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  Glossary - A  

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Glossary of Accounting, Financial & Investing Information - A

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Accounts payable

Accounts payable are amounts owed by a business for goods or services they have purchased.

Accounts payable turnover

The accounts payable (a/p) turnover ratio is calculated as

total purchases in the year
average accounts payable

Average accounts payable can be determined 2 different ways:

  1. Add together the a/p balances from the beginning of the year and the  end of the year, and divide by 2

  2. Add together the a/p totals from the end of each month, and divide by 12.  This is a better way of calculating the ratio.

If this ratio decreases from one year to the next, it means the company is taking longer to pay off its suppliers.  If the ratio increases, the company is paying off its suppliers more quickly.

Accounts receivable

Accounts receivable are amounts owed to a business by their customers.

Accounts receivable turnover

The accounts receivable (a/r) turnover ratio is calculated as

total credit sales in the year
average accounts receivable

Average accounts receivable can be determined 2 different ways:

  1. Add together the a/r balances from the beginning of the year and the  end of the year, and divide by 2

  2. Add together the a/r totals from the end of each month, and divide by 12.  This is a better way of calculating the ratio.

If this ratio decreases from one year to the next, it means the company is taking longer to collect from its customers.  If the ratio increases, the company is collecting from its customers more quickly.

See also aged accounts receivable  and day's sales outstanding.

Accrual

An accrual is done at the end of an accounting period (usually monthly) to record costs which have been incurred but not paid for or previously recorded, and to record revenue which has been earned but not received or previously recorded.

Accrual method accounting

Using the accrual method (or accrual basis) for preparing accounting records, revenues and costs are recorded in the accounting period in which they occur, even if the revenues have not been received or the costs have not been paid.  Under the cash method, the revenues and expenses are recorded when the revenues are received and the expenses are paid.

Most non-farm taxpayers engaged in business are required to use the accrual method for preparing their tax returns.  Farmers may choose the cash method, but corporations or partnerships engaged in farming must report their income using the accrual method.  There are some exceptions to this.  See the IRS publication Farmers ATG - Chapter Two - Income, Cash/Accrual/Hybrid.

Accrued Interest

Interest which has accumulated since the last interest payment date, and has not been paid.

Accumulated depreciation

The total of all depreciation which has been written off over the years against depreciable assets such as buildings, machinery and equipment.

Aged accounts receivable

An aged accounts receivable report shows the amounts in accounts receivable according to how long they have been outstanding, such as current, over 30 days, over 60 days, and over 90 days.  This report is used at year end to calculate the allowance for doubtful accounts.  When amounts are outstanding over 90 days there is much less likelihood that they will be eventually collected.

See also accounts receivable turnover and day's sales outstanding.

Amortization

Amortization is the gradual expensing of an asset over a number of years, instead of expensing it in the year of purchase.  Amortization usually relates to intangible assets such as goodwillDepreciation is the term used for amortization of property such as buildings, machinery and equipment, furniture and other assets which are used in a business and have an expected life of more than one year.

Amortization is also the term used when a loan is being repaid over time.  The amortization schedule is a document which shows the payment dates, payment amount, interest and principal portion of each payment, and the balance of the loan after each payment, until the balance reaches zero.

Annual report

Public corporations must make available to their shareholders a yearly report which includes the financial statements of the corporation.

Arbitrage

The simultaneous purchase of a security on one stock exchange and sale of the same security on another stock exchange, often in  a different country.  This is done to make a profit from the difference in prices between the two stock exchanges, due to different prices, and currency fluctuations.  The person doing the simultaneous purchase and sale is called an arbitrageur.

Arrears

Amounts owed that were not paid when due.

Articles of incorporation

Every corporation has articles of incorporation, a document prepared by the people creating the corporation.  This document sets out the structure and purpose of the corporation, and specifies rules that the corporation must follow regarding issuing or transferring shares, electing officers, conducting general meetings, voting of members, borrowing funds, paying dividends, and other corporate functions.

Ask/bid

The ask price on a security is the price that a prospective seller is willing to accept, and the bid price is the price that a prospective buyer is willing to pay.

Assets

Assets are items owned by or owed to a company or individual, such as cash and investments, inventories, prepaid expenses, accounts receivable, and intangible assets (goodwill, intellectual property, etc.).  Assets are generally shown at cost on a balance sheet.  Property, equipment and intangible assets are shown at book value (cost less accumulated depreciation or amortization).  Land is a fixed asset which is not depreciated.

Average collection period

See day's sales outstanding.

Averaging down

Averaging down is when you purchase a security that you already own, for less than the price you originally paid.  This lowers your average cost.

Tax Tip:  Pay down all non-tax-deductible debt with over 8% interest, then see our Save and Invest page.

Revised: August 08, 2017

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