Accounting Terminology

Parent Company: A company that owns or maintains control over other companies, known as subsidiaries, which are themselves separate legal entities; control generally refers to more than 50 percent ownership of the stock of another company.

Partnership: An association of two or more individuals or organizations to carry on economic activity.

Partnership Agreement: A legal agreement between partners; it usually specifies, among other things, the capital contributions to be made by each partner, the ratios in which partnership earnings and losses will be distributed, the management responsibilities of the partners, and the partners' rights to transfer or sell their individual interests.

Par-Value Stock: Stock that has a nominal value assigned to it in the corporation's charter and printed on the face of each share of stock.

Patent: An exclusive right granted for 17 years by the federal government to manufacture and sell an invention.

Pay on Delivery: The buyer pays the cost of the goods (to the carrier) on receipt of them.

Payee: The person (entity) to whom payment on a note is to be made.

P/E (price earnings) Ratio: A measure of growth potential, earnings stability, and management capabilities; computed by dividing market price per share by earnings per share.

Pension Plan: A contract between a company and it employees whereby the company agrees to pay benefits to employees after their retirement.

Performance Reports: Regular evaluations of departments, programs, or people against their stated goals and objectives.

Period (or Accounting Period): The interval (weekly, monthly, or quarterly) at which a business regularly closes it's books and generates new account balances.

Periodic Inventory Method: A system of accounting for inventory in which cost of goods sold is determined and inventory is adjusted at the end of the accounting period, not when merchandise is purchased or sold.

Perpetual Inventory Method: A system of accounting for inventory in which detailed records of the number of units and the cost of each purchase and sales transactions are prepared throughout the accounting period.

Personal Accounts: These are the accounts of a business's customers and suppliers. They are usually held in the Sales and Purchase Ledgers.

Petty Cash: A small amount of money held in reserve (normally used to purchase items of small value where a check or other form of payment is not suitable).

Petty Cash Slip: A document used to record petty cash payments where an original receipt was not obtained (sometimes called a petty cash voucher).

Physical Safeguards: Physical precautions used to protect assets and records, such as locks on doors, fireproof vaults, password verification, security gauds.

Point of Sale (POS): The place where a sale of goods takes place, e.g. a shop counter.

Post-Closing Trial Balance: A listing of all real account balances after the closing process has been completed; provides a means of testing whether total debits equal total credits for all real accounts prior to beginning a new accounting cycle.

Posting: The process of transferring or recording amounts to a ledger. (A/P, A/R, PR or GL).

Preemptive Right: The right of current stockholders to purchase additional shares of stock in order to maintain their same percentage of ownership if new shares are issued.

Preferred Stock: A class of stock that usually provides dividend and liquidation preferences over common stock.

Premium on Stock: The excess of the issuance (market) price of stock over its par or stated value.

Prepaid Expenses: Payments made in advance for items normally charged to expense.

Prepaid Income: (Also called unearned revenue) It represents money the business received in advance of providing a service to your customer. Prepaid income is actually a liability of your business because you still owe the service to the customer.

Pre-payments: One or more accounts set up to account for money paid in advance (e.g. insurance, where part of the premium applies to the current financial year, and the remainder to the following year).

Present Value: The discounted value of a future amounts or amounts of cash, assuming a given rate of interest.

Present Value of $1: The value today of $1 to be received or paid at some future date given a specified interest rate.

Present Value of an Annuity: The value today of a series of equally spaced, equal-amount payments to be made or received in the future given a specified interest rate.

Price-Earnings (P/E) Ratio: A measure of growth potential, earnings stability, and management capabilities; computed by dividing market price per share by earnings per share.

Primary Financial Statements: The balance sheet, income statement, and statement of cash flows, used by external groups to assess a company's economic standing.

Principal (Face Value or Maturity Value): The amount that will be paid on a bond at a maturity date.

Principal on a Note: The face amount of a note; the amount (excluding interest) that the maker agrees to pay the payee.

Prior-Period Adjustments: Adjustments made directly to Retained Earnings in order to correct errors in the financial statements of prior periods.

Profit and Loss Account: This statement is sometimes called an Income Statement. It shows all the revenue earned during a period (year/month) and all the expenses incurred during that period. At the end of the year, all the accounts are cleared to zero balances, and the profit or loss is transferred to the equity part of the balance sheet.

Profit Margin: The percentage difference between the costs of a product and the price you sell it for. E.g. if a product costs you $10 to buy and you sell it for $20, then you have a 100% profit margin. This is also known as your 'mark-up'.

Profitability: A company's ability to generate revenues in excess of the costs incurred in producing those revenues.

Proper Authorization: Policy regarding either a general class of transactions such as inventory or a specific transaction to achieve control objectives.

Property Dividend: The distribution to shareholders of assets other than cash.

Property, Plant, and Equipment: Tangible, long-lived assets acquired for use in business operations; includes land, buildings, machinery, equipment, and furniture.

Property, Plant, and Equipment Turnover: A measure of how well property, plant, and equipment are being utilized in generating a period's sales; computed by dividing net sales by average property, plant and equipment.

Proprietorship: A business owned by one person.

Pro-Forma Invoice: An invoice sent that requires payment before any goods or services have been dispatched.

Pro Rata: A term describing an allocation that is based on a proportionate distribution of the total.

Public Companies: Entities whose stock is publicly traded.

Purchase Discount: A reduction in the purchase price, allowed if payment is made within a specified period.

Purchase Method: A method used to prepare consolidated financial statements when one company has acquired a controlling interest in another company with similar activities by exchanging cash or other assets for more than 50 percent of the acquired company's outstanding voting stock.

Purchase Order: The written authorization for a vendor to ship merchandise and bill the customer for it.

Purchase Returns and Allowances: A contra-purchase account used for recording the return of, or allowances for, previously purchased merchandise.

Purchases Account: An account in which all inventory purchases are recorded; used with the periodic inventory method.

Purchases Journal: A special journal in which credit purchases are recorded.