The Finance Dictionary

Accounting

Accounts payable

Accounts payable are amounts owed by a business for goods or services they have purchased.

Accounts payable turnover

The accounts payable turnover ratio is calculated as

total purchases in the year
average accounts payable

Average accounts payable can be determined 2 different ways:

• Add together the a/p balances from the beginning of the year and the end of the year, and divide by 2

• Add together the a/p totals from the end of each month, and divide by 12. This is a better way of calculating the ratio.

If this ratio decreases from one year to the next, it means the company is taking longer to its suppliers. If the ratio increases, the company is paying off its suppliers more quickly.

Accounts receivable

Accounts receivable turnover

The accounts receivable turnover ratio is calculated as

total sales in the year
average accounts receivable

Average accounts receivable can be determined 2 different ways:

• Add together the a/r balances from the beginning of the year and the end of the year, and divide by 2

• Add together the a/r totals from the end of each month, and divide by 12. This is a better way of calculating the ratio.

If this ratio decreases from one year to the next, it means the company is taking longer to collect from its customers. If the ratio increases, the company is collecting from its customers more quickly.

See also aged accounts receivable and day's sales outstanding.

Accrual

An accrual is done at the end of an accounting period (usually monthly) to record costs which have been incurred but not paid for or previously recorded, and to record revenue which has been earned but not received or previously recorded.

Accrual basis accounting

Using the accrual basis for preparing accounting records, revenues and costs are recorded in the accounting period in which they occur, even if the revenues have not been received or the costs have not been paid. Under the cash basis, the revenues and expenses are recorded when the revenues are received and the expenses are paid.

Most businesses are required to use the accrual basis for preparing their tax returns. Those people who are in a farming or fishing business, or who are self-employed commission sales agents, are allowed by the Income to use the cash basis.

Accrued Interest

Accumulated depreciation

The total of all depreciation which has been written off over the years against fixed assets.

Accumulated payment (AIP)

Accumulated income payments (AIP) may be made, under certain conditions, when the beneficiary to an RESP does not pursue post-secondary education. An AIP is a payment from a Registered Education Savings Plan (RESP) to a subscriber of the plan, and is made from the earnings portion of the RESP. These payments may only be made under certain circumstances, and are subject to regular income and an additional 20% tax. Up to $50,000 of AIPs can be transferred directly to the subscriber's RRSP if sufficient contribution room exists, thus avoiding both taxes.

Accumulated Income Payments (AIP) can only be made if each beneficiary for whom contributions were made under the RESP
a. has reached 21 years of age and is not eligible to receive educational assistance payments; or
b. has died, and
the RESP has existed for at least 10 years. There are also other conditions.

Active business Income

The first $300,000 (for 2005, federally) of active business income of a Canadian controlled private corporation, or CCPC, is taxed at lower rates. The tax reduction is called the small business deduction. Income from most businesses qualifies as active business income. However, active business income does not include investment income, income from a specified investment business, or income from a personal services business. Investment income, which is excluded from active business income, includes taxable less allowable capital losses, property income less property losses, and foreign business income. ITA 125(7)

Adjusted cost base (ACB)

Adjusted cost base (ACB) includes the original purchase price, and all costs related to the purchase of an item.

The adjusted cost base of an in securities would include the purchase price, as well as any commission paid. See also cost basis.
The adjusted cost base of an interest-paying investment such as a bond would not include any amount paid for interest accrued since the last interest payment date.

The adjusted cost base of a fixed asset such as machinery or equipment would include installation costs, customs brokerage and legal fees, and any other costs expended to get the asset into operation.

The adjusted cost base of a rental property would include any repairs or renovations that cannot be expensed for tax purposes. Examples of this type of repair would be a new roof, new appliances, etc.

There may be costs related to any fixed asset (for instance, major repairs that extend the life of the asset) that must be added to the adjusted cost base instead of being expensed.

Age of majority / minor

A minor is a person who has not yet reached the age of majority.

The age of majority in Canada is determined by province of residence.

The age of majority is 18 in

• Alberta
• Manitoba
• Ontario
• Prince Edward Island
• Québec
• Saskatchewan

The age of majority is 19 in

• British Columbia
• New Brunswick
• Newfoundland and Labrador
• Northwest Territories
• Nova Scotia
• Nunavut
• Yukon

Aged accounts receivable

An aged accounts receivable report shows the amounts in accounts receivable according to how long they have been outstanding, such as current, over 30 days, over 60 days, and over 90 days. This report is used at year end to calculate the allowance for doubtful accounts. When amounts are outstanding over 90 days there is much less likelihood that they will be eventually collected.

See also accounts receivable turnover and day's sales outstanding.

Allowable loss (ABIL)

An allowable business investment loss (ABIL):

• is 50% of a business investment loss
• is treated differently from allowable capital losses in that it can be used to reduce all
• can be carried back or carried forward as a non- See the glossary item non-capital loss for carry-back and carry-forward periods.

• if unused after 10 years can then be treated as a net capital loss and carried forward indefinitely to be deducted against taxable capital gains

Allowable capital loss

See capital gain or loss.

Amortization is the gradual expensing of an asset over a number of years, instead of expensing it in the year of purchase. Usually relates to intangible assets such as goodwill. Depreciation is the term used for amortization of a fixed asset.

Amortization is also the term used when a is being repaid over time. The is a document which shows the payment dates, payment amount, interest and principal portion of each payment, and the balance of the loan after each payment, until the balance reaches zero.

Amortization

Annuity

Annual report

Public corporations must make available to their shareholders a yearly report which includes the financial statements of the corporation.

Appraisal

Appraiser

Arbitrage

The simultaneous purchase of a security on one and sale of the same security on another stock exchange, often in a different country. This is done to make a profit from the difference in prices between the two stock exchanges, due to different prices, and fluctuations. The person doing the simultaneous purchase and sale is called an arbitrageur.

Arm's length

Two people, or entities, are said to be dealing at arm's length with each other if they are independent, and one does not have undue influence over the other. However, the deems some people NOT to be at arm's length with each other (non-arm's length). This is the case with "related persons", who are "individuals connected by blood relationship, marriage or common-law partnership or adoption". Blood relationships do not normally include aunts, uncles, nieces, nephews, or cousins for purposes of the Income Tax Act.

"Related persons" also include a corporation and
i. a person who controls the corporation, if it is controlled by one person
ii. a person who is a member of a related group that controls the corporation, or
iii. any person related to a person described in (i) or (ii).

Two corporations can also be "related persons".

Generally, a corporation is controlled by a person or a related group if the person or related group owns enough to have the majority of the votes in the election of the board of directors. However, there are many situations where there is "deemed" control.

CRA's interpretation bulletin IT- 419 provides a much more detailed description of the meaning of arm's length. See also IT-64, Corporations: Association and Control.

Arrears

Amounts owed that were not paid when due.

Articles of incorporation

Every corporation has articles of incorporation, a document prepared by the people creating the corporation. This document sets out the structure and purpose of the corporation, and specifies rules that the corporation must follow regarding issuing or transferring shares, electing officers, conducting general meetings, voting of members, borrowing funds, paying dividends, and other corporate functions.

Ask/bid

The ask price on a security is the price that a prospective seller is willing to accept, and the bid price is the price that a prospective buyer is willing to pay.

Assets

Assistance holdback amount

The assistance holdback amount of a registered disability (RDSP) is the total amount of Canada Disability Savings (CDSG) and Canada Disability (CDSB) paid into the RDSP in the immediately preceding 10-year period, less any amount of CDSG or CDSB paid in that 10-year period that has been repaid to the government. The assistance holdback amount is the amount that would have to be repaid in certain circumstances.

Automobile

For purposes of the Income Tax Act, an automobile is a motor vehicle designed to carry people on highways and streets, and can carry a driver and no more than 8 passengers. A taxable benefit will arise when an employee is provided an automobile which is used partly for personal use. 

The definition of automobiles excludes:
-ambulances,
-clearly marked emergency-response vehicles used in the course of an individual's employment with a fire department or the police,
-a motor vehicle acquired primarily for use as a taxi,
-a bus used in the business of transporting passengers,
-a hearse used in a funeral business, as well as

A passenger vehicle is an automobile that was purchased or leased after June 17, 1987. For purposes, there are limitations on the expenses that can be claimed for a passenger vehicle. There are special rules for GST registrants for claiming input tax credits on the purchase of passenger vehicles.

Average collection period

Averaging down

Averaging down is when you purchase a security that you already own, for less than the price you originally paid. This lowers your average cost.