1. Instrument of ancient origin used to perform arithmetic calculations by sliding counters along rods or in grooves.
2. Semiannual accounting research journal (founded in 1965) published by the Sydney University Press, edited by the University of Sydney, Department of Accounting. The subject matter covers all areas of accounting including international accounting.
ABANDONMENT – voluntary surrender of property, owned or leased, without naming a successor as owner or tenant. The property will generally revert to a person holding a prior interest or, in cases where no owner is apparent, to the state.
ABATEMENT – complete or partial cancellation of a levy imposed by a governmental unit. Abatements usually apply to tax levies, special assessments, and service charges.
ABC METHOD – inventory management method that categorizes items in terms of importance. Thus, more emphasis is placed on higher dollar value items (“A”s) than on lesser dollar value items (“B”s), while the least important items (“C”s) receive the least time and attention. Inventory should be analyzed frequently when using the ABC method. The procedure for ABC analysis follows: (1) Separate finished goods into types (chairs of different models, and so on); separate raw materials into types (screws, nuts, and so on). (2) Calculate the annual dollar usage for each type of inventory (multiply the unit cost by the expected future annual usage). (3) Rank each inventory type from highest to lowest, based on annual dollar usage. (4) Classify the inventory as A the top 20%; B the next 30%; and C the last 50% of dollars usage, respectively. (5) Tag the inventory with its appropriate ABC classification and record those classifications in the item inventory master records.
ABNORMAL SPOILAGE – spoilage that is recognized as a loss when discovered. NORMAL SPOILAGE is inherent in the manufacturing process and is unavoidable in the short run. Abnormal spoilage is spoilage beyond the normal spoilage rate. It is controllable because it is a result of inefficiency. It is not a cost of good production, but rather it is a loss for the period. Costs are assigned to the spoiled units and then credited to WORK-IN-PROCESS inventory and debited to a loss account.
1. to assimilate, transfer, or incorporate amounts in an account or a group of accounts in a manner in which the first entity loses its identity and is “absorbed” within the second entity. Examples include the sequential transfer of expenditure account amounts to WORK-IN-PROCESS, finished goods, and COST OF SALES.
2. to distribute or spread costs by the process of proration or allocation. See also ABSORPTION COSTING.
ABSORPTION COSTING – method in which all manufacturing costs, variable and fixed, are treated as PRODUCT COSTS, while nonmanufacturing costs (e.g., selling and administrative expenses) are treated as PERIOD COSTS. Absorption costing for inventory valuation is required for external reporting. See also DIRECT COSTING.
A comparison between absorption and direct costing follows:
Absorption Costing Direct Costing
1. Required for outside reporting 1. Not accepted for outside reporting
2. Includes fixed overhead as an 2. Does not include fixed overhead
inventoriable cost as an inventoriable cost
3. Stresses gross profit 3. Stresses contribution margin
4. Has a higher net income when 4. Has a higher net income when
production exceeds sales sales exceed production
ABUSIVE TAX SHELTER – limited partnership the IRS believes is claiming illegal tax deductions. This type of shelter usually inflates the value of purchased property, thus providing a basis for higher depreciation write-offs. When the IRS disallows the writeoffs, back taxes as well as interest charges and high penalties must be paid. See also LIMITED PARTNER.
ACADEMY OF ACCOUNTING HISTORIANS – voluntary organization dedicated to the study of accounting history. This organization publishes the ACCOUNTING HISTORIANS JOURNAL in addition to monographs, working papers, and a newsletter.
ACCELERATED COST RECOVERY SYSTEM (ACRS) – system of depreciation for tax purposes mandated by the Economic Recovery Act (ERA) of 1981 and modified by the Tax Reform Act of 1986. The type of property determines its class. Instead of providing statutory tables, prescribed methods of depreciation are assigned to each class of property. For 3, 5, 7, and 10 year classes, the relevant depreciation method is the 200% declining balance method. For 15 and 20 year property, the appropriate method is the 150% declining balance method switching to the STRAIGHT-LINE method when it will yield a larger allowance. For residential rental property (27.5 years) and nonresidential real property (31.5 years), the applicable method is the straight-line method. A taxpayer may make an irrevocable election to treat all property in one of the classes under the straight-line method. Property is statutorily placed in one of the classes. The purpose of ACRS is to encourage more capital investment by businesses. It permits a faster recovery of the asset’s cost and thus provides larger tax benefits in the earlier years. See also MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS).
ACCELERATED DEPRECIATION – method recognizing higher amounts of depreciation in the earlier years and lower amounts in the later years of a fixed asset’s life. Some machines, for example, are more efficient early on and generate greater service potential; matching dictates higher depreciation expense in those years. Over time, depreciation expense moves in a downward direction and maintenance costs tend to become higher; thus the effect of accelerated depreciation is fairly even charges to income. Greatest tax benefits from depreciation are enjoyed in the earlier years. See also ACCELERATED COST RECOVERY SYSTEM; DOUBLE DECLINING BALANCE; SUM-OF THE YEARS’ DIGITS (SYD) METHOD.
ACCELERATION CLAUSE – provision contained in a BOND INDENTURE requiring that in an event of default any remaining interest and principal become immediately due and payable.
ACCEPTABLE QUALITY LEVEL (AQL) – a quality standard that allows a pre-specified number of defects.
1. drawee’s promise to pay either a TIME DRAFT or SIGHT DRAFT. Typically, the acceptor signs his name after writing “accepted” on the bill along with the date. Instead of “accepted,” similar wording indicating an intention to pay would also suffice to show a desire to honor the bill at maturity. An acceptance of a bill in effect makes it a PROMISSORY NOTE: the acceptor is the maker and the drawer is the endorser.
2. BANKER’S ACCEPTANCE.
3. binding contract effected when one party to a business arrangement accepts the offer of another. Acceptance may be in written or oral form.
ACCEPTANCE SAMPLING – statistical procedure used in quality control. Acceptance sampling involves testing a batch of data to determine if the proportion of units having a particular attribute exceeds a given percentage. The sampling plan involves three determinations: (1) batch size; (2) sample size; and (3) maximum number of defects that can be uncovered before rejection of the entire batch. This technique permits acceptance or rejection of a batch of merchandise or documents under precisely specified circumstances, thereby ensuring that the auditor does not reject too many acceptable batches. Acceptance sampling is of particular value to the internal auditor who wants continuous control on the quality of clerical work. From acceptance sampling tables, one can select a sampling plan to assure that errors will not be greater than a specified percentage of the batch (tolerable error rate), provided a full check of rejected batches is made. Acceptance sampling can also be used by the internal auditor to inspect the documents flowing through information channels of the organization. Items that can be checked include pricing and mathematical calculations. Acceptance sampling is basically an internal audit tool. It would be very difficult for the external auditor to devise a sampling plan that, while rejecting, say, 90% of unsatisfactory batches, does not also reject a high number of satisfactory batches.
ACCESS TIME – length of time that a data storage device, associated with a computer, takes to process and return data from the time of the original request for the data.
ACCOMMODATION ENDORSEMENT – written agreement to be liable made without consideration on a credit instrument (e.g., notes payable) to which another person or firm is a party, thus adding strength to the credit application. An example: a parent company endorses a note of a subsidiary payable to a bank or other lender.