Accelerated Depreciation
A method of calculating depreciation where deductions are higher in the early years of the asset's life. Contrasted with straight-line depreciation where deductions are equal for each year of the life of the asset.

Acceleration Clause
A clause (often in mortgages or other loans) where some action will occur ahead of schedule as a result of some other action. For example, an acceleration clause in a loan may mean that the full amount is due immediately if the debtor misses two monthly payments in a row.

Accountant's Opinion
If a independent certified public accountant is requested to audit a company's books, he will issue a opinion as to the condition of the financial statements. There are several degrees of opinion from clean to adverse. A clean opinion doesn't mean that every number is correct, only that the financials fairly represent the position of the company. An adverse opinion means the financials don't represent the position of the company. A disclaimer means the auditor can't (for any number of reasons) express an opinion on the statements.

Accounting Controls
Methods and procedures intended to safeguard assets, authorize transactions, and ensure the accuracy of financial records.

Accounting Equation
Simply stated, assets are equal to liabilities plus owners' equity.

Accounting Method
Any number of approaches for calculating the income of an entity. Usually applied to the general means of recognizing income and expenses, e.g., cash or accrual. But it can also apply to method of keeping inventories, etc.

Accounting Procedure
Similar to accounting method, but applied to more routine issues. For example, the method of computing depreciation, handling small capital expenditures.

Accounting Rate of Return
A method of computing the profitability where the total cash inflow over the life of the project is reduced by expenses. This amount is divided by the estimated life of the project to arrive at an annual return. That's divided by the investment's cost. The result is an average rate of return. See Discounted Cash Flow.

Accounts Payable
A liability arising when a vendor provides goods or services that are not immediately paid for and where the liability is not formalized in writing but backed by the reputation and credit worthiness of the debtor. When a business using the accrual basis of accounting purchases goods or services the company reports an expense and an account payable. When payment is made the account payable is reduced.

Accounts Receivable
For accrual basis businesses, transactions not paid in cash create an account receivable, an unsecured promise to pay in the future. The accounting entry is a debit to accounts receivable and a credit to sales. On payment, the account receivable is credited and cash is debited.

Accounts Receivable Financing
Financing where the company's accounts receivable are used as collateral. This type of financing is usually short-term in nature.

Accounts Receivable Turnover
Ratio obtained by dividing total credit sales by accounts receivable. The result indicates how many times the receivables have been collected during the period covered by the sales. It's a measure of how well the company is collecting it's accounts receivable.

Accrual Accounting
Under this method of accounting, income is recognized when earned, whether or not collected, and expenses are recognized when events have occurred that determine that a liability exists and the amount of the liability can be ascertained with reasonable accuracy. For example, at December 31 you ship a customer 100 widgets. You have to record the income in that year, even though you won't get paid until the following year. If you were buying the widgets, you could accrue the expense in the tax year you ordered them. There are some special rules for tax purposes and there can be a significant divergence between recognition of income and expenses for tax and financial accounting purposes.

Accrued Expense
An expense that has been incurred, but not yet paid in cash. Similar to accounts payable, but usually associated with nontrade vendors. For example, an electric bill.

Accrued Revenue
Income that has been earned (by the sale of goods or performance of services) but where payment has not been received in cash. Similar to accounts receivable.

Accrue
To record an item in the accounting books when using the accrual method of accounting. For example, you accrue income when the customer signs a contract, even though you won't receive any cash at that time. When you accrue an item of income or expense can depend on a number of factors including the entity's procedures. IRS requirements here frequently diverge from accounting rules.

Accumulated Depreciation
The total depreciation taken on an asset since it was acquired.

Acid-Test Ratio
Also called the quick ratio, it's equal to the sum of cash, short-term investments and net current receivables divided by current liabilities. It's a measure of whether or not the business could pay all its current liabilities if they came due immediately.

Active Participation
Involvement in a rental real estate activity making management decisions. Requires no specific number of hours.

Activity
For the passive activity rules, it's the integral economic unit for measuring a taxpayer's level of participation in a trade or business. One location can have more than one business activity. For example, you might have an S corporation that sells computers at retail and does typesetting working out of the same location. The two may be separate activities. On the other hand, two or more related businesses can also be combined into one activity.

Additional Paid-In Capital
Equity contributions to a corporation in excess of the amount of capital stock. See Owner's Equity, below.

Add-On Interest
Interest that isn't paid by the debtor, but added to the principal amount.

Adjusted Basis
Used for determining depreciation and gain or loss on the disposition of an asset. Your adjusted basis in an asset is your beginning basis (see Basis, below), decreased by depreciation, depletion or any Sec. 179 expense taken or increased by capital additions. For example, you purchase a machine for $10,000 (your basis) and take a Sec. 179 expense deduction of $1,000 and depreciation of $2,000 in the first year. At the end of the year your adjusted basis is $7,000. Note. Even professionals often say basis when they really mean adjusted basis.

Adjusted Gross Income
Also known as AGI, it's your individual income before personal exemptions or standard or itemized deductions. It's the total of wages, interest, dividends, capital gains (or up to $3,000 in losses), profit or loss from real estate or pass-through entities (e.g., S corporation), pension income and certain other items less contributions to an IRA or Keogh plan, one-half of any self- employment income, and health insurance for self-employed individuals, and certain other deductions.

Adjusted Trial Balance
A list of all the ledger accounts with their adjustments and the adjusted balances.

Adjusting Entry
An entry made at the end of the period to assign expenses to the period for which they were incurred and revenue to the period in which it was earned. They are also used to correct entries that could not be accurately made before the end of the year.

Administrative Dissolution
The dissolution of a corporation by the Secretary of State or similar state authority as a result of the corporation's failure to file corporate tax returns, file an annual report, maintain a registered agent, etc.

Administrative Expense
Sometimes part of general expense, it's an expense that isn't directly associated with selling, manufacturing, distributing, etc. but part of overall management such as accounting, general management, etc.

Administrative Services Only
Where one party provides only administrative or clerical services to an employee benefit plan. (Typically the employer is the administrator.) Another party acts as the trustee.

Advances
Funds made available to another party. In the case of a loan, it's the disbursement of funds under a note. In tax parlance it often means something between a formalized loan and equity. For example, a shareholder puts money into a corporation with the intention of being paid back shortly.

Adverse Opinion
Instead of an unqualified opinion, it's an opinion by a CPA that the financial statements do not represent fairly the results of the operations of the company and/or are not in conformity with generally accepted accounting principles (GAAP).

After-Acquired Clause
A clause in a mortgage or similar loan document that provides that any mortgageable property acquired after the mortgage is signed will be considered additional security for the loan.

Agent
A person or entity authorized to act on behalf of another party. While a person can act on his own, a corporation can only act through its agents.

Aggregation
The combination of several business operations into a larger unit. Primarily used to combine passive trade or business undertakings into one or more activities in order to determine whether a taxpayer is a material participant.

Aging of Accounts Receivable
A way to estimate bad debts by analyzing individual accounts receivable according to the length of time they have been outstanding. For example, outstanding accounts may be split into those 30 days or less outstanding, 60 days or less outstanding, etc. The analysis includes arriving at the balance for all the accounts in a group.

All-or-None Bid
A bid for a number of different items in which the bidder will not accept a partial award, but only an award for all the items, services, etc. included in the bid.

All-Risk
An insurance policy covering real or personal property against any loss except those specifically excluded.

Allocation Base
An approach for assigning a given cost to two or more departments of a business.

Allowance for Doubtful Accounts
An offset, or contra account, to accounts receivable to reflect the estimated collection losses on outstanding accounts receivable. The allowance reduces revenue. Such an allowance is generally not allowed for tax purposes. Also known as an allowance for bad debts and allowance for uncollectible accounts.

Allowance Method
A method of recording collection losses based on estimates before the actual determination that the business will be unable to collect such losses. For example, at the end of the year a company will make an estimate of the uncollectible accounts receivable at that point in time. The actual dollar amount of the accounts receivable that will be uncollected may not be known for certainty for many months or even years.

Amortization
This is similar to straight-line depreciation, allowing a business or individual to write off an expenditure over a number of years. Amortization generally applies to intangible assets. For example, you purchase a business consisting of a machine with a fair market value of $10,000 and goodwill of $15,000. You can't expense (write off) the cost in the year acquired, but you can depreciate the machine using any of several methods, including one that provides greater deductions in the early years. The goodwill can only be amortized over 15 years using a straight-line method, or $1,000 per year.

Annual Meeting
A meeting of the shareholders held each year to elect directors of the corporation, present the annual report, and conduct other business including items which requires shareholder approval.

Annual Percentage Rate (APR)
The effective interest rate required to be disclosed under the Truth in Lending Act.

Annuity
The dictionary definition is a contract issued by an insurance company that pays an annuitant an amount periodically for a certain time for the remainder of his life. Common usage has expanded that definition to the point where you must dig deeper to understand the meaning. Variations include a deferred annuity where you make payments into a fund over a period of years (where tax on the fund's income is deferred), an immediate annuity (the original definition) or many other plans where a series of payments, either into or out of the fund, are involved.

Appropriation of Retained Earnings
Restriction of retained earnings that is recorded by a formal journal entry. The restriction may be made voluntarily by the board of directors to show the earnings are being accumulated for a particular purpose or the restriction may be the result of a covenant in a loan agreement.

Articles of Incorporation
Document to be filed in most states with the secretary of state or similar authority of a state by the founders of the corporation specifying such items as the name, location, nature of the business, capital investment, etc. The document is also known as a Certificate of Incorporation. The corporation only comes into existence when the filing is approved by the state.

Articles of Organization
Similar to Articles of Incorporation, but the document filed with the secretary of state or similar authority of a state by the founders of an limited liability company (LLC). It is also known as Articles of Formation.

Assessments
The right to secure additional payments from partners or co-venturers in a project.

Assignment
A transfer of your rights to another party. For example, in the case of an insurance policy it's the partial or total transfer of the policyowner's rights to another party. If you're selling a piece of equipment, you may be able to assign the warranty to the buyer. Some contracts expressly prohibit assignment.

Assumption
An agreement where the purchaser agrees to make the payments on an existing mortgage on the property. The original borrower remains liable unless he is specifically released.

Authorized Shares
The maximum number of shares of stock a corporation may issue according to its articles of incorporation. If additional shares are to be issued either to be sold or because of a stock split or dividend, the corporation must file an amendment with the state.

Average Cost Method
Inventory costing method based on the average cost of inventory during the period. Average cost is determined by dividing the cost of goods in inventory by the number of units of the same type in inventory at any point in time.

Bad Debt Expense
Generally, the cost of uncollectible accounts receivable which occurs when customers to whom a business has extended credit fail to pay. It can also refer to any debt owed you which is uncollectible.

Balance Sheet
Listing of the assets, liabilities and owner's equity at a spcific point in time.

Balloon Payment
The final installment on a loan which is greater than the prior payments and pays any remaining amount outstanding under the loan. For example, a loan calls for equal monthly payments of $600, where most of the payment is for interest. At the end of the loan a balloon payment of $100,000 is due.

Banker's Acceptance
A time draft (note) drawn on and accepted by a bank. This instrument is usually used for financing import-export transactions and generally financing international trade. Payment of the note is guaranteed by the bank.

Base
Also known as a Stop. In real estate leases tenants are often responsible for operating expenses of the building over a certain dollar amount, the base or stop. The base may be expressed in dollars per square foot, total dollars, or as a base year (in which case the base is the expense in the base year).

Basis
Used in determining depreciation or gain or loss on the sale of property. In the simplest situation, your basis in property you purchase is the cost. For example, you pay $1,000 for a machine-that's your basis. How you acquire the property determines your basis. For example, if you inherited the machine, your basis would be the fair market value at the decedent's death. In a simple tradein, your basis is equal to your adjusted basis (see above) in the equipment traded in plus any cash paid. If you contributed the property to a corporation, the corporation's basis would be the basis of the property in your hands. Your basis in the stock in an S corporation is your cost plus profits taxed to you less losses passed through and distributions. There are a number of other ways of arriving at basis. Please see Adjusted Basis, above.

Basis Point
A way of quoting the yield on a bond, note, or other debt instrument. One basis point is equal to 0.01%. Thus, a 50 basis point yield increase in a bond would be equal to 0.5%.

Batch Processing
Entering transactions in a group rather than as they occur.

Bearer Bond
While new issues are rare because of a change in the tax law, the principal and interest on the bond is payable to whoever has possession. On the other hand, the ownership of a bond in registered form is recorded with a bank, the issuer, etc.

Bearer Instrument
A note, instrument, or draft, payable to someone other than a designated payee, i.e., the bearer or to cash. Beneficiary. A person entitled to the benefits of a trust, will, insurance policy, pension plan, etc. For example, if you name your daughter as the sole beneficiary of a life insurance policy, only she is entitle to the proceeds.

Bid Bond
An agreement in which a third party agrees to be liable in the event the bidder fails to sign the contract as bid (if his bid is accepted). A bid deposit is similar, but the bidder must deposit cash or a certified check.

Blanket Mortgage
A single mortgage that covers more than one property.

Blanket Order
A purchasing arrangement where the purchaser contracts with a vendor to provide his requirements for an item or service on an as-required basis.

Blanket Position Bond
A fidelity bond where each employee is covered up to the bond penalty. The maximum liability is equal to the bond penalty times the number of employees.

Blind Pool
A partnership or syndication where the investments to be purchased are not specified at the time the investments are sold.

Blue Sky Laws
State laws that govern the issuance and sale of securities (stocks, bonds, etc.) to residents of the state and require the registration of the securities with the state prior to sale. The rules are designed to protect investors from fraud. While a new stock issue may be exempt from federal regulation, it may not be exempt from state rules.

Bond Discount
The excess of the value of a bond at maturity (the par value) over the issue price of a bond or the purchase price. The difference between the value at maturity and the issue price is often called original issue discount. For example, the par value of a bond is $1,000; the bond is issued at $990. The bond has $10 of original issue discount. Another bond has a par value of $1,000; you purchase it in the open market at $900. The bond has $100 of discount.

Bond Premium
The excess of the bond's price over the maturity (par) value. For example, you purchase a bond for $1050; the maturity value is $1,000. The bond has a premium of $50.

Bond Sinking Fund
Amounts accumulated and segregated for the purpose of redeeming or retiring bonds. Can also apply to preferred stock.

Book Value of an Asset
The asset's cost less accumulated depreciation.

Book Value of Stock
The book value of the assets of a company less the liabilities. Can be translated into book value per share by dividing by the number of shares outstanding.

Boot
A tax term that means cash or unlike property received in an exchange. For example, you trade investment real estate worth $500,000 for another property worth only $300,000. In addition to the deed on the new property you receive $200,000 in cash (or notes). The $200,000 is boot.

Break-Even Point
The dollar amount or unit amount of sales where total revenue equals total expenses.

Breakpoint
See Overage Rent.

Bridge Loan
See Interim Financing.

Broad Form Storekeepers Policy
An insurance policy for a retail store with four or fewer employees that provides both fidelity and crime coverage.

Builder's Bonds
Mortgage-backed securities issued by builders on mortgages accumulated from the sales of houses.

Bullet Loan
Generally, a loan where no principal repayments are made during the loan. Only interest is paid, leaving the total amount borrowed as a balloon payment at maturity.

Business Interruption Insurance
A policy that pays a stipulated amount when the business cannot operate because of some insured peril. For example, a policy will pay a certain percentage of the business's earnings lost because of a fire.

Businessowner's Program
An insurance policy designed for small offices or stores, covering the building and contents for full replacement cost as well as liability insurance.

Buy-Down
A loan in which someone other than the borrower puts up money to reduce the interest rate or borrower's monthly payments. Frequently done by builders in poor markets. It makes the house more affordable. The buy-down usually expires within a few years.

Bylaws
The rules governing the operation of an organization. In the case of a corporation, the bylaws are drawn up at the time, or shortly after incorporation. (Most stationery stores have standard forms which can be modified.)

Byproduct
Output of a production process with relatively little sales value when compared to the main product.

Callable Bond
A bond that can be redeemed by the issuer before the stated maturity date. Usually, the bond cannot be redeemed before a certain time, say 5 years. And often bonds are only callable at certain times. If a call date is missed, the bond may not be callable until the next call date. The call priviledge is to enable the issuer to refund the bonds at a lower interest rate should that occur during the term. The yield and value of a bond can be affected by any call priviledge. Sometimes known as a call feature.

Call Option
1. The right to buy 100 shares of a stock (or stock index, etc.) at set price. Usually, the option holder has the right, but not the obligation to purchase the property. The option expires at a set time. For example, the current price of Madison Inc. is $50. For $5 per share you can purchase a option that allows you to buy Madison stock at $52 at anytime within the next 60 days. Traded options expire at preset times. 2. The right to prepay a mortgage.

Call Premium
In the case of straight or convertible bonds or preferred stock it's the amount in excess of the par value of the security the issuer may have to pay for the priviledge of redeeming the security before maturity. For example, if the par value is $1,000, the issuer may have to pay $1,100 to redeem the bond. The call premium can vary with the timing of the call feature. For example, the call premium may be $100 on a bond that's callable 5 years from issuance. The premium may be only $50 if the bond is callable 10 years after issuance. The term call premium can also refer to the purchase price of a call option.

Call Protection
The length of time during which a bond, preferred stock, etc. cannot be redeemed by the issuer.

Capital
Sometimes used as a synonym for the owner's equity in a business.

Capital Budgeting
A formal plan for making investments in plant, equipment, other fixed assets, advertising projects, etc. Items included in the capital budget have lives in excess of one year and often require long-range planning.

Capital Expenditure
The purchase of or outlay for an asset with a life of more than a year, or one that increases the capacity or efficiency of an asset or extends it's useful life. Generally, such expenditures cannot be deducted currently for tax purposes (or expensed for financial accounting purposes. Instead, they must be depreciated or amortized over their useful life.

Capital Gain (or loss)
A category of gain or loss under the tax law resulting from the sale or other disposition of specified property such as stock or bond investments, real estate, etc. It does not include property used in a trade or business. However, special rules apply in such situations that can result in similar treatment for business property.

Capitalization Rate
The rate of interest used to discount the future income from a property to arrive at a present value.

Cash-On-Cash Return
Usually reserved for real estate income properties, it's the annual cash flow from the property divided by your cash investment. Sometimes called return on equity or equity dividend rate. It's a quick and dirty way to evaluate an investment.

Certificate of Compliance
A vendor's certification that the supplies or services delivered meet certain specified requirements.

Claims-Made Basis
Under this type of insurance policy the insurer is responsible only for claims filed during the period the policy is in force. See Claims-Occurrence Basis below.

Claims-Occurrence Basis
With this type of insurance policy the insurer is responsible for claims from events that occurred during the time the policy was in force. It makes no difference when the claim is filed.

Closely Held Corporation
A corporation with five or fewer shareholders who own more than 50% in value of the stock at any one time during the year. Note, this is the IRS definition. In common usage the definition can be broader.

Collateralization
To pledge mortgages, bonds, accounts receivable or other marketable properties as security for a loan.

Coinsurance Amount Limit
A requirement under burglary insurance that a minimum amount of insurance be maintained, based on the type and amount of merchandise.

Coinsurance Clause
In the case of a partial loss where the property is not insured for the indicated percentage of its cash value at the time of the loss, the recovery from the company is based on a percentage.

Commercial Blanket Bond
A bond that covers employee theft by one or more employees up to a fixed amount.

Commercial Paper
Short-term (generally 2 to 270 days) obligations (notes) issued by banks and corporations with high credit ratings. These notes are usually unsecured and usually issued at a discount. Commercial Property Form. An all-risk type insurance policy covering business personal property against physical loss for retailers, wholesalers and certain other types of businesses.

Common Control
In tax parlance, the situation where a group of five or fewer persons own more than 50% of an undertaking and therefore have the ability (whether or not it is exercised) to direct operations.

Comparable Properties
One of the ways of appraising real estate (or other property) is to find recent selling prices of properties that are comparable to the one being appraised. If the properties are not identical, an appraiser can make adjustments.

Completion Bond
A guarantee provided by a bonding company to a lender or other party that the contractor will turn over the property to the owner free of any claims.

Concealment
Intentionally withholding adverse facts that are known when you're obligated to reveal them.

Concessions
In real estate, free rent, allowances for alterations, etc., or similar payments or allowances from a landlord to induce a tenant to sign a lease.

Conditional
In insurance parlance, a contract requiring the insured to meet specified conditions to obtain payment for any losses.

Consequential Losses
Indirect losses from an event.

Construction Loan
A loan intended only to finance the construction of a property. Usually must be converted to a term loan after construction is complete.

Constructive Total Loss
A partial loss where the cost of repairing the damage is greater than the value of the property after restoration.

Contingent Business Interruption Insurance
An insurance policy that provides benefits if your earnings are reduced because of damages to another business on which yours is dependent.

Contingent Financing Clause
A clause in a purchase and sale agreement the specifies that the buyer must be able to secure financing on reasonable terms or he can back out of the purchase.

Contingent Payments
Payments where the amount and/or timing is dependent on other events, usually the income from the property.

Contingent Interest
Income from a note that is at least partially based on the income from the property. This is common in financing commercial real estate. For example, Fred loans Madison $1 million at 8%. The terms also require the payment of 3% of the cash flow from the property in any year that the cash flow exceeds $750,000.

Contra Account
An asset account that normally has a credit balance. The contra account is used to offset a related account. The approach is used so that the regular asset account is shown at the original or undiminished value. For example, accounts receivable has a contra account usually called allowance for doubtful accounts. Fixed assets have a contra account called accumulated depreciation.

Contract Interest Rate
The stated, or nominal, interest rate in a contract.

Contributory Negligence
A defense argument that the plaintiff did not exercise sufficient care and that this contributed to his injury.

Convenience of Termination Clause
A contract clause that permits the party to terminate, at its own discretion.

Conventional Loan
A mortgage loan that is not backed by insurance from a government agency or other source.

Convertible Term
Term life insurance which is convertible into whole life without showing insurability.

Conversion Costs
The costs required to convert raw materials into finished product; including direct labor and overhead.

Cost Method
An appraisal method that values a property based on the cost to reproduce it today. That amount is usually adjusted for depreciation.

Covenants
Promises included in an agreement to perform or not to perform certain acts. For example, a loan may contain a covenant that the borrower's debt-to-equity ratio cannot exceed 2 to 1.

Credit Enhancements
Using third-party guarantees such as a cosigner, the pledging of assets, an insurance company bond, or a letter of credit to provide additional security for a loan.

Cross-Purchase Plan
A plan by which each stockholder or partner in a closely held business agrees to purchase the interest of a departing stockholder or partner. Usually funded by life insurance on the lives of the other stockholders or partners. (Note, cross-purchase agreements can become unwieldy when more than four owners are involved.)

Current Yield
The yield of a bond or similar instrument, taking into account only the current interest and the price paid. Computed by dividing the annual interest by the purchase price.

Debt Instrument
A generic term representing any written promise to repay the debt.

Debt Service
The cash required to pay the interest and principal due (usually during one year) on outstanding debt.

Debt-To-Equity Ratio
Total liabilities divided by total shareholders' equity. This is a measure of the cushion available to creditors should the firm be forced to liquidate. The ratio is sometimes calculated by dividing total long-term debt by shareholders' equity.

Debt Service Coverage
The borrower's annual net operating income before debt service and taxes divided by the annual debt service. A measure of how safe the loan is to the lender.

Deed In Lieu Of Foreclosure
The delivery of an asset's title to the lender when the loan is in default. The approach may benefit both parties by avoiding the expenses associated with foreclosure and the stigma of foreclosure. CAUTION. For tax purposes, the transaction is the same as a sale.

Deep Discount Bond
A bond where the market price is less than 20% or so of its face value. Like a zero coupon bond, the market price of a deep discount bond will rise faster when interest rates fall and drop faster when interest rates rise than a bond that is selling close to its face value.

Deep In, Deep Out Of The Money
A call option whose exercise price is well below the market price of the underlying stock (deep in the money) or well above the market price (deep out of the money). Thus, the premium associated with buying a deep-in-the-money call option is high.

Default
The failure of a debtor to comply with a provision of a bond indenture or loan agreement (commonly known as a technical default) or to make timely payment of interest or principal when due.

Defeasance
In corporate finance it is generally the discharge of old, low-rate debt without repayment prior to maturity. The corporation replaces it with newly issued securities with a lower face value buy paying higher interest or having a higher market value. The technique can result in tax and balance sheet advantages.

Deferred Charge
An expenditure carried as an asset until the amount represents a true expense for the period. For example, if a one-year insurance premium is paid three months before the end of the fiscal year, three months of the premium would be an expense in the year paid, nine months would be an expense of the following year. Thus, 9/12 of the premium would be a deferred charge. In this case it would be represented by an account called prepaid insurance. Deferred income is the opposite situation. For example, six months rent received in advance. Any amount not properly credited to the current period would be represent a liability.

Deferred Interest Bond
A bond where interest payments are not made currently, but at a later date. Similar to a zero coupon bond which pays 'interest' and principal at maturity. The interest, in effect, is compounded and paid at maturity. Market prices for such bonds are much more volatile than bonds which pay interest currently.

Demand Deposit
The technical name for a checking account or any other type of account where the funds can be withdrawn without prior notice.

Demand Loan
A loan with no set maturity date. The loan is payable whenever the lender chooses to call it.

Depreciation
A method of recovering your purchase price or other basis in an asset over its life rather than deducting the full amount immediately. An expense for book purposes or a deduction for tax purposes. Depreciation is often different for book and tax purposes. See Accelerated Depreciation above.

Depreciation Recapture
When tangible personal property is sold, the tax gain is based on the difference between the asset's adjusted basis and the selling price. Any gain up to the amount of depreciation taken is deemed depreciation recapture and taxed as ordinary income.

Direct Costs
Costs directly related to conversion of raw materials into product. Includes raw materials, direct labor and variable overhead.

Direct Costing
Also know as variable costing, a method of calculating costs that involves only raw materials, direct labor and variable overhead.

Direct Overhead
Costs directly associated with the manufacture of goods. That could include factory lighting, rent, insurance. Indirect overhead could include office expenses, R&D, lighting, etc.

Direct Placement
Also known as a private placement, the sale of securities directly to one or more professional investors or institutions, frequently insurance companies. The sale of securities in this fashion avoids many of the fees typically associated with public offerings.

Disappearing Deductible
An insurance policy where losses below a certain amount are excluded. Those above a certain amount are paid in full and those in between are paid a multiple of the loss.

Discount
This term can have a number of meanings, depending on the context. When used in connection with a loan, it's where the bank deducts its interest payment before giving the loan proceeds to the borrower. For example, where $100 is borrowed at 10% for one year, the borrower receives only $90. For bonds, it's the difference between the current market price and the face amount of the bond.

Discounted Cash Flow
The application of a factor, based on the cost of the firm's capital or prevailing interest rates (with a possible adjustment for risk), to the cash inflows and outflows from a project or investment. Also called net present value analysis.

Discount Rate
1. The rate used to compute discounted cash flows or the present value of an investment. 2. The interest rate that the Federal Reserve charges member banks for loans.

Discount Yield
The yield on a security sold at a discount. U.S. treasury bills are sold at a discount. The face amount is returned to the investor at maturity. The annual yield is computed by dividing the discount by the face amount, then multiplying by the number of days in the year (360) and dividing by the number of days to maturity. For example, a note purchased for $950 that returns $1,000 at maturity 11 months later. The note pays no interest; instead, your entire return is determined by the amount of the discount ($50 in this example). Banker's acceptances, commercial paper, and other short-term instruments frequently use this approach to compensate the buyer.

Disintermediation
When individuals (or other entities) take money out of savings accounts and put the funds in money market accounts.

Dividend Exclusion
Regular (not S) corporations can exclude from income 70% of dividends received. If the corporation owns 20% or more of the stock of the other corporation, it can exclude 80%. A 100% exclusion is provided for 80% plus owned corporations.

Dividend Payout Ratio
The ratio of the annual dividend to the earnings of a company. Stable, mature companies (such as utilities) typically have a high payout ratio.

Due Diligence
The thorough investigation of a potential acquisition candidate, real estate investment, etc. Often used to refer to the investigation of a company for an initial public offering.

Due-On-Sale
A clause in a mortgage that stipulates any balance remaining on a mortgage is due when the underlying property is sold.