Dictionary of...Accounting Terms
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illusory profits
- See phantom profits.
IMA
- A national organization formerly known as the Institute of Management Accountants and also as the National Association of Accountants. Its focus is on management accounting issues.
impairment
- A decrease in the value of a long term asset to an amount that is less than the amount shown under the cost principle.
impairment of long-lived assets
- See Statement of Financial Accounting Standard No. 121. Under this standard if the undiscounted future cash flows from the asset (including sale amount) are less than its carrying amount, a loss is recognized. The amount of the impairment loss is measured by subtracting the asset's fair value from its carrying value.
implicit interest rate
- An interest rate that is not explicitly stated. For example, instead of paying $100 cash a person is allowed to pay $9 per month for 12 months. The interest rate is not stated, but the implicit rate can be determined by use of present value factors.
imprest amount
- A constant or unchanging amount that is often used when referring to petty cash. For example, if the petty cash account in the general ledger has an imprest balance of $100, the account balance will be a constant $100. The journal entry to replenish an imprest petty cash fund involves debiting each of the expenses involved and crediting cash (not Petty Cash) for the amount necessary to get the actual cash on hand equal to the imprest amount. Any difference in these amounts is entered into the account Cash Short and Over.
imputed interest
- An interest rate that is not explicit. For example, if a business lends its majority owner $100,000 at 0% interest, the IRS might determine that a fair interest rate would be 6% and not 0%. The IRS will impute interest of 6%.
income
- This term is used in several ways. Some use the word interchangeably with revenues. Others use the word to signify a net amount, such as income from operations (revenues minus expenses in the company's main operating activities). Still others use it when referring to nonoperating revenues, such as interest income.
income from operations
- The result of subtracting operating expenses from gross profit. Income from operations is the amount before non-operating items (such as gains and losses on the sale of assets, interest revenue, and interest expense).
income statement
- One of the main financial statements (along with the balance sheet, the statement of cash flows, and the statement of stockholders' equity). The income statement is also referred to as the profit and loss statement, P&L, statement of income, and the statement of operations. The income statement reports the revenues, gains, expenses, losses, net income and other totals for the period of time shown in the heading of the statement. If a company's stock is publicly traded, earnings per share must appear on the face of the income statement. To learn more, see Explanation of Income Statement.
income statement account
- Revenues, Expenses, Gains, and Losses are the categories or classification of income statement accounts.
income summary account
- A temporary account to which the income statement accounts are closed to. This account is then closed to the owner's capital account or a corporation's retained earnings account. This and other summary accounts can be thought of as a clearing account.
income tax code
- The United States Internal Revenue Code which contains the federal laws and regulations pertaining to federal taxes.
income tax depreciation
- The depreciation computed on the tax return according to the income tax code and regulations. This amount is usually different from the depreciation used on the financial statements (book depreciation).
income tax expense
- The amount of income tax that is associated with (matches) the net income reported on the company's income statement. This amount will likely be different than the income taxes actually payable, since some of the revenues and expenses reported on the tax return will be different from the amounts on the income statement. For example, a corporation is likely to use straight line depreciation on its income statement, but will use accelerated depreciation on its income tax return.
income taxes payable
- A current liability account which reflects the amount of income taxes currently due to the federal, state, and local governments.
incremental cost
- The additional cost of an additional quantity. It is similar to marginal cost, except that marginal cost refers to the cost of next unit. Incremental cost might be the additional cost from the next 200 units.
incremental revenue
- The additional revenues from an additional quantity. It is similar to marginal revenue, except that marginal revenue refers to the revenue from the next unit. Incremental revenue might be the additional revenues from the next 200 units.
incurred
- A word used by accountants to communicate that an expense has occurred and needs to be recognized on the income statement even though no payment was made. The second part of the necessary entry will be a credit to a liability account.
indenture
- A document that discloses important information on bonds or preferred stock. Included in the indenture would be the call price, the actions that can occur if the company fails to pay the interest or dividend, etc.
independent contractor
- Someone who performs a task for a company, but is not an employee. The IRS has criteria to assist in distinguishing between an independent contractor and an employee.
independent variable
- In the equation y = a + bx, x is the independent variable. The dependent variable is y. In other words the value of y is dependent on the quantity of x. Let's say that y is the amount of your weekly compensation you will receive from your sales position. Your employer pays a fixed salary of $250 per week plus 5% of your sales. The equation will now look like this: y = $250 + .05x, where x is your weekly sales (the independent variable). If your sales are $1,000 during the week, your compensation will be y = $250 + .05($1,000) or $300.
indirect cost
- A cost or expense that is not directly traceable to a department, product, activity, customer, etc. As a result indirect costs and expenses are often allocated to the department, product, etc. For example, a manufacturing department that molds plastic has some costs that are directly traceable to it, such as the wages and fringe benefits of the direct labor working exclusively in that department. However, the heat for the entire building appears only on one utility bill. The heating bill is an indirect cost to the molding department. Generally it will be assigned to all departments based on the number of square feet each department occupies.
indirect labor
- Usually this refers to manufacturing employees who are not classified as direct labor. Material handlers, mechanics, setup workers, clean up workers are a few examples of indirect labor.
indirect manufacturing costs
- Also referred to as manufacturing overhead, factory burden, factory overhead, and manufacturing support costs. To learn more, see Explanation of Manufacturing Overhead.
indirect materials
- For a manufacturer these would include factory supplies and other materials considered to be manufacturing overhead.
indirect method of SCF
- The most common method of preparing the statement of cash flows. Under this method the starting point is the net income reported on the income statement. To learn more, see Explanation of Cash Flow Statement.
industry practices
- Industries that are regulated by the government often have prescribed reporting requirements that carry over to the generally accepted reporting formats for financial reporting. For example, utilities' balance sheets present the utility plant as the first asset instead of current assets. Insurance and securities firms will have financial reports that differ from the formats used by manufacturers.
in-process inventory
- See work-in-process inventory.
insolvent
- The inability to pay liabilities as they become due. Some consider a company to be insolvent when its current liabilities exceed its current assets.
Institute of Management Accountants
- See IMA.
insurance
- A contract to provide coverage or protection in exchange for a payment or "premium." Examples of insurance protection include liability, property, business interruption, life, disability, etc. The company paying the premiums for the protection will have insurance expense and possibly an asset, Prepaid Insurance (if the premiums are paid in advance). The insurance company would have insurance premium revenues and possibly a liability, Unearned Insurance Premiums (if the premiums were paid in advance).
insurance expense
- The amount of insurance that was incurred/used up/expired during the period of time appearing in the heading of the income statement. The amount of insurance premiums that have not yet expired should be reported in the current asset account Prepaid Insurance.
intangible assets
- Some examples of intangible assets include copyrights, patents, goodwill, trade names, trademarks, mail lists, etc. These assets will be reported at cost (or lower) on the balance sheet after property, plant and equipment. Trade names and trademarks that were developed by a company (as opposed to buying them from another company at a significant cost) may not appear on the balance sheet, even though they might be a company's most valuable asset.
interest earned
- An amount earned by a company on its interest bearing bank accounts or other investments. The amount should be reported as Interest Revenues, Interest Income, or Investment Revenues in the accounting period in which the interest is earned.
interest expense
- This account is a non-operating or "other" expense for the cost of borrowed money or other credit. The amount of interest expense appearing on the income statement is the cost of the money that was used during the time interval shown in the heading of the income statement, not the amount of interest paid during that period of time.
interest income
- See interest revenue.
interest payable
- This current liability account reports the amount of interest the company owes as of the date of the balance sheet. (Future interest is not recorded as a liability.)
interest receivable
- The current asset that represents the amount of interest revenue that was reported as earned, but has not yet been received.
interest revenues
- Under the accrual basis of accounting, the Interest Revenues account reports the interest earned by a company during the time period indicated in the heading of the income statement. Interest Revenues includes interest earned whether or not the interest was received or billed. Interest Revenues is nonoperating revenue or income for companies not in the business of lending money. For companies in the business of lending money, Interest Revenues is reported in the operating section of the multiple-step income statement.
interim financial statement
- Financial statements issued between the end of year financial statements. For example, quarterly financial statements are interim financial statements.
internal rate of return
- The rate that will discount all cash flows to a net present value of zero.
Internal Revenue Service (IRS)
- The U.S. government agency responsible for federal income tax regulations.
interperiod tax allocation
- Income tax allocations arising from differences between income tax rules and generally accepted accounting rules. For example, depreciation for income tax purposes is based on the income tax code and may require that equipment be depreciated on the income tax return over a 7-year period. However, accounting principles require that for financial statements the equipment be depreciated over its useful life. The useful life might be more than 7 years or it might be less than 7 years. These "timing" differences lead to interperiod tax allocation.
interpretations
- See FASB Interpretations.
intraperiod tax allocations
- The allocation of one year's income tax expense to the various sections of the income statement. For example, extraordinary items must be reported after income tax on the income statement, while operating revenues are reported before income tax.
inventoriable cost
- Cost that is considered to be part of the cost of merchandise. For a retailer, the inventoriable cost is the cost from the supplier plus all costs necessary to get the item into inventory and ready for sale, e.g. freight-in. For a manufacturer the product costs include direct material, direct labor, and the manufacturing overhead (fixed and variable).
inventory
- A current asset whose ending balance should report the cost of a merchandiser's products awaiting to be sold. The inventory of a manufacturer should report the cost of its raw materials, work in process, and finished goods. The cost of inventory should include all costs necessary to acquire the items and to get them ready for sale.
When inventory items are acquired or produced at varying costs, the company will need to make an assumption on how to flow the changing costs. See cost flow assumptions.
If the cost to replace inventory is less than the actual cost of the inventory, it may be necessary to reduce the inventory amount. See lower of cost or market.
To learn more, see Explanation of Inventory & Cost of Goods Sold. inventory carrying costs
- The cost to hold an item in inventory. Includes the cost of capital tied up in inventory, the cost of space and insurance, and the cost of items becoming obsolete while being held in inventory. This is an important component of the economic order quantity model.
inventory conformity rule
- Generally, this rule requires that the cost flow assumption used for tax purposes be the same cost flow assumption used for the financial statements. Consult a tax professional about this and other tax matters.
inventory-FG
- See inventory-finished goods.
inventory-finished goods (FG)
- The products in a manufacturer's inventory that are completed and are awaiting to be sold. You might view this account as containing the cost of the products in the finished goods warehouse. A manufacturer must disclose in its financial statements the amount of finished goods, work in process, and raw materials.
inventory-materials
- A part of a manufacturer's inventory that includes direct and indirect materials. Also referred to as stores.
inventory shrinkage
- Inventory that is less than the expected amount. It might be associated with theft or damage.
inventory turnover ratio
- This ratio relates the costs in inventory to the cost of the goods sold. See Explanation of Financial Ratios for a discussion of this ratio.
inventory-WIP
- See inventory-work in process.
inventory-work in process (WIP)
- That part of a manufacturer's inventory that is in the production process and has not yet been completed and transferred to the finished goods inventory. This account contains the cost of the direct material, direct labor, and factory overhead placed into the products on the factory floor. A manufacturer must disclose in its financial statements the cost of its work in process as well as the cost of finished goods and materials on hand.
investing activities
- The second section of the statement of cash flows. To learn more, see Explanation of Cash Flow Statement.
investment in another company
- An asset account which reports the carrying amount of a company's investment in another enterprise.
investment revenues
- The amounts earned on money invested. Often this is interest and dividends earned on a company's investment in stocks and bonds of other companies.
investment securities
- An asset account in a bank's general ledger that indicates the amount at which the bank is reporting or carrying its investments.
investments
- The long term asset category of a classified balance sheet which appears immediately after the current assets. Listed in this category would be a bond sinking fund, funds held for construction, the cash surrender value of a life insurance policy owned by the company, and long term investments in stocks and bonds.
IRR
- See internal rate of return.
IRS
- See Internal Revenue Service.
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