amortized debt to guarantee payment if the holder dies before it is paid off.
DeedA document that identifies legal ownership of real estate.
Deferred AnnuityAn annuity that pays an income or lump sum at a future date.
DeficitA negative amount of retained earnings caused by cumulative losses and dividend distributions exceeding cumulative net income.
Defined Benefit PlanAn employer funded and controlled retirement plan that pays a predetermined benefit based on an employee’s years of service and salary or wages.
Defined Contribution PlanA retirement plan to which an employer contributes a fixed amount or percentage of the employee’s salary each year. The employee may be allowed to make individual contributions or choose the investment mix for his or her account.
DeflationThe opposite of inflation. A reduction in the price of goods and services. Possible causes of deflation are a decrease in the supply of money or credit or reduced individual or government spending.
Demand LoanA loan repayable upon the demand of a creditor.
DependentA person who relies on another for financial support. Taxpayers who support dependents can claim tax exemptions for them.
DepletionGradual using up or consumption of a natural resource.
DepositFunds used as collateral for the delivery of a good, such as a security deposit. It can also refer to the transfer of funds to another party for safekeeping, such as a deposit into a bank account.
DepreciationThe decrease in value of a fixed asset during its projected life expectancy, or the decrease in value of one currency in relation to another.
DerivativeA financial instrument whose characteristics and value depend on the value of an underlying instrument or asset, such as a commodity, bond, equity or currency. Futures and options are types of derivatives.
Direct CostCosts identified with a specific unit of product. For example, clay in the production of flowerpots or tubing in the production of bicycles are direct costs.
Direct DepositThe transfer of funds refund directly to a bank account.
Direct RolloverThe tax-free transfer of money or property from one retirement plan or account to another.
Direct TaxA direct tax cannot be shifted to others, unlike an indirect tax. For example, federal income tax is a direct tax. You are required by law to pay.
DirectorsDirectors are elected by the shareholders. They manage or direct the affairs of the corporation. Typically, the directors make only major business decisions and monitor the activities of the officers.
Disability-Income InsuranceA policy that provides an income if total disability prevents the insured from working.
Discount BrokerA broker who buys and sells securities at lower rates than a full-service broker, and who may offer fewer services.
Disposable IncomeAn individual’s income after taxes.
DissolutionThe termination of a corporation’s legal existence. Dissolution may be caused in a variety of ways including: failure to file annual reports, failure to pay certain taxes, bankruptcy or voluntary dissolution of the corporation by the shareholders and directors.
DiversificationAn investment strategy that spreads investment risk over a number of industries, market sectors or companies. Gains in one area can offset losses in another.
DividendA distribution of earnings to a shareholder or mutual life insurance policy owner. This distribution is usually in the form of money or stock.
Dollar Cost AveragingA strategy that invests a fixed dollar amount in securities at set intervals, regardless of market prices. With this approach, an investor buys more shares when prices are low and fewer shares when prices are high, usually resulting in a lower average cost per share.
Domestic CorporationA corporation is domestic in the state where it was incorporated.
Double TaxationThe result of tax laws that cause the same earnings to be taxed twice. For example, C corporations are taxed at the corporate level, and their shareholders also pay taxes on the dividends they receive.
Dow Jones Industrial Average (DJIA)The price-weighted average of 30 actively traded blue-chip stocks on the New York Stock Exchange (NYSE). The DJIA represents 15-20% of the market value of NYSE stocks.
Early WithdrawalThe removal of funds from a fixed-rate investment before the maturity date or from a tax-deferred investment account before a predetermined time.
Earned IncomeThe sum of income pertaining to wages, salaries, tips, self-employed net earnings and any other income received for personal services.
Earned Income CreditA refundable tax credit low-income workers can file for, even if no income tax was withheld from the worker’s pay.
Electronic BankingComputerized network services that allow bank account holders to securely access their accounts on the internet.
Electronic Commerce (E-Commerce)The use of the internet to conduct business and buy or sell goods and services.
Electronic Filing (IRS e-file)IRS e-file options allow you to file federal income tax returns, and some state returns, through a tax professional, through your home computer or even through your telephone. It may also be available in many other places in your local community.
Electronic Funds Transfer System (EFTS)A process by which funds are electronically transferred between accounts. EFTS allows for direct deposits or withdrawals without processing written checks.
Employee Retirement Income Security Act (ERISA)A 1974 law establishing government oversight and federal limitations for pension and retirement plans.
Employee Stock Ownership Plan (ESOP)An employer-sponsored program that encourages employees to purchase shares in the company they work for and possibly participate in management.
EndowmentAssets, funds or property donated to an individual, organization or group to be used as a source of income.
Engagement LetterWritten communication between an accountant and a client with respect to a professional engagement, outlining the scope of the accountant’s responsibilities and arrangements agreed upon.
Enrolled AgentA federally-authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audits, collections, and appeals.
EquityAnything that represents ownership interests, such as stock in a company. Equity can also refer to the difference between an asset’s current market value and the debt against it.
Equity LoanA loan that allows a homeowner to borrow against the accumulated equity in his or her home.
EscrowA third-party agent, or account, that assumes possession of a contract, a deed or money from a grantor until all outstanding obligations or commitments are complete. Upon completion of these obligations, the property held in escrow is delivered to the grantee.
EstateReal and personal property owned by a person at the time of death. Real property is land and anything permanently attached to it.
Estate PlanningThe process of determining the disposition of a person’s assets after death.
Estate TaxesFederal or state taxes levied on the assets of a person who dies, paid by the decedent’s estate rather than by the heirs.
Excess CompensationThe amount above the specified amount upon which calculations for future benefits are based in a pension plan integrated with federal old-age, survivors’ and disability insurance (OASDI).
Excise TaxExcise taxes are taxes on the sale or use of certain products or transactions.
ExecutorThe person who is named in a will to administer the distribution of the deceased’s assets.
Exempt (from tax liability)Before a taxpayer pays taxes, he or she can claim a set amount of tax deductions for him or herself, a spouse and eligible dependents. The total amount is subtracted from the adjusted gross income before the tax on the remaining income is figured out.
Exempt (from withholding)A taxpayer can be exempt from paying a certain amount of federal income tax if they meet certain income, tax liability and dependency requirements.
ExpenditureConsumption of an asset or payment for an expense.
External AuditorAn independent accountant engaged to determine if the financial statements of an entity represent the economic events that occurred during the period audited. The external audit is for the shareholders and owners, rather than for management.
F.O.B.Shipping term meaning “free on board” to inform the purchasers of the location at which they become responsible for the shipping charges. For example, F.O.B. Toronto means the vendor pays the charges to Toronto’s freight yard and the purchaser is responsible from there.
FICA (Federal Insurance Contributions Act)The Federal Insurance Contributions Act (FICA) consists of both a Social Security payroll tax and a Medicare tax. The tax is levied on employers, employees and certain self-employed individuals.
FORM 1040EZA simplified form to be used in place of the 1040 form for some individuals.
FORM W-2By January 31 of each year, your employer, even if you do not work there anymore, will provide you with a statement of how much you earned in wages, tips and other compensation from the previous year. This form will reflect state and federal taxes, social security, Medicare wages and tips withheld. It also includes a lot of other really important information you will need to file your return.
FORM W-4 (Employee’s withholding allowance certificate)Form W-4 is used to determine how much of an employee’s paycheck is withheld for federal income taxes.
Fair Market ValueThe highest price available in an open and unrestricted market between informed, prudent parties, acting at arm’s length and under no compulsion to transact. Fair market value is expressed in terms of money, or money’s worth.
Family Limited Partnership (FLP)A partnership of family members that helps arrange for generational transfers of wealth or a business, maintain control within the general partners and reduce potential liability to the transferer and transferee.
Federal Reserve System (The Fed)The board of governors that oversee the Federal Reserve Banks, establishes monetary policy, such as interest rates or credit, and monitors the economic health of the country. Its members are appointed by the President, subject to Senate confirmation and serve 14-year terms.
Federal Tax Identification NumberA number given to a corporation or other business entity by the federal government for tax purposes. Banks generally require a tax identification number to open bank accounts.
FiduciaryAn individual who provides investment advice for a fee, who exercises discretionary authority in managing assets or who is responsible for holding assets in trust and investing them for the benefit of another party.
File A ReturnTo file a return is to send in your completed tax forms. All your tax information appears on the return, including income and tax liability.
Filing StatusYour filing status determines your tax bracket and amount of taxes you must pay. Factors such as marital status affect your filing status.
Financial AidFinancial support that a student receives to attend school, including loans, grants, scholarships and work-study programs.
Financial StatementsFormal financial reports prepared from accounting records. For example, Profit & Loss Statement, Balance Sheet or Statement of Retained Earnings are all types of financial statements.
First-to-Die Life InsuranceA life insurance policy covering two or more people that pays a death benefit when the first person dies.
Fiscal YearA period of one year for which financial statements are prepared that may, or may not, coincide with the calendar year. Any twelve-month period used by a business as its accounting period.
Fixed AnnuityAn investment contract sold by a life insurance company that guarantees regular payments to the purchaser for life or a specified period of time, in exchange for a premium paid either in a lump sum or in installments.
Fixed AssetsSee Capital Assets
Fixed RateA mortgage with an interest rate which does not increase or decrease during the term of the loan.
Fixed-Rate MortgageA mortgage with a set interest rate that remains the same over the life of the loan.
Floating DebtThe constant renewal of government Treasury bills, or short-term corporate bonds, to pay off current liabilities, or finance cash flow.
Flood InsuranceInsurance against flood damage, usually required by mortgage lenders if a property is located in a flood zone.
For Sale By Owner (FSBO)When a homeowner sells his or her home directly to another party, without the assistance of an agent, or broker.
ForeclosureThe legal procedure by which a mortgage holder can seize the property of a borrower who has not made required payments.
Foreign CorporationA corporation is referred to as a foreign corporation in all states except for the state where it is incorporated. If a corporation conducts business in a state other than where it was incorporated, it must register for a certificate of authority to transact business in the other state or possibly lose access to that state’s courts and face fines.
ForfeituresNon-vested employer contributions from the accounts of employees who leave an employer’s pension plan. These may be applied as credits to remaining employee accounts or used to offset future employer contributions.
Formal Tax Legislation ProcessThere are strict steps, that involve the President and Congress, that a proposed tax must pass through before it becomes a law.
FranchiseA license that allows a designee to sell and market a company’s products or services in a fixed geographic area.
Franchise TaxA tax imposed by the state for the privilege of carrying on business as a corporation or LLC. The value of the franchise tax may be measured by amount of earnings, total value of capital or stock or by amount of business done.
Fringe BenefitsOpportunities and services offered beyond wages, or salary, in compensation for employment. Common fringe benefits include paid holidays, sick days, paid vacation days, insurance coverage or retirement plans.
Front-End LoadA sales fee, or load, that is paid up front by investors when they purchase an investment and deducted from the investment amount. A front-end load generally lowers the size of the investment.
FuturesAgreements to buy or sell a specific amount of a commodity or financial instrument at a set price on a specific future date.
GAAPAbbreviation for generally accepted accounting principles. GAAP, by definition, have been given formal recognition, or authoritative support.
GAASAbbreviation for generally accepted auditing standards. GAAS, by definition, have been given formal recognition, or authoritative support.
General JournalJournal in which transactions are recorded for which specific journals are not provided. For example: adjustments and corrections. In a small operation the general journal may be the only book of original entry.
General LedgerAll the financial accounts and statements of a business, including debits, credits and balances.
General PartnerAn authorized agent of a partnership and of all other partners for all purposes within the scope and objectives of a business.
GiftA voluntary transfer of assets, or property, with no compensation.
Gift TaxA tax levied on assets transferred from one person to another. This tax is paid by the donor.
Golden BootThe offering of financial incentives or benefits to persuade an older employee to retire early.
Golden HandcuffsBenefits given to a valued employee to persuade him or her to remain with the company.
Golden ParachuteA benefits package given to top executives who are laid off due to a corporate buyout, or takeover.
GoodwillThe difference between going-concern value and tangible asset value. Tangible assets include identifiable intangible assets with values that can be separately determined.
Government BondA debt security issued by the U.S. government: two common types are savings bonds and marketable securities.
Grace PeriodA period of time after the due date of a payment during which the overdue payment may be made without penalty, or lapse, in contractual obligations.
Gross EstateThe total dollar value of a person’s assets at the time of death, before taxes and other debts.
Gross IncomeGross income is the total of all receipts and gains minus the inventory cost of the business in a given time period. For example, people who use the barter system are required to include whatever they’ve bartered for as part of their gross income.
Gross Monthly IncomeTotal monthly income from all sources before taxes and other expenses.
Group Life InsuranceA life insurance policy that insures a group of people. This type of policy is often provided as an employee benefit.
GuardianAn individual who has legal responsibility for a minor child, or a legally incapacitated adult.
Health Savings Account (HSA)An account that offers individuals covered by high-deductible health plans (HDHPs) tax-favored opportunities to save for medical expenses.
Highly Compensated Employee (HCE)For benefit plan purposes, an employee who receives compensation in the top 20% of all employees, is a 5% owner of the business, and exceeds certain annual compensation levels.
Holding CompanyA corporation that has no other function except owning other corporations.
Home EquityThe difference between a home’s current market value and the sum of all claims against it.
Home Equity LoanA loan in which the lender allows the borrower to use the equity in his or her home as collateral for a line of credit, or revolving credit. The borrower may then obtain cash advances by using a credit card, or checks, up to some predetermined limit.
Hope CreditA federal tax credit that compensates families for a certain amount of tuition per student per year for the first two years of post-secondary education.
Horizontal EquityHorizontal equity says that people in the same income groups should be taxed at the same rate.
Household IncomeThe combined income of all household members from all sources. These sources include wages, commissions, bonuses, Social Security and other retirement benefits, unemployment compensation, disability, interest and dividends.
Housing RatioThe ratio of a person’s monthly housing payment to his or her total monthly income.
IncomeThe amount of money a person receives from all sources. These sources include wages, commissions, bonuses, Social Security and other retirement benefits, unemployment compensation, disability, interest and dividends.
Income StatementA financial statement summarizing revenues, expenses, gains and losses for a stated period of time. The income statement is also known as a profit & loss statement, statement of earnings, statement of income or statement of operations.
Income TaxThese are taxes on income, both earned income, such as salaries, wages, tips or commissions, and unearned income, such as interest from savings accounts or dividends if you hold stock. Individuals and businesses are subject to income taxes.
Incorporated (Inc.)See Corporation
IncorporatorThe person or entity that prepares and files the articles of incorporation. Total Tax Solutions acts as an incorporator for many new companies.
IndemnifyTo reimburse or compensate. Directors and officers of corporations are often reimbursed or indemnified for all the expenses they may have incurred during the incorporation process.
IndexAn hypothetical portfolio of securities that represents a particular market or portion of it. An index is used to measure the amount of change in a particular security by comparing it to similar companies.
Indirect TaxA tax collected by an intermediary who shifts the economic burden to another. For example, a company might have to pay a specific tax to the government. The company pays the tax but can increase the cost of their products so consumers are actually paying the tax indirectly by paying more for the company’s products.
Individual Retirement Accounts (IRAs):A tax-deferred product offered by banks, mutual funds and other companies. Under current law, a married couple can put $4,000, $2,000 each, into their own IRA each year in a wide range of savings accounts and investments. Earnings are tax-deferred until you begin withdrawing the money, which you can start doing without penalty after age 59 ½. Under current tax law, some people, depending on income, marital status or other factors, can deduct all or part of their IRA contributions, which reduces their taxes.
InflationThe general rise in the prices of goods and services that occurs when demand increases relative to supply.
Informal Tax Legislation ProcessMeetings where individuals and interest groups get together to discuss tax issues.
Initial Public Offering (IPO)A company’s first public offering of stock.
InsolvencyWhen liabilities exceed assets. Also, the inability to pay debts when due. See Bankruptcy.
InstallmentA part of a sum of money, or debt, to be paid at regular intervals, usually made up of principal and interest combined.
Insufficient FundsNot having enough money in a bank account to cover a specific debt.
InsurabilityAn insurance applicant’s likelihood of being accepted by an insurer, based on health, occupation, lifestyle and finances.
Insurable InterestA vested financial interest in the life of another person.
InsuredAn individual who is covered by an insurance policy.
Intangible AssetAn asset without physical substance that has value due to rights resulting from its ownership and possession. For example, goodwill, patents or trademarks are all intangible assets..
Integrated PlanAn employee pension plan included with Social Security benefits or with Old-Age, Survivorship and Disability Insurance (OASDI) contributions.
Intellectual CapitalThe financial value that human innovations and intelligence bring to a business enterprise.
Interest (1)“Interests” represent a member’s ownership of an LLC just as a partner has an interest in a partnership and shareholders own stock in a corporation.
Interest (2)The cost of using money over time usually expressed as an annual percentage.
Interest IncomeFully-taxable income earned in the form of interest which accumulates from cash temporarily held in savings accounts, certificates of deposits, or other investments.
Interest RateThe cost of borrowed money expressed as a percentage for a given period of time, usually one year.
Internal AuditorAn employee of an entity, such as a corporation, who audits for management, providing valuable information for decision-making concerning the effective operation of its business.
Internal ControlA coordinated system of procedures and techniques designed to safeguard a company’s assets, to ensure the accuracy of its accounting records and to promote efficiency and adherence to prescribed policies.
Internal Rate of Return (IRR)The theorem of compounding interest in reverse, or discounting. IRR is important in planning capital outlays and evaluating rental real estate investments.
InventoryItems of tangible property held for sale. An inventory is a detailed list of items and their values owned at a specific point in time. Stock inventory would include raw materials for manufacture, materials partly processed and finished products including items in transit for which title is held, but would not include items physically held for which title belongs to others. Inventories may also be made of fixed assets, stationery and supplies, etc.
InvestmentFunds committed to acquire something tangible or intangible in order to receive a return, either in revenue or use.
Investment ObjectiveThe financial goal of an investment.
InvoiceDocument for goods purchased or services rendered showing details such as quantities, prices, dates, shipping details, order numbers, terms of sale, etc.
Irrevocable TrustA trust that cannot be altered or canceled without the permission of the beneficiary or trustee. The grantor gives up all ownership rights to the assets and the trust in such cases.
Joint ProductsTwo or more goods having approximately the same economic value that are manufactured simultaneously from the same raw material.
Joint TenancyA form of property ownership in which two or more people own an undivided interest in the property. When one joint owner dies, ownership automatically passes to the surviving joint owner(s).
JournalA book of original entry in which financial transactions are recorded. For example, a purchase journal is a record of purchase transactions.
Journal EntryA transaction log of unique or recurring items. For example, debits and credits would be logged into a journal as journal entries.
Keogh Accounts:Similar to a 401(k), but for the self-employed.
Keogh PlanA tax-deferred defined benefit or contribution plan that a self-employed individual can set up.
Key EmployeeAn employee whose skills, knowledge or abilities are crucial to the ongoing operation of the company. This term is used in applying top-heavy tests for qualified referral plans under the Internal Revenue Code Section 416.
Key Person InsuranceAn insurance policy that reimburses a company for the loss of a key employee.
Lapsed PolicyAn insurance policy that is canceled for nonpayment of premiums, or canceled before it has cash or surrender value.
LeaseA legal contract conveying the use of property from the owner (lessor) to another (lessee) at a fixed rate, for a stated length of time.
Lease-Purchase AgreementAn agreement where a portion of each lease payment applies to a future purchase of the leased property. Also, applies where the leaseholder has the right to buy the property during or at the conclusion of the lease term.
Leaseback (Sale and Leaseback)An arrangement in which the seller of an asset leases that same asset back from the purchaser. For example, a business owner may sell the business’s office building to raise cash, then arrange to lease the building from the new owner so the business can remain at its present location.
Leasehold ImprovementsAdditions, improvements or alterations made to leased property by the lessee.
LedgerA book of final entry containing all the accounts of a business or all the accounts of a particular type. Some examples are general ledgers and accounts receivable ledgers.
LenderA person or organization that parts with something of value for a stated, or open, duration of time in exchange for specific compensation.
Letter of CreditA document by which a bank substitutes its creditworthiness for that of a recipient customer and buyer in a sales transaction.
Level Premium Term InsuranceA life insurance policy for which premiums remain the same from year to year for a specified period.
LiabilitySomething for which one is held liable, such as an obligation or debt. Financial liabilities can include loans, mortgages, accounts payable, deferred revenues and accrued expenses, among others.
Life AnnuityAn annuity that provides income for life.
Life CycleThe time period from the beginning to the end of the life of an individual, product or business. Corporate business entities frequently have life cycles that extend beyond those of their founders or current owners.
Life ExpectancyThe average number of years that an individual of a given age is expected to live.
Life InsuranceA contract in which the insured pays a premium to an insurance company in exchange for a defined payment to a beneficiary, usually a family member, upon his or her death. Available types of life insurance include term life, whole life and universal life.
Lifetime Learning CreditA federal tax credit for qualified higher education expenses incurred to learn or improve job skills.
Limited (Ltd.)See Corporation
Limited Liability CompanyA business entity formed upon filing articles of organization with the proper state authorities and paying all fees. LLCs are a new entity in the United States, although the concept has long been used internationally. LLCs provide limited liability to their members, and are taxed like a partnership, preventing double taxation. LLCs can be formed in every state.
Limited Liability Corporation (LLC)A form of business ownership that provides each shareholder with limited liability to the extent of invested capital.
Limited PartnershipAn investment affiliation consisting of a general partner and limited partners. The general partner, in return for fees and a percentage of ownership, manages business operations and is ultimately liable for any debt. Limited partners may receive income, capital gains, and tax benefits in return for their investment, but have little involvement in management.
Liquid AssetAn asset, such as cash, that can be readily converted into other types of assets or used to buy goods and services or satisfy obligations.
Liquid AssetsCash and short-term investment vehicles. Liquid assets can be things like commercial paper, checking accounts, account receivables and Treasury bills.
LiquidationThe winding-up of an organization by settling with debtors, creditors and shareholders. Usually done by selling or otherwise disposing of assets to pay off liabilities.
Liquidation ValueThe net amount realized on assets in the event of a liquidation.
LiquidityThe ability to quickly convert assets into cash without significant loss.
Liquidity RatioA ratio that quantifies a company’s ability to discharge debt obligations maturing within one year.
Living TrustA trust established by a living person who controls the assets he or she contributes to the trust.
Living WillA document designating another person to make medical decisions for the principal if he or she becomes incapacitated due to accident or illness.
Local TaxIn addition to federal and state taxes, your local town or city may also need tax money to operate services such as garbage pick-up water treatment, and street-cleaning. This tax money is known as a local tax.
Locking InThe process of assuring that an interest rate has been set. In the case of a mortgage, there may be a fee to lock in a particular rate.
Long-Term Care InsuranceAn insurance policy that covers long-term health care expenses, such as nursing home care, in-home assistance, assisted living or adult day care.
LossThe excess of expenditures over revenues. The opposite of income or profit.
Management AccountingAccounting concerned with providing information to managers who are inside an organization and also direct and control operations. Management Accounting includes cost accumulation for product costing, budgeting and financial statement analysis.
Management BuyoutWhen managers or executives of a company buy a controlling interest in their company from existing shareholders. If they pay a premium over the existing fair market value of the outstanding shares, the company then becomes a private corporation without a majority of shares trading on the market.
Management FeeA charge against an investor’s assets for a fund manager’s services.
ManagerAn LLC may be operated by a group of managers who act much like a board of directors. If an LLC is to be controlled by mangers this fact must be stated in the articles of organization.
Mandatory Employee ContributionSome employee benefit plans require employees to make contributions in order to accrue benefits.
Market RiskThe portion of a security’s risk common to all securities in the same asset class. Market risk cannot be eliminated through diversification.
Market TimingA strategy in which an investor attempts to predict market trends, such as the direction of stock prices or interest rates, and buys and sells securities quickly to turn profits on short-term price fluctuations.
Market ValueThe highest price that an owner could realize in an open market transaction. See Fair Market Value.
MaterialityA term used to describe the significance of financial statement information to decision makers. An item of information is material if it is probable that its omission or misstatement would influence or change a decision.
MaturityThe point in time when a debt, such as a bond, becomes due for payment.
MedicaidA federal program that covers medical expenses for individuals who are financially unable to afford health care.
MedicareA federal program that covers health care for individuals age 65 and over and individuals with certain disabilities.
Medicare Part DThe prescription drug benefit program for Medicare recipients.
MemberA member is a person who is an owner of a Limited Liability Company. The members make the business decisions of an LLC unless the articles of organization provide that the LLC will controlled by a manager, or managers.
MergerA merger occurs when one corporation is taken over by another.
Minimum Participation RequirementsGenerally, a participant must be 21 years old and have been a full-time employee for one year to receive benefits from an employer-sponsored retirement plan.
Minority InterestThe equity of all shareholders who do not hold a controlling interest in a company.
MinutesA written record which details the events of the corporation. These records should be kept in the corporation’s record book.
Money MarketFinancial markets in which short-term debt instruments such as Treasury bills, commercial paper and CDs are traded.
Monthly Housing ExpensesThe sum of the principal, interest and taxes a borrower pays toward housing on a monthly basis, used to determine affordability.
Mortality TableA statistical table showing the death rates of people at various ages.
Municipal BondA tax-exempt bond issued by a state government or agency, or by a town, county or other political subdivision or district.
Name ReservationThe name of a corporation or LLC must be distinguishable on the records of the state government. If the name is not unique, the state will reject the articles of incorporation or articles of organization in the case of LLCs. A name can be reserved, usually for 120 days, by applying with the proper state authorities and paying a fee.
National Association of Securities Dealers Automated Quotations (NASDAQ)A computerized system that facilitates trading and offers price quotes for the most actively traded over-the-counter (OTC) securities.
Net IncomeTotal revenue minus total costs, expenses and taxes.
Net WorthThe amount of asset value exceeding total liabilities.
New York Stock Exchange (NYSE)The oldest and largest stock exchange in the U.S. The NYSE lists many of the country’s largest corporations.
No-Par-Value StockStock with no minimum value. Most states allow no-par stock.
Noncontributory Retirement PlanA pension plan that is funded only by employer contributions with no employee contributions.
Nonforfeitable BenefitIn an employee benefit plan, a benefit that is payable upon any occurrence listed in the employee contract and cannot be forfeited.
Nonqualified PlanAn employee benefit plan that does not meet the requirements laid out in Section 401(a) of the Internal Revenue Code and, therefore, is not qualified for favorable tax treatment.
Not-For-Profit CorporationA corporation organized for some charitable, civil or other social purpose that does not entail the generation of profits for shareholders. These corporations receive special tax treatment. Not-for-profit corporations must file not-for-profit articles of incorporation with the state.
Notary PublicA public officer who can authenticate signatories on documents and take depositions or oaths, authorized by a particular state or jurisdiction. Banks, insurance agencies, legal offices and government buildings often have notaries public on staff.
Note Payable (Promissory Note)Written promise made by one party to another to pay a specific amount on demand or by a definite date.
Note ReceivableWritten promise by one party to make payment to another party at a specified date.
Offering PriceThe per share price at which a stock or mutual fund is offered to the public. The market price may be more or less than the offering price.
OfficersOfficers are people who are appointed by the directors. They manage the daily affairs of the corporation. A corporation’s officers usually consist of a president, vice-president, treasurer and secretary. In most states, one person can hold all of these positions.
Old-Age, Survivors and Disability Insurance (OASDI)Also known as Social Security. OASDI is a comprehensive federal benefits program that includes retirement benefits, disability income, veterans’ pensions, public housing and food stamps.
Operating AgreementAn agreement among the LLC members which govern the LLC operations and the rights of its members. It is analogous to corporate bylaws.
OptionThe right to buy or sell a security at a set price on or before a given date. “Call” options are bets that the security will be worth more than the price set by the option, the strike price, plus the price of the option. “Put” options are bets that the security’s price will fall below the price set by the option.
OptionsMarketable securities that provide for future exchange of cash and common shares contingent upon the option owner’s choice.
Ordinary IncomeIncome derived from normal business activities, such as wages and salary, as opposed to capital gains.
Organizational MeetingThe initial meeting where the formation of the corporation is completed. At the organizational meeting a number of initial tasks are completed, such as the articles of incorporation are ratified, the initial shares are issued, officers are elected, bylaws approved and a resolution authorizing the opening of bank accounts is passed. If the initial directors are named in the articles of incorporation, they can hold the organizational meeting. If they are not named, then the incorporator holds the organizational meeting.
Over-the-Counter (OTC)A security traded in contexts other than a formal exchange. OTC can also refer to a market where security transactions are conducted by telephone and computer, rather than on the floor of an exchange.
OverheadFixed costs not directly applicable to the production of a product. For example, costs of lighting and heating a factory.
Owner’s EquityWhat the business is worth to the owner. See Capital and Equity.
PITIThe four components of a mortgage payment: principal, interest, property taxes and insurance.
Paid in Capital RequirementsA few states require corporations to have a specified amount of paid-in capital prior to starting business. These states include CT, DC, SD and TX and require that the company have $1,000 in paid-in capital before starting business.
Paid-Up AdditionsAdditional life insurance coverage. These are typically purchased with policy dividends.
Par ValueThe face value of a stock or bond when issued, which may bear little relationship to the security’s current market value.
Par-ValueThe stated minimum value of a share stock. Stock must be sold for at least this value or the owner of the stock can face liability. With low par value stock or no par value stock this liability is minimized.
Parent CompanyA corporation that directly or indirectly owns a controlling interest in another corporation. See Subsidiary.
PartnershipA contractual association between individuals who share in the management and profitability of a business venture.
Pass-Through TaxationIncome to the entity is not taxed. Instead the income is “passed through” to the individual shareholders or interest holders. S corporations, Partnerships and LLCs are pass-through taxation entities.
Past DueA payment that has not been received by the end of the lender’s grace period. Creditors may assess late fees for past due payments or report the account holder to a credit reporting agency.
PatentAn official license granted by the Patent Office that gives an individual or business the rights to the production or sale of a specific invention, process, or design for a specified period of time.
PayableAn obligation to pay a sum at a future date.
PayrollA record of wages or salaries paid or payable. The actual wages and salaries paid during a given period.
Payroll TaxesTheir are two main forms of payroll taxes. One is in the form of withholding and the other is paid directly by the employer. In the first case employers deduct a certain amount from employee paychecks to pay for taxes. In the second, employers pay a tax based on the number of employees and how much they are paid. This tax money funds many finance specific programs, including social security, health care and worker’s disability.
PensionArrangement whereby an employer agrees to provide benefits to retired employees. A pension is paid out in a series of regular payments or a lump sum of money to retired employees or their beneficiaries.
Permanent Life InsuranceA life insurance policy that does not expire and combines a death benefit with a savings portion that the insured can borrow against or withdraw for cash needs. The two main types of permanent life policies are whole life and universal life.
Personal Income TaxEveryone pays a tax on his or her yearly total amount of taxable income. The personal income tax is not a tax on the taxpayers total income as the taxpayer can take deductions. Deductions are subtracted first from the taxpayer’s income and then he or she pays the tax on the remaining amount.
Plan AdministratorAn individual who administers government regulations and procedures for an employee benefit program and confirms that all participating employees receive annual reports.
Plan SponsorAn employer who establishes and perpetuates a qualified employee benefit pension plan.
PointsA measure that quantifies the initial fee charged by a mortgage lender, with each point being equal to 1% of the total loan principal. For example, on a $100,000 mortgage, four points would cost a borrower $4,000.
PolicyA legal document that states the terms of an insurance contract, or the contract itself.
Policy DividendA refund that reflects the difference between the life insurance premium charged and the insurer’s actual cost of providing coverage.
Policy ExclusionAn item specifically not covered by an insurance policy.
Policy LoanA loan from an insurance company against the cash surrender value of a life insurance policy.
Policy ReservesThe funds that insurers are required to hold in order to cover all policy obligations.
Policy RiderA provision that can be added to an insurance policy at an additional cost to increase or limit the benefits of the policy.
PolicyholderThe person or entity that owns an insurance policy.
PortabilityAn employee’s ability to retain his or her benefits after employment ceases.
PortfolioThe combined security holdings of an investor or mutual fund.
PostingProcess whereby transactions are transferred from a journal to a general ledger or subsidiary ledger.
Power of AttorneyA legal document that gives one person the power to perform specified acts or make decisions on behalf of another person, should that person become incapacitated.
Preemptive RightsRights delineated in the articles of incorporation granting shareholders the first opportunity to buy a new issue of stock in proportion to their current equity. The shareholder has the right to buy the new issue of stock, but is not required to make the purchase. If the shareholder elects not to exercise this right, the shares can be sold on the open market.
Preferred StockA security representing partial ownership or equity in a corporation. Preferred stock does not give the stockholder voting rights, but takes precedence in claims against the company’s profits and assets.
Premature or Early DistributionsWithdrawals from qualified retirement plans before the age of 59½.
PremiumA periodic payment for an insurance policy.
Premium LoanA loan made from an insurance policy to cover premiums.
PrepaidAn asset created by payment for economic benefits that do not expire until a later time. As the benefit expires, the asset becomes an expense. Such assets include prepaid rent and prepaid insurance.
PrepaymentRepaying installment credit before it is due or paying off a loan before its maturity date.
Prepayment PenaltyOn a loan without a prepayment clause, the fee a borrower pays for repaying the loan before it is due.
Present ValueThe amount that a future sum of money is worth today, given a specified rate of return.
Price/Earnings Ratio (P/E)A stock’s price divided by its earnings per share; this ratio tells investors how much they are paying for a company’s current earnings.
Primary BeneficiaryThe named beneficiary who receives the proceeds of an insurance policy or annuity contract upon the death of the insured or annuitant.
Prime RateA standardized short-term borrowing rate established by the Federal Reserve Board.
PrincipalThe original amount of money invested in a security, the face value of a bond, or the remaining amount owed on a loan, separate from interest. “Principal” can also refer to the owner of a private company or the main party in a financial transaction.
Private Letter RulingThe Internal Revenue Service’s interpretation of a tax situation in light of a particular individual’s circumstances. Private letter rulings are nonbinding and do not set precedent for other cases.
Private Mortgage Insurance (PMI)Insurance that protects the lender in case of default on a mortgage.
Professional CorporationA corporation that is organized for the purpose of engaging in a learned profession such as law, medicine or architecture. Professional corporations must file articles of incorporation with the state which meet the state’s requirements for professional corporations.
ProfitThe excess of total revenue over total expenses for a period of time.
Profit and Loss StatementA statement that summarizes a company’s revenues, costs and expenses incurred during a specific time period.
Profit-Sharing PlanA defined contribution plan to which employers contribute a percentage of the company’s profits, usually based on the employee’s earnings.
Progressive TaxA tax that takes a larger percentage of income from higher income groups than from lower income groups.
Prohibited TransactionA transaction involving an IRA that is forbidden by the Internal Revenue Code, such as borrowing against an IRA, using an IRA as collateral or investing IRA funds in collectibles.
PropertyAnything that has a value and is owned whether it is tangible, intangible, personal, public or common.
Property TaxA tax imposed upon the owner of real property. This type of tax is also known as a millage tax.
Proportional TaxProportional taxes take the same percentage of income from all groups. This type of tax is not currently in use.
ProspectusAn official document that must be provided by the issuer to potential purchasers of a new security. A prospectus will contain reports on the financial status of the issuer and the specifics of the issue itself.
ProxyIf a shareholder can not attend a meeting, the shareholder is allowed to vote by proxy. A proxy grants another individual the power to vote on their behalf.
Qualified PlanA retirement plan that meets the requirements of Section 401(a) of the Internal Revenue Code and is eligible for tax-favored treatment.
QuorumThe minimum attendance required to conduct business at a meeting. Usually, a quorum is achieved if a majority of directors are present, for directors meetings, or outstanding shares are represented, for shareholder meetings. The percentage needed for a quorum may be modified in the bylaws.
QuotationThe highest bid and lowest asked offering price currently available for a security.
Rate of ReturnThe gain or loss of an investment over a specified period of time, expressed as a percentage of the original investment cost.
Rated PolicyAn insurance policy that covers a higher risk for a higher than usual premium.
RatioRelative size, expressed as the number of times one quantity is contained in another. For example, the ratio of assets to liabilities of a company having total assets of $200,000 and liabilities of $150,000 would be $200,000 / $150,000 = 1.33
Real Estate Investment Trust (REIT)A security that is traded like a stock on the major exchanges and invests primarily in real estate.
RecapitalizationWhen a company changes its capital structure by exchanging preferred stock for bonds to reduce taxes or to avoid or emerge from a bankruptcy.
ReceivableAn amount to be received at a future date.
RedemptionThe repayment of a debt security or preferred stock, either for par value at maturity or for a premium before maturity.
RefinancingRescheduling of payments due. This usually resulting in smaller payments over a longer period of time.
RefundWhen your employer deducts too much money from your paycheck, the government owes you that money back. When they pay it, it is called a refund.
Registered AgentThe agent named in the articles of incorporation. The agent will receive service of process on the corporation and other important documents. The agent must be named in the articles of incorporation.
Registered OfficeThe office named in the articles of incorporation. The registered office must be where the registered agent is located, and need not be the principal office or place of business of the corporation.
Regressive TaxA tax that takes a smaller percentage from those with high income than from those with lower income.
Required Minimum Distribution (RMD)The legally required minimum annual amount that must be distributed from a retirement account to an IRA holder or qualified plan participant.
ResolutionA resolution is a formal decision of the corporation that has been adopted by either the shareholders or the board of directors.
Retained EarningsCumulative net incomes of a corporation less losses and dividend distributions to shareholders, profits not distributed.
RevenueMoney that a company receives from the sale of goods and services, before expenses and taxes.
Reverse MortgageA loan used to turn home equity into tax-free cash payments to the homeowner, or borrower, usually to fund retirement needs.
Review EngagementThe unaudited review of financial statements of a business or organization by an independent accountant for the purpose of determining the plausibility of the information reported on. A review includes making inquiries concerning financial, operating and contractual information, applying analytical procedures and having discussions with appropriate officials of the enterprise.
Review Engagement ReportThe accountant’s report that prefaces unaudited financial statements and provides negative assurance that the financial information conforms to generally accepted accounting principles.
RiskPossibility that the actual return on an investment will be less than its expected return.
Risk ToleranceAn investor’s ability to handle declines in the value of his or her investment portfolio.
RolloverA tax-free transfer of funds from one retirement plan to another.
Roth IRAA type of Individual Retirement Account (IRA) in which contributions are nondeductible. Earnings in a Roth IRA grow tax-deferred and distributions are tax-free if you have owned the account for five years and are at least age 59½.
Roth IRA ConversionThe process of converting an existing IRA into a Roth IRA. There are specific income eligibility requirements, through 2009, and income tax consequences for this.
S CorporationA small corporation which elects sub-chapter S tax treatment. This tax treatment allows the corporation to avoid federal level taxation. Corporate Profits and Losses are passed through to the shareholders.
SIMPLE (Savings Incentive Match Plan for Employees) PlanA retirement plan that allows employee pretax contributions and requires employer matching contributions. All contributions are immediately vested, and the plan can be set up as a 401(k) or IRA.
Salary Reduction PlanA qualified retirement program to which employees make tax-advantaged contributions on a pretax basis.
Sales TaxesA tax collected by a retailer against the retail price of a commodity.
Savings AccountA account with a bank, or savings and loan company, that pays interest on money deposited.
ScheduleA form a taxpayer uses to itemize specific sources of income or expenses that are claimed as deductions.
Section 162 (Executive Bonus) PlanA life insurance policy for which the insured’s employer pays premiums under Internal Revenue Code Section 162.
Secured CardA credit card guaranteed by a deposit in a savings account, or certificate of deposit (CD), with a credit line usually equal to the deposit. If the cardholder defaults on payments, the issuer may apply the deposit toward the balance owed.
Securities and Exchange Commission (SEC)The primary federal regulatory agency for the securities industry. The SEC is responsible for promoting full public disclosure and protecting investors against fraudulent and manipulative practices.
SecurityCollateral for a debt. For example, accounts receivable may be pledged as security for a loan. Security is a generic term used to refer to a bond, share certificate or other medium or long-term investment evidencing debt or ownership.
Security DepositA payment required to secure a personal loan, a rental property or a later purchase.
Self-Directed IRA (SDA)An individual retirement arrangement that allows a wider choice of investments than an IRA, including stocks, bonds, mutual funds and money market funds.
Self-Employment TaxThe Social Security tax imposed on self-employed individuals.
Self-Select PinA method of filing a of paperless return to the IRS.
Seller FinancingA financing technique in which an owner sells property directly to a buyer with no mortgage. The title or deed transfers only after full payment, and any foreclosure results in the property reverting to the seller.
Settlement CostsThe expenses involved in transferring real estate to a buyer from a seller, also called closing costs. These typically include charges for loan origination, discount points, appraisal, property survey, title search, title insurance, deed filing, credit reports, taxes and legal services. They do not include points or the cost of private mortgage insurance (PMI).
ShareOne unit of ownership in a corporation, mutual fund or limited partnership.
ShareholderAny holder of one or more shares in a corporation. A shareholder usually has evidence that they are a shareholder. This evidence is represented by a stock certificate.
Simplified Employee Pension Plan (SEP)A retirement plan that allows both an employer and an employee to contribute to the employee’s IRA on a discretionary basis.
SitusThe location or position of a property. For intangible property, such as debt, the situs is considered to be the jurisdiction where the debt obligation was issued.
Small Business Association (SBA)A federal organization that provides programs and opportunities to promote the growth and success of small businesses.
Smart CardA prepaid card that can be used to purchase goods, services or admissions. They are often used at hotels, recreational facilities, and other businesses.
Social SecuritySocial Security is America’s government-run retirement plan. One day, when you’re your grandparents’ age, you’ll get the money back.
Social Security TaxThe tax that funds the Social Security system. It is paid by both employers and employees.
Sole ProprietorshipA business carried on by the owner as an individual. The owner of a sole proprietorship is personally liable for all business debts; thus, personal property could be taken to pay business debts. A sole proprietorship is an unincorporated business wholly owned by one individual.
Split-Dollar Life InsuranceA contract between employer and employee to share the obligations and benefits of a life insurance policy.
Spousal IRAAn IRA for a nonworking spouse. It is funded by contributions from the working spouse. The IRS limits the combined amount that married couples may contribute to traditional and spousal IRAs.
Standard & Poor’s 500 Index (S&P 500)An index of 500 of the most widely held common stocks on the New York Stock Exchange (NYSE). It is used as a measure of the overall health of the U.S. stock market.
Standard DeductionsSome taxpayers choose to take a standard amount instead of itemizing all of their deductions. This is a fixed amount that is generally based on a person’s filing status.
State TaxesThere are all kinds of taxes which are used to pay for all sorts of things. Some of our money goes to the federal government, which pays for services like interstate highways, the armed forces, the FBI and a lot more. Your state also needs money for schools, roads and state troopers, to name just a few. At the end of the tax year you will need to send one form to the federal government and another to your state government.
Stated CapitalThe par value of shares multiplied by the number of shares outstanding. The amount of stated capital may effect the ability to pay dividends.
StatementSummary of an account for a period of time, usually one month, showing invoices, credits and balance due. A statement is provided to a customer by a supplier.
Statement of Changes in Financial PositionA financial statement showing the impact of operating, financing and investing activities effecting the cash position of the company. Also known as Cash Flow Statement, Statement of Cash Flow, Statement of Operating, Financing and Investing Activities or Statement of Changes in Cash Resources.
Statement of EarningsSee Income Statement
Statement of Financial PositionSee Balance Sheet.
Statement of Retained EarningsA financial statement summarizing the changes in retained earnings for a stated period. Also known as Statement of Changes in Capital Accounts or Statement of Changes in Retained Earnings and Reserves.
StockCapital of a corporation that is divided into portions or shares. Stock refers to an equity or ownership interest in a corporation. There may be several classes of stock in a corporation, each class divided into equal portions or shares. Ownership of shares is demonstrated by stock certificates. See Share.
Stock CertificateA document substantiating the legal ownership of shares of stock.
Stock DividendA dividend paid by the issuance of shares of capital stock.
Stock MarketThe organized trading of securities in the various market exchanges and the over-the-counter market.
Stock OptionThe right to buy shares of capital stock at a stated price on or by a given date. A privilege often extended to executives or employees of a company.
Stock Purchase PlanA mechanism for employees to purchase stock in their company.
Stock SplitA distribution of additional shares to each holder of a certain stock in proportion to the shares the individual already owns, with each share’s par value reduced to maintain the same total equity. For example, if a stock splits 2-for-1 and you own one share with a $100 par value before the split, you would own two shares with a $50 par value after the split.
Stock Transfer BookA record book which lists the owners of shares of stock in a corporation.
Straight-Term MortgageA mortgage in which the borrowed amount is due at the maturity date.
SubsidiaryA corporation controlled by another corporation that owns, directly or indirectly, an interest sufficient to elect a majority of the board of directors. See Parent Company.
Survivorship Life InsuranceA life insurance policy that covers the lives of two people and pays benefits when the second person dies. It is often used by couples to fund estate tax liability.
Tangible AssetAnything that has a value and physically exists, such as land, machines, equipment or currency.
Tariff DutyA tax on imports collected by state custom authorities.
Tax AvoidanceLegal minimization of the impact of taxation.
Tax CreditA dollar-for-dollar reduction in the amount of taxes an individual owes.
Tax CreditsThe amount of money that tax payers can deduct directly from their taxes.
Tax DeductionsThe amount that a person or business can subtract from their taxable income. The more you can deduct, the less you pay.
Tax EvasionIllegal attempt to escape the impact of taxes.
Tax ExemptNot subject to general taxation.
Tax LiabilityThe total amount of tax that a person must pay. Taxpayers pay this through withholdings, estimated tax payments and payments attached to their yearly tax forms.
Tax LienA claim against property for unpaid taxes, which lasts until the claim is satisfied or a statute of limitations takes effect.
Tax ShelterInvestment to acquire something of value with the expectation it will produce income and reduce or defer taxes.
Tax ShiftOne lucky person or group is able to shift a tax that they’re supposed to pay to someone else.
Tax WithholdingsThe portion that an employer takes from an employee’s paycheck to pay part or all of the employee’s taxes.
Tax-Exempt BondA bond issued by a municipal, county or state government with interest payments that are not taxed.
Tax-Sheltered AnnuityAn annuity that allows employees of government and nonprofit organizations to make pretax contributions to a retirement plan up to a predefined annual limit.
Taxable IncomeA taxpayer’s gross income minus all allowable adjustments.
TaxesTaxes are required payments of money to the government. This money is used to make your life better. You might not even realize it, but tax money provides public goods and services for the community as a whole. Roads, schools, law enforcement and public libraries are just some of the many benefits of paying taxes. Show a little gratitude and pay your fair share.
TeleFileTeleFile is a method of filing a tax return, in some states, using a touch-tone phone to send tax information directly to an IRS computer.
Tenants by the EntiretyA form of property ownership used by married couples where each spouse theoretically owns 100% of the property. After the first spouse dies, complete ownership passes to the surviving spouse without tax and probate.
Tenants in CommonTwo or more owners who have undivided, but not necessarily equal, ownership of a property.
Term CertainA payout option in an annuity contract that provides income for a specified period of time.
Term InsuranceA type of life insurance that pays benefits only if the insured dies within a specific period. Term insurance has no cash value, and premiums usually rise with the insured’s age.
Time HorizonThe length of time for which an investor plans to hold investments.
TipsGratuity paid by a customer to an employee in appreciation of service. Employees who earn more than $20 a month in tips must report the amount to their employer.
TitleA document that identifies legal ownership of property, used to transfer ownership from a seller to a buyer.
Title InsuranceA type of insurance that protects against loss due to a defect in a real estate title, such as an ownership dispute or a lien against property.
Title SearchAn inspection of city, town or county records to determine the legal owner of a piece of real estate property and to find any applicable liens, mortgages or future interests.
Total DisabilityInability to complete most job requirements based on a physical or mental disability.
Total ReturnThe gross annual yield on an investment, including capital appreciation or distributions, interest, dividends and personal taxes.
Transaction FeeA charge for a credit-related activity, such as receiving a cash advance or using an ATM.
Transaction TaxesA levy on the sale of goods and services. See sales tax.
TreasuriesNegotiated debt obligations that the U.S. government regularly offers at public auction through the Federal Reserve Bank. Treasury bills, bonds and notes have varying maturities and yields.
Treasury BillA negotiable debt obligation issued by the U.S. government, also called a T-bill. Treasury bills mature in one year or less, are exempt from state and local taxes, and range in value from $10,000 to $1 million; they sell at a discount based on current interest rates.
Treasury SharesShares of stock that were issued and later acquired by the corporation.
Trial BalanceThe listing and totaling of all balances in a ledger to verify that total debits equal total credits.
Triple Net LeaseA lease in which the lessee assumes payments for maintenance, taxes, utilities and insurance. The lessee bears the risks associated with these fluctuating expenses.
TrustFiduciary relationship under which property is held by one person, a trustee, for the benefit of another, the beneficiary.
Trust FundMoney, property or valuables legally held by a person or company for the benefit of another.
TrusteeThe party who manages a trust on behalf of a beneficiary or beneficiaries. Trustees may hold titles to property, distribute assets or oversee investments and payments, among other tasks.
Ultra ViresTraditionally, the purpose of a corporation was closely spelled out in its articles of incorporation. If the corporation acted beyond its described purposes these actions were unenforceable against the corporation or by the corporation. However, most modern statutes allow corporate purposes to be any lawful activity. Therefore, the importance of this doctrine has greatly diminished.
Unanimous Written ConsentNearly all states allow directors to act without a meeting if they each give their consent
UnderwritingThe process by which an insurance company determines whether it can assume the risk of a specific life insurance policy. Alternatively, this can refer to the business of investment bankers, who purchase new issues of securities and resell them to the public.
UnemploymentThe state of being “not in gainful employment,” in which a person may be eligible for some state and federal benefits.
Uniform Gift to Minors Act (UGMA)The law that allows an adult to contribute to a custodial account in a minor’s name without having to establish a trust or name a legal guardian. The UGMA is called the Uniform Transfer to Minors Act (UTMA) in some states.
Universal Life InsuranceA type of life insurance policy that allows the holder to vary the amount and timing of premiums and change the death benefit based on the policyholder’s changing needs and circumstances. It usually includes a cash value savings feature.
Unsecured DebtDebt that is not guaranteed by collateral.
Valuation DayA date established by law as the basis of one method of valuation for the calculation of capital gains or losses for income tax purposes.
Variable Interest RateAn interest rate that fluctuates according to a measure or an index. Variable rates on loans are usually capped to protect borrowers from dramatic increases in the interest rate.
VarianceDifference between standard cost and actual cost. Also, the difference between an actual revenue or expense item and the budget for that item, or budget variance.
Vertical EquityVertical equity states that people in different income groups pay different rates of taxes. Our current tax system is one of vertical equity.
VestingThe process leading to a future time when money or property held in trust will belong to a person. This usually refers to the scheduled confirmation of ownership rights in qualified employee benefit plans.
VolatilityThe relative rate at which the price of a security moves up and down, derived by calculating the annualized standard deviation of daily changes in price.
Voluntary ComplianceYour mom might order you to clean up your room but the IRS doesn’t have time to tell every single taxpayer to file taxes correctly and on time. There are millions of taxpayers in this country, after all. This system relies on citizens to report their income, calculate tax liability and file tax returns on time. Everyone has to grow up sometime. Check it out.
Voluntary Employee ContributionA contribution by an employee to a retirement plan in excess of mandatory contributions to his or her plan account.
Volunteer Income Tax AssistanceAvailable in most communities are Volunteer Income Tax Assistance (VITA) sites to help with tax return preparation. People volunteer their time to help their neighbors. The service is free to those with limited or moderate income people, non-English speaking, the elderly and the disabled. Some VITA sites even offer free electronic filing. If you want to know more about a VITA site in your community or volunteering your time, call the IRS at 1-800-829-1040 begin_of_the_skype_highlighting FREE 1-800-829-1040end_of_the_skype_highlighting. Check out IRS e-file.
Waiver of PremiumAn insurance policy rider that waives premium payments if the insured becomes permanently disabled.
Walk-In Electronic FilingIf you need help preparing your taxes visit the Volunteer Income Tax Assistance (VITA) office nearest you. Many VITA offices have IRS representatives who can help you fill out your forms and then transmit the information on your forms electronically.
Whole Life InsuranceA type of life insurance that provides coverage for the insured’s entire life as long as the policyholder pays the premiums. Whole life insurance also has a cash value component that can be drawn upon to meet financial needs.
Withholding (‘Pay-as-you-earn’ taxation)A system that takes a certain amount from an employee’s paycheck to pay for, completely or partially, that employee’s income tax for the year. This money is used to pay for federal income taxes, state and local income taxes, federal social security and Medicare taxes.
Withholding AllowanceAn allowance an individual claims on a W-4 Form. It is mainly used to assist an employer in calculating the amount of income tax to withhold from an employee’s paycheck. The more allowances you wish to claim, the less income tax will be withheld from your paycheck. You can claim one allowance for yourself, one for your spouse, and one for each of your dependents.
Working CapitalMoney that ensures a business’s ability to operate on a daily basis.
Write-offTo transfer an item that was an asset to an expense account. For example, to transfer an uncollectable account receivable to bad debts expense.
YieldAn investment’s annual gain or loss. Yield is generally expressed as a percentage.
Yield to Maturity (YTM)The total return on a long-term interest-bearing investment, such as a bond, that is held until its maturity date.
Zero Coupon BondA bond that makes no periodic interest payments, but sells at a deep discount from its face value. At the maturity date, the investor receives the face value of the bond plus the interest that has accrued.