Financial Key Terms to Cash Flow Success

Key

401(k)

A retirement account to which an eligible employee can contribute a certain amount of his or her pretax salary; earnings are tax-deferred. Some employers may match a stated percentage of employee 401(k) contributions. The reduced cost and liability of 401(k) plans appeal to employers.

403(b)

A qualified retirement plan similar to the 401(k), available to employees of nonprofit and government organizations.

Adjustable Rate Mortgage (ARM)

A mortgage with an interest rate that changes periodically based on a measure or an index, such as the rate on US Treasury bills or the average national mortgage rate. Borrowers assume a degree of risk in order to receive a lower rate at the beginning of an ARM.

Adjusted Gross Income (AGI)

The amount of income subject to federal income taxes. To determine AGI, subtract deductions (e.g., business expenses or IRA contributions) from gross income (employment income, interest income, dividends, and capital gains).

Amortization

Amortization isĀ an accounting technique used to periodically lower the book value of a loan or an intangible asset over a set period of time. Concerning a loan, amortization focuses on spreading out loan payments over time. When applied to an asset, amortization is similar to depreciation.

Annual Percentage Rate (APR)

The yearly cost of credit or a loan, expressed as a simple percentage. All consumer credit agreements and loans are legally required to disclose the APR.

Annuity

A long-term contract sold by life insurance companies that guarantees fixed or variable payments to the purchaser at regular intervals. Payments are usually scheduled to begin at a future time, such as retirement. Some annuities provide tax-deferred earnings, often as part of retirement plans.

Application Fee

A fee to process a loan application.

Appraisal

An assessment of a property’s value by a qualified appraiser, based on information from recent sales of similar properties.

Appreciation

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

Asset

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

Assignment

The legal transfer of ownership of an asset to another person or entity.

Bad Debts

Accounts receivable that are uncollectible used in accrual method accounting.

Balance

Amount arrived at by adding all debits and subtracting all credits to ensure total debits equal the total credits.

Balloon Mortgage

A type of mortgage with a final payment that is considerably larger than the preceding payments, typically used when borrowers anticipate receiving a large sum of cash to pay the balance or when they expect to refinance before the final payment.

Bank Overdraft

Balance of a bank account when funds withdrawn exceed funds deposited.

Bank Reconciliation

Analysis that accounts for the difference between the balance shown on the bank statement and the balance shown in the accounting records on a given date.

Bankrupt

Legal status of a person/corporation who/which is unable to pay its debts as they become due and who/which has made a transfer of property or of a right or interest in property to a trustee for the benefit of creditors.

Bankruptcy

The state of being insolvent or unable to pay outstanding debt. Declaring bankruptcy is expensive, and it can have adverse effects on one’s credit in the future. These are some common ways to apply for bankruptcy:

Beneficiary

The person or entity named in a will, life insurance policy, qualified retirement plan, or annuity who will receive benefits upon the death of the insured or the plan participant.

Bond

A debt security issued by a corporation, government, or governmental agency that obligates the issuer to pay interest at predetermined intervals and repay the principal at maturity. A bond’s face value is the amount of money the holder will receive when the bond matures. The face value does not change, but the bond’s market value may fluctuate before maturity.

Bookkeeping

The recording of financial transactions electronically or manually. The record-keeping part of the accounting process.

Broker

A financial professional who facilitates the trading of services or property such as securities, real estate, insurance, or commodities.

Budget

A report of projected income and expenses for a given period.

Business Taxes

A government levy on income for businesses.

Buy-and-Hold

An investment strategy that advocates holding securities for the long term and ignoring short-term price fluctuations.

Bylaws

Bylaws are the rules and regulations adopted by a corporation for its internal governance. It usually contains provisions relating to shareholders, directors, officers and general corporate business. At the corporation’s initial meeting the bylaws are adopted. Bylaws are a private document not filed with any state authority. Bylaws are more flexible than the articles of incorporation because they are easier to amend.

Canceled Check

A check that has cleared the bank and is returned to the depositor with his monthly statement.

Capital (or Equity)

Interest of the owner in the business that is the difference between Assets & Liabilities. Also called Equity or Net worth. In a corporation, capital represents the stockholders’ equity.

Capital Gain / Loss

Profit or gain realized from the sale or exchange of a capital asset. The amount is determined by calculating the difference between an asset’s purchase and sale price.

Capital Gains Distribution

A payment to shareholders of profits realized on the sale of an investment company’s securities.

Capital Gains Tax

A tax on profits from the sale of securities or other assets.

Capital Loss

A decrease in the value of an investment or capital asset from its purchase price.

Cash Advance

An instant loan against a line of credit. Interest is usually charged on cash advances from the date the advance is made until it is repaid. Issuers may also charge transaction fees.

Cash Basis

An accounting method that counts cash inflows or outflows when they are actually expended or received (as opposed to accrual basis).

Cash Flow

The aggregate of all cash inflows and outflows. This can be expressed as positive or negative cash flow.

Cash Management

The process of channeling cash into expenditures that enhance productivity.

Cash Surrender Value

The amount the policy-owner receives when voluntarily terminating a cash value life insurance or annuity contract before its maturity or before the insured event occurs.

Certificate of Deposit (CD)

An agreement with a commercial bank in which funds are deposited at a fixed interest rate for a specified period of time. CDs are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. There may be a penalty if funds are withdrawn before the CD reaches maturity.

Certified Public Accountant (CPA)

A professional accountant who has received certification to practice accounting from a state board of examination and may also be a member of the American Institute of Certified Public Accountants or other various state CPA organizations.

Chapter 11

A debtor (business, individual, or partnership) is declared bankrupt but is allowed reorganization to attempt debt repayment. Creditor approval is required. A separate taxable entity is created.

Chapter 13

A debtor (individual or sole proprietor) is declared bankrupt but is allowed to retain estate related assets and restructure debt obligations for eventual payment. No creditor approval is required.

Chapter 7

A debtor (individual) is declared bankrupt, and a court-appointed trustee initiates a liquidation process and a discharge of all eligible debts. The debtor has no financial sources to attempt a reorganization. A separate taxable entity is created.

Check

A written, signed, and dated instrument that allows for the transfer of money from a bank account to a payee.

Check Register

A form of cash payments journal which is used to record deposits and expenditures in and out of a bank account.

Closing

The end of a trading session or the process of transferring real estate from a seller to a buyer.

Closing Costs

Costs involved in transferring real estate from a seller to a buyer, over and above the price of the property. These can include charges for loan origination, discount points, appraisal, property survey, title search, title insurance, deed filing, credit reports, taxes, and legal services. Closing costs do not include points or the cost of private mortgage insurance (PMI).

Commercial Loan

A loan intended for short-term financing of a business, based on the creditworthiness of the business or owner and the prime lending rate.

Commission

The fee charged by an agent or broker for facilitating a transaction.

Compound Interest

Interest calculated on both the principal amount invested and the previously accumulated unpaid interest.

Compounding

A process in which income and gains on an investment are reinvested to grow further. When you earn compound interest, you earn interest on both the principal amount and the accumulated interest as it is earned.

Corporation

A group of people acting jointly for business and tax purposes who are able to incur debt and realize profit without immediate legal or taxable liabilities. A corporate entity allows its owners to attract outside capital by selling shares of ownership, protects the owners from liability beyond their investment outlay, provides for continuity of operations beyond the lives of the current owners and allows changes in ownership through the transfer of shares.

Corporation

A group of people acting jointly for business and tax purposes who are able to incur debt and realize profit without immediate legal or taxable liabilities. A corporate entity allows its owners to attract outside capital by selling shares of ownership, protects the owners from liability beyond their investment outlay, provides for continuity of operations beyond the lives of the current owners and allows changes in ownership through the transfer of shares.

Credit (1)

Legal obligation to make repayment at a later date for goods, services or money obtained through the extension of credit, or a promise to pay in the future. The cost of credit is usually referred to as a finance charge, interest or time-price differential

Credit (2)

Entry recording an increase to a liability or owner’s equity or revenue, or a reduction to an asset or expense. Credits are recorded in the right hand column of an account or a two-column book. Opposite of debit.

Credit Bureau

Entry recording an increase to a liability or owner’s equity or revenue, or a reduction to an asset or expense. Credits are recorded in the right hand column of an account or a two-column book. Opposite of debit.

Credit History

A record of how a party has paid past debts.

Credit Line

A revolving agreement that allows a person to borrow any amount up to a preapproved limit for purchases or cash advances. When the outstanding balance is paid off, credit again becomes available to fund new purchases or cash advances.

Credit Note

A revolving agreement that allows a person to borrow any amount up to a preapproved limit for purchases or cash advances. When the outstanding balance is paid off, credit again becomes available to fund new purchases or cash advances.

Credit Rating

A formal assessment of an individual’s or a corporation’s ability to handle credit, based on the history of borrowing and repayment, as well as the availability of assets and the extent of liabilities.

Credits

If you have a store credit, you can use the credit to purchase merchandise free of charge. If you have a tax credit, your taxes are reduced by the amount of your credit. You can get tax credits for purposes such as child care expenses and the earned income credit for low-income taxpayers.

Current Asset

Unrestricted cash, or any other asset that is expected to be converted into cash or consumed in the production of income within a year.

Current Liability

Liability expected to be liquidated in a year.

Debit

An entry recording an increase to an asset or expense or a reduction to a liability, revenue or owner’s equity. Debits are recorded in the left-hand column of an account or a two-column book. Opposite of credit.

Debit Card

A card issued by a bank that can be used to withdraw cash from an automated teller machine or to make purchases at merchant locations. Debit cards deduct funds from the checking or savings account linked to the card when they are used.

Debt

A legal obligation to deliver a product, service or amount of money.

Debt-to-Equity Ratio

The ratio that indicates a company’s ability to repay outstanding creditors. This also indicates the degree of leveraged money to improve the rate of return for shareholders.

Decreasing Term Insurance

A term insurance policy with a death benefit that decreases over time. This type of insurance is often used in conjunction with a mortgage or other amortized debt to guarantee payment if the holder dies before it is paid off.

Deed

A document that identifies legal ownership of real estate.

Deferred Annuity

An annuity that pays an income or lump sum at a future date.

Demand Loan

A loan repayable upon the demand of a creditor.

Dependent

A person who relies on another for financial support. Taxpayers who support dependents can claim tax exemptions for them.

Deposit

Funds used as collateral for the delivery of a good, such as a security deposit. It can also refer to the transfer of funds to another party for safekeeping, such as a deposit into a bank account.

Depreciation

The decrease in value of a fixed asset during its projected life expectancy, or the decrease in value of one currency in relation to another.

Direct Deposit

The transfer of funds refund directly to a bank account.

Direct Rollover

The tax-free transfer of money or property from one retirement plan or account to another.