A priori probability is calculated by logically examining a circumstance
or existing information regarding a situation. It usually deals with
independent events where the likelihood of a given event occurring is in
no way influenced by previous events. An example of this would be a coin
toss. The largest drawback to this method of defining probabilities is
that it can only be applied to a finite set of events as most events are
subject to conditional probability to at least a small degree.
Abandon rate is the percentage of tasks that are abandoned by the
customer before completing the intended task. There are two common
industries where abandon rate is a commonly used metric. The first is in
call centers, the second is online retailing.
Abandonment is the act of surrendering a claim to, or interest in, a
particular asset. In securities markets, abandonment is the permitted
withdrawal from a forward contract that is made for the purchase of
deliverable securities. For instance, in some cases an options contract
may not be worthwhile or profitable to exercise, so the purchaser of the
option lets it expire without being exercised.
An abatement cost is a cost borne by firms when they are required to
remove and/or reduce undesirable nuisances or negative byproducts
created during production.
Abeyance is a situation in which the rightful owner of a property,
office or title has not yet been decided.
Ability to pay is an economic principle that states that the amount of
tax an individual pays should be dependent on the level of burden the
tax will create relative to the wealth of the individual. The ability to
pay principle suggests that the real amount of tax paid is not the only
factor that has to be considered, and that other issues such as ability
to pay should also be factored into a tax system.
The ability to repay refers to an individual's financial capacity to
make good on a debt. Specifically, the phrase "ability to repay" was
used in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection
Act to describe the requirement that mortgage originators substantiate
that potential borrowers can afford the mortgage they are applying for.
The abnormal earnings valuation model is a method for determining a
company's equity value based on both its book value and its earnings.
Also known as the residual income model, it looks at whether
management's decisions will cause a company to perform better or worse
The model is used to forecast future stock prices and concludes that investors should pay more than book value for a stock if earnings are higher than expected and less than book value if earnings are lower than expected.
An abnormal return describes the unusual profits generated by given
securities or portfolios over a specified period. The performance is
different from the expected, or anticipated, rate of return (RoR) for
the investment. The anticipated rate of return is the estimated return
based on an asset pricing model, using a long run historical average or
Abnormal spoilage is the amount of waste or destruction of inventory
beyond what is expected in normal business processes. Abnormal spoilage
can be the result of broken machinery or from inefficient operations,
and is considered to be at least partially preventable. In accounting,
abnormal spoilage, an expense item, is recorded separately from normal
spoilage on internal books.
Above par is a term used to describe the price of a bond when it is
trading above its face value. A bond usually trades at above par when
its income distributions are higher than those of other bonds currently
available in the market. This occurs when interest rates have declined
so that newly-issued bonds carry lower coupon rates.
Above-the-line costs refer, literally, to: 1) costs above the line that
separates gross profits from operating expenses, or 2) costs above the
line that separates operating income from other expenses. In the first
case, these costs are generally considered cost of sales (COS) or cost
of goods sold (COGS) for companies that manufacture products. Utilities
and companies in the service sector consider expenses above the
operating income line as "above-the-line" costs.
Absenteeism is the habitual non-presence of an employee at his or her
job. Habitual non-presence extends beyond what is expected as a normal
amount of time away for reasons such as scheduled vacation or occasional
illness. Possible causes of absenteeism include job dissatisfaction,
ongoing personal issues and chronic medical problems. Regardless of the
cause, a worker with a pattern of being absent may put his reputation
and his employed status at risk. However, some forms of absence from
work are legally protected and cannot be grounds for termination.
Absolute advantage is the ability of an individual, company, region or
country to produce a good or service at a lower cost per unit than
another entity that produces the same good or service. An entity with an
absolute advantage can produce a product or service using a smaller
number of inputs or a more efficient process than another entity
producing the same good or service.
An absolute auction is a type of auction where the sale is awarded to
the highest bidder. Absolute auctions do not have a reserve price which
sets a minimum required bid for the item to be sold. There are many
different types of auctions. An absolute auction is the "classic" type
of auction where the item is sold to the highest bidder, regardless of
the price. Since there is no reserve price, or minimum floor above which
bidding must start, the bidding starts at $0 in an absolute auction.
One type of absolute auction relates to foreclosed properties, where the winning bid acquires the foreclosed property. This is opposed to a lender confirmation auction, where the lender must approve the bid in order to complete the transaction.
The Absolute Breadth Index (ABI) is a market indicator used to determine
volatility levels in the market without factoring in price direction. It
is calculated by taking the absolute value of the difference between the
number of advancing issues and the number of declining issues.
Typically, large numbers suggest volatility is increasing, which is
likely to cause significant changes in stock prices in the coming weeks.
Market technicians are regular users of an Absolute Breadth Index
approach to managing assets. Its methodology falls in line with similar
market momentum indicators.
An absolute exclusion is an insurance policy clause that eliminates
coverage of certain events. This type of clause allows insurers to deny
coverage of claims regardless of how the event came to be, even if the
claim only relates to the type of exclusion remotely. Insurers use
absolute exclusions to clarify what events they will not cover in a
policy, regardless of how an event comes to pass.
Insurance companies must provide policyholders with plainly worded forms that any absolute exclusions clear. If insurers willfully obscure or omit policy information or fail to provide clear, comprehensive forms, policyholders sometimes take them to court for bad faith insurance practices.
Absolute frequency is a statistical term describing the number of times
a particular piece of data, or value, appears during a trial or set of
trials. Essentially, it is the number of times a particular thing
happens. If each relative frequency is added up for the entire trial,
the total of all of the relative frequencies will equal the total number
of pieces of data or observations collected during the trial.
Absolute interest means having full ownership or the total and complete
rights to an asset. Absolute interest can be held on assets such as real
estate, jewelry or vehicles, to name a few. It indicates that the
owner's interest is not diluted by or subject to another party's
ownership, nor is it dependent on conditions that must be fulfilled. An
individual with an absolute interest has both legal and beneficial
possession of an asset or property, meaning that person has the sole
right to legally possess the asset and receive benefits from it.
Absolute percentage growth is an increase in the value of an asset or
account expressed in percentage terms. Absolute percentage growth
implies that the increase in value is displayed on a standalone basis,
and not in relation to a benchmark or another asset. The term "absolute
percentage growth" can cause some confusion since "absolute" usually
refers to total increase or decrease in asset value in dollar terms,
while "percentage" refers to the relative change (increase or decrease)
over a period of time. Thus, if stock X increases in price from $10 to
$15, the absolute increase is $5, while the percentage increase is 50%.
The term may, therefore, be more accurately referred to as absolute
growth (or absolute return) in percentage terms.
Absolute priority is a rule that stipulates the order of payment in the
event of corporate liquidation among creditors and shareholders. The
absolute priority rule is used in corporate bankruptcies to decide what
portion of payment will be received by which participants. Debts to
creditors will be paid first and shareholders divide what remains.
Absolute priority also applies to individuals, who face liquidation of
their assets to settle claims. Secured always takes precedence over
The absolute rate, sometimes also referred to as an absolute swap yield,
is the fixed portion of an interest rate swap, expressed as a percentage
rather than as a premium or a discount to a reference rate. It is
therefore calculated as the sum of two parts of the contract: the fixed
rate component as well as the variable bank rate of a swap. The absolute
rate represents the total yield accrued by both parties in an interest
The absolute rate can be thought of as a combination of the reference rate and the premium or discounted fixed percentage. For example, if the LIBOR is 3% and the fixed interest portion of the swap is at a 7% premium, then the absolute rate would be 10%.
Absolute return is the return that an asset achieves over a certain
period of time. This measure looks at the appreciation or depreciation,
expressed as a percentage, that an asset, such as a stock or a mutual
fund, achieves over a given period of time. Absolute return differs from
relative return because it is concerned with the return of a particular
asset and does not compare it to any other measure or benchmark.
The absolute return index is a stock index designed to measure absolute
returns on investment. The index was created to compare the performance
of an individual hedge fund against the hedge fund market as a whole. It
is a composite index made up of five other indexes.
Absorbed as a business term generally refers to taking in, acquiring or
bearing. The term can be applied in a number of situations, the most
common of which is manufacturing overhead. Absorbing a cost increase
instead of passing it on to a consumer is another instance in which the
term is used. Others include absorbing shares in an initial public
offering (IPO) and absorbing a firm in a mergers and acquisition
Absorbed cost, also known as absorption cost, is a managerial accounting
method that accounts for the variable and fixed overhead costs of
producing a particular product. Knowing the full cost of producing each
unit enables manufacturers to price their products. That is why
absorption costing is also referred to as full costing or the full
Absorption rate is a term most commonly used in the real estate market
to evaluate the rate at which available homes are sold in a specific
market during a given time period. It is calculated by dividing the
average number of sales per month by the total number of available
homes. This equation can also be reversed to identify the number of
months it would take for supply to be sold.
The Abu Dhabi Investment Authority is a government-owned investment
organization that manages the sovereign wealth fund for Abu Dhabi,
United Arab Emirates. According to the Sovereign Wealth Fund Institute's
rankings, the ADIA sovereign wealth fund ranked as the third-largest in
the world in 2018 with $828 billion in assets. It is one of the world's
largest institutional investors.
Abusive Tax Shelter is an investment scheme that claims to reduce income
tax without changing the value of the user's income or assets. Abusive
tax shelters serve no economic purpose other than lowering the federal
or state tax owed when filing. Often, these schemes channel funds
through trusts or partnerships to avoid taxation.
An accelerated dividend is a special dividend paid by a company ahead of
an imminent change in the treatment of dividends, such as an adverse
change in dividend taxation. Companies will also sometimes pursue an
accelerated dividend strategy to drive growth by sending a signal to
investors that the company is making more money than it knows what to do
Accelerated payments is a term generally associated with making
additional unscheduled payments on an invoice or non-revolving loan.
The acceleration principle is an economic concept that draws a
connection between the rate of change of consumption and capital
investment. According to the acceleration principle, if demand for
consumer goods increases, then the percentage change in the demand for
machines and other investment necessary to make these goods will
increase even more. In other words, if income and therefore consumption
increases, there will be a corresponding but magnified change in
investment. It is important to note that this principle does not compute
the rate of change in capital investment as a product of the overall
level of consumption, but as a product of the rate of change in the
level of consumption. The acceleration principle is also referred to as
the accelerator principle.
The accelerator theory is an economic postulation whereby companies'
investments increase when either demand or income increases. The theory
also suggests that when there is an excess of demand, companies can meet
the demand in two ways; either decrease demand by raising prices or
increase investment to meet the level of demand. The accelerator theory
posits that companies typically choose to increase production, thereby
increasing profits. This growth, in turn, attracts additional investors
who also accelerate growth.
An acceptance is a contractual agreement on a time draft or sight draft
to pay the amount due at a specified date. The party who is expected to
pay the draft writes "accepted," or similar wording indicating
acceptance, next to his or her signature along with the date. This
person then becomes the acceptor, and is obligated to make the payment
by the maturity date.
A banker's acceptance is a time draft honored by a bank, and is typically used in international trade. A trade acceptance is a time draft drawn by the seller of goods on a buyer. In a trade acceptance, the buyer is the acceptor.
Acceptance market is an investment market based on short-term credit
instruments typically used by exporters who prefer to get paid faster
for their exported goods. Acceptances are typically used to finance
imports and exports between foreign countries and storage of readily
marketable staples in foreign countries.
Acceptance sampling is a statistical measure used in quality control
that allows a company to measure the quality of a batch of products by
selecting a specified number of products for testing. The quality of
these products will be viewed as the quality level for the group of
products. A company cannot test every one of its products due to either
ruining the products, or the volume of products being too large.
Acceptance sampling solves this by testing a sample of the product for
defects. The process involves batch size, sample size and the number of
defects acceptable in the batch. This process allows a company to
measure the quality of a batch with a specified degree of statistical
certainty without having to test every unit of product. The statistical
reliability of a sample is generally measured by a t-statistic.
Accepting risk occurs when a business acknowledges that the potential
loss from a risk is not great enough to warrant spending money to avoid
it. Also known as "risk retention," it is an aspect of risk management
commonly found in the business or investment fields. It posits that
small risks — ones that that do not have the ability to be catastrophic
or otherwise too expensive — are worth accepting with the
acknowledgement that any problems will be dealt with if and when they
arise. Such a trade-off is a valuable tool in the process of
prioritization and budgeting.
Accommodative monetary policy occurs when a central bank (such as the
Federal Reserve) attempts to expand the overall money supply to boost
the economy when growth is slowing (as measured by GDP). The policy is
implemented to allow the money supply to rise in line with national
income and the demand for money. Accommodative monetary policy is also
known as "easy monetary policy" or "loose credit policy."
Account activity generically applies to whenever a movement of funds (or
something that has monetary value) takes place in an account, whatever
the type of account.
Account analysis is a process in which detailed line items in a
financial transaction or statement are carefully examined for a given
account. An account analysis can help identify trends or give an
indication of how an account is performing.
In cost accounting, this is a way for an accountant to analyze and measure the cost behavior of a firm. The process involves examining cost drivers and classifying them as either fixed or variable costs. The cost accountant then uses the company's data to figure out the estimated variable cost per cost-driver unit or fixed cost per period.
When it comes to banking, account analysis takes the form of a periodic statement outlining the banking services provided to a firm. The statement is usually provided monthly and involves the display of all important account data, including the company's average daily balance and charges that the company incurs from the bank.
An account balance is the amount of money in a financial repository,
such as a savings or checking account, at any given moment. It can also
refer to the total amount of money owed to a third party, such as a
credit card company, utility company, mortgage banker or other type of
lender or creditor. The account balance is always the net amount after
factoring in all debits and credits. Debts can sometimes be considered
negative account balances; for example, when there is an overdraft on a
The account current is a summary statement detailing the financial performance of an individual insurance agent’s business over a specified period. These statements form the basis for reconciliation of accounts between the insurer and the agent. The account current provides the basis of a paper trail as premiums paid by policyholders travel between insurance provider, agencies, and agents.
An account freeze is an action taken by a bank or brokerage that
prevents any transactions from occurring in the account. Typically, any
open transactions will be canceled, and checks presented on a frozen
account will not be honored.
Account freezes can also be initiated by either an account holder or a third party. Many banks and credit card providers are now offering a bevy of online and mobile banking options including the ability to freeze an account with the ‘click of a button.’ In the event of a lost or stolen card, a cardholder can quickly “freeze” the account without contacting directly or visiting client service locations in person. Mobile and on-demand banking services are increasingly popular with customers interested in self-service and enhanced cyber security features. An account freeze more commonly may be known as “freezing an account,” as one might say in general conversation.
An account hold is a restriction on the account owner's ability to
access funds in the account due to various reasons. When a bank places
an account on hold, it usually does so to protect itself from potential
loss, but it also may have the interest of the customer in mind. An
account hold can last only a day or two, but could be much longer
depending on the reason for the hold.
An account in trust is a general term used to define any type of
financial account that is opened by an individual and managed by a
designated trustee for the benefit of a third party in accordance with
For example, a parent can open a bank account for the benefit of the minor and stipulate rules as to when the minor can access the funds or assets in the account as well as any income they generate. In most cases, the trustee who manages the funds and assets in the account acts as a fiduciary, meaning the trustee has a legal responsibility to manage the account prudently and manage assets in the best interests of the beneficiary.
An account inquiry is a review of any type of account, whether it be a
depository account or credit account. The inquiry can refer to past
records, payments or other specific transactions, or any other entries
relating to the account.
An account manager is an employee who is responsible for the day-to-day
management of a particular customer's account with the business.
An account manager is generally the business representative with whom the client has the most one-on-one interaction. This staff member oversees the daily, routine tasks involved with addressing the customer’s needs and concerns and maintaining their account activities.
An account number is the primary identifier for ownership of an account,
whether a vendor account, a checking or brokerage account, or a loan
account. An account number is used whether or not the identifier uses
letters or numbers.
Account reconcilement is the process of confirming that two separate
records of transactions in an account are equal. Both institutions and
individuals perform account reconcilement. At the institutional level,
banks and brokers must internally review transactions between their
general ledger entries and individual account records.
Reconcilement also occurs when a customer of a bank or broker confirms that his or her personal records match what is reported on periodic statements. At the individual level, balancing a checkbook is a form of account reconcilement. The term can also refer to balancing the books and records of a business with software programs and data entries.
An account statement is a periodic summary of account activity with a
beginning date and an ending date. The most commonly known are checking
account statements, usually provided monthly, and brokerage account
statements, which are provided monthly or quarterly. Monthly credit card
bills are also considered account statements.
An account supervisor oversees the handling of corporate client accounts
and generally supervises a number of account executives. It is a
middle-management position that requires a number of years of relevant
work experience. This job title is common in the advertising and media
Accountability is when an individual or department is held responsible
for the performance of a specific function. Essentially, they are liable
for correct execution of a particular task, even if they may not be the
one performing the task. Other parties rely on the task to be completed,
and the accountable party is the party whose head will roll if the
action is not carried out. Accountability is common in the financial
arena and in the business world as a whole.
There are several examples of accountability in action. Relating to accounting jobs, an auditor reviewing a company's financial statement is responsible and legally liable for any misstatements or instances of fraud. Accountability forces an accountant to be careful and knowledgeable in their professional practices, as even negligence can cause them to be legally responsible.
An accountant in charge is the person responsible for supervising an
audit. An audit is an objective examination and evaluation of the
financial statements of an organization to make sure that the records
are a fair and accurate representation of the transactions they claim to
represent. The accountant in charge generally has final responsibility
for the accuracy of the results of an audit
Accountant responsibility is the ethical responsibility an accountant
has to those who rely on his work. An accountant has a responsibility to
his clients, his company's managers, investors, and creditors, as well
as to outside regulatory bodies such as the Internal Revenue Service.
Accountants are responsible for the validity of the financial statements
they work on, and they must perform their duties following all
applicable principles, standards, and laws.
An organization whose volunteer accountants provide free services to
nonprofit organizations, charities and other groups that would otherwise
be unable to afford it. In addition to providing these services, the
Accountants for the Public Interest provide guidance to small businesses
on how to navigate accounting principles.
An accountant's liability describes the legal liability assumed while
performing professional duties. An accountant is liable for a client's
accounting misstatements. This risk of being responsible for fraud or
misstatement forces accountants to be knowledgeable and employ all
applicable accounting standards. An accountant who is negligible in his
or her examination of a company can face legal charges from either the
company or investors and creditors that rely on the accountant's work.
Accounting is the systematic and comprehensive recording of financial
transactions pertaining to a business. Accounting also refers to the
process of summarizing, analyzing and reporting these transactions to
oversight agencies, regulators and tax collection entities. The
financial statements that summarize a large company's operations,
financial position and cash flows over a particular period are a concise
summary of hundreds of thousands of financial transactions it may have
entered into over this period.
The Accounting and Auditing Organization for Islamic Financial
Institutions (AAOIFI) is a not-for-profit organization that was
established to maintain and promote Shari'ah standards for Islamic
financial institutions, participants, and the overall industry. The
Accounting and Auditing Organization for Islamic Financial Institutions
(AAOIFI) was created on February 26, 1990, to ensure that participants
conform to the regulations set out in Islamic finance.
The founding and associate members, as well as the regulatory and supervisory authorities of the Accounting and Auditing Organization for Islamic Financial Institutions, define the acceptable standards for various functions. This includes areas such as accounting, governance, ethics, transactions, and investment.
An accounting change is a change in accounting principles, accounting
estimates, or the reporting entity. A change in an accounting principle
is a change in a method used, such as using a different depreciation
method or switching between LIFO to FIFO inventory valuation methods. An
example of an accounting estimate change could be the recalculation of
machine's estimated life due to wear and tear. The reporting entity
could change due to a merger or a break up of a company.
Accounting changes require full disclosure in the footnotes of the financial statements to describe the justification and financial effects of the change. This allows readers of the statements to analyze the changes appropriately, ideally to help them make more informed decisions about a business's operations.
Accounting conservatism is a branch of accounting that requires a high
degree of verification before making a legal claim to any profit as it
requires recognition of all probable losses as they are discovered and
most expenditures as they are incurred. Revenue will be deferred until
it is verified since strict revenue-recognition criteria is one of the
most common forms of accounting conservatism. An example of accounting
conservatism — overestimating an allowance for doubtful accounts — can
give a more accurate picture of recoverable receivables given a specific
Accounting control is the methods and procedures that are implemented by
a firm to help ensure the validity and accuracy of its financial
statements. The accounting controls do not ensure compliance with laws
and regulations, but rather are designed to help a company comply.
Accounting currency is the monetary unit used when recording
transactions in a company's books. It is also called the reporting
currency. The accounting/reporting currency is not necessarily the same
as the functional or transactional currency, which is what customers see
when conducting a transaction, such as a sale. Often, the accounting
currency is in the same currency denomination as the local currency
where the company operates.
An accounting cushion is a term used to describe an intentionally
excessive expense reported on a company’s financial statements in order
to even out fluctuations in their earnings across periods. Company
management can use these inflated numbers to artificially understate
income in a current period by overstating liability or allowance
accounts. Doing this will give the company the ability to overstate
income in a later period.
Accounting earnings is another name for a company’s stated earnings, or
net income, which is calculated by taking total revenue and subtracting
the costs of doing business such as cost of goods sold, general
administrative expenses, depreciation, interest, taxes, etc. Accounting
earnings should not be confused with economic earnings, which measure
the actual profitability of a company.
The accounting equation is considered to be the foundation of the
double-entry accounting system. The accounting equation shows on a
company's balance sheet whereby the total of all the company's assets
equals the sum of the company's liabilities and shareholders' equity.
Based on this double-entry system, the accounting equation ensures that the balance sheet remains “balanced,” and each entry made on the debit side should have a corresponding entry (or coverage) on the credit side.
The Formula for the Accounting Equation Is:
Assets=(Liabilities + Owner’s Equity)
How to Calculate the Accounting Equation
The balance sheet holds the basis of the accounting equation:
1. Locate the company's total assets on the balance sheet for the period.
2. Total all liabilities, which should be a separate listing on the balance sheet.
3. Locate total shareholder's equity and add the number to total liabilities.
4. Total assets will equal the sum of liabilities and total equity.
Accounting method refers to the rules a company follows in reporting
revenues and expenses. The two primary methods are accrual accounting
and cash accounting. Cash accounting reports revenue and expenses as
they are received and paid; accrual accounting reports them as they are
earned and incurred.
An accounting period is an established range of time during which
accounting functions are performed, aggregated, and analyzed including a
calendar year or fiscal year. The accounting period is useful in
investing because potential shareholders analyze a company’s performance
through its financial statements that are based on a fixed accounting
Accounting principles are the rules and guidelines that companies must
follow when reporting financial data. The common set of U.S. accounting
principles is the generally accepted accounting principles (GAAP). To
remain listed on many major stock exchanges in the U.S., companies must
regularly file financial statements reported according to GAAP.
Accounting profit is a company's total earnings, calculated according to
generally accepted accounting principles (GAAP). It includes the
explicit costs of doing business, such as operating expenses,
depreciation, interest and taxes.
Accounting profit differs from economic profit in that accounting profit only represents the monetary expenses a firm pays and the monetary revenue it receives; it tends to be higher than economic profit since it omits certain implicit costs, such as opportunity costs.
Accounting ratios, an important sub-set of financial ratios, are a group
of metrics used to measure the efficiency and profitability of a company
based on its financial reports. They provide a way of expressing the
relationship between one accounting data point to another and are the
basis of ratio analysis.
The Accounting Standards Committee (ASC) was a former organization under
the Consultative Committee of Accountancy Bodies (CCAB) in the United
Kingdom. The Accounting Standards Committee (ASC) duties included
developing standards for financial reporting and accounting, recording
these standards and communicating them through press releases and
publications. It existed between 1976 and 1990 when its duties were
assumed by the Accounting Standards Board (ASB). The committee was
preceded by the Accounting Standards Steering Committee (ASSC).
Before regulatory boards were established, accounting scandals occurred with some regularity. Accounting scandals in the late 1960s and early 1970s prompted the formation of the Accounting Standards Committee to issue accounting standards. In 1990, the Accounting Standards Board took over its responsibilities, which was then replaced by the International Accounting Standards Board (IASB) in 2001. The International Accounting Standards Board issues accounting standards within the United Kingdom and collaborates with other countries' accounting standard-setters. In the U.S. there is the Financial Accounting Standards Board (FASB) based in Connecticut.
Accounting valuation is the process of valuing a company's assets and
liabilities for financial reporting purposes. Several
accounting-valuation methods are used while preparing financial
statements in order to value assets. Many valuation methods are
stipulated by accounting rules, such as the need to use an accepted
options model to value the options that a company grants to employees.
Other assets are valued simply by the price paid, such as real estate.
Typically, fixed assets are valued at the historical price. Marketable
securities are valued at the current market price.
Accounts payable (AP) is an accounting entry that represents a company's
obligation to pay off a short-term debt to its creditors or suppliers.
It appears on the balance sheet under the current liabilities. Another
common usage of AP refers to a business department or division that is
responsible for making payments owed by the company to suppliers and
Accounts receivable is the balance of money due to a firm for goods or
services delivered or used but not yet paid for by customers. Said
another way, account receivable are amounts of money owed by customers
to another entity for goods or services delivered or used on credit but
not yet paid for by clients.
Accounts receivable refers to the outstanding invoices a company has or the money clients owe the company. The phrase refers to accounts a business has a right to receive because it has delivered a product or service. Accounts receivable, or receivables represent a line of credit extended by a company and normally have terms that require payments due within a relatively short time period, ranging from a few days to a fiscal or calendar year.
Accounts uncollectible are receivables, loans or other debts that have
virtually no chance of being paid. An account may become uncollectible
for many reasons, including the debtor's bankruptcy, an inability to
find the debtor, fraud on the part of the debtor, or lack of proper
documentation to prove that debt exists.
An accredited investor is a person or a business entity who is allowed
to deal in securities that may not be registered with financial
authorities. They are entitled to such privileged access if they satisfy
one (or more) requirements regarding income, net worth, asset size,
governance status or professional experience. In the U.S., the term is
used by the Securities and Exchange Commission (SEC) under Regulation D
to refer to investors who are financially sophisticated and have a
reduced need for the protection provided by regulatory disclosure
filings. Accredited investors include natural high net worth individuals
(HNWI), banks, insurance companies, brokers and trusts.
An accreting principal swap is a derivative contract in which two
counterparties agree to exchange cash flows, usually a fixed rate for a
variable rate, as with most other types of interest rate or
cross-currency swap contracts. However, in this case, the notional
principal amount increases over time on a schedule on which both parties
agree in advance. Also called accreting swap, accumulation swap,
construction loan swap, drawdown swap, and step-up swap.
Accretion refers to the gradual and incremental growth of assets and
earnings growth to business expansion, a company's internal growth, or
mergers and acquisitions.
In finance, accretion is also the accumulation of capital gains an investor expects to receive after purchasing a bond at a discount and holding until maturity. The most well-known applications of financial accretion include zero-coupon bonds or cumulative preferred stock.
Accretion of discount is the increase in the value of a discounted
instrument as time passes and the maturity date looms closer. The value
of the instrument will accrete (grow) at the interest rate implied by
the discounted issuance price, the value at maturity and the term to
An accrual bond is a bond that does not pay periodic interest to
bondholders. Instead, interest is added to the principal balance of the
bond and is either paid at maturity or, at some point, the bond begins
to pay both principal and interest based on the accrued principal and
interest to that point.
Accrual rates apply to a range of financial instruments including bonds,
mortgages, credit cards, other types of loans and pensions. Accrual
rates vary by instrument. For example, credit cards, bonds and mortgages
often accrue daily interest, while student loans might accrue interest
on either a daily or monthly basis. In the case of a six-month bond with
interest payable semiannually, it will accrue daily interest during the
six-month term until it is paid in full on the date it becomes due.
An accrual swap is a type of interest rate swap in which the interest on
one side accrues only if certain conditions are met. Payment of interest
in the accrual swap occurs if the reference rate, such as the London
Interbank Offered Rate (LIBOR) or Euro Interbank Offer Rate (EURIBOR),
is above or below a certain level. One party pays the standard floating
reference rate and, in turn, receives the reference rate plus a spread.
Interest payments to the counterparty will only accrue for days in which
the reference rate stays within a certain range.
Most accrual swaps use one month, two month, six month or 12 month LIBOR for the reference rate, although accrual swaps can be done using treasury rates like the 10 year. The range itself must be determined in advance and may be fixed for the life of the swap. However, depending on the type and terms of the accrual swap, the rate range can be reset after set periods of time, usually on the coupon date. Accrual swaps are also referred to as corridor accrual swaps or range accrual swaps.
An accrued dividend is a term referring to balance sheet liability that
accounts for dividends on common stock that have been declared but not
yet paid to shareholders. Accrued dividends are booked as a current
liability from the declaration date and remain as such until the
dividend payment date. Accrued dividends and "dividends payable" are
sometimes interchanged by companies in name.
Accrued dividends are also synonymous with accumulated dividends, which refer to dividends due to holders of cumulative preferred stock.
Accrued income is earned but has yet to be received. Mutual funds or
other pooled assets that accumulate income over a period of time but
only pay out to shareholders once a year are by definition accruing
their income. Individual companies can also accrue income without
actually receiving it, which is the basis of the accrual accounting
Accrued interest adjustment is the extra amount of interest that is paid
to the owner of a convertible bond or other fixed income security. The
amount paid is equal to the balance of interest that has accrued since
the last payment date of the bond.
Accrued market discount is the gain in the value of a discount bond
expected from holding it for any duration until its maturity. Because
discount bonds are sold below face value, it is expected that they will
gradually rise in market price until reaching maturity.
Accrued revenue is revenue that has been earned by providing a good or
service, but for which no payment has been received because the customer
has yet to be billed. Accrued revenues are recorded as receivables on
the balance sheet to reflect the amount of money that customers owe the
business for the goods or services they purchased.
An accumulated dividend is a dividend on a share of cumulative preferred
stock that has not yet been paid to the shareholder. Accumulated
dividends are the result of dividends that are carried forward from
previous periods. Shareholders of cumulative preferred stock receive
dividends before any other shareholders.
Accumulated earnings and profits (E & P) is an accounting term
applicable to stockholders of corporations. Accumulated earnings and
profits are a company's net profits after paying dividends to the
stockholders, and serves as a measure of the economic ability of a
corporation to pay such cash distributions.
The accumulated earnings tax is a tax imposed by the federal government
on companies with retained earnings deemed to be unreasonable and in
excess of what is considered ordinary. Essentially, this tax encourages
companies to issue dividends, rather than retain the earnings.
Accumulated income includes the portion of net income that is retained
by a corporation instead of being distributed as dividends. Any
accumulated income is typically used by the corporation to reinvest in
its principal business or to pay down its debt. Accumulated income
appears under shareholder's equity on the corporation's balance sheet.
Accumulated income is called "retained earnings" far more in practice.
Accumulating shares is a classification of common stock given to
shareholders of a company in lieu of or in addition to a dividend. By
taking accumulating shares instead of cash dividends, shareholders don't
have to pay income tax on the distributions in the current year;
however, it is still mandatory to pay capital gains tax, if any, in the
year when the shares are sold. Sometimes companies pay out these types
of shares in addition to cash dividends. Accumulating shares are also
referred to as stock dividends.
Accumulation has several definitions in the finance world:
It can refer to an individual investor's cash contributions toward building wealth over a period of time (often for retirement). Many investors go through an accumulation phase in order to create a portfolio of a desired value. During a period of accumulation, the investor often re-invests all dividends and capital gains.
It can also cover an institutional investor's purchase of a large number of shares (i.e., taking a position) in a public company over an extended period of time.
It can mean the retention of company profits for reinvestment in business operations (as opposed to the payout of earnings as dividends to shareholders).
An accumulation bond is one sold at a discount, known as an original
issue discount (OID). An OID is a discount from par value at the time a
bond or debt instrument is issued. In other words, the bondholder, or
lender, is merely giving the issuing company less money than it has
legally borrowed. In exchange, the lender will forgo the interest income
since the bond issuer is not required to make interest payments, as is
An accumulation bond is so named because the value of the bond accumulates over time. They are also known as zero-coupon discount bonds.
An accumulation option is a policy feature of permanent life insurance
that reinvests dividends back into the policy, where it can earn
interest. Some types of insurance pay dividends to their policyholders
each year when the insurance company performs better than estimated.
Accumulation options are one of several options policyholders have for
what to do with the dividends they receive. An accumulation option is
also known as an "accumulation at interest dividend option,"
"accumulation at interest option" or "dividends on accumulation."
An accumulation period is the segment of time in which contributions to
an investment are made regularly, or premiums are paid on an insurance
product intended to be used for retirement purposes.
The acid-test ratio uses a firm's balance sheet data as an indicator of
whether it has sufficient short-term assets to cover its short-term
liabilities. This metric is more useful in certain situations than the
current ratio, also known as the working capital ratio, since it ignores
assets such as inventory, which may be difficult to quickly liquidate.
The acid-test ratio is also commonly known as the quick ratio.
The Formula for the Acid-Test Ratio
Acid Test= (Cash + Marketable Securities + A/R)/ Current Liabilities
An acquiree is a company that is being acquired or purchased in a merger
or acquisition transaction. The acquiree is also known as the "target
firm" during takeover scenario.
Usually, the acquiree will see a short-term movement in the price of its shares to resemble the price per share that was paid by the acquirer. This can be a positive or negative value.
An acquisition is when one company purchases most or all of another
company's shares to gain control of that company. Purchasing more than
50% of a target firm's stock and other assets allows the acquirer to
make decisions about the newly acquired assets without the approval of
the company’s shareholders. Acquisitions, which are very common in
business, may occur with the target company's approval, or in spite of
We mostly hear about acquisitions of large well-known companies because these huge and significant deals tend to dominate the news. In reality, mergers and acquisitions (M&A) occur more regularly between small- to medium-size firms than between large companies.
An acquisition adjustment describes the difference between the price an
acquiring company pays to purchase a target company and the net original
cost of the target utility company's assets. An acquisition adjustment
is a premium paid for acquiring a company for more than its tangible
assets or book value.
An acquisition cost, also referred to as the cost of acquisition, is the
total cost that a company recognizes on its books for property or
equipment after adjusting for discounts, incentives, closing costs and
other necessary expenditures but before sales taxes. An acquisition cost
may also entail the amount needed to take over another firm or purchase
an existing business unit from another company. Additionally, an
acquisition cost can describe the costs accrued by a business in
relation to the efforts involved in acquiring a new customer.
Acquisition debt is a financial obligation incurred during the
construction, improvement or purchase of a primary or secondary
residence. A home mortgage loan is an example of acquisition debt. The
Internal Revenue Service (IRS) (IRS) provides certain tax advantages for
home acquisition debt.
Acquisition financing is the capital that is obtained for the purpose of
buying another business. Acquisition financing allows users to meet
their current acquisition aspirations by providing immediate resources
that can be applied toward the transaction.
An acquisition loan is a loan that's given to a company to purchase a
specific asset or for purposes that are laid out before the loan is
granted. Typically, a company can only use an acquisition loan for a
short window of time—and only for specific purposes.
An act of God describes an event outside of human control or activity.
It's usually a natural disaster, such as a flood or an earthquake.
Insurance policies usually specify which particular acts of God they
cover, if any.
The phrase “act of God” is not actually associated with any particular religion or belief system. Contractual language referring to acts of God are known as force majeure clauses.
An active asset is an asset that is used by a business in its daily or
routine operations. Active assets can be tangible, such as buildings or
equipment, or intangible, such as patents or copyrights. Active assets
are listed as assets on the business's balance sheet.
Categorically, the essential point of differentiation for an asset is its revenue-generating capabilities. Those assets required to maintain standard operations while producing revenue are classified as active assets. It's not uncommon to hear active assets called core assets.
An active bond is a corporate bond or other fixed-income security that
is frequently traded at large volumes on the New York Stock Exchange
(NYSE). This is not to be confused with actively managed bond investment
Active bond crowd is the name given to members of the New York Stock
Exchange (NYSE) and the specific bond trading departments that are
acknowledged as frequent traders in active bonds.
An active index fund is a basket of assets which the fund manager
constructs the initial investment with holdings from a benchmark index
and then adds securities unrelated to the underlying index that can
drive performance higher. This additional layer of non-benchmark
securities aims to boost returns above a traditional buy and hold
passive strategy. By adding individual stocks disconnected from the
broader index, the fund manager can unlock additional alpha.
Active management is the use of a human element, such as a single
manager, co-managers or a team of managers, to actively manage a fund's
portfolio. Active managers rely on analytical research, forecasts, and
their own judgment and experience in making investment decisions on what
securities to buy, hold and sell. The opposite of active management is
passive management, better known as "indexing.”
Total amount of exposure a bank has with a customer for both spot and
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An option which may be exercised at any valid business date throughout
the life of the option.
Describes a currency strengthening in response to market demand rather
than by official action.
A type of trading where the same instrument is bought and sold
simultaneously in two different markets in order to cash in on the
difference in these markets.
Ask is the lowest price acceptable to the buyer.
In the context of foreign exchange, it is the right to receive from a
counterparty an amount of currency either in respect of a balance sheet
asset (e.g. a loan) or at a specified future date in respect of an
unmatched forward or spot deal.
An instruction given to a dealer to buy or sell at the best rate that is
currently available in the market.
When the forward price is equivalent to the spot price.
A stop loss order that must be executed at the requested level
regardless of market conditions.
An option whose strike/exercise price is equal to or near the current
market price of the underlying instrument.
Sale of an item to the highest bidder. (1) A method commonly used in
exchange control regimes for the allocation of foreign exchange. (2) A
method for allocating government paper, such as US Treasury Bills. Small
investors are given preferential access to the bills. The average
issuing price is then computed on the basis of the competitive bids
accepted. In some circumstances for government auctions it is the yield
rather than the price which is bid.
A contract where the exercise price is based on the difference between
the strike price and the average spot rate over the contract period.
Sometimes called an "Asian option".