Account – a record of financial transactions; usually refers to a specific category or type, such as travel expense account or purchase account.
Accountant – a person who trained to prepare and maintain financial records.
Accounting – a system for keeping score in business, using dollars.
Accounting period – the period of time over which profits are calculated. Normal accounting periods are months, quarters, and years (fiscal or calendar).
Amortize – to charge a regular portion of an expenditure over a fixed period of time. For example if something cost $100 and is to be amortized over ten years, the financial reports will show an expense of $10 per year for ten years. If the cost were not amortized, the entire $100 would show up on the financial report as an expense in the year the expenditure was made. (See entries on Expenditure and Expense.)
Application fee – A fee charged by a lender to cover initial costs of processing a loan application, often including charges for property appraisal and a credit report.
Appreciation – an increase in value. If a machine cost $1,000 last year and is now worth $1,200, it has appreciated in value by $200. (The opposite of depreciation.)
Assets – things of value owned by a business. An asset may be a physical property such as a building, or an object such as a stock certificate, or it may be a right, such as the right to use a patented process.
Current Assets are those assets that can be expected to turn into cash within a year or less. Current assets include cash, marketable securities, accounts receivable, and inventory.
Fixed Assets cannot be quickly turned into cash without interfering with business operations. Fixed assets include land, buildings, machinery, equipment, furniture, and long-term investments.
Intangible Assets are items such as patents, copyrights, trademarks, licenses, franchises, and other kinds of rights or things of value to a company, which are not physical objects. These assets may be the most important ones a company owns. Often they do not appear on financial reports.
Audit – a careful review of financial records to verify their accuracy.
Bad debts – amounts owed to a company that are not going to be paid. An account receivable becomes a bad debt when it is recognized that it won’t be paid. Sometimes, bad debts are written off when recognized. This is an expense. Sometimes, a reserve is set up to provide for possible bad debts. Creating or adding to a reserve is also an expense.
Borrower (Mortgagor) – An individual who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full.
Breakeven point – the amount of revenue from sales which exactly equals the amount of expense. Breakeven point is often expressed as the number of units that must be sold to produce revenues exactly equal to expenses. Sales above the breakeven point produce a profit; below produces a loss.
Cash – money available to spend now. Usually in a checking account. Cash flow – the amount of actual cash generated by business operations, which usually differs from profits shown.
Cash-out – A refinance for more than the balance of the original mortgage, with the extra money is taken out of the equity in the property.
Closing (or settlement) – Meeting between the buyer, seller and lender or their agents at which property and funds legally change hands.
Closing costs – Fees incurred in a real estate or mortgage transaction and paid by borrower and/or seller during a mortgage loan closing. These typically include a loan origination fee, discount points, attorney’s fees, title insurance, appraisal, survey and any items that must be prepaid, such as taxes and insurance escrow payments. The cost of closing is usually about 3 to 6 percent of the mortgage amount.
Collateral – Assets that back a mortgage loan.
Contingent liabilities – liabilities not recorded on a company’s financial reports, but which might become due. If a company is being sued, it has a contingent liability that will become a real liability if the company loses the suit. Cost of sales, cost of goods sold – the expense or cost of all items sold during an accounting period. Each unit sold has a cost of sales or cost of the goods sold. In businesses with a great many items flowing through, the cost of sales or cost of goods sold is often computed by this formula: Cost of Sales = Beginning Inventory + Purchases During the Period ? Ending Inventory.
Credit – an accounting entry on the right or bottom of a balance sheet. Usually an increase in liabilities or capital, or a reduction in assets. The opposite of credit is debit. Each credit in a balance sheet has a balancing debit. Credit has other usages, as in “You have to pay cash, your credit is no good.” Or “we will credit your account with the refund.”
Credit report – A report detailing the credit history of a prospective borrower, used when determining creditworthiness.
Debit – an accounting entry on the left or top of a balance sheet. Usually an increase in assets or a reduction in liabilities. Every debit has a balancing credit.
Deed – A legal document that transfers a property from one owner to another. The deed contains a description of the property, and is signed, witnessed and delivered to the buyer at closing.
Deferred income – a liability that arises when a company is paid in advance for goods or services that will be provided later. For example, when a magazine subscription is paid in advance, the magazine publisher is liable to provide magazines for the life of the subscription. The amount in deferred income is reduced as the magazines are delivered.
Depreciation – an expense that is supposed to reflect the loss in value of a fixed asset. For example, if a machine will completely wear out after ten year’s use, the cost of the machine is charged as an expense over the ten-year life rather than all at once, when the machine is purchased. Straight line depreciation charges the same amount to expense each year. Accelerated depreciation charges more to expense in early years, less in later years. Depreciation is an accounting expense. In real life, the fixed asset may grow in value or it may become worthless long before the depreciation period ends.
Dividend – a portion of the after-tax profits paid out to the owners of a business as a return on their investment.
Equity – the owners’ share of a business. Expenditure – an expenditure occurs when something is acquired for a business – an asset is purchased, salaries are paid, and so on. An expenditure affects the balance sheet when it occurs. However, an expenditure will not necessarily show up on the income statement or affect profits at the time the expenditure is made. All expenditures eventually show up as expenses, which do affect the income statement and profits. While most expenditures involve the exchange of cash for something, expenses need not involve cash. (See expense below.)
Escrow – The neutral third party that holds money and/or documents until the escrow instructions are fulfilled and escrow can be a title company or an attorney, depending on state regulations.
Expense – an expenditure which is chargeable against revenue during an accounting period. An expense results in the reduction of an asset. All expenditures are not expenses. For example, a company buys a truck. It trades one asset ? cash ? to acquire another asset. An expenditure has occurred but no expense is recorded. Only as the truck is depreciated will an expense be recorded. The concept of expense as different from an expenditure is one reason financial reports do not show numbers that represent spendable cash. The distinction between an expenditure and an expense is important in understanding how accounting works and what financial reports mean. (To expense is a verb. It means to charge an expenditure against income when the expenditure occurs. The opposite is to capitalize.)
FHA Loan – A loan insured by the FHA open to all qualified home purchasers.
Fixed asset – see asset.
Fixed cost – a cost that does not change as sales volume changes (in the short run.) Fixed costs normally include such items as rent, depreciation, interest, and any salaries unaffected by ups and downs in sales.
Fixed-rate mortgage – A mortgage with an interest rate that doesn’t change for the life of the loan, guaranteeing fixed payments.
Income – see profit.
Interest – a charge made for the use of money.
Journal – a chronological record of business transactions.
Late charge – Penalty paid by a borrower when a payment is made after the due date.
Liabilities – amounts owed by a company to others. Current liabilities are those amounts due within one year or less and usually include accounts payable, accruals, loans due to be paid within a year, taxes due within a year, and so on.
Lien – A claim by one person on the property of another for payment of a debt.
Loan origination fee – A fee a lender charges to process a mortgage, usually expressed as a percentage of the loan (or points), which pays for the work in evaluating and processing the loan.
Long?term liabilities – normally include the amounts of mortgages, bonds, and long?term loans that are due more than a year in the future.
Liquid – having lots of cash or assets easily converted to cash. Marginal cost, marginal revenue – marginal cost is the additional cost incurred by adding one more item.
Points – Interest prepaid to the lender at closing. Each point is equal to 1 percent of the loan amount. Paying more points at closing generally reduces a loan’s interest rate and monthly payments.
Present value – a concept that compares the value of money available in the future with the value of money in hand today. For example, $78.35 invested today in a 5% savings account will grow to $100 in five years. Thus the present value of $100 received in five years is $78.35. The concept of present value is used to analyze investment opportunities that have a future payoff.
Price/earnings (p/e) ratio – the market price of a share of stock divided by the earnings (profit) per share. P/e ratios can vary from sky high to dismally low, but often do not reflect the true value of a company.
Private Mortgage Insurance (PMI) – Insurance purchased by a buyer on a conventional loan when a down payment is less than 20 percent of the purchase price to protect the lender against default.
Profit – the amount left over when expenses are subtracted revenues. Gross profit is the profit left when cost of sales is subtracted from sales, before any operating expenses are subtracted. Operating profit is the profit from the primary operations of a business and is sales minus cost of sales minus operating expenses. Net profit before taxes is operating profit minus non-operating expenses and plus non-operating income. Net profit after taxes is the bottom line, after everything has been subtracted. Also called income, net income, earnings. Not the same as cash flow and does not represent spendable dollars.
Property tax – A government tax based on the market value of a property.
Refinancing – The process of paying off one loan with the proceeds from a new loan secured by the same property.
Retained earnings – profits not distributed to shareholders as dividends, the accumulation of a company’s profits less any dividends paid out. Retained earnings are not spendable cash.
Return on investment (ROI) – a measure of the effectiveness and efficiency with which managers use the resources available to them, expressed as a percentage. Return on equity is usually net profit after taxes divided by the shareholders’ equity. Return on invested capital is usually net profit after taxes plus interest paid on long?term debt divided by the equity plus the long?term debt. Return on assets used is usually the operating profit divided by the assets used to produce the profit. Typically used to evaluate divisions or subsidiaries. ROI is very useful but can only be used to compare consistent entities – similar companies in the same industry or the same company over a period of time. Different companies and different industries have different ROIs.
Risk – the possibility of loss; inherent in all business activities. High risk requires high return. All business decisions must consider the amount of risk involved.
Sales – amounts received or due for goods or services sold to customers. Gross sales are total sales before any returns or adjustments. Net sales are after accounting for returns and adjustments.
Second mortgage – A subordinate mortgage made in addition to a first mortgage.
Stock – a certificate (or electronic or other record) that indicates ownership of a portion of a corporation; a share of stock. Preferred stock promises its owner a dividend that is usually fixed in amount or percent. Preferred shareholders get paid first out of any profits. They have preference. Common stock has no preference and no fixed rate of return. Treasury stock was originally issued to shareholders but has been subsequently acquired by the corporation . Authorized by unissued stock is stock which official corporate action has authorized but has not sold or issued. (Stock also means the stock of goods, the stock on hand, the inventory of a company.)
Sunk costs – money already spent and gone, which will not be recovered no matter what course of action is taken. Bad decisions are made when managers attempt to recoup sunk costs.
Term – The number of years until a loan is due to be paid in full.
Title – A document that gives evidence of ownership of a property, as well as rights of ownership and possession.
Title insurance – Insurance that protects the lender (lender’s policy) or buyer (owner’s policy) against loss due to disputes over property ownership.
Title search – Examination of municipal records to ensure that the seller is the legal owner of a property and that there are no liens other claims against the property.
Underwriting – The process of verifying data and evaluating a loan application. The underwriter gives the final loan approval.
Variable cost – a cost that changes as sales or production change. If a business is producing nothing and selling nothing, the variable cost should be zero. However, there will probably be fixed costs.
Write-down – the partial reduction in the value of an asset, recognizing obsolescence or other losses in value.
Write-off – the total reduction in the value of an asset, recognizing that it no longer has any value. Write-downs and write-offs are non-cash expenses that affect profits.