Investing Glossary

Amortization is the periodic expensing of an intangible asset over the asset’s estimated useful life. Common intangible assets include copyrights, trademarks, and patents.  Like depreciation, amortization is accumulated into an account which offsets the carrying value of the intangible asset. However, unlike tangible assets, intangible assets generally do not have residual value. Thus, amortized intangible […]

Accumulated depreciation refers to the aggregate amount of depreciation expense occurred since the fixed assets were placed on the company’s books.  Accumulated depreciation is a contra asset account because it reduces the carrying value of the underlying asset.   For an example of accumulated depreciation, consider the following scenario. A company purchases a vehicle for $50,000.

Accelerated depreciation refers to methods of calculating an asset’s depreciation which recognize greater depreciation in the earlier years of an asset’s useful life.   Accelerated depreciation differs from straight-line depreciation, which recognizes an equal amount of depreciation expense each period. In contrast with straight-line depreciation, accelerated depreciation recognizes higher depreciation expense in the asset’s earlier years

A contra account is an account which reduces the balance of an account to which it is paired.   Contra accounts can exist for all of the five account types: asset, liability, equity, income, and expense accounts. However, some contra accounts are more common than others.  A contra account has the opposite normal balance as the

A corporation is a business entity which has a separate legal identity from its owners. As a separate legal entity, a corporation has many of the rights and responsibilities of an individual.  Corporations have two important features which help attract capital. First, corporations offer their owners financial liability limited to the owners’ original investment.  Second,

Depreciation represents the periodic expensing of the cost of a tangible asset.   When a company purchases a fixed asset, the company capitalizes the cost of the asset on the balance sheet rather than directly expensing the cost on the income statement. However, fixed assets lose value as they age. Depreciation is thus a method for

The chart of accounts is a listing of all of the accounts a company uses in its accounting system.   There are five types of accounts: assets accounts, liability accounts, equity accounts, income accounts, and expense accounts. Every account within the chart of accounts is one of these account types.  The chart of accounts is used

Capital expenditures (“capex”) are investments made to acquire or enhance the value of long-term productive assets.   Capital expenditures are not expensed on the income statement. Rather, capital expenditures are “capitalized” into the asset section of the balance sheet. Capital expenditures also appear within the cash flow statement under the cash flow from investing section. Capital

Accounts receivable represent sales made to customers who have not yet paid for them. Accounts receivable are thus monies owed to the firm from customers.   Accounts receivable is presented on the balance sheet under current assets. Under U.S. GAAP, accounts receivable must be presented at their net realizable value. This requires the company to create

The statement of changes in equity is a financial statement which details the changes in the equity section of the balance sheet over a given period. For corporations, this statement is also called the statement of shareholder’s equity.  The statement of changes in equity is required annually under U.S. GAAP. Thus, all companies which issue