Glossary of Accounting, Financial & Investing Information - D

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Day order

An order to buy or sell securities, valid only on the day for which the order is placed.

Day's sales outstanding

Also called average collection period, this ratio is calculated as

trade accounts receivable balance x 365
annual credit sales

The trade accounts receivable amount used in this ratio should be the amount before any deduction for uncollectible accounts.

The following is an example of the calculation:

For a firm with terms of net 30 days, days outstanding of 91.25 would indicate a severe problem in the collection of accounts receivable.

See also accounts receivable turnover and aged accounts receivable.

Debenture

A debenture is a type of debt issued by a corporation.  It is not secured by any specific assets, as is a bond.  A debenture is backed by assets of the corporation that have not been pledged as security for other debt.

Debt/Equity ratio (D/E)

This measure of financial strength is calculated as a company's total debt divided by its total shareholders' equity.  The lower the number, the better.

Deferred life annuity

Deficit

When referring to the government deficit, this is the excess of expenditures over revenues for a one year period.  The National Debt is the total debt of the Federal government, and when there is a deficit the debt is increased.

When referring to the financial statements of a corporation, a deficit occurs when a corporation has accumulated more losses than profits over the years.  This shows up as a negative amount of Retained Earnings on the balance sheet.

Defined Benefit Pension Plan (DBPP)

Retirement plans can be classified as either Defined Benefit Pension Plans or Defined Contribution Pension Plans.  With a defined benefit plan, the employees know in advance what their pension will be when they retire.  The company makes contributions to the plan based on actuarial calculations of what contributions are necessary to fund current and future pensions.  The plan funds are invested, and the company must make higher contributions if the investments perform poorly.

With defined benefit pension plans there is some risk to the employee, because these plans are never funded enough that 100% of current and future pension obligations can be covered.  If the company becomes insolvent, employees may not get their full pension. 

Defined Contribution Pension Plan (DCPP)

Retirement plans can be classified as either Defined Benefit Pension Plans or Defined Contribution Pension Plans.  With a defined contribution plan, the employees do not know in advance what their pension will be when they retire, but they do have some control over how their pension funds are invested.  The company makes contributions to the plan usually based on a percentage of the employee's wages.  Often the employee can also contribute, which may result in a higher contribution by the employer.  The plan funds are invested in individual accounts for each employee.  The employee usually has a choice of types of securities in which to invest their funds.

With defined contribution pension plans the risk to the employee is that the investments may perform poorly.  However, the upside is that if the investments perform well, all profit increases go to the employee.  If the company becomes insolvent the employee will not lose any of the pension, because the funds are in the employee's name.

Depreciation

Depreciation is the expensing, over a period of years, of the cost of property such as machinery, equipment, buildings, vehicles and furniture, usually based on the estimated useful life of the asset.  Land is not depreciated.  There are various methods of depreciation used for accounting purposes, with two of the most common being straight line and declining balance (usually double declining balance).  

Straight line depreciation - the original cost of the asset is written off in equal amounts over the estimated useful life.  
Example:  machinery with an estimated useful life of 5 years, original cost $50,000.
Straight line depreciation amount = $50,000/5 (or $50,000 x 20%) = $10,000 each year

Declining balance depreciation - a fixed percentage is applied to the remaining book value (undepreciated balance) each year to determine the depreciation amount.  With double declining balance, a percentage of twice the straight line rate is used.

Example showing the first 5 years of  declining balance depreciation:

When income-producing property is depreciated for tax purposes, the method and rate of depreciation for each asset are determined by the Internal Revenue Code, and the Treasury (Tax) Regulations, also known as the Federal tax regulations.  Depreciation can be claimed if all of the following conditions are met - the property

See the following Internal Revenue Service (IRS) information:

Derivative

A financial product whose value is derived from fluctuations in the value of an asset, such as options and futures.  See also hedging and speculator.

Director

Directors are the people elected by shareholders to oversee the management of the company.

Discount rate

The discount rate is the interest rate charged to commercial banks and other financial institutions on loans from their regional Federal Reserve Bank's lending facility, the discount window.  There are three discount window programs - primary credit, secondary credit, and seasonal credit.  Each of these has its own interest rate, but the term "discount rate" is often used to describe the primary credit rate.

The discount rates are higher than the Federal Open Market Committee (FOMC) federal funds rate (target rate for federal funds).  The primary credit rate is currently 25 basis points (0.25%) higher than the FOMC target rate for federal funds.

See the Federal Reserve Discount Window website for further information, as well as current and historical discount rates.

Discretionary account

A discretionary account is a brokerage account where the client has authorized the broker to buy and sell stocks without contacting the client.

Diversification

Diversification is a method of reducing risk by buying assets in different industries, different countries, and different types of securities such as bonds, stocks, etc. (Don't put all your eggs in one basket.)

Dividend

An amount distributed out of a corporation's retained earnings (accumulated profits) to shareholders.  Dividends on preferred shares will usually be for a fixed amount.  Dividends on common shares may fluctuate depending on the profits of the company.  Some companies pay dividends on common shares, and some do not.

Dividend reinvestment plan (DRIP)

A DRIP is a dividend reinvestment plan, whereby when a dividend is issued to the shareholder, it is used to purchase further shares of the company instead of paying out a cash dividend.  These purchases are usually done with no brokerage fees. Shareholders can only participate in a DRIP if they have shares registered in their own name, instead of in street name.  The dividends that are reinvested in more shares are still considered taxable dividend income.

Dividend yield

This is the % obtained by dividing the dividend per share by the current market price per share, x 100.

Example:  market value per share $37, annual dividend $1.85, yield = 1.85/37 x 100 = 5%

Dollar cost averaging

Instead of purchasing a large number of shares at one time, a smaller number of shares are purchased at regular intervals over a period of time.  This reduces volatility, because stocks usually go up slowly, but can go down quickly.

Due diligence

Performing an investigation to verify information, often regarding a business which is being considered for purchase.

Revised: October 12, 2021