Accounting & Tax Definitions -- A

Accelerated Cost Recovery System (ACRS): The system of depreciation that came into effect in 1981, replacing traditional methods of depreciation based on useful life. Under ACRS, costs of qualified property are written off over predetermined periods. The minimum number of years and the applicable percent of cost that may be deducted each year depends on the class of the property. The Tax Reform Act of 1986 contained several changes to the ACRS rules. The changes are generally effective for property placed in service after December 31, 1986. See Modified Accelerated Cost Recovery System.

Accountant: An individual trained and knowledgeable in the profession of accountancy.

Accounting (Accountancy): The function of compiling and providing financial information primarily by reports referred to as financial statements. Accounting includes bookkeeping, systems design, analysis and interpretation of accounting information.

Accounting Method: The method under which income and expenses are determined for tax purposes. Major accounting methods are the cash method and the accrual method.

Accounts Payable: Obligations to pay for goods or services that have been acquired on open accounts from suppliers. Accounts Payable is a current liability in the Balance Sheet.

Accounts Receivable: Amounts due the company on account from customers who have bought merchandise or received services. Accounts Receivable is a current asset in the Balance Sheet.

Accrual Basis: The method of keeping accounts which shows all expenses incurred and income earned for a given period of time, even though such expenses and income may not actually have been paid or received in cash during the same period of time.

Accrued Expense: An expense incurred, but not yet paid.

Accrued Interest: Interest that has been earned but not yet paid or credited; for example, interest earned on a bond since the last interest payment was made.

Accrued Revenue: Revenue earned, but not yet collected.

Accumulated Depreciation: An account to which estimated depreciation is added.

Active Income: For purposes of the passive loss rules, income must be divided into three categories: active income, passive income, and portfolio income. Active income is income for which the taxpayer performs services. Examples are wages, salaries, tips, bonuses, and business and partnership income in which the taxpayer materially participates in the business or partnership. See Passive Income and Portfolio Income.

Active Participant: A taxpayer who is covered by an employer-maintained qualified retirement plan, or a qualified self-employed retirement plan, if even for only one day during the year.

Additional Child Tax Credit: A refundable credit available to taxpayers with three or more children qualifying for the child tax credit and whose regular child tax credit exceeds tax liability minus other nonrefundable credits. The additional child tax credit is computed on Form 8812. See also Child Tax Credit.

Adjustable Rate Mortgage (ARM): A mortgage with an interest rate that may increase or decrease during the term of the loan, according to determined margins with limits on increases or decreases (called "caps").

Adjustment to Income: An expense that may be deducted even if the taxpayer does not itemize deductions. Adjustments to income are subtracted from gross income to arrive at adjusted gross income.

Adjusted Basis: The cost or other original basis of property reduced by adjustments such as depreciation allowed or allowable and increased by capital improvements and other adjustments.

Adjusted Entry: An entry made in the general journal at the end of an accounting period to bring certain accounts up to date.

Adoption Credit: A nonrefundable credit for qualified adoption expenses incurred for each eligible child. The credit cannot exceed $10,160 per child. The limit is a per-child limit, not an annual limit, and can be carried forward for five years or until used.

Advance Earned Income Credit: Payment by an employer based on an employee's claim to entitlement to the earned income credit. Advance earned income credit payments are treated as additional taxes on the tax return.

Agent: A person authorized by another to act on their behalf. Thus, an agent can enter into contacts and other such legal binding functions on behalf of another. Usually, the corporation's officers act as corporate agents.

Adjusted Gross Income (AGI): A person's entire income reduced by adjustments including a deduction for an IRA (Individual Retirement Account), medical savings accounts, and alimony paid to an ex-spouse. Note to the wise: Saving money now in an IRA for your retirement (yes, even though it seems like a million years away) could be one of your smartest moves yet.

Alimony Payments: Payments made by one spouse to the other spouse or former spouse under a separation or divorce agreement. Qualified alimony and separate maintenance payments are includable in the gross income of the recipient and are deductible by the payer. Child support payments, voluntary payments, and property settlements are not treated as alimony.

Alternative Minimum Tax (AMT): The alternative minimum tax is designed to prevent taxpayers from escaping a fair share of tax liability by use of certain tax breaks. A taxpayer is subject to this tax if he or she has certain minimum tax adjustments or tax preference items and his or her alternative minimum taxable income exceeds the exemption allowed for his or her filing status and income level. The alternative minimum tax is computed on Form 6251.

Amended Return: A tax return filed on Form 1040X after the original return has been filed. An amended return is used to correct errors or to claim more advantageous ways of filing the original return. An amended return can also be used to carry back certain unused credits or a net operating loss.

Amortization: Accounting or financial process of reducing an amount by periodic payments or write-downs. Refers to liquidation, writing off or extinguishing of a debt over a period of time.

Annual Meeting of Shareholders: Nearly all states require a corporation to hold an annual meeting of shareholders at which time directors are elected and other corporate issues are voted on.

Annuities: A tax-deferred product that mixes features of an investment and an insurance policy. There are generally two types- fixed annuities (pay a fixed rate of interest) or variable (your return is not guaranteed but you have freedom to choose how your money is invested). Among the advantages: unlike a 401(k) or IRA, there's no dollar limit on how much you can invest. Among the disadvantages: annuities typically carry relatively high fees and penalties.

Annuity: A sequence of equal payments, usually made at regular intervals of time.

Appreciation: Increase in value. Often used with reference to an asset, such as land, building, stocks or bonds.

Articles of Incorporation (Certificate of incorporation or charter): The articles are the primary legal document of a corporation; they serve as a corporation's Constitution. The articles are filed with the state government to begin corporate existence. The articles contain basic information on the Corporation as required by state law.

Articles of Organization: LLCs must file the articles with the proper state authorities to begin existence. The articles of organization are very similar to a corporation's articles of incorporation.

Asset: Anything of value owned or controlled by a corporation or individual. An asset may be tangible or intangible.

Assumed Name: A name under which a corporation conducts business that is not the legal name of the corporation as shown in its articles of incorporation. If a corporation does business under an assumed name, it may be required to file registration of the assumed name with the state. Also known as a Fictitious Business Name or DBA ("Doing Business As").

At-Risk Rules: Special rules limiting the taxpayer's deductible business, partnership, S corporation, or real estate loss to cash invested plus debt he or she is legally obligated to pay and the adjusted basis of any property contributed.

Audit (Tax): An IRS examination and verification of a taxpayer's return or other transactions with tax consequences. An office audit is an audit by the IRS that is conducted in the agent's office. A field audit is conducted by the IRS on the business premises of the taxpayer or in the office of the tax practitioner representing the taxpayer.

Authorized Shares or Stock: The total number of shares a corporation is authorized to sell. This number is specified in the articles of incorporation. All of the shares authorized need not be issued.

Automobile Expenses: Automobile expenses are generally deductible to the extent the automobile is used in business or for the production of income. Personal commuting expenses are not deductible. The taxpayer may deduct actual expenses (including depreciation and insurance) or the standard (optional) mileage rate may be used during any one year. The standard business mileage rate for 2004 is 37.5 cents per mile. Automobile expenses incurred for charitable activities, medical purposes, and in connection with job-related moving expenses are deductible to the extent of actual out-of-pocket expenses for gas and oil or at the rate of 14 cents per mile for charitable activities, and 14 cents per mile for medical purposes and job-related moving expenses.