QuickBooks 2016 All-in-One For Dummies (2016)
See www.dummies.com/extras/quickbooks2016aio for a list of great government websites for business research.
Contents at a Glance
Glossary of Accounting and Financial Terms
ABA transit number
The number that identifies the bank against which a check is drawn. Every check has an American Bankers Association (ABA) transit number, usually located in the top-right corner. The number — actually, two numbers separated by a hyphen — identifies the bank’s location and the bank’s name.
ABC (activity-based costing) management
An approach to cost accounting that tries to more accurately assign overhead costs and more precisely measure the profits of a firm’s products, services, and business units. Refer to Book IV, Chapter 4 for a more complete discussion.
The record of transactions in a checking, savings, securities, trust, or charge account, including the account’s up-to-date balance.
The number that identifies the holder of an account. All accounts must have an account number.
The results of an audit of a company’s records and books.
An accounting method in which income gets recorded as it’s earned (typically, when you prepare an invoice) and expenses are recorded as they occur (typically, when you receive an invoice).
Interest earned on a bond or certificate of deposit but paid at some future date, such as when the bond or certificate of deposit is sold.
Latin for to the value. Sales and property taxes are calculated ad valorem, as a percentage of the property value or the thing being sold.
The insurance company representative who decides how much insurance settlements should be.
A signed statement promising that you will fulfill an obligation. Affidavit means has pledged his faith in Latin.
A check whose signature, date, payee name, or amount has been changed or erased. Banks can refuse to honor altered checks.
alternative minimum tax
A flat-rate tax that trusts, corporations, and individuals must pay, regardless of how much or how little tax they owe. The alternative minimum tax ensures that individuals and companies pay at least some tax.
The gradual paying off of a debt or a loan.
A schedule for making payments on a mortgage. The schedule shows the number of payments, when payments are due, how much of each payment goes toward the principal and how much goes toward paying interest, and the declining amount of money owed on the loan as payments are made.
A percentage rate above which payments on an adjustable-rate mortgage can’t rise, no matter how much interest rates rise.
annual percentage rate (APR)
The cost of a loan, expressed as a percentage of the amount of the loan.
annual percentage yield (APY)
The amount of interest income that an account will earn in a year, expressed as a percentage rate.
A report showing the financial status of a corporation. Public corporations are required to issue annual reports to their shareholders. Smaller firms typically don’t issue annual reports.
Submitting a dispute to a third party for settlement instead of to a court of law. If the arbitration is binding, the parties involved are required to agree to the settlement.
A transaction made between a buyer and seller who have no relationship with each other. Transactions made between subsidiary companies of the same parent company aren’t arm’s-length transactions because the companies may be acting in the interest of a parent company instead of in their own interest.
For tax purposes, the value of a property. Usually, property taxes are paid as a percentage of the assessed valuation of the property.
The amount charged, such as for property taxes.
Any property that has value. Real estate, personal items, and even trademarks are examples of assets. The value of all your assets is called your total assets.
A dividend paid as property instead of cash. For example, in lieu of cash, a corporation may pay dividends in the form of stock certificates to its stockholders.
A lending method in which a company’s accounts receivable and inventory are used as collateral for the loan and as the basis for determining whether the company is worthy of receiving a loan.
A mortgage in which the borrower, if he or she subsequently sells the property, has the right to pass on the unpaid portion of the mortgage to the new buyer.
A person hired to act in the name of another person; also called power of attorney.
A formal examination of the accounts, assets, liabilities, and transactions of a company or an individual.
The results of an audit of a company’s records and books.
average annual yield
The interest income you can earn on a certificate of deposit (CD) or bank account, expressed as a percentage.
A sales commission that the investor pays to the broker only if the investor sells or disposes of mutual funds. With a front-end load, the investor pays the sales commission when purchasing the funds from an investment house.
A check that a bank refuses to honor. A check is considered to be bad if it isn’t filled out completely, if it doesn’t have the proper endorsement signatures, or if the account on which it’s drawn doesn’t have sufficient funds to cover it.
A bank loan in which the last payment is a large lump-sum payment.
A mortgage in which the last payment is much larger than the other payments. Typically, a balloon mortgage is given to home buyers who anticipate a large appreciation of their property and who intend to sell before the mortgage matures. Balloon mortgages are also given to borrowers whose incomes are likely to rise.
A large lump-sum payment made as the last payment on a loan.
bank discount rate
The rate that banks charge customers for the use of banker’s acceptances and other financial instruments.
A check written by a bank that draws on funds that the bank holds in another bank. For example, if a customer in Las Vegas needs funds immediately, a bank in Boston may issue a bank draft on its account in Las Vegas so that the customer can get the money more quickly. Banks charge for this service.
A short-term credit instrument used by importers and exporters to speed international trade. The exporter sends a bill of exchange to a bank in the United States, which accepts the bill of exchange and agrees to pay it if the importer can’t pay.
The legal procedure for deciding how to handle the debts of a business or individual who can’t meet credit obligations.
The original cost of an asset, used to calculate capital gains and capital gains taxes.
A percent of 0.01, the smallest percentage point for quoting bond yields. If a bond yield changes from 6.00 to 6.85 percent, it has moved 85 basis points in yield.
The people who benefit, or receive annuities, from a life insurance policy when the policyholder dies.
A gift of money or personal items made in a will.
A measure of how volatile the price of an investment or stock is, compared with the entire market. If the price changes dramatically, the investment has a high beta. If the price is stable, it has a low beta.
bill of exchange
A financial instrument by which one party instructs another party to pay a third party; also called a draft.
an online payment system and also the virtual currency unit used by the online payment system.
A check or bill of exchange in which the “Pay to the order of” line is left blank.
A mortgage that covers more than one piece of property.
An insurance policy that covers more than one piece of property or that offers insurance of more than one type for a single piece of property.
board of directors
Advisors elected by stockholders to manage an incorporated company. The board of director’s job is to represent stockholder interests and oversee the company’s management.
An interest-bearing certificate of public or private indebtedness. Bonds pay a fixed interest rate and are redeemable after a certain time period.
A bond sold for less than the value that its issuer promises to pay when the bond reaches maturity.
bond, fidelity or surety
Binding promises that “principal(s)” will perform certain acts for “obligee(s),” with the obligee(s) being paid sums of money if the principal(s) don’t fulfill the obligations. Fidelity bonds pay employers in case their bonded employees prove to be dishonest. Surety bonds guarantee that the principal, often an employer, will fulfill certain duties.
A bond sold for more than the value its issuer promises to pay when the bond reaches maturity.
Bonds of the same type of class offered at the same time.
A ranking system for assessing the financial solvency of bonds. AAA is the highest ranking. Bonds are ranked by Standard & Poor’s and Moody’s Investors Service, among others.
The original value of an asset less the accumulated depreciation. The book value is the value of an asset on the balance sheet and is different from the market value.
A short-term loan provided while long-term financing is being finalized.
A loan for which the principal is paid in one payment, in one lump sum. For example, a ten-year bullet loan probably would require regular interest payments but wouldn’t require any principal payments until the end of the ten years.
A plan explaining to loan officers or potential investors how a new business or a business that is restructuring will use the loan or investment money. See Book VI, Chapter 3 for more information.
An option to purchase shares of a stock at a specific price in a certain time period. Brokers exercise a call option if the price of the stock rises above the option price during the option period.
Bonds that issuers can pay off before the maturity date is reached.
A check that has been endorsed by a payee and paid by the bank from which it was drawn.
All items of value owned by an individual or corporation, including cash, inventory, and property.
capital gain (or loss)
The difference between the purchase price of a capital asset and the resale price. If the resale price is higher than the purchase price, a capital gain results. If the resale price is lower than the purchase price, a capital loss results. Capital gains of individuals are subject to favorable tax treatment.
For accounting purposes, a lease that is treated as an owned asset. Equipment is often leased to companies on a capital basis. The company leasing the asset enjoys the tax benefits of ownership, including deductions for maintenance expenses. When the lease expires, the company leasing the asset is usually allowed to purchase it.
A general term referring to stock markets and bond markets where governments and corporations can sell securities, stocks, and bonds in order to raise capital.
Money that can be used for financial transactions, including funds held in checking accounts.
An accounting method in which income and expenses are recorded when money actually changes hands. Cash-basis accounting is generally easier to do than accrual accounting — and often produces tax benefits.
Stock dividends paid in cash, not in shares of stock.
cash surrender value
The amount of money that a life insurance policy pays if the holder gives up the policy or cancels it. The cash surrender value of a life insurance policy can be used as collateral on a loan.
A check written by a bank against its own funds. Cashier’s checks are guaranteed to be redeemable because they’re drawn on banks.
A check that has been guaranteed by a bank and can be considered as good as cash. Before giving its acceptance, the bank makes sure that enough money is in the account to cover the check and that the signature is valid.
certified public accountant (CPA)
A person who has been certified by the state to issue opinions about the accuracy and fairness of a business’s financial reports. CPAs also typically provide tax planning and preparation services for businesses and individuals.
A contribution to a charity that can be deducted for income tax purposes.
A written order instructing a bank to pay a sum to a third party.
An illegal scheme for fraudulently inflating the account balance of checking accounts. For example, a man with two checking accounts, one in Bank A and one in Bank B, writes a check on account A for $5,000 to his Bank B account. He deposits the check in Bank B. Until the check clears, he has $5,000 in both Bank B and Bank A. Next, he writes a check on account B for $5,000 to his Bank A account. He deposits this check, too. Until the checks clear, he has $10,000 in his Bank A account and $5,000 in his Bank B account. On paper he has $15,000; actually, he has only $5,000.
A demand for money from an insurance company. You file a claim when you believe you’re entitled to compensation from an insurer.
A lawsuit filed on behalf of a group of people who have been wronged in the same way.
To settle or discharge an account. Checks are cleared when they’re redeemed for cash.
A convenient place where banks in a given area exchange checks written against one another. Clearinghouses make it easier for banks to clear and settle checks because bank representatives can meet in a central place without needing to visit one another’s banks. These days, clearinghouses are mostly electronic.
A fund that issues a fixed number of shares instead of continuously offering new shares to buyers.
The final price of a stock or commodity at the time the exchange closes for the day.
cloud on title
A title that can’t be transferred to someone else because liens, court judgments, or other impediments prevent the owner from selling it.
A percentage amount for which an insurance policyholder must be covered. For example, if a fire insurance policy has a 70 percent co-insurance clause, the insured must be covered for at least 70 percent of the value of his or her home.
As part of a loan agreement, the property or securities that the borrower pledges to the lender in case the borrower can’t pay back the loan.
A loan given on the strength of the borrower’s collateral, as opposed to the borrower’s good standing in the community or good character.
The value of the properties and securities that a prospective borrower has pledged when applying for a loan.
An organization whose job is to collect outstanding debts from individuals on behalf of companies and businesses.
A letter, always very polite but vaguely threatening, asking you to please pay an overdue bill.
When bidders agree among themselves to offer one (usually low) bid. Collusive bidding always results in a lower bid than competitive bidding, in which the bidders don’t know one another’s bids.
A full-service bank owned by stockholders that makes loans, accepts deposits, and offers other commercial financial services.
Promissory notes, such as checks, drafts, and IOUs, that constitute a debt of some kind. Commercial paper is negotiable and can be traded.
The fee that brokers and agents charge for their services. A commission is often a percentage of the total value of a sale.
The body of law developed in England, based on precedents and custom, that forms the basis of the legal system in all U.S. states except Louisiana, where Napoleonic law is practiced.
Securities that represent ownership in a corporation. By law, holders of common stock can receive dividends only after claims by preferred stockholders, creditors, and bondholders have been satisfied. Common stockholders are the last to be paid if a corporation goes bankrupt.
A minimum balance that borrowers who want to secure a loan from a bank must keep on deposit with the bank.
Interest calculated on the original principal of a deposit plus all accrued interest.
A judicial decree in which the parties settle their differences by agreeing to change their practices rather than by going through litigation.
A person appointed by a court to manage the affairs of an estate or the affairs of a person deemed to be incompetent.
An arrangement in which the manufacturer or person who made the goods is paid only after the goods are sold (referred to as sold on consignment).
A loan covering construction costs, paid out at intervals as the construction project is completed; also called a construction mortgage.
A notice published in a newspaper announcing some action, such as a lien or the confiscation of property by the state. By law, some actions must be given constructive notice so that anyone who objects can take action.
Credit given to individuals so that they can buy personal things.
Items that consumers purchase infrequently and use over a period of years, such as television sets and washing machines; also called durable goods.
The lease of a consumer item, such as a car, with a value of less than $25,000.
consumer price index
An index that measures the cost of living in the United States. The U.S. Labor Department is responsible for monitoring the consumer price index.
Consumer Credit Protection Act
An act passed by Congress in 1969 requiring lenders to be truthful about how they compute finance charges. Under the Consumer Credit Protection Act, finance charges must be expressed as an annual percentage rate (APR) of the loan amount. This act is also called Truth in Lending.
A legally binding agreement between two or more parties, in which the responsibilities of each party are clearly outlined.
In a health insurance plan, a percentage of a medical bill that you pay. (The insurer covers the rest.) Typically, you co-pay bills until you reach a certain dollar limit. After that point, the insurer pays 100 percent of your medical bills.
A joint signer of a promissory note. Co-signers are jointly responsible for paying back loans.
cost-of-funds index (COFI)
An index that banks use to help determine the cost of adjustable-rate mortgages (ARMs). If the index goes up, so do ARM payments.
Payment increases that pensioners and Social Security recipients receive to offset rising costs caused by inflation.
Money, bank cards, or checks that look real but are not. If you accept a counterfeit dollar bill from a customer, by the way, you’re the only one who loses.
A signature that asserts the authenticity of a document already signed by another. In most companies, large checks require a countersign. A countersign is also called a countersignature.
A written agreement between parties that has been sealed from public disclosure.
Money that a bank or other lending institution places at your disposal when you agree to pay it back later; also, the portion of a bookkeeping entry that appears on the right side of a ledger (as discussed in Book I, Chapter 2).
An agency that obtains data about the credit history of individuals and companies and then offers that data to creditors and others.
Insurance purchased by banks as a defense against large credit losses.
The most that a consumer or company can borrow at one time from a bank or other creditor.
A prearranged agreement whereby a lender will extend credit to an individual or company. You typically pay an annual fee for a credit line even if you don’t use the credit line.
A lender’s appraisal of a borrower’s ability to pay back loans. Credit ratings are based primarily on the borrower’s history of paying back loans.
The risk that a borrower won’t be able to pay back a loan.
A notice removing a credit card charge from a cardholder’s bill. If you return something that you’ve purchased with a credit card, you’re issued a credit slip in the amount of the charge to reverse its effect on your credit card balance.
A bank or other agency that extends credit to borrowers. The opposite of a creditor is a debtor.
Collateral that backs up several loans, not just one, as arranged by agreement with the lender.
Paper money in circulation; also, the paper money issued by a nation. The dollar is the currency of the United States.
Assets that either are equivalent to cash or that can easily and readily be converted to cash, including cash, money market funds, accounts receivable, inventory, and short-term investments.
The annual interest rate paid by a bond or other security, expressed as a percentage of the principal.
The time between the date a bond is issued and its first call date — that is, the day it can be redeemed, either in whole or in part.
An institution or a broker that oversees the management of a group of assets.
A bank account held in trust by a parent or guardian on behalf of a minor.
Taxes placed on goods being imported.
Billing one set of customers from a customer list on specific days of the month. For example, customers whose last names begin with A would be billed on the first day of the month, customers whose last names begin with B would be billed on the second day, and so on. The idea is to spread out the paperwork over a month and keep bill payments coming in regularly.
Interest compounded daily on a bank deposit. Although the interest is compounded daily, it’s deposited in accounts at weekly, biweekly, or monthly intervals.
A person who trades in securities on his or her own. Dealers trade with their own money and take the risks themselves; brokers trade on behalf of others.
Unsecured bonds backed by the general credit of the issuer, not by the issuer’s assets.
An entry made on the left side of a ledger that records an expense. Refer to Book I, Chapter 2, for a complete discussion.
Interest or principal payments on a mortgage. Debt service usually describes either the monthly payments or the total annual payment.
A signed document describing a legal agreement or contract.
deed of trust
A legal document giving the bearer title to a property. Banks usually hold the deed of trust until the borrower has paid the mortgage in full. After that, title is given over to the borrower.
To fail to pay back a loan or meet an obligation.
Earnings to be received in the future, not when they’re earned. Deferring compensation sometimes has tax advantages.
The amount by which a taxpayer fails to fulfill tax obligations. For example, if you underpay by $500, you have a $500 deficiency.
A court order giving a lender authority to collect part of the proceeds from a sale of property when the seller of the property has defaulted on a mortgage or other financial obligation.
defined benefit plan
A retirement plan set up for an organization’s employees whereby the retirement benefit is set (defined) with a formula. These plans pay no taxes on their investments and must be managed according to federal standards.
defined contribution plan
Blanket term for various plans by which employees can make tax-deferred contributions to retirement plans. A key feature of these plans is that the contribution amount is set (defined) with a formula.
A decline in prices. Inflation, a rise in prices, is the opposite of deflation.
Failure to fulfill a financial obligation. Loans with two or more payments overdue are considered to be delinquent.
A loan that can be paid back at any time and has no maturity date. Interest is paid until the principal has been paid off.
Money entered in a bank account.
Insurance on bank deposits to protect depositors in the event of a bank failure. The Federal Deposit Insurance Corporation (FDIC), a government agency, insures bank accounts up to $250,000.
A bank where funds and securities are deposited.
A method of calculating the expense of using certain long-lived assets; also, the decline in value of an asset.
Automatic depositing of paychecks in employees’ bank accounts. Many companies now offer their employees direct deposit.
Selling a security issue to one group of investors without the use of underwriters. Long-term securities are sometimes sold to institutions this way.
discharge of bankruptcy
A court order giving a bankrupt debtor release from all debt obligations. The debtor is no longer responsible for the debts, although the record of bankruptcy remains on the debtor’s credit record for ten years.
Information about the annual percentage rate (APR), method of computing interest, and minimum monthly payment that banks must give to mortgage customers. Federal law requires banks to disclose this information.
A reduction in price. In the bond market, the discount is the difference in price between what a bond costs today and its face value (what it will cost at maturity).
One percent of the principal of a mortgage. Home buyers typically pay the lender one discount point when their loans close.
Rate used to measure the value of money over time. As a practical matter, a discount rate is the same thing as an interest rate.
Method for computing Treasury bill yields, in which the par value is computed instead of the purchase price. The formula for computing discount yields is the discount, divided by the par value amount multiplied by 360, divided by the number of days to maturity.
discounted cash flow
A mathematical technique used by financial analysts in which future-day dollars are converted to present-day dollars by adjusting for inflation and compound interest.
Converting future-day dollars to present-day dollars by adjusting for inflation and compound interest. Because discounting calculations are cumbersome, one typically uses a computer to perform the actual calculations.
Investing in many different areas — real estate, stocks, and bonds, for example — as a hedge against decline in one area. Diversification really means not putting all your eggs in one basket.
To sell off assets or businesses because they’re unprofitable or because they don’t fit in a company’s plans for the future.
A profit share paid out to a stockholder.
dividend reinvestment plan
A plan that allows corporate stockholders to be paid in cash or in stock.
Refers to federal taxes on corporate earnings and how these earnings are taxed twice: once in the form of corporate taxes and again when earnings are distributed to shareholders.
Tax on imported or exported items.
A sum of money paid for property to assure the seller that the buyer is sincere. When the sales transaction is completed, the earnest money is counted toward the purchase price of the property.
Any asset that generates interest income.
earnings per share
The amount that each stock share earns in dividends after both preferred stockholders and taxes have been paid.
Economic Value Added (EVA)
Measures the true economic profit of a business by comparing a firm’s profit with the return on investment that shareholders should have earned. Refer to Book V, Chapter 2 for a more complete discussion.
effective annual yield
What a depositor earns on a certificate of deposit (CD) or savings account on a yearly basis, provided that the money isn’t withdrawn.
electronic funds transfer (EFT)
Transferring money by electric wire instead of by traditional paper means, such as check writing.
Keeping ships from entering port or leaving port by government decree.
Fraudulently appropriating money for personal use.
Employee Retirement Income Security Act (ERISA)
Federal act describing how managers of profit-sharing funds and private pension funds may invest those funds. ERISA sets guidelines for fund managers.
employee stock ownership plan (ESOP)
A plan that allows employees to buy stock in the company that they work for.
A signature that allows for the transfer of a negotiable item. The signature on the back of a check, for example, is an endorsement.
A tax accountant who has proved her skills to the Internal Revenue Service by passing three tests about tax law. An enrolled agent is essentially an alternative to a CPA for individual taxpayers and some small businesses.
An agreement whereby a deed, a bond, or property is held in trust by a third party until some obligation is fulfilled.
A deceased’s property at the time of death. An estate is passed to the deceased’s heirs if he or she left a will. If not, the matter of how to divide the estate is decided by a probate court.
Taxes levied by federal and state governments on the transfer of property from an estate to its beneficiaries. Estate taxes are paid by the estate. Inheritance taxes are paid by heirs for the property that they receive.
The rate that the currency of one country is trading against the currency of another. For example, an exchange rate of 118.18 yen to the dollar means that one U.S. dollar purchases 118.18 Japanese yen.
Taxes on acts, not property. For example, sales of liquor are subject to excise taxes.
The principal of a stock, bond, or other security; also, the principal of an insurance policy. Face value is sometimes called par value.
fair market value
The reasonable price of an asset. Fair market value is the price that a willing seller and buyer would negotiate for an asset, given that both know all the facts and are under no compulsion to buy or sell.
Federal Deposit Insurance Corporation (FDIC)
Federal agency that insures bank accounts against bank failures. At this writing, the FDIC insures accounts to $250,000.
federal funds rate
Interest rate charged to commercial banks for purchasing federal funds. The federal funds rate is the benchmark for many commercial credit rates, including short-term business loans.
Federal Unemployment Tax
Tax paid on wages and salaries to pay for federal and state unemployment programs.
The cost of interest payments, filing fees, and other costs apart from the actual cost of an item. The finance charge is what you pay when you finance a purchase.
A private company that issues loans.
Financial Accounting Standards Board (FASB)
The board that establishes rules for CPAs. This board also determines the generally accepted accounting principles.
A period of 12 months for which a company plans its budget and reports on its financial activity. The fiscal year and the calendar year don’t always coincide; the fiscal year can begin at any point in the calendar year.
A tangible asset, such as equipment, that a company can’t dispose of without interrupting normal business activities.
A loan whose rate of interest doesn’t change.
Personal property that becomes part of real property because of the way in which it’s used. Fixture is a legal term. If you build shelves into a wall in your rented apartment, they become a fixture — that is, part of the rental property.
Legal proceeding in which a lender attempts to obtain the collateral that was secured for a defaulted loan.
Converting the currency of one country to its equivalent in the currency of another country.
Importing and exporting goods between nations.
A check whose drawer signature or endorsement signature is invalid.
Fraudulently altering a document, such as a check.
The disclosure form filed with the IRS that lists all unearned and miscellaneous income.
A business arrangement whereby one party is allowed to use another party’s name for a fee. Fast-food eateries are the best examples of franchises.
A tax imposed by a state on a business headquarters outside the state that does business in the state.
Intentional deception undertaken to trick someone else into parting with something of value. No legal definition of fraud exists.
The value that a stock, bond, or commodity will attain in the future.
Commodities to be delivered and paid for at a future date at a price agreed on by the buyer and seller.
Court judgment ordering a lender to be given part of the wages or salary of a borrower who has defaulted on a loan.
A co-owner of a business. General partners receive a share of the business’s profit and are partly responsible for its debts and liabilities.
generally accepted accounting principles (GAAP)
The rules and guidelines that CPAs use when preparing financial statements.
A bond issued to pay for public works projects, issued by a state or municipal government; also called a G-O bond.
Name for special mortgage loans available to veterans of the U.S. armed services.
A tax on gifts of cash or property. Gift taxes are paid by the donor.
Name for low-risk AAA corporate bonds that have proven earnings.
Name to describe a business that is in operation and is expected to remain so in the future.
The property in an estate before debts, taxes, and other expenses are paid. The net estate is what remains after these expenses are paid.
A bond whose principal and interest are backed by a corporation other than the issuer.
A person or corporation that guarantees a debt will be paid if another party defaults. Guarantors are considered to be co-endorsers of a debt and therefore are liable for the debt.
A promise on the part of an individual or corporation that it will pay the debt of another party if the other party defaults on a debt.
Refers to assets that aren’t easy to liquidate — that is, to convert to cash.
Taxes levied on certain imported items. Most nations have import taxes to protect domestic markets from foreign competition.
A report describing a corporation’s activities, its profit, and its losses over a fixed period.
An obligation to pay all costs of damage, pain, or suffering.
A document that states the terms under which a bond is issued. The indenture declares the maturity date, the interest, and other information.
A numerical measurement that compares past and present economic activity. The Dow Jones Industrial Average is an index of stock performance. The Consumer Price Index measures the price of consumer goods.
individual retirement account (IRA)
A retirement account into which individuals can deposit $5,500 (or more) annually out of earnings. IRAs provide two significant income tax benefits: IRA contributions may reduce an individual’s current taxable income, and IRA earnings aren’t taxed until withdrawal.
individual retirement account rollover
Rule allowing holders of IRAs to pass on the accumulated savings in one IRA to another IRA, provided that they do so within the first 60 days of closing the first IRA.
Rise in prices. Inflation is caused by excess purchasing power among the general populace and by increasing production costs, which producers pass on to consumers.
Being unable to pay debts.
Agreement to pay for goods in fixed installments — for example, weekly or monthly.
A loan that is repaid in monthly payments of the same amount.
What you have if you try to write a check for $10 and you only have $7.50 in your checking account, or if you try to withdraw $20 from a savings account with $18 in it.
The assets of a company that aren’t property but are assets nonetheless. For example, an established clientele is an intangible asset.
Amount of money paid to borrow capital. Typically, the interest is expressed as a percentage of the principal that was borrowed.
The price of borrowing money. The interest rate is usually expressed as a percentage of the total principal borrowed, although sometimes the rate of interest on a loan is tied to an index of some kind.
A loan that requires the borrower to pay only interest for the term of the loan. Loan payments on an interest-only loan don’t reduce the loan balance. At the end of the loan, the borrower makes a balloon payment equal to the original (and ending) loan balance.
A report showing stockholders how a company is doing. An interim report appears before the company’s annual report.
A statement regarding account balances that you can get from an automatic teller machine (ATM). Interim statements aren’t as detailed as monthly statements.
internal rate of return (IRR)
The profit that an investment earns expressed as a percentage. Typically, IRRs are stated as annual profit percentages. On an investment that pays interest and for which there is no change in value, such as a bank savings account, the interest rate is the IRR.
International Financial Reporting Standards (IFRS)
Supposedly, a global standard for accounting that everyone says will someday be used everywhere, but that no one believes will actually ever be used inside the world’s largest economy: the United States.
Commercial trading of goods across state lines.
In a business, a list of stock on hand, with the value of each item and the total value of all items listed by category.
A petition by creditors asking a bankruptcy court to declare a firm bankrupt when the firm has failed to pay its debts and meet its financial obligations; also called a creditor’s opinion.
A lien made by the judgment of a court without the consent of the property owner.
The official decision of a court of law.
A court order placing a lien on the property of a debtor.
A sale of property, as ordered by a court to satisfy a debt. A foreclosure is an example of a judicial sale.
A second or subsequent mortgage on a property. If the property is in default, junior mortgages are paid only after the first mortgage has been paid.
Retirement plan that allows you to set aside some of your wages or salary for retirement. Keogh plans are more complex to set up and to administer than SEP/IRA (Simplified Employee Pension/Individual Retirement Account) plans, but they may allow larger contributions.
An extra condition imposed by a lender before the lender will approve a loan. Part ownership in the property or a share of its proceeds are examples of kickers.
See check kiting.
An economic indicator that usually reflects not where the economy is headed, but where it has been. For example, the gross national product (GNP) is a lagging indicator because increases or declines in the GNP aren’t registered until after the fact.
A charge for tardiness in paying a bill or a mortgage payment.
A contract that gives an individual or business the right to use a property for an agreed-on price and time period.
The right of occupancy that tenants enjoy as part of a lease.
Credit acquired in order to improve an individual’s or company’s ability to invest or speculate.
When one company takes over another and uses the acquired company’s assets to pay back the loans that were taken out in order to take over the company in the first place.
All debts and obligations of a business.
Insurance protecting the policyholder against financial losses resulting from injury done to others.
A charge against real or personal property to secure the repayment of a debt.
limited liability company
Similar to a corporation, a business form that shields investors, called members, from risk. Limited liability companies are chameleons for tax purposes and may be treated as sole proprietorships, partnerships, or corporations, depending on the number of owners and on the tax elections that those owners have made.
A partnership in which profits and responsibility for liabilities and debts are shared according to how much of the business each partner owns.
line of credit
A commitment on the part of a bank to lend up to a certain amount of money to a borrower.
Turning assets such as property into cash. An asset with good liquidity can be sold or converted to cash easily.
In financial terms, a security that matures in ten or more years.
The writer of a check.
A report describing company performance, prepared monthly for the officers of a corporation.
The date when the borrower is obliged to pay back the loan.
The most you can pay for insurance in a year. Usually, the maximum out-of-pocket is the sum of the premium, the deductible, and all co-payments.
A lien on real property made by a contractor or builder for payment overdue. A builder can request a mechanic’s lien if he or she hasn’t been paid according to the contract made to build or improve the property.
An investor in a limited liability company.
An arrangement in which two or more corporations pool their common stock and become one corporation.
The least amount of money that can be kept in a savings or checking account. Letting the balance drop below the minimum sometimes incurs a service charge.
The smallest payment that can be made on a monthly credit card bill without incurring a service charge.
In most states, a person under age 18. Minors don’t have all the legal rights or responsibilities of adults.
money market fund (MMF)
A mutual fund that invests in Treasury bills, certificates of deposit (CDs), and other short-term debt instruments. Investors own shares in the fund and receive regular interest payments.
money market rates
The rate of return paid by individual money market funds.
A situation in which an individual or corporation has complete control of a market through ownership of source materials, ownership of distribution in a certain area, or ownership of the means by which the product is made.
A deed giving ownership of a property to a borrower on the condition that the borrower makes all interest and principal payments to a lender. The lender owns the mortgage until the borrower pays in full, after which the borrower becomes sole owner of the property.
Name for the lender who supplies mortgages and collects mortgage payments.
On a mortgage, the borrower who must pay the interest and principal.
Capable of being transferred from one party to another. Checks, drafts, securities, and commercial paper are negotiable.
The total value of the assets of a business less the liabilities.
An organization that doesn’t distribute its profits, if there are any, to owners. Profits are plowed back into the nonprofit’s capital fund.
A loan for which, if the borrower defaults, the lender has no recourse except to foreclose on the borrower’s collateral.
A public officer who attests to the authenticity of deeds, affidavits, and depositions.
A written promise to pay a debt or sum of money.
In a general ledger, an account showing the business’s liability for promissory notes.
In a general ledger, an account showing the business’s promissory notes received from customers.
An agreement to remove one party from a contract and replace that party with another. All parties in the contract must agree to the novation substitute.
online banking service
A service offered by a bank that allows you to download bank statements and to make electronic fund transfers and payments by using a computer with an Internet connection.
A car lease requiring monthly payments, at the end of which the borrower can make a large balloon payment to buy the car outright or return the car to the lender.
A lease covering a time period shorter than the economic life of the asset. Operating leases can be canceled at any time.
A contract giving a dealer or broker the right to buy or sell a security during a certain time period at a certain price.
original issue discount (OID)
The difference between what a bond costs when it was issued and its price at maturity.
The time between the day a bond was issued and the day it reaches maturity. The current maturity is the time between today’s date and the date the bond reaches maturity.
The fee that lenders charge loan applicants to handle loan applications and to conduct credit investigations.
The amount that a check exceeds what is in the checking account that it was written against. If you write a check for $20, and you have only $15 in your checking account, you have a $5 overdraft.
A business with two or more owners who share in the profits, as well as the liability for debts.
The person or party to whom a check is written.
Taxes on a payroll, including Social Security taxes and employment insurance taxes.
The clause in many banking contracts stating that customers must pay a penalty for late mortgage payments, early withdrawals of savings accounts, and the like.
A fund set up by a corporation to provide for its employees in retirement. Typically, employees contribute a portion of their paychecks to the fund.
A plan by which a company provides for its employees in retirement. Employees — sometimes with matching contributions from employers — contribute to a pension fund, which is used to make investments as part of the plan.
A title to a property that is free of debts, liens, previous claims, and other encumbrances.
A lien that has not only been filed by the lienholder, but also is in force.
The price of credit, expressed as a percentage and charged at periodic intervals.
A long-term mortgage, typically used to finance construction projects, covering all requirements of the project from legal costs to building materials.
personal identification number (PIN)
The password or number that you punch in at an automatic teller machine (ATM) to make deposits and withdrawals; also known as an access code.
Items and things, as opposed to real property, such as buildings and land. By definition, personal property isn’t immovable; in other words, it can be moved. A baseball card is personal property; a baseball field is real property.
personal property tax
Tax on valuable personal property, such as jewelry, cars, and yachts; also called a luxury tax.
Placing property or collateral with a lender in order to secure a loan. For example, a watch left with a pawnbroker in return for a loan is a pledge.
In stock prices, a point equals one dollar; in bond prices, a point equals ten dollars.
The term for the total assets and investments held by an individual, company, or institution. For reporting and tracking purposes, a portfolio can be divided into smaller portfolios, such as the loan portfolio, land portfolio, and so on.
Recording accounting entries in a general ledger.
power of attorney
A legal document that lets someone you trust run your financial affairs if you become unable to do so.
The sum above the face value of a bond when the bond is purchased at an above-par price. In insurance, a premium is the amount that you pay for insurance coverage.
The current-day equivalent of some future amount or future value. In converting future values to present values, one adjusts for compound interest and for inflation.
The ratio between the current price of a stock and the earnings that it will make over a specific period of time. Investors use the price/earnings ratio to measure the value of stocks.
The rate that banks charge their most trustworthy customers for commercial loans. Note that a bank’s very best customers pay less than prime, however.
The actual money borrowed in a loan, as distinguished from the interest, the price of buying the loan. Also, principal is a deposit as distinguished from the interest that it earns.
A plan by which employees share in the profits of a company, either by receiving bonuses or by having their profit shares put in a trust. Profit-sharing plans encourage employees to be more productive and more loyal to their companies.
A written promise to pay a sum of money at a future date to a specific person or to the bearer of the written promise; also known as an IOU.
Taxes on property, including real estate and stocks.
A business owned by one person. Sole proprietorship is one of three types of business organizations; the other two are partnership and corporation.
A bond-issue offering to the general public.
An accountant’s opinion letter that, essentially, indirectly says a firm’s financial statements don’t comply with generally accepted accounting principles.
quiet title action
A legal action meant to resolve all claims against a property.
The minimum number of people who must be present at a corporate meeting to conduct business.
The highest bid to buy and the lowest offer to sell a security or commodity; also called a quotation.
rate of return
Money made on invested capital.
Income measured for what it can buy, not in dollars-and-cents terms. For example, the real income of a low-wage earner may be higher than that of someone who earns higher wages if the low-wage earner lives in a region where goods and housing are inexpensive.
Land and buildings on the land, as opposed to personal property, which is composed of movable items such as jewelry and equipment.
real rate of return
The rate of return on an investment that takes into account how rates are affected by inflation. The real rate of return is the rate of return less the rate of inflation over the length of the investment.
The interest rate that takes into account how interest yields are reduced by inflation. To get the real-interest rate, you subtract the inflation rate in a given period from interest earnings in the same period.
The cash profit or loss from the sale of a security.
A return of part of a payment, made after the payment is received. Rebates are offered as incentives for consumers to buy or use products.
A person assigned by a court to help a bankrupt business reorganize its finances, satisfy its creditors, and become profitable.
A bankrupt business to whom a receiver has been assigned is in receivership.
Exchanging bonds for cash when the bonds reach maturity.
A check purchased at a bank and backed by the bank that can be presented as payment to a third party. Registered checks work like money orders.
Attached to a check, a list of all deductions, corrections, discounts, taxes, and other information, along with the net amount of the check.
After a business has declared bankruptcy, the restructuring of its assets in order to make it profitable again.
Seizing the collateral for a loan due to inability to pay the interest or principal. Repossession is usually the last recourse for failure to pay a debt.
Funds put aside for anticipated future costs.
Reserves that banks are required to keep on hand for their basic operations. These reserves are deposited at the bank’s district Federal Reserve Bank.
The value that an asset has when the asset’s user or owner is finished using it.
restraint of trade
Refers to the concept, ingrained in U.S. law and in the American tradition, that no restrictions should be placed on the free flow of commerce.
A clause in an agreement or contract prohibiting a party or parties from taking certain actions. The most common restrictive covenant in business is one that prohibits a seller of a business from engaging in the same business for a certain number of years.
Business profits that are retained for use in expansion rather than being paid in dividends to stockholders.
return on assets
A company’s profits as a percentage of its assets. Return on assets is one way to measure a company’s profitability.
return on investment
When the earnings derived from a piece of capital equipment equal the price paid for the piece of equipment, you have a perfect return on your investment.
The total income from a given endeavor; also, gross income from an investment.
When stockholders exchange stock such that each owns the same number of shares. Reverse splits are undertaken so that all stockholders own the same percentage of a corporation.
A trust giving property to heirs that can be changed or revoked at any time by the person who originates the trust. Under this arrangement, the property is transferred to the heirs on the death of the trust originator, and the estate doesn’t need to go through probate.
A form of credit in which the account holder is given a credit line, runs up a bill, and pays off the amount owed in monthly payments. If the amount owed isn’t paid off monthly, interest charges are made. A minimum monthly payment is usually required on outstanding credit loans. Most credit card accounts are revolving credit accounts.
right of foreclosure
The right of a lender to foreclose on a mortgaged property if the borrower can’t meet mortgage obligations.
right of redemption
The right of a debtor to buy a property at a sale of foreclosure if he or she has the means to do so. To redeem the property this way, the debtor must pay the interest and principal on the defaulted mortgage, as well as all foreclosure costs incurred by the lender.
right of survivorship
The right of surviving spouses to inherit the property of deceased spouses.
In financial terms, the possibility that an investment won’t be repaid and that the method of investment will be rendered unprofitable by market conditions.
A situation in which many depositors try to withdraw their money from a bank at short notice. When depositors fear that a bank is failing or otherwise lose confidence in the bank, a bank run can result.
safe deposit box
A small safe in a bank vault that can be rented for storing valuables and important papers.
A retirement plan in which money is taken automatically from employees’ salaries and put in a retirement fund, such as a 401(k).
A tax levied by state and local governments, usually as a percentage of retail sales.
A deposit bank account that yields interest. Cash can be deposited or withdrawn at the discretion of the holder.
A bank that accepts deposits from customers and invests it in mortgages and securities.
A U.S. government bond, issued to finance the debt of the U.S. government. Savings bonds earn variable interest and are sold in denominations of $25 to $10,000.
Adjusting data collected throughout the year to an annual rate for the purposes of analysis. For example, retail sales rise in December, when people shop for the holidays. Retail sales figures for December, therefore, need to be adjusted downward.
The line of credit extended to businesses during peak manufacturing and sales cycles.
Another mortgage on a property, usually taken out to provide capital for home improvements or to finance a business. The obligations due to the lender of a second mortgage are subordinate to the obligations owed to the lender of a first mortgage.
secondary mortgage market
A market in which first mortgages, or residential mortgages, are pooled and sold to investors. The secondary mortgage market serves as a capital fund for the mortgage originators, who sell their mortgages for the secondary market.
secured credit card
A credit card backed by a savings account. Issuers of secured credit cards can draw on cardholders’ savings accounts if cardholders are unable to pay their credit card bills.
Stocks, bonds, and other financial instruments that can be traded in a securities market.
Securities and Exchange Commission (SEC)
The regulatory agency charged with overseeing laws regarding the buying and selling of securities. Companies selling securities, and brokers and dealers who trade in them, must register with the SEC.
A document that gives a lender a claim to the assets that the borrower has put up as collateral for a loan. The security agreement must be signed by the borrower to be valid.
The claim of a lender to assets that the borrower has pledged as collateral to back up a loan.
A rainy-day fund set aside for emergencies, illness, and periods of unemployment.
Raising demand and raising the price that sellers can offer goods in short supply.
When two or more liens have been placed on a property, the senior lien takes precedence over other liens and must be satisfied first. The senior lien is the first mortgage on the property.
Bonds from the same issue that mature at different times. This way, the bonds don’t all fall due at once and strain the finances of the issuer.
A bank charge, such as the charge issued when an account is overdrawn or a check bounces.
The actual date of the transfer of a security from the buyer to the seller.
severally but not jointly
In a stock offering, an arrangement in which the people selling the stock are each responsible for selling their part but not for selling the entire offering. In a jointly but severally arrangement, all parties are responsible for the sale of the offering.
An auction of a borrower’s property as part of a foreclosure. The proceeds go to help pay the borrower’s debts.
A loan that falls due in less than one year.
A loan given without collateral, with only the borrower’s promise to pay and his or her signature on a promissory note. Such loans are given on the basis of the good standing of the borrower.
A simplified pension plan for small businesses that want to give their employees retirement savings options. Simple IRAs work much like 401(k)s but at a much lower administrative cost to the employer.
Simplified Employee Pension Plan (SEP)
A retirement plan for small businesses. It allows people in small businesses to set aside up to 25 percent of employee wages and up to 20 percent for owner profits for retirement.
Small Business Administration (SBA)
An agency of the federal government that helps to provide credit to small businesses.
Insurance benefits provided by the federal government for old age, disability, and survivor benefits.
A business owned by one person. Sole proprietorship is one of three types of business organizations; the other two are partnership and corporation.
A block of securities so large that it can’t be offered on the trading floor without depressing prices. Instead of being traded on the floor, special offerings are traded through members of the exchange, who sell them on their own.
A broker or dealer who specializes in trading a single commodity or security.
Coins, not paper money.
Trading at a greater risk in order to obtain a fast profit.
A person who trades in commodities, stocks, or bonds with the idea of making a quick profit by taking many risks.
The dividing of existing stock into more shares. Individual stocks lose value, but the total value of the stock stays the same. Stock splits are often undertaken to make the stock easier to trade when companies are bought and sold.
A shortage of funds in the money market, which causes a demand for money and a hike in interest rates.
A check more than six months old.
Taxes in the form of stamps, which manufacturers must buy and stick on their products or securities before they can be sold. You can see tax stamps on some brands of whiskey, for example.
Standard & Poor’s
The advisory service that rates securities for their creditworthiness.
standard of living
The goods and services that a social group requires for its well-being. The standard of living is an abstract term and can’t be measured against an index.
statute of frauds
A legal statute that says a contract can’t be enforced unless it has the signature of the person against whom it is being enforced. In the case of a mortgage or other assumable debt, the signature of the borrower is required.
statute of limitations
A limit on the time within which a legal action can be brought or a file claimed.
A written document giving title to a share or shares of stock.
A market where stocks are traded.
stock purchase option
A benefit offered to employees, giving them the option to buy stock in the companies that they work for.
The dividing of existing stock into more shares. Individual stocks lose value, but the total value of the stock stays the same. Stock splits are often undertaken to make the stock easier to trade when companies are bought and sold.
An order to buy or sell a stock or commodity when it reaches a certain price.
To inform a bank not to honor a check. Even after a check is written and delivered, a bank customer can stop payment on it if he or she thinks the check was written in error.
A company that is owned wholly or partly by another company, called the parent company. The parent company usually owns a majority of the stock in the subsidiary.
An extra charge for people who pay with credit cards instead of cash. The surcharge pays for the extra costs of processing credit card payments.
A guarantee that a debt will be repaid; also, a person who is legally responsible for a debt.
An agreement that if a housing development can’t be completed, an insurance company will take charge of the project, settle all disputes, and finish the project if necessary. Municipal development projects require surety bonds.
An added tax on income that has already been taxed once.
Taxes on import goods, levied to protect domestic industries or to raise revenue.
A lien on property for failure to pay property taxes.
An auction of property to raise money for the payment of delinquent taxes.
The part of an estate that is subject to taxes. The taxable estate is what is left after all debts, funeral expenses, and taxes are paid.
Tax-free savings that can be put in an individual retirement account (IRA) or other retirement plan. Taxes aren’t imposed on the interest or principal until funds are withdrawn at age 59½ or later.
The automatic renewal of a certificate of deposit (CD), tax-free at present rates of interest; also, the automatic tax-free reinvestment of money market funds.
taxpayer identification number (TIN)
For taxation purposes, the number that identifies corporations, nonprofit organizations, associations, and partnerships to the IRS. Sole proprietors and individuals are identified by their Social Security numbers.
A check written by a bank against its own funds. Teller’s checks are guaranteed to be redeemable because they’re drawn on banks.
The time that it takes for a loan or deposit to mature. The term is usually expressed in months.
A check transferred by the endorser to another party. The endorser writes “Pay to the order of” and then the third party’s name on the check, making it redeemable by the third party.
time value of money
A general rule that says a dollar today is worth more than a dollar a year from today because if you have a dollar today, you can invest it and earn interest over the next year.
Ownership of real property. A deed, bill of sale, or certificate is required to prove title.
A company that determines who has ownership of a property. After it conducts a title search, the company issues a certificate of title to the owner.
A claim, obstruction, or other condition that makes it difficult to determine the owner of a property.
A financial officer of a corporation whose job is, among other duties, to manage cash payments and deposits, procure and budget funds, handle payroll, and discharge tax liabilities.
A short-term bill issued by the U.S. government to cover its debt. Treasury bills are in $100 denominations. They mature in periods of 4, 13, 26, or 52 weeks.
A long-term bond issued by the U.S. government to cover its debts. Treasury bonds are sold in denominations of $100 or more.
Property held by one person or persons for the benefit of others.
Federal Reserve regulation (Regulation DD) establishing what information lenders must disclose to borrowers, including how finance charges are imposed, when additional charges will be made, and when a borrower may acquire a security interest in a property.
A lien to which other liens and property claims are subordinate. A first mortgage, for example, is an underlying lien.
The person at an insurance company who processes applications for insurance and decides who gets insurance and who doesn’t get insurance; alternatively, the person at a mortgage company who processes applications for mortgages, and decides who does and doesn’t get a mortgage.
Income earned from investments and interest.
A federal- and state-run program that provides an income to unemployed workers. Contributions to unemployment insurance are usually deducted from salaries and wages.
Uniform Commercial Code (UCC)
Standardized state laws that establish rules for contracts, including how to prepare negotiables and handle deeds of title.
Uniform Consumer Credit Code
A law applicable in some states outlining how lenders and borrowers should treat consumer loans of less than $25,000. The code sets guidelines for fair lending practices and describes how lenders can recoup defaulted loans.
A depositor with a savings or checking account larger than the amount insured by the Federal Deposit Insurance Corporation (FDIC).
A loan given without the borrower’s posting collateral or providing any other security.
U.S. savings bond
A U.S. government bond issued to finance the debt of the U.S. government. Savings bonds earn variable interest and are sold in denominations of $25 to $10,000.
The lending of money at an exorbitant rate of interest. By law, usury is defined as charging an interest rate above the legal limit.
An annuity paid out at a variable rate, depending on interest accrued on a principal.
A loan whose rate of interest changes. The rate is determined by a standard index, such as the prime rate.
A mortgage whose interest rate is adjusted periodically. Variable-rate mortgages usually are tied to some sort of money index, such as the prime lending rate or the cost of Treasury bills. When the index goes up or down, so does the monthly mortgage payment. A variable-rate mortgage is also called an adjustable-rate mortgage (ARM).
Capital available for new enterprises and start-up companies.
In financial terminology, a stake in something that will give you money in the future. For example, employees have a vested interest in the prosperity of their company pension plans.
Null and no longer applicable, such as a voided check.
volume of trading
The total number of shares traded on a stock market. Trading volume is a measure of market activity.
When a debtor declares bankruptcy in order to gain relief from creditors.
A court judgment ordering a lender to be given part of the wages of a borrower who has defaulted on a loan.
A guarantee that what is written in a contract is indeed true.
wholly owned subsidiary
A subsidiary completely owned by its parent company.
Transferring money electronically, as opposed to by check or by means of another type of paper transfer.
Taking deductions from income to cover taxes or liabilities.
worker’s compensation insurance
By state law, insurance paid by employers in case of injury to their employees on the job.
Removing an item from an account ledger because the item has been fully depreciated or deemed to be worthless.
A graph comparing the yields at maturity of different securities.
yield to maturity
The annual return, expressed as a percentage, of a bond or note redeemed at maturity.
A bond issued without coupons and without a statement of its rate of interest.
A security that pays no interest until maturity, when the interest is paid in a lump sum.