Donovan, Klimczak & Company CPAs

Glossary of Accounting Terms

Accounting - Recording and reporting of financial transactions, including the origin of the transaction, its recognition, processing, and summarization in the financial statements.

Accrual Basis - Method of accounting that recognizes revenue when earned, rather than when collected. Expenses are recognized when incurred rather than when paid. The accrual basis of accounting utilizes the matching principal.

Alternative Minimum Tax (AMT) - Tax imposed to back up the regular income tax imposed on corporations and individuals to assure that taxpayers with economically measured income exceeding certain thresholds pay a certain level of income tax.

Audit – The presentation of financial data where the accountant expresses assurance that the financial statements taken as a whole are in conformity with generally accepted accounting principles (GAAP) and are free from material misstatement. In an audit, the Certified Public Accountant (CPA) conducts the examination under Generally Accepted Auditing Standards (GAAS).

Balance Sheet - Basic financial statement, usually accompanied by appropriate disclosures that describe the basis of accounting used in its preparation and presentation of a specified date the entity's assets, liabilities and the equity of its owners. This report could also be titled as a statement of financial condition.

Cash Basis - Method of bookkeeping by which revenues and expenditures are recorded when they are received and paid. There may not be a consistent matching of income or expense with the proper reporting periods.

Certified Public Accountant (CPA) - Accountant who has satisfied the education, experience, and examination requirements of his or her jurisdiction necessary to be certified as a public accountant.

Compilation – Accountants’ report of financial statement data without the accountant’s assurance as to conformity with Generally Accepted Accounting Principles (GAAP).

C Corporation – A C Corporation is a corporation which, under the Internal Revenue Code, is directly subject to its federal income tax after all revenue and expenses have been considered.

Fair Market Value - Price at which property would change hands between a buyer and a seller without any compulsion to buy or sell, and both having reasonable knowledge of the relevant facts.

Financial Statements - Reports of financial data including the balance sheet, income statement and statements of cash flow, or any supporting statement that is intended to communicate an entity's financial position at a point in time and its results of operations for a period then ended.

Generally Accepted Accounting Principles (GAAP) - Conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. The highest level of such principles are set by the Financial Accounting Standards Board (FASB).

General Partnership – A partnership with no limited partners.

Goodwill - Premium paid in the acquisition of an entity over the fair value of its identifiable tangible and intangible assets less liabilities assumed.

Historical cost - Original acquisition cost of an asset to the entity.

Income Statement – Report summarizes the revenues and expenses over a period of time.

Limited Liability Company (LLC) - Form of doing business combining limited liability for all owners (called members) with taxation as a Partnership. An LLC is formed by filing Articles of Organization with an appropriate state official. Rules governing LLCs vary significantly from state to state.

Limited Liability Partnership (LLP) - General Partnership which, via registration with an appropriate state authority, is able to provide all its partners in limited liability. Rules governing LLPs vary significantly from state to state.

Limited Partnership - Partnership in which one or more partners, but not all, have limited liability to creditors of the partnership. At least one member is a general partner.

Matching Principle - A fundamental concept of basic accounting. In any one given accounting period, the revenue is matched with the expenses it took to generate that revenue in the same time period, or over the periods in which one will be receiving benefits from that expenditure.

Materiality - Magnitude of an omission or misstatements of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would change or be influenced.

Other Comprehensive Basis of Accounting (OCBOA) - Consistent accounting basis other than Generally Accepted Accounting Principles (GAAP) used for financial reporting. Examples include the Income Tax Basis or a Cash Basis.

Partnership - Relationship between two or more persons based on a written, oral, or implied agreement whereby they agree to carry on a trade or business for profit and share the resulting profits.

Passive Activity Loss - Loss generated from activities involved in the conduct of a trade or business in which the taxpayer does not materially participate, or in rental real estate activities.

Prepaid Expense - Cost incurred to acquire economically useful goods or services that are expected to be consumed in the revenue-earning process within the current operating cycle.

Proprietorship - Business owned by an individual without the limited liability protection of a Corporation or a Limited Liability Company (LLC). Also known as sole proprietorship.

Review - Accounting service that provides some assurance as to the reliability of financial information. In a review, a Certified Public Accountant (CPA) does not conduct an examination under Generally Accepted Auditing Standards (GAAS).

S Corporation - An S Corporation is a corporation which, under the Internal Revenue Code, is generally not subject to federal income taxes. Instead, taxable income of the corporation is passed through to its stockholders and taxed at their respective individual income tax rates.

Surviving Spouse - This is a person whose husband or wife died during the tax year. A surviving spouse may file a joint return for the year in which the death occurred and typically files as “Head of Household” in subsequent years provided he or she:
  1. Remains unmarried; and
  2. Maintains as his or her home a household that is the principal place of abode during the entire tax year for a child for whom a dependency exemption may be claimed.

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