Accounting Terms

Accounting Terms
The following explanations of terms are presented to aid in understanding the narrative discussions and illustrations included in this text and the terminology generally used in governmental accounting, auditing, financial reporting and budgeting. Because this glossary is reprinted from the Government Finance Association?s Governmental Accounting and Financial Reporting, the terms and explanations have not been modified to reflect specific Texas school district issues, etc. Synonyms for specific terms also may be presented in this appendix. In such instances, the abbreviation ?syn.? is used before the term.
ACCOUNTABILITY. Being obliged to explain one?s actions, to justify what one does. Accountability requires governments to answer to the citizenry-to justify the raising of public resources and the purposes for which they are used. Governmental accountability is based on the belief that the citizenry has a ?right to know,? a right to receive openly declared facts that may lead to public debate by the citizens and their elected representatives.
accounting principles board (apb). Authoritative private-sector standard-setting body that preceded the fasb. The apb issued guidance in the form of Opinions.

accounting standards executive committee (AcSEC). An aicpa committee that is authorized to issue Practice Bulletins. A Practice Bulletin specifically targeted to state and local governments and cleared by the gasb would enjoy ?level 2? status on the hierarchy of authoritative sources of gaap established by sas No. 69, The Meaning of ?Present Fairly in Conformity with Generally Accepted Accounting Principles? in the Independent Auditor?s Report.

accrual basis OF accounting. A method of accounting that recognizes the financial effect of transactions, events, and interfund activities when they occur, regardless of the timing of related cash flows.
acquisition costs. Term used in connection with public-entity risk pools. Costs that vary with and are primarily related to the acquisition of new and renewal contracts. Commissions and other costs (e.g., salaries of certain employees involved in the underwriting and policy issue functions, and inspection fees) that are primarily related to contracts issued or renewed during the period in which the costs are incurred are considered to be acquisition costs [sgas 10]
activity. A specific and distinguishable service performed by one or more organizational components of a government to accomplish a function for which the government is responsible (e.g., police is an activity within the public safety function).

actuarial accrued liability. Term used in connection with defined benefit pension plans. That portion, as determined by a particular actuarial cost method, of the actuarial present value of pension plan benefits and expenses which is not provided for by future normal costs. [sgas 25]

actuarial assumptions. Term used in connection with defined benefit pension plans. Assumptions as to the occurrence of future events affecting pension costs, such as: mortality, withdrawal, disablement and retirement; changes in compensation and government-provided pension benefits; rates of investment earnings and asset appreciation or depreciation; procedures used to determine the actuarial value of assets; characteristics of future entrants for open group actuarial cost methods; and other relevant items. [sgas 25]

actuarial cost method. Term used in connection with defined benefit pension plans. A procedure for determining the actuarial present value of pension plan benefits and expenses and for developing an actuarially equivalent allocation of such value to time periods, usually in the form of a normal cost and an actuarial accrued liability. [sgas 25].

actuarial section. One of five sections of a comprehensive annual financial report of a public employee retirement system. The contents of this section typically include the actuary?s certification letter, a summary of actuarial assumptions and methods, a schedule of active member valuation data, a schedule of retirants and beneficiaries added to and removed from rolls, a solvency test, an analysis of financial experience, an independent actuarial review opinion (if available), and a discussion of changes in plan provisions (if the plan has been amended).
actuarial value OF assets. Term used in connection with defined benefit pension plans. The value of cash, investments, and other property belonging to a pension plan, as used by the actuary for the purpose of an actuarial valuation. The actuarial value of assets, which may represent an average value over time, normally differs from the amount reported in the financial statements, which is a point-in-time measure (i.e., as of the date of the statement of net assets). [sgas 25]
additions. Term used to describe increases in the net assets of fiduciary funds.
advance refunding. A transaction in which new debt is issued to provide monies to pay interest on old, outstanding debt as it becomes due, and to pay the principal on the old debt either as it matures or at an earlier call date. An advance refunding occurs before the maturity or call date of the old debt, and the proceeds of the new debt are invested until the maturity or call date of the old debt. Most advance refundings result in defeasance of debt. [sgas 7]
adverse opinion. Term used in connection with auditing. Conclusion in the independent auditor?s report that financial statements are not fairly presented.

agency funds. One of four types of fiduciary funds. Agency funds are used to report resources held by the reporting government in a purely custodial capacity (assets equal liabilities). Agency funds typically involve only the receipt, temporary investment, and remittance of fiduciary resources to individuals, private organizations or other governments. [sgas 34]

agent multiple-employer defined benefit pension plan. An aggregation of single-employer plans, with pooled administrative and investment functions. Separate accounts are maintained for each employer so that the employer?s contributions provide benefits only for the employees of that employer. A separate actuarial valuation is performed for each individual employer?s plan to determine the employer?s periodic contribution rate and other information for the individual plan, based on the benefit formula selected by the employer and the individual plan?s proportionate share of the pooled assets. The results of the individual valuations are aggregated at the administrative level. [sgas 27]

aggregate actuarial cost method. Term used in connection with defined benefit pension plans. A method under which the excess of the actuarial present value of projected benefits of the group included in an actuarial valuation over the actuarial value of assets is allocated on a level basis over the earnings or service of the group between the valuation date and assumed exit. This allocation is performed for the group as a whole, not as a sum of individual allocations. That portion of the actuarial present value allocated to a valuation year is called the normal cost. The actuarial accrued liability is equal to the actuarial value of assets. [sgas 25]

allocated claims adjustment expenses. Term used in connection with risk financing activities. Expenses associated directly with specific claims paid or in the process of settlement, such as legal and adjusters? fees. [sgas 10]

ALLOTMENT. Portion of an annual or biennial budget appropriation allocated to an interim period.

analytical review. Term used in connection with auditing. The process of attempting to determine the reasonableness of financial data by comparing their behavior with other financial and nonfinancial data.

annual covered payroll. Term used in connection with defined benefit pension plans. All elements included in annual compensation paid to active employees on which contributions to a pension plan are based. [sgas 27]

annual required contribution (arc). Term used in connection with defined benefit pension plans. The employer?s mandated contribution for the year, calculated in accordance with certain parameters. The parameters include requirements for the frequency and timing of actuarial valuations as well as for the actuarial methods and assumptions that are acceptable for financial reporting. [sgas 27]

appropriated budget. The expenditure authority created by the appropriation bills or ordinances that are signed into law and related estimated revenues. The appropriated budget would include all reserves, transfers, allocations, supplemental appropriations, and other legally authorized legislative and executive changes. [ncga Interpretation 10]

ARBITRAGE. Classically, the simultaneous purchase and sale of the same or an equivalent security in order to profit from price discrepancies. In government finance, the most common occurrence of arbitrage involves the investment of the proceeds from the sale of tax-exempt securities in a taxable money market instrument that yields a higher rate, resulting in interest revenue in excess of interest costs.

assessed valuation. A valuation set upon real estate or other property by a government as a basis for levying taxes.

asset allocation. Term used in connection with pension plans. The process of determining which types of investments are to be included and the percentages that they are to comprise in an overall investment portfolio.

attained age actuarial cost method. Term used in connection with defined benefit pension plans. A method under which the excess of the actuarial present value of projected benefits over the actuarial accrued liability in respect to each individual included in an actuarial valuation is allocated on a level basis over the earnings or service of the individual between the valuation date and assumed exit. The portion of this actuarial present value that is allocated to a valuation year is called the normal cost. The actuarial accrued liability is determined using the unit credit actuarial cost method. [sgas 25]

audit committee. A group of individuals, selected by the governing body, having specific responsibility for addressing all issues related to the independent audit of the financial statements.

audit scope. In the contest of a financial statement audit, the coverage provided by the independent auditor?s opinion on the financial statements.

auditor rotation. Policy that a government periodically change the independent auditor of its financial statements.

AUDITOR?S report ON internal controls and compliance over financial reporting. Report issued in conjunction with a financial audit performed in accordance with gagas. In this report, the independent auditor reports on internal control weaknesses and instances of noncompliance discovered in connection with the financial audit, but does not offer an opinion on internal controls or compliance.

audit guides. A series of aicpa publications that enjoy ?level 2? status on the hierarchy of authoritative sources of gaap established by sas No. 69, The Meaning of ?Present Fairly in Conformity with Generally Accepted Accounting Principles? in the Independent Auditor?s Report, when they are specific to state and local government and cleared by the gasb.

availability criterion. Principle of the modified accrual basis of accounting according to which revenues may only be recognized when they are collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period. [ncga Statement 1]

availability period. A specified period immediately following the close of the fiscal year by the end of which cash must be collected for related revenue to be recognized in accordance with the availability criterion of modified accrual accounting.

bank holding company. A company that controls one or more banks and may own subsidiaries with operations closely related to banking. When branch banking was severely limited, bank holding company statutes allowed banking systems to develop by permitting common ownership of several banks. Generally, the Bank Holding Company Act provides that a holding company has control over a bank if it owns, controls, or holds 25 percent or more of the voting stock of the bank. [TB 97-1]

bank investment contracts. A separate account at a financial institution that functions like a guaranteed investment contract.

BANKERS? acceptances. Short-term, noninterest-bearing notes sold at a discount and redeemed by the accepting banks at maturity for face value. Bankers? acceptances generally are created based on a letter of credit issued in a foreign trade transaction. [sgas 31]

banking pools. One of four different types of public-entity risk pool. An arrangement by which monies are made available for pool members in the event of loss on a loan basis. [sgas 10]

basic financial statements. The minimum combination of financial statements and note disclosures required for fair presentation in conformity with gaap.

basis differences. Differences that arise through the employment of a basis of accounting for budgetary purposes that differs from the basis of accounting prescribed by gaap for a given fund type. [ncga Interpretation 10]

basis OF accounting. The timing of recognition, that is, when the effects of transactions or events should be recognized for financial reporting purposes. For example, the effects of transactions or events can be recognized on an accrual basis (that is, when the transactions or events take place), or on a cash basis (that is, when cash is received or paid). Basis of accounting is an essential par of measurement focus because of a particular timing of recognition is necessary to accomplish a particular measurement focus. [sgas 11]

BETTERMENT. An addition made to, or change made in, a capital asset, other than maintenance, to prolong its life or to increase its efficiency or capacity. The cost of the addition or change is added to the book value of the asset. The term improvement is preferred.

BLENDING. The method of reporting the financial data of a component unit that presents the component unit?s balances and transactions in a manner similar to the presentation of the balances and transactions of the primary government. [sgas 14]

blue book. A term commonly used to designate the Government Finance Officers Association?s publication Governmental Accounting, Auditing, and Financial Reporting.

bond anticipation note. Short-term interest-bearing note issued by a government in anticipation of bond proceeds to be received at a later date. The note is retired from proceeds of the bonds to which it is related.

book-entry system. A system that eliminates the need for physically transferring bearer-form paper or registering securities by using a central depository facility. [sgas 3]

budgetary basis OF accounting. The method used to determine when revenues and expenditures are recognized for budgetary purposes.

budgetary accounts. Special accounts used to achieve budgetary integration, but not reported in the general-purpose external financial statements. By convention, all caps commonly are used to designate budgetary accounts. The most common budgetary accounts are estimated revenues, appropriations, budgetary fund balance, and encumbrances.

budgetary guidelines. Recommendations on budgeting issued by the National Advisory Council on State and Local Budgeting (nacslb). The NACSLB?s budgetary guidelines are chiefly of interest to accountants because of the emphasis they place on performance measurement in the context of the budgetary process.

budgetary integration. The management control technique by which the annual operating budget is recorded in the general ledger through the use of budgetary accounts. Budgetary integration is intended to facilitate control over revenues and expenditures during the year.

budgetary journal entries. Journal entries involving budgetary accounts, Budgetary journal entries arise in connection with budgetary integration.

budgetary reporting. The requirement to present budget-to-actual comparisons in connection with general purpose external financial reporting. Budgetary reporting is required in connection with the basic financial statements for both the general fund and individual major special revenue funds with legally adopted annual budgets. Budgetary reporting also is required within the comprehensive annual financial report to demonstrate compliance at the legal level of control for all governmental funds with legally adopted annual budgets.

business-type activities. One of two classes of activities reported in the government-wide financial statements. Business-type activities are financed in whole or in part by fees charged to external parties for goods or services. These activities are usually reported in enterprise funds. [sgas 34]

call options. A contract giving the buyer (owner) the right, but not the obligation, to purchase from (call option) the seller (writer) of the contract a fixed number of items (such as shares of equity securities) at a fixed or determinable ?strike? price on a given date or at any time on or before a given date. [sgas 31]

capital and related financing activities. Term used in connection with cash flows reporting. Capital and related financing activities include (a) acquiring and disposing of capital assets used in providing services or producing goods, (b) borrowing money for acquiring, constructing, or improving capital assets and repaying the amounts borrowed, including interest, and ? paying for capital assets obtained from vendors on credit. [sgas 9]

capital assets. Land, improvements to land, easements, buildings, building improvements, vehicles, machinery, equipment, works of art and historical treasures, infrastructure, and all other tangible or intangible assets that are used in operations and that have initial useful lives extending beyond a single reporting period.

Accounting Terms 8.6 of 10 on the basis of 3792 Review.