Definition of Accounts

Accounts

‘Buckets’ within the ledger, part of the accounting system. Each account contains similar transactions (line items) that are used for the production of financial statements. Or commonly used as an abbreviation for financial statements.

Accounts payable

Money owed to suppliers.

Accounts receivable

Money owed by customers.

Accounts receivable turnover

The ratio of net credit sales to average accounts receivable, a measure of how
quickly customers pay their bills.

Average age of accounts receivable

The weighted-average age of all of the firm's outstanding invoices.

IRA/Keogh accounts

Special accounts where you can save and invest, and the taxes are deferred until money
is withdrawn. These plans are subject to frequent changes in law with respect to the deductibility of
contributions. Withdrawals of tax deferred contributions are taxed as income, including the capital gains from
such accounts.

ACCOUNTS PAYABLE

Amounts a company owes to creditors.

ACCOUNTS RECEIVABLE

Amounts owed to a company by customers that it sold to on credit. Total accounts receivable are usually reduced by an allowance for doubtful accounts.

Accounts payable

Amounts owed by the company for goods and services that have been received, but have not yet been paid for. Usually accounts payable involves the receipt of an invoice from the company providing the services or goods.

Accounts receivable

Amounts owed to the company, generally for sales that it has made.

Allowance for doubtful accounts

A contra account related to accounts receivable that represents the amounts that the company expects will not be collected.

Permanent accounts

The accounts found on the Balance Sheet; these account balances are carried forward for the lifetime of the company.

Temporary accounts

The accounts found on the Income Statement and the Statement of Retained Earnings; these accounts are reduced to zero at the end of every accounting period.

accounts payable

Short-term, non-interest-bearing liabilities of a business
that arise in the course of its activities and operations from purchases on
credit. A business buys many things on credit, whereby the purchase
cost of goods and services are not paid for immediately. This liability
account records the amounts owed for credit purchases that will be paid
in the short run, which generally means about one month.

accounts receivable

Short-term, non-interest-bearing debts owed to a
business by its customers who bought goods and services from the business
on credit. Generally, these debts should be collected within a month
or so. In a balance sheet, this asset is listed immediately after cash.
(Actually the amount of short-term marketable investments, if the business
has any, is listed after cash and before accounts receivable.)
accounts receivable are viewed as a near-cash type of asset that will be
turned into cash in the short run. A business may not collect all of its
accounts receivable. See also bad debts.

accounts receivable turnover ratio

A ratio computed by dividing annual
sales revenue by the year-end balance of accounts receivable. Technically
speaking, to calculate this ratio the amount of annual credit sales should
be divided by the average accounts receivable balance, but this information
is not readily available from external financial statements. For
reporting internally to managers, this ratio should be refined and finetuned
to be as accurate as possible.

Accounts payable

Acurrent liability on the balance sheet, representing short-term obligations
to pay suppliers.

Accounts receivable

A current asset on the balance sheet, representing short-term
amounts due from customers who have purchased on account.

Chart of accounts

A listing of all accounts used in the general ledger, usually sorted in
order of account number.

Balance of Payments Accounts

A statement of a country's transactions with other countries.

National Income and Product Accounts

The national accounting system that records economic activity such as GDP and related measures.

Accounts Payable

Amounts due to vendors for purchases on open account, that is, not evidenced
by a signed note.

Accounts Payable Days (A/P Days)

The number of days it would take to pay the ending balance
in accounts payable at the average rate of cost of goods sold per day. Calculated by dividing
accounts payable by cost of goods sold per day, which is cost of goods sold divided by 365.

Accounts Receivable

Amounts due from customers for sales on open account, not evidenced
by a signed note.

Accounts Receivable Days (A/R Days)

The number of days it would take to collect the ending
balance in accounts receivable at the year's average rate of revenue per day. Calculated as
accounts receivable divided by revenue per day (revenue divided by 365).

Allowance for Doubtful Accounts

An estimate of the uncollectible portion of accounts receivable
that is subtracted from the gross amount of accounts receivable to arrive at the estimated collectible
amount.

Provision for Doubtful Accounts

An operating expense recorded when the allowance for
doubtful accounts is increased to accommodate an increase in uncollectible accounts receivable.

Unbilled Accounts Receivable

Revenue recognized under the percentage-of-completion
method in excess of amounts billed. Also known as cost plus estimated earnings in excess of
billings.

Accounts Receivable

Money owed to a business for merchandise or services sold on open account.

Discounting of Accounts Receivable

Short-term financing in which accounts receivable are used as collateral to secure a loan. The lender does not buy the accounts receivable but simply uses them as collateral for the loan. Also called pledging of accounts receivable.

Accounting exposure

The change in the value of a firm's foreign currency denominated accounts due to a
change in exchange rates.

Aging schedule

A table of accounts receivable broken down into age categories (such as 0-30 days, 30-60
days, and 60-90 days), which is used to see whether customer payments are keeping close to schedule.

Average collection period, or days' receivables

The ratio of accounts receivables to sales, or the total
amount of credit extended per dollar of daily sales (average AR/sales * 365).

Buy-side analyst

A financial analyst employed by a non-brokerage firm, typically one of the larger money
management firms that purchase securities on their own accounts.

Capitalized

Recorded in asset accounts and then depreciated or amortized, as is appropriate for expenditures
for items with useful lives greater than one year.

Cash

The value of assets that can be converted into cash immediately, as reported by a company. Usually
includes bank accounts and marketable securities, such as government bonds and Banker's Acceptances. Cash
equivalents on balance sheets include securities (e.g., notes) that mature within 90 days.

Cash and equivalents

The value of assets that can be converted into cash immediately, as reported by a
company. Usually includes bank accounts and marketable securities, such as government bonds and Banker's
Acceptances. Cash equivalents on balance sheets include securities (e.g., notes) that mature within 90 days.

Cash conversion cycle

The length of time between a firm's purchase of inventory and the receipt of cash
from accounts receivable.

Cash cycle

In general, the time between cash disbursement and cash collection. In net working capital
management, it can be thought of as the operating cycle less the accounts payable payment period.

Collection policy

Procedures followed by a firm in attempting to collect accounts receivables.

Commission house

A firm which buys and sells future contracts for customer accounts. Related: futures
commission merchant, omnibus account.

Current assets

Value of cash, accounts receivable, inventories, marketable securities and other assets that
could be converted to cash in less than 1 year.

Current liabilities

Amount owed for salaries, interest, accounts payable and other debts due within 1 year.

Dealer market

A market where traders specializing in particular commodities buy and sell assets for their
own accounts.

Demand deposits

Checking accounts that pay no interest and can be withdrawn upon demand.

Discretionary account

accounts over which an individual or organization, other than the person in whose
name the account is carried, exercises trading authority or control.

Electronic depository transfers

The transfer of funds between bank accounts through the Automated
Clearing House (ACH) system.

Factor

A financial institution that buys a firm's accounts receivables and collects the debt.

Factoring

Sale of a firm's accounts receivable to a financial institution known as a factor.

FASB No. 8

U.S. accounting standard that requires U.S. firms to translate their foreign affiliates' accounts by
the temporal method. Gains and losses from currency fluctuations were reported in current income. It was in
effect between 1975 and 1981 and became the most controversial accounting standard in the U.S. It was
replaced by FASB No. 52 in 1981.

FASB No. 52

The U.S. accounting standard which was replaced by FASB No. 8. U.S. companies are required
to translate foreign accounts by the current rate and report the changes from currency fluctuations in a
cumulative translation adjustment account in the equity section of the balance sheet.

Foreign currency translation

The process of restating foreign currency accounts of subsidiaries into the
reporting currency of the parent company in order to prepare consolidated financial statements.

Homemade leverage

Idea that as long as individuals borrow (or lend) on the same terms as the firm, they can
duplicate the affects of corporate leverage on their own. Thus, if levered firms are priced too high, rational
investors will simply borrow on personal accounts to buy shares in unlevered firms.

Investment bank

Financial intermediaries who perform a variety of services, including aiding in the sale of
securities, facilitating mergers and other corporate reorganizations, acting as brokers to both individual and
institutional clients, and trading for their own accounts. Underwriters.

Maturity factoring

Factoring arrangement that provides collection and insurance of accounts receivable.

Membership

or a seat on the exchange A limited number of exchange positions that enable the holder to
trade for the holder's own accounts and charge clients for the execution of trades for their accounts.

Monetary / non-monetary method

Under this translation method, monetary items (e.g. cash, accounts
payable and receivable, and long-term debt) are translated at the current rate while non-monetary items (e.g.
inventory, fixed assets, and long-term investments) are translated at historical rates.

Old-line factoring

Factoring arrangement that provides collection, insurance, and finance for accounts receivable.

Other current assets

Value of non-cash assets, including prepaid expenses and accounts receivable, due
within 1 year.

Payables

Related: accounts payable.

Receivables balance fractions

The percentage of a month's sales that remain uncollected (and part of
accounts receivable) at the end of succeeding months.

Receivables turnover ratio

Total operating revenues divided by average receivables. Used to measure how
effectively a firm is managing its accounts receivable.

Savings deposits

accounts that pay interest, typically at below-market interest rates, that do not have a
specific maturity, and that usually can be withdrawn upon demand.

Settlement price

A figure determined by the closing range which is used to calculate gains and losses in
futures market accounts. Settlement prices are used to determine gains, losses, margin calls, and invoice
prices for deliveries. Related: closing range.

Short-term solvency ratios

Ratios used to judge the adequacy of liquid assets for meeting short-term
obligations as they come due, including
1) the current ratio,
2) the acid-test ratio,
3) the inventory turnover ratio, and
4) the accounts receivable turnover ratio.

Trade debt

accounts payable.

Trading paper

CDs purchased by accounts that are likely to resell them. The term is commonly used in the Euromarket.

ACID-TEST RATIO

A ratio that shows how well a company could pay its current debts using only its most liquid or “quick” assets. It’s a more pessimistic—but also realistic—measure of safety than the current ratio, because it ignores sluggish, hard-toliquidate current assets like inventory and notes receivable. Here’s the formula:
(Cash + accounts receivable + Marketable securities) / (Current liabilities)

BALANCE SHEET

A “snapshot” statement that freezes a company on a particular day, like the last day of the year, and shows the balances in its asset, liability, and stockholders’ equity accounts. It’s governed by the formula:
Assets = Liabilities + Stockholders’ Equity.

Current assets

Cash, things that will be converted into cash within a year (such as accounts receivable), and inventory.

NUMBER OF DAYS SALES IN RECEIVABLES

(also called average collection period). The number of days of net sales that are tied up in credit sales (accounts receivable) that haven’t been collected yet.

Accounting system

A set of accounts that summarize the transactions of a business that have been recorded on source documents.

Double entry

The system of recording business transactions in two accounts.

Ledger

A collection of all the different accounts of the business that summarize the transactions of the
business.

Allowance method

A method of adjusting accounts receivable to the amount that is expected to be collected based on company experience.

Bad debts

The amount of accounts receivable that is not expected to be collected.

Balance Sheet

One of the basic financial statements; it lists the assets, liabilities, and equity accounts of the company. The Balance Sheet is prepared using the balances at the end of a specific day.

Closing entries

The entries that transfer the balances in the revenue, expense, and dividend accounts to Retained earnings and zero out the revenue, expense, and dividend accounts for the next period.

Direct write-off method

A method of adjusting accounts receivable to the amount that is expected to be collected by eliminating the account balances of specific nonpaying customers.

General ledger

A book that contains all the accounts of the company and the balances of those accounts.

Income Statement

One of the basic financial statements; it lists the revenue and expense accounts of the company.
The Income Statement is prepared for a given period of time.

Interest income

Income that a company receives in the form of interest, usually as the result of keeping money in interest-bearing accounts at financial institutions and the lending of money to other companies.

Purchases journal

A journal used to record the transactions that result in a credit to accounts payable.

Trial balance

A listing of all the accounts and their balances on a specified day.

accounting equation

An equation that reflects the two-sided nature of a
business entity, assets on the one side and the sources of assets on the
other side (assets = liabilities + owners’ equity). The assets of a business
entity are subject to two types of claims that arise from its two basic
sources of capital—liabilities and owners’ equity. The accounting equation
is the foundation for double-entry bookkeeping, which uses a
scheme for recording changes in these basic types of accounts as either
debits or credits such that the total of accounts with debit balances
equals the total of accounts with credit balances. The accounting equation
also serves as the framework for the statement of financial condition,
or balance sheet, which is one of the three fundamental financial
statements reported by a business.

accrued expenses payable

The account that records the short-term, noninterest-
bearing liabilities of a business that accumulate over time, such
as vacation pay owed to employees. This liability is different than
accounts payable, which is the liability account for bills that have been
received by a business from purchases on credit.

acid test ratio (also called the quick ratio)

The sum of cash, accounts receivable, and short-term marketable
investments (if any) is divided by
total current liabilities to compute this ratio. Suppose that the short-term
creditors were to pounce on a business and not agree to roll over the
debts owed to them by the business. In this rather extreme scenario, the
acid test ratio reveals whether its cash and near-cash assets are enough
to pay its short-term current liabilities. This ratio is an extreme test that
is not likely to be imposed on a business unless it is in financial straits.
This ratio is quite relevant when a business is in a liquidation situation
or bankruptcy proceedings.

bad debts

Refers to accounts receivable from credit sales to customers
that a business will not be able to collect (or not collect in full). In hindsight,
the business shouldn’t have extended credit to these particular
customers. Since these amounts owed to the business will not be collected,
they are written off. The accounts receivable asset account is
decreased by the estimated amount of uncollectible receivables, and the
bad debts expense account is increased this amount. These write-offs
can be done by the direct write-off method, which means that no
expense is recorded until specific accounts receivable are identified as
uncollectible. Or the allowance method can be used, which is based on
an estimated percent of bad debts from credit sales during the period.
Under this method, a contra asset account is created (called allowance
for bad debts) and the balance of this account is deducted from the
accounts receivable asset account.

book value and book value per share

Generally speaking, these terms
refer to the balance sheet value of an asset (or less often of a liability) or
the balance sheet value of owners’ equity per share. Either term emphasizes
that the amount recorded in the accounts or on the books of a business
is the value being used. The total of the amounts reported for
owners’ equity in its balance sheet is divided by the number of stock
shares of a corporation to determine the book value per share of its capital
stock.

cash flow from operating activities, or cash flow from profit

This equals the cash inflow from sales during the period minus the cash
outflow for expenses during the period. Keep in mind that to measure
net income, generally accepted accounting principles require the use of
accrual-basis accounting. Starting with the amount of accrual-basis net
income, adjustments are made for changes in accounts receivable,
inventories, prepaid expenses, and operating liabilities—and depreciation
expense is added back (as well as any other noncash outlay
expense)—to arrive at cash flow from profit, which is formally labeled
cash flow from operating activities in the externally reported statement
of cash flows.

current assets

Current refers to cash and those assets that will be turned
into cash in the short run. Five types of assets are classified as current:
cash, short-term marketable investments, accounts receivable, inventories,
and prepaid expenses—and they are generally listed in this order in
the balance sheet.

current liabilities

Current means that these liabilities require payment in
the near term. Generally, these include accounts payable, accrued
expenses payable, income tax payable, short-term notes payable, and
the portion of long-term debt that will come due during the coming year.
Keep in mind that a business may roll over its debt; the old, maturing
debt may be replaced in part or in whole by new borrowing.

mark to market

Refers to the accounting method that records increases
and decreases in assets based on changes in their market values. For
example, mutual funds revalue their securities portfolios every day based
on closing prices on the New York Stock Exchange and Nasdaq. Generally
speaking, however, businesses do not use the mark-to-market method
to write up the value of their assets. A business, for instance, does not
revalue its fixed assets (buildings, machines, equipment, etc.) at the end
of each period—even though the replacement values of these assets fluctuate
over time. Having made this general comment, I should mention
that accounts receivable are written down to recognize bad debts, and a
business’s inventories asset account is written down to recognize stolen
and damaged goods as well as products that will be sold below cost. If
certain of a business’s long-term operating assets become impaired and
will not have productive utility in the future consistent with their book
values, then the assets are written off or written down, which can result
in recording a large extraordinary loss in the period.

operating leverage

A relatively small percent increase or decrease in
sales volume that causes a much larger percent increase or decrease in
profit because fixed expenses do not change with small changes in sales
volume. Sales volume changes have a lever effect on profit. This effect
should be called sales volume leverage, but in practice it is called operating
leverage.
operating liabilities
The short-term liabilities generated by the operating
(profit-making) activities of a business. Most businesses have three types
of operating liabilities: accounts payable from inventory purchases and
from incurring expenses, accrued expenses payable for unpaid expenses,
and income tax payable. These short-term liabilities of a business are
non-interest-bearing, although if not paid on time a business may be
assessed a late-payment penalty that is in the nature of an interest
charge.

stockholders' equity, statement of changes in

Although often considered
a financial statement, this is more in the nature of a supporting schedule
that summarizes in one place various changes in the owners’ equity
accounts of a business during the period—including the issuance and
retirement of capital stock shares, cash dividends, and other transactions
affecting owners’ equity. This statement (schedule) is very helpful
when a business has more than one class of stock shares outstanding
and when a variety of events occurred during the year that changed its
owners’ equity accounts.

Average Collection Period

Average number of days necessary to receive cash for the sale of
a company's products. It is calculated by dividing the value of the
accounts receivable by the average daily sales for the period.

Ratio Analysis

The process of using financial ratios, calculated from key accounts
found in a company's financial statements, to make judgements
concerning the finances and operations of the firm

controller

the chief accountant (in a corporation) who is responsible
for maintaining and reporting on both the cost
and financial sets of accounts but does not handle or negotiate
changes in actual resources

standard cost system

a valuation method that uses predetermined
norms for direct material, direct labor, and overhead
to assign costs to the various inventory accounts and
Cost of Goods Sold

Allocation

The process of storing costs in one account and shifting them to other
accounts, based on some relevant measure of activity.

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