Accounting Terms

PACKING CREDIT is any loan or advance granted or any other credit provided by a bank to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment, on the basis of letter of credit opened in his favor or in favor of some other person, by an overseas buyer or a confirmed and irrevocable order for the export of goods from the producing country or any other evidence of an order for export from that country having been placed on the exporter or some other person, unless lodgment of export orders or letter of credit with the bank has been waived.

PACKING LIST is a statement of the contents of a container, usually put into the container so that the quantity of merchandise may be counted by the person who opens the container. Also known as a packing slip.

PAID-IN-CAPITAL is capital received from investors for stock, equal to capital stock plus paid-in capital, NOT that capital received from earnings or donations. Also called contributed capital.

PAID-UP CAPITAL is the total amount paid by shareholders for their shares of capital stock.

P&A, dependent upon usage, can be: Parts & Accessories, Pay & Allowances, Personnel & Administration, or Price & Availability.

PAPER is: a. amount received, by a seller of real estate, in the form of a mortgage or note rather than cash; b. a short-term debt security; c. customer buy and sell orders coming to a trading pit; d. money market instruments, commercial paper.

PAPER GAIN (LOSS) is an unrealized capital gain (loss) in an investment or portfolio.

PARI PASSU is to do or apply something at an equal pace or rate. In finance, it is used in reference to two class of securities or obligations that have equal entitlement to payment.

PARTNERSHIP is an unincorporated business that has more than one owner. It is different from a sole proprietorship in that a sole proprietorship can have only one owner.

PARTNERSHIP DEED is the formal partnership agreement in that it is the blue print of the rights and liabilities of partners as to their capital, profit sharing ratio, drawings, interest on capital, commission, salary, etc, terms and conditions as to working, functioning and dissolution of the partnership business.

PAR VALUE is a. the maturity value or face value, i.e., the amount that an issuer agrees to pay at the maturity date; b. the official exchange rate between two countries' currencies; or, c. the value of a security that is set by the company issuing it; unrelated to market value.

PAS could mean: Personal Accounting System, Personnel Accounting System, or Personnel Accounting Symbol.

PASSIVE ACTIVITY is defined in the US Tax Code as one or more trades, business or rental activity, that the taxpayer does not materially participate in managing or running. All income and losses from passive activities are grouped together on an income tax return and, generally, loss deductions are limited or suspended until the passive activity that generated them is disposed of in its entirety.

PASS-THROUGH GRANTS as defined under GASB Statement 24 are grants "received by a recipient government to transfer to or spend on behalf of a secondary recipient" and should be recognized as revenues and expenditures/expenses in a governmental, proprietary or trust fund. The only exception to this requirement is if the recipient government serves only as a cash conduit (i.e., has no administrative or direct financial involvement in the program) in which case the grant should be reported in a GAAP agency fund.

PATENT is a legal form of protection that provides a person or legal entity with exclusive rights to exclude others from making, using, or selling a concept or invention for the duration of the patent. There are three types of patents available: design, plant, and utility.

PAYABLE is an amount awaiting payment to be made, e.g. interest payable or taxes payable.

PAYABLE TO SHAREHOLDERS normally refers to distribution of dividends to shareholders and / or repayment of notes held by shareholders.

PAYBACK PERIOD, in capital budgeting, is the length of time needed to recoup the cost of CAPITAL INVESTMENT. The payback period is the ratio of the initial investment (cash outlay, regardless of the source of the cash) to the annual cash inflows for the recovery period. The major shortcoming for the payback period method is that it does not take into account cash flows after the payback period and is therefore not a measure of the profitability of an investment project. For this reason, analysts generally prefer the DISCOUNTED CASH FLOW methods of capital budgeting; primarily, the INTERNAL RATE OF RETURN and the NET PRESENT VALUE methods.

PAY CYCLE is a set of rules that defines the criteria by which scheduled payments are selected for payment creation, e.g., payroll may be on a weekly, bi-weekly, or monthly pay cycle.

PAYMENT is the satisfaction of a debt or claim; primarily money paid to fulfill an obligation.

PAYOUT RATIO is dividends paid divided by company earnings over some period of time, expressed as a percentage.

PAYROLL, dependent upon usage, can mean a. the total amount of money paid in wages; b. a list of employees and their salaries; or, c. the department that determines the amounts of wage or salary due to each employee.

PAYROLL BURDEN, in the U.S., includes the cost of your payroll administration, FICA, FUTA, SUTA, workers’ compensation, etc., based on each $100.00 of payroll. For example: $100.00 of payroll earned + 37.56 payroll burden = $137.56 total payroll.

PAYROLL VARIANCE is the difference between actual salaries and “unloaded” labor expenditures. The largest contributing factor to payroll variance is usually employees not submitting project oriented timesheets, or supervisors failing to approve those submitted timesheets. The effect being wages being paid without direct assignment of labor charges to those areas or projects to which the labor hours were expended. Thereby causing a variance between recorded labor costs and actual payroll, e.g., project costs are not recorded, reimbursable costs are not billed, and program and project managers are unable to accurately monitor their budgets or do projections.

PBC LIST (PROVIDED BY CLIENT LIST) is a request by external auditors of items that will be required from the client by the auditor prior to the commencement of fieldwork. Such PBC lists are preliminary and will likely be expanded once the audit commences.

PEACHTREE is commercial accounting software developed and owned by Sage Software.

PEAK is the period of maximal use or demand or activity; for example, at peak commute hours, street traffic can be unbelievable. See OFF-PEAK.

PEG RATIO compares earnings growth and the Price Earnings Ratio. The PEG Ratio (formula) is the current Price Earnings Ratio divided by the expected long-term growth rate (per the earnings per share).

PENDING usually refers to either: 1. Not yet decided; or, 2. Being in continuance.

PENSION is a regular payment to a person that is intended to allow them to subsist without working, e.g. a retirement fund for employees paid for or contributed to by an employer as part of a package of compensation for the employees' work.

PENSION FUND is a fund reserved to pay workers' pensions when they retire from service. Also known as SUPERANNUATION FUND.

PENSION MAXIMIZATION is a controversial strategy, often espoused by life insurance agents, of using insurance to augment a company benefit plan. Under this arrangement, a retiree takes pension payments for his or her own life only and buys life insurance to provide for a surviving spouse. Also known as pension max.

P/E RATIO (PRICE/EARNINGS RATIO) is a stock analysis statistic in which the current price of a stock (today's last sale price) is divided by the reported actual (or sometimes projected, which would be forecast) earnings per share of the issuing firm; it is also called the "multiple".

PER CAPITA INCOME is the mean income computed for every man, woman, and child in a particular group. It is derived by dividing the total income of a particular group by the total population in that group.

PERCENTAGE DESIGN, in construction, is the percentage expended for design and construction management services in proportion to total construction.

PERCENTAGE LEASE is a type of lease where the landlord charges a base rent plus an additional percentage of any profits realized by the business tenant.

PERCENTAGE OF COMPLETION METHOD OF ACCOUNTING is instituted if your revenues exceed $10,000,000 (3-year average) or your contracts will not be completed within a two-year period, you are generally required to use the percentage of completion accounting for contracts. There are many advantages to using to percentage of completion method including:

PER DIEM is a. one every day (e.g., save 10 man-hours per diem); or, b. payment of daily expenses and/or fees of an employee or an agent.

PERFORMANCE BUDGET is a budget format that relates the input of resources and the output of services for each organizational unit individually. Sometimes used synonymously with program budget.

PERFORMANCE INDICATORS are those empirical data points that indicate how well, or poorly, an entity is performing against preset goals and objectives. Normally, in business or strategic planning, a company will set targets over a specified period that the business believes are attainable and track performance over time to those targets or objectives.

PERFORMING ASSET is an asset that provides a dependable annual financial return; for example, production machinery or, in transportation, an airliner.

PERIOD COST is an expense that is not inventoriable; it is charged against sales revenues in the period in which the revenue is earned (e.g., SG&A is a period cost). Also called period expense.

PERIODICITY CONCEPT is the concept that each accounting period has an economic activity associated with it, and that the activity can be measured, accounted for, and reported upon.

PERIODIC VALUATION allows for the determination on future dates the value of assets, portfolios, etc. with the idea of setting a new standard cost or value to those assets. Such revaluations, up or down, are then posted as the new standard cost or value. See REVALUATION.

PERMANENCE is the quality or state of being permanent; primarily judged by durability and useful life. See ORDER OF PERMANENCE.

PERPETUAL INVENTORY is an inventory accounting system whereby book inventory is kept in continuous agreement with stock on hand. A daily record is maintained of the dollar amount and physical quantity. There are periodic physical inventories taken to reconcile at short intervals.

PERPETUAL SUCCESSION is one of the legal distinctions between a business and a company. A company has perpetual succession meaning that a change in the membership does not affect the existence of the company whereas a business does not enjoy this perpetual succession. For example, in the case of a partnership, which is one form of business registration, a change in the membership affects the partnership.

PERSISTENT EARNINGS is the level of earnings, from accounting to accounting period, that are continually recurring.

PERSONAL ACCOUNTS represents money due to or due from a person or group of persons. For example, Accounts Payable - Suppliers is a personal account since this amount is payable to a supplier/suppliers.

PERSONAL EQUITY is that portion of equity ownership that is held to ones own benefit or invested as an integral part of the assets of a legal entity.

PERSONAL EQUITY PLAN (PEP) was an investment plan in the U.K. that used to allow people over the age of 18 to invest in shares of U.K. companies. The plan encouraged investment by individuals. Discontinued in 1999, it was replaced by Individual Savings Accounts (ISA). It was done through an approved plan, qualifying unit trust, or investment trust. Investors received both income and capital gains free of tax.

PERSONAL LOAN is a short-term loan that is extended based on the personal integrity of the borrower.

PERSONAL PROPERTY means property of any kind except real property. It may be tangible (having physical existence) or intangible (having no physical existence, such as patents, inventions, and copyrights).

PERVASIVENESS OF ESTIMATES means that the estimates have to be complete, of high quality and in depth, i.e., they have to adequately cover the whole accounting entity.

PETTY CASH, normally, is an account and location where tangible cash is stored for usage in purchasing or the reimbursing of inexpensive out-of-pocket expenditures.

PHANTOM PROFIT is hypothetical profit, i.e., no cash flow is generated. Appreciation on any asset, e.g. stock, is considered phantom profit unless or until the asset is sold, thereby generating cash flow.

PICPA is Pennsylvania Institute of Certified Public Accountants or Philippine Institute of Certified Public Accountants.

PIERCING THE CORPORATE VEIL is a legal concept through which a corporation's shareholders, who generally are shielded from liability for the corporation's activities, can be held responsible for certain actions.

PIGGYBACK, dependent upon usage, can mean: 1. On the back or shoulder or astraddle on the hip; 2. Two lenders participating in the same loan (piggyback loan); 3. Unauthorized access to a data processing system via an authorized user's legitimate connection (piggyback entry); 4. Haul by railroad car; 5. SEC registration of existing holdings of shares in a corporation combined with an offering of new public shares (piggyback registration); 6. Rights that entitle an investor to register and sell his or her stock whenever the company conducts a public offering (piggyback rights).

PIPE (Private Investment in Public Equity) refers to any private placement of securities of an already-public company that is made to selected accredited investors (usually to selected institutional accredited investors) wherein investors enter into a purchase agreement committing them to purchase securities and, usually, requiring the issuer to file a resale registration statement covering the resale from time to time of the securities the investors purchased in the private placement. PIPE transactions may involve the sale of common stock, convertible preferred stock, convertible debentures, warrants, or other equity or equity-like securities of an already-public company. There are a number of common PIPE transactions, including:

PISCAN DOCUMENT, a precursor of double entry bookkeeping, dates from the early 12th century. Records indicate that primitive bookkeeping with sequential transactions using Roman numerals was presented in paragraph form. Some of the record fragments are from an unknown Florentine banking firm dated from 1211. It was not yet double entry bookkeeping, but advancing in that direction. Other fragments include the Castra Gualfred and the Borghesia Company from 1259-67; Gentile de' Sassetti and Sons, 1274-1310; and Bene Bencivenni, 1277-96. The most complete records are from Rinieri Fini & Brothers, 1296-1305, and Giovanni Farolfi & Co., 1299-1300.

PITI is an acronym for Principal, Interest, Taxes and Insurance when dealing with property mortgages.

PLACEMENT is bank depositing Eurodollars with (selling Eurodollars to) another bank is said to be making a placement.

PLANT ASSET is a non-current physical asset applicable to manufacturing activities.

PLEDGE is a. the transfer or assignment of assets as collateral to secure payment of a debt obligation as when securities are pledged to a lender for a loan secured by the owner of the securities. When securities a pledged, the lender frequently requires the physical transfer of the collateral to preclude possibility of using the same asset for additional pledging; b. the deposit or placing of personal property as security for a debt or other obligation with a person called a pledgee. The pledgee has the implied power to sell the property if the debt is not paid. If the debt is paid, the right to possession returns to the pledgor; or, c. a written or oral agreement to contribute cash or other assets.

PLEDGED ACCOUNTS RECEIVABLE is short-term borrowing from financial institutions where the loan is secured by accounts receivable. The lender may physically take the accounts receivable but typically has recourse to the borrower; also called discounting of accounts receivable.

PLEDGED ASSET is an asset that is transferred to a lender as security for debt. The lender of the debt takes possession of the pledged asset, but does not have ownership unless default occurs.

PLEDGED REVENUES is funds generated from revenues and obligated to debt service or to meet other obligations specified by the bond contract.

PMSI is Purchase-Money Security Interest; it is normally a lien resulting from a purchase, e.g. an auto loan.

PNL is Profit and Loss (statement/analysis; business/accounting). See also PROFIT AND LOSS STATEMENT.

POINT OF is a positional determinant or modifier in that it is either the starting or ending position, e.g. point of sales, point of delivery, point of collection, or point of completed production.

POINTS are additional fee paid to a lender. Points are generally stated as a percent of the total amount borrowed and are in essence prepaid interest. Points paid can be deducted over the life of the loan.

POISON PILL is where the targeted company defends itself by making its stock less attractive to an acquirer.

POLITICAL COSTS HYPOTHESIS predicts that firms with low agency and political costs and effective shareholders' monitoring will distribute cash dividend and those with moderate agency and political costs may use stock dividends in lieu of cash dividends to separate themselves from firms having high agency and political costs. This indicates that cash dividend firms will face better long-term stock market valuation of their shares than stock dividend firms.

POOL is: 1. a group of people organized for a specific purpose or any communal combination of funds; 2. in capital budgeting, the concept that investment projects are financed out of a pool of bonds, preferred stock, and common stock, and a weighted-average cost; 3. in insurance, a group of insurers who share premiums; and 4. in investments, the combination of funds for the benefit of a common project, or a group of investors who use their combined influence to manipulate prices.

POOLING-OF-INTERESTS, in the US, is the method of accounting used in a business combination in which the acquiring company has issued voting common stock in exchange for voting common stock of the acquired company. The features of the method are that the acquired company's net assets are brought forward at book value, retained earnings and paid-in capital are brought forward, the net income is recognized for the full financial year regardless of the date of acquisition, and the expenses of pooling are immediately charged against earnings. In order to use the method there are a number of criteria to be met concerning the prior independence of the companies and the nature and timing of the acquisition. See POOLING OF INTEREST METHOD.

POOLING OF INTEREST METHOD is an accounting method for reporting acquisitions accomplished through the use of equity. The combined assets of the merged entity are consolidated using book value, as opposed to the PURCHASE METHOD, which uses market value. The merging entities` financial results are combined as though the two entities have always been a single entity. See POOLING-OF-INTERESTS.

POP is an acronym for, among others, Point Of Presence or Post Office Protocol (Internet e-mail protocol).

PORTFOLIO is a term for describing all the investments that an entity owns. A diversified portfolio contains a variety of investments.

PORTFOLIO RISK, in risk analysis, it is the risk that a particular combination of projects, assets, units or whatever is in the portfolio will fail to meet the overall objectives of the portfolio because of poor balance of risks within the portfolio.

POSITIVE ACCOUNTING THEORY is where theorists tend to explain why some accounting practices are more popular than others (e.g., because they increase management compensation). They tend to support their conclusions with inductive theory and empirical evidence as opposed to deductive methods. Generally avoid advocacy of one accounting rule as being better or worse than its alternatives. Positivists are inspired by anecdotal evidence, but anecdotal evidence is never permitted without more rigorous and controlled scientific investigation.

POST it the transfer of accounting entries from a journal of original entry into a ledger book, in chronological order according to when they were generated.

POST DATE is placing on a document or a check a date that follows the date of the initiation or execution of the document. For example, a post dated check cannot be cashed until the date written on the check.

POSTING, in bookkeeping, is to list on the company's records, such as to list the detail of sales and purchases on the accounts receivable or payable records.

POSTULATE, in logic, is a proposition that is accepted as true in order to provide a basis for logical reasoning.

PR is an acronym for, among others, 'public relations', 'payroll' and 'purchase request'.

PRACTICAL CAPACITY is where the cost of production is based on the 'practical capacity' of production facilities. Therefore, the proportion of overheads allocated to a unit of production is not to be increased as consequence of idle capacity of the plant.

PREDICTOR RATIOS: Most ratios are descriptive in nature; that is, they describe the firm as it is now. As you might expect, Predictor Ratios provide suggestions about likely future conditions for the firm. VentureLine provides two industry standard Predictor Ratios:

PREEMPTIVE RIGHT is the right of a current stockholder to maintain the percentage ownership interest in the company by buying new shares on a pro rata basis before they are issued to the public.

PREFERRED BIDDER is the bidder who is selected by the vendor, usually to some predetermined criteria, as being the party to whom it intends to sell the business, or award a contract, subject to the completion of negotiations and legal arrangements.

PREFERENCE SHARE CAPITAL is capital raised by an entity through the sale of preferred shares.

PREFERRED CREDITOR is a creditor whose account takes legal preference for payment over the claims of others.

PREFERRED STOCK, usually, non-voting capital stock that pays dividends at a specified rate and has preference over common stock in the payment of dividends and the liquidation of assets.

PREMIUM ON CAPITAL STOCK is excess received over the par value of stock issued. The premium account is shown under the paid-in capital section of stockholder's equity because it resulted from the issuance of stock. It is not an income statement account since the company earns profit by selling goods and services to outsiders, not by issuing shares of stock to owners.

PRE-OPERATING COSTS are costs that are deferred until the related assets are ready for revenue service at which time the costs are charged to operations.

PREPAID EXPENSES are amounts that are paid in advance to a vender or creditor for goods and services. Typically, insurance premiums are paid in advance of the coverage contained in the policy. Prepaid Expenses is a Current Asset for your business. This is because you have paid for something and someone owes you the service or the goods for which you prepaid.

PRESCRIBED SECURITY generally means any bond, debenture, stock, stock certificate, treasury bill or other like security, or any coupon, warrant or other document for the payment of money in respect of such a security, issued by a government authority.

PRESENT VALUE is the discounted value of a payment or stream of payments to be received in the future, taking into consideration a specific interest or discount rate. Present Value represents a series of future cash flows expressed in today's dollars. A given amount of money is almost always more valuable sooner than later, so present values are generally smaller than corresponding future values.

PRICE is the property of having material worth. Price is usually indicated by the amount of money something would bring if or when sold.

PRICE CEILING is a government-imposed limit on how high a price can be charged on a product.

PRICE EARNINGS MULTIPLE: The price-earnings ratio (P/E) is simply the price of a company's share of common stock in the public market divided by its earnings per share. Multiply this multiple by the net income and you will have a value for the business. If the business has no income, there is no valuation. If the common stock in not publicly traded, valuation of the stock is purely subjective. This may not be the best method, but can provide a benchmark valuation.

PRICE ELASTICITY is the degree to which customers respond to price changes (calculation: % change in quantity divided by % change in price). A value greater than 1 = customers exhibit a good sensitivity to price. A value less than 1 = customers are insensitive to price. Price Elasticity is if a small change in price is accompanied by a large change in quantity demanded, the product is said to be elastic (or responsive to price changes). A product is inelastic if a large change in price is accompanied by a small amount of change in demand.

PRICE FIXING is an illegal practice where competing companies agree, informally or formally, to jointly restrict or control prices within a specified range.

PRICE MIX is the value of the product determined by the producers. Price mix includes the decisions as to: Price level to be adopted; discount to be offered; and, terms of credit to be allowed to customers.

PRICE TO BOOK is a financial ratio that is derived by dividing a stock’s capitalization by its book value. Also called Market-to-Book.

PRICE TO CASH FLOW is a measure of the market's expectations of a firm's future financial health. It is calculated by dividing the price per share by cash flow per share.

PRICE TO EARNINGS RATIO (P/E) is a performance benchmark that can be used as a comparison against other companies or within the stock's own historical performance. For instance, if a stock has historically run at a P/E of 35 and the current P/E is 12, you may want to explore the reasons for the drastic change. If you believe that the ratio is too low, you may want to buy the stock. You will generally find a P/E ratio based on either the prior reporting year's earnings, or the earnings of the prior four quarters added together (LTM or Latest Twelve Months)

PRICE TO REVENUE is a financial ratio derived by dividing current stock price by revenue per share (adjusted for stock splits).

PRIMARY DEALER is a designation given by the Federal Reserve System to commercial banks or broker/dealers who meet specific criteria, including capital requirements and participation in Treasury auctions. A primary dealer is entitled and obligated to purchase and sell government securities with the Federal Reserve directly. They serve as the conduits for Federal Reserve open market activities. There are approximately 30-40 such dealers.

PRIMARY MARKET is the first sale of a newly issued security. Those securities are purchased in the primary market. All subsequent trading of those securities is done in the secondary market.

PRIME BROKERS are providers of back-office administration and stock lending for hedge funds.

PRIME RATE is the interest rate that banks charge to their preferred customers. Changes in the prime rate influence changes in other rates; mortgage interest rates for example.

PRINCIPAL is: a. a person who has controlling authority (e.g. the CEO or owner of a company) or is in a leading position (part owners of a legal entity); or, b. a matter or thing of primary importance, e.g. is the amount of a loan, excluding interest, or the amount you invest, excluding income.

PRINCIPLES-BASED ACCOUNTING provides for few exact rules and little implementation guidance. Instead, general principles are put forward and companies must ensure that their financial statements fairly and accurately represent these principles. Proponents argue that this type of system does not allow for less than ethical financial engineering, where complex transactions are undertaken in order to get around following specific rules-based accounting standards. Critics believe a principles-based system allows too much leeway for companies, because they generally do not have to follow specific rules, only wide-arching principles. See also RULES-BASED ACCOUNTING.

PRIOR PERIOD refers to accounting periods that have occurred in the past. See also ACCOUNTING PERIOD.

PRIVATE CORPORATION is a corporation that ownership is held by the private sector, i.e. individuals or companies.

PRIVATE EQUITY is equity securities of unlisted (non-publicly traded) companies. Private equities are generally illiquid and thought of as a long-term investment. Private equity investments are not subject to the same high level of government regulation as stock offerings to the general public. Private equity is also far less liquid than publicly traded stock.

PRIVATE PLACEMENT is investments in companies that are privately owned; i.e, they are companies that are not traded on a public stock exchange (e.g., NYSE, NASDAQ, and AMEX).

PRIVATE PLACEMENT (DEBT) is the sale of a bond or other security directly to a limited number of investors; used in the context of general equities. For example, sale of stocks, bonds, or other investments directly to an institutional investor like an insurance company, avoiding the need for the registration with the regulator if the securities are purchased for investment as opposed to resale.

PROCEEDS, generally in business, is the total amount brought in, e.g. the proceeds of a sale. In insurance, it is the net amount received (as for a check or from an insurance settlement) after deduction of any discount or charges.

PROCESS COSTING is a method of cost accounting applied to production carried out by a series of chemical or operational stages or processes. Its characteristics are that costs are accumulated for the whole production process and that average unit costs of production are computed at each stage.

PROCUREMENT, from a business perspective, is the purchasing of services or materials.

PRODUCER PRICE INDEX (PPI) measures the average change over time in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and some services.

PRODUCT is: a. the end result of the manufacturing process, b. commodities offered for sale, or c. an artifact that has been created by someone or some process.

PRODUCT COST is cost of inventory on hand, also called Inventoriable Cost. They are assets until the products are sold. Once they are sold, they become expense, i.e. Cost of Good Sold (COGS). All manufacturing costs are product costs, e.g., direct material, direct labor, and factory overhead.

PRODUCT INVOICE is an invoice associated with a tangible or physical item as opposed to a service or professional invoice. See PROFESSIONAL INVOICE and SERVICE INVOICE.

PRODUCTION BUDGET is used to propose how much you will manufacture (or buy in from suppliers) so that you can compensate for the demand (identified on your sales budget). If your maximum capacity for producing stock was 100 units for the month (due to available resources), it may not be necessary to produce this maximum (due to a lower demand) each month because it adds to expense and ties up finance. If you expect a high demand during a certain month(s), it may be that your manufacturing capacity cannot compensate. In which case, you may budget to manufacture excess in the months where you do not manufacture the maximum so that you can build up your supplies for the expected months with high demand. Alternatively, it may be a call to buy/hire more machinery/staff in that particular month to allow an increased capacity for production. See OPERATING BUDGET.

PRODUCTIVE ACTIVITY usually is defined as including activities that have economic value in the marketplace. A more contemporary definition of productive activity includes any activity that produces a valued good or service, even if it is not actually paid for.

PRODUCTIVITY is a measured relationship of the quantity and quality of units produced and the labor required per unit of time.

PRODUCTIVITY RATIO is the ratio of outputs to inputs. The closer the ratio is to 1.0, the higher the productivity; the closer the ratio is to 0.0, the lower the productivity. Productivity is important because it relates to an organization's ability to compete, and to the overall wealth and standard of living of a nation. Productivity is affected by work methods, capital, quality, technology, and management.

PRODUCT MIX involves planning and developing the right type of product that will satisfy fully the needs of customers. A product has several dimensions. These dimensions are collectively called 'product mix'. Product mix for example may consist of size and weight of the product, volume of output, product quality, product design, product range, brand name, package, product testing, warranties and after sales services and the like.

PROFESSIONAL FEE is that fee charged for services from university trained professionals; primarily doctors, lawyers and accountants. The term is often expanded to include other university trained professions, e.g. pharmacists charging to maintain a medicinal profile of a client or customer.

PROFESSIONAL INVOICE is an invoice associated with professional services rendered, i.e. medical, legal or accounting services. See SERVICE INVOICE and PRODUCT INVOICE.

PROFESSIONAL SERVICES are those services offered by university trained professionals, e.g. doctors, lawyers, and accountants for, normally, a professional fee.

PROFESSIONAL SUBSCRIBER means all other persons who do not meet the definition of Non-Professional Subscriber. SEE NON-PROFESSIONAL SUBSCRIBER.

PROFIT is the excess of revenues over outlays in a given period of time (including depreciation and other non-cash expenses).

PROFITABILITY is company's ability to generate revenues in excess of the costs incurred in producing those revenues.

PROFITABILITY RATIOS are measures of performance showing how much the firm is earning compared to its sales, assets or equity.

PROFIT AFTER TAX (PAT) is the net profit earned by the company after deducting all expenses like interest, depreciation and tax. PAT can be fully retained by a company to be used in the business. Dividends, if declared, are paid to the share holders from this residue.

PROFIT & LOSS ACCOUNT shows the net profit which is left after all relevant business expenses have been deducted.

PROFIT AND LOSS SHARING (PLS) is the method utilized in Islamic banking to comply with the prohibition of interest. The Islamic solution, commonly referred to as Profit & Loss Sharing (PLS), suggests an equitable sharing of risks and profits between the parties involved in a financial transaction. In the banking business, there are three parties - the entrepreneur or the actual user of capital, the bank which serves as a partial user of capital funds and as a financial intermediary, and the depositors in the bank who are the suppliers of savings or capital funds. There are two different partnerships of the type mentioned in Islam: the partnership between the depositors and the bank, and the partnership between the entrepreneur (or the borrower) and the bank. Under this proposal, financial institutions will not receive a fixed rate of interest on their outstanding loans, rather, they share in profits or in losses of the business owner to whom they have provided the funds. Similarly, those individuals who deposit their funds in a bank will share in the profit/loss of the financial institution.

PROFIT AND LOSS STATEMENT (P&L) is also known as an income statement. It shows your business revenue and expenses for a specific period of time. The difference between the total revenue and the total expense is your business net income. A key element of this statement, and one that distinguishes it from a balance sheet, is that the amounts shown on the statement represent transactions over a period of time while the items represented on the balance sheet show information as of a specific date (or point in time).

PROFIT BEFORE TAXES (PBT) is a profitability measure that looks at a company's profits before the company has to pay income tax. This measure deducts all expenses from revenue including interest expenses and operating expenses, but it leaves out the payment of tax.

PROFIT CENTER is a section of an organization that is responsible for producing profit, e.g., a division of a corporation that is not a stand-alone entity but is required to produce profits within the corporation.

PROFIT MARGIN ON SALES is: a. Gross Profit Margin on Sales = Gross Profit/Sales * 100; or, b. Net Profit Margin on Sales = Net Profit After Tax/Sales * 100. See also GROSS PROFIT MARGIN ON SALES.

PROFIT MULTIPLE: Profit and sales multiples are the most widely used valuation benchmarks used in valuing a business. The information needed are pretax profits and a market multiplier, which may be 1, 2, 3, or 4 and usually a ceiling of 5. The market multiplier can be found in various financial publications, as well as analyzing the sale of comparable businesses. This method is easy to understand and use. The profit multiple is often used as the valuation ceiling benchmark.

PRO-FORMA is to provide in advance to a prescribed form or to describe item, e.g. pro forma financial statement or pro forma invoice.

PRO-FORMA FINANCIAL STATEMENT is a financial statement projection that shows how an actual financial statement will look if certain specified assumptions are realized.

PRO-FORMA INVOICE is a price quote. It is written as an invoice, and, in effect, says: 'This is the purchase price and terms we are offering.'

PROGRAM BUDGET is a budget wherein inputs of resources and outputs of services are identified by programs without regard to the number of organizational units involved in performing various aspects of the program.

PROGRESSIVE TAX is an income tax system to where the more income that is made the higher the tax percentage that must be paid.

PROGRESS BILLINGS are interim billings for construction work or government contract work. The entry is to debit progress billings receivable and credit progress billings on construction in progress. Progress billings is a contra account to CONSTRUCTION-IN-PROGRESS.

PROJECTION is an approximation of future events. Usually a projection is made by extrapolating known information into the future period, considering events that could affect the outcome. See FORECAST, BUDGET.

PROMISES FOR THE FUTURE is not a standard term, but is sometimes used in contracts to delineate what orders/commitments may exist in the future. Dependent upon the contractual language, it may or may not be binding.

PROMISSORY NOTE, usually just called a 'note', is a NEGOTIABLE INSTRUMENT wherein the maker agrees to pay a specific sum at a definite time.

PROMOTIONAL ALLOWANCES are offered by manufacturers to support the additional promotional activities undertaken by channel members (retailers) on their behalf, e.g. discounts given as part of promotional programs, such as when products are put on sale to increase traffic in a retail store.

PROOF OF POSTING (POP) is: a. to prove by acceptable methods the accuracy of any posts made within accounting ledgers; or b. details confirming the shipment of mail with a postal organization.

PROPORTIANATE UNIT CONCEPT is where a value or distribution is agreeing in amount, magnitude, or degree, e.g. a shareholder holding 1% outstanding shares of an entity is entitled to receive 1% of that entities declared dividend, i.e. it is in proportion.

PROPRIETARY is an account, item, or information belonging to a company or individual. See PROPRIETARY ASSET.

PROPRIETARY ASSET, usually, is any asset that is considered in the realm of intellectual property that should not be disclosed, e.g., all information having to do with clients/customers, including but not limited to names, addresses, telephone numbers and other contact information, as well as any other personal or business related information, as it may exist from time to time is a valuable, and unique proprietary asset to a company. Proprietary assets would also include trade secrets and undisclosed inventions.

PROPRIETARY THEORY is where no fundamental distinction is drawn between a legal entity and its owners, i.e. the entity does not exist separately from the owners for accounting purposes. The primary focus is to report information useful to the owners, and therefore the financial statements are prepared from their perspective. See ENTITY THEORY.

PROPRIETORS DRAW is when a business proprietor draws money for personal needs, but is taxed on business results (at individuals’ marginal rate) regardless of drawings.

PRO RATA is the basis for allocating an amount proportionally to the items involved. An amount may be proportionally distributed to assets, expenses, funds, etc.

PROSPECTIVE PAYMENT SYSTEM (PPS), in healthcare, is a Medicare administered payment plan where providers are paid a predetermined sum for caring for a given number of consumers. The built in incentive is for providers to control costs, theoretically leading to more cost effective care.

PROSPECTIVE REIMBURSEMENT, in healthcare, is a reimbursement method where the third party payer set the amount of money for a particular service to be delivered to clients in agreement with the organization before the service is delivered.

PROSPECTUS is the disclosure document for an offering registered with the SEC. The final prospectus is issued on the effective date, i.e., when the offering is released by the SEC.

PROVISION, generally, is to prepare in advance for an event that is projected to take place in the future. In accounting, it is an amount charged against profits for a specific liability (for example: bad debts, depreciation or taxes). A liability may be known, but the amount is often uncertain. This uncertainty may lead to an adjustment in a later income statement once the final amount of the liability is ascertained.

PROVISION FOR CREDIT LOSSES, in lending institutions, is a charge to income which represents an expense deemed adequate by management given the composition of a bank’s credit portfolios, their probability of default, the economic environment and the allowance for credit losses already established. Specific provisions are established to reduce the book value of specific assets (primarily loans) to establish the amount expected to be recovered on the loans. See also PROVISION.

PROXY is a person authorized to act for another, e.g. a power of attorney document given by shareholders of a corporation authorizing a specific vote on their behalf at a corporate meeting.

PRUDENCE is having foresight and caution along with discretion, and to not act recklessly.

PRUDENCE CONCEPT, otherwise known as conservatism, says that whenever there are alternative procedures or values, the accountant will choose the one that results in a lower profit, a lower asset value and a higher liability value.

PUBLIC ACCOUNTING means the performance of or offering to perform any engagement that will result in the issuance of an attest report that is in accordance with professional standards. "Practice of public accounting" also means the performance of or offering to perform services other than those described above, such as consulting services, personal financial planning services, or the preparation of tax returns or the furnishing of advice on tax matters by a sole proprietorship, partnership, limited liability company, professional association, corporation, or other business organization, that advertises to the public as a "certified public accountant" or "public accountant."

PUBLIC CORPORATION is a corporation formed by federal, state or local governments for specific public purposes.

PUBLIC DEBT OFFICE, in the U.S., is a part of the Department of Treasury and is responsible for the issuance, control, and payment of government issued securities in compliance to existing regulations.

PUBLIC FUNDS is money funded in government securities or through the levy of taxes from a governmental entity.

PUBLIC OFFERING is the sale of a new securities issue to the public by way of an underwriter, a transaction that must be registered with the Securities and Exchange Commission.

PUBLIC OWNERSHIP is either: a. Government ownership and operation of a productive facility for the purposes of providing some goods or services to citizens; or, b. In investments, portion of a corporations stock that is publicly traded and owned in the open market.

PURCHASE ACCOUNT is an account in which all inventory purchases are recorded; used with the periodic inventory method.

PURCHASE DISCOUNT is a reduction in the purchase price, allowed if payment is made within a specified period.

PURCHASE METHOD is accounting for an acquisition using market value for the consolidation of the two entities` net assets on the balance sheet. Generally, depreciation/amortization will increase for this method (due to the creation of goodwill) compared to the POOLING OF INTEREST METHOD resulting in lower net income.

PURCHASE MONEY AGREEMENT is an agreement under which a person pledges the property or item bought as security.

PURCHASE MONEY INTEREST is that interest associated with the purchase money mortgage.

PURCHASE MONEY MORTGAGE (PMM) is seller financing as a part of the purchase price.

PURCHASE ORDER is a written authorization for a vendor to supply goods or services at a specified price over a specified time period. Acceptance of the purchase order constitutes a purchase contract and is legally binding on all parties.

PURCHASE REQUISITION is a written request for goods to be purchased. It is usually prepared by a department head or manager and sent to a firm's purchasing department.

PURCHASE RETURNS is a contra purchase account that records all credits from returned inventory purchases.

PURCHASES BUDGET is a budget of the expected usage of materials in production and the purchase of the direct materials required. See OPERATING BUDGET.

PURCHASING POWER is the value of a particular monetary unit in terms of the amount of goods or services that can be purchased with it, i,e, the ability to purchase, generally measured by income.

PURE COST is any direct readily verifiable cost assignable to the subject or item, e.g., the direct cost of producing a product.

PURE RESEARCH is motivated exclusively by the search for knowledge for its own sake.

PUSH-DOWN ACCOUNTING, in acquisitions, is an exception to the general rule that the acquiree’s carrying values are unaffected by the purchase may arise when substantially all of the acquiree’s shares are purchased by the acquirer. In that case, the acquirer may direct the acquiree to revalue its assets in accordance with the fair values attributed to those assets by the acquirer. This practice is known as push-down accounting, because the fair values are “pushed down” to the acquiree’s books. The net effect is the same as if the acquirer had formed a new subsidiary, which then purchased all of the assets and liabilities of the acquiree. There are two advantages to push-down accounting: a. The first is that the financial position and results of operations of the acquiree will be reported on the same economic basis in both the consolidated statements and its own separate entity statements. Without push-down accounting, for example, it would be possible for the subsidiary to report a profit on its own and yet contribute an operating loss to the parent’s consolidated results, if the consolidation adjustments are sufficient to tip the balance between profit and loss; and, b. The second advantage is that the process of consolidation will be greatly simplified for the parent. Since the carrying values will be the same as the acquisition fair values, there will be no need for many of the consolidation adjustments that otherwise will be required every time consolidated statements are prepared.

PUSH-PULL STRATEGY is the effective simultaneous use of a combination of two marketing strategies: PUSH = 1. (physical distribution definition) A manufacturing strategy aimed at other channel members rather than the end consumer. The manufacturer attempts to entice other channel members to carry its product through trade allowances, inventory stocking procedures, pricing policies, etc. 2. (sales promotion definition) The communications and promotional activities by the marketer to persuade wholesale and retail channel members to stock and promote specific products. PULL = 1. (physical distribution definition) A manufacturing strategy aimed at the end consumer of a product. The product is pulled through the channel by consumer demand initiated by promotional efforts, inventory stocking procedures, etc. 2. (sales promotion definition) The communications and promotional activities by the marketer to persuade consumers to request specific products or brands from retail channel members.

PUT is (1) A stipulated privilege of buying or selling a stated property, security, or commodity at a given price (strike price) within a specified time (for an American-style option, at any time prior to or on the expiration date). A securities option is a negotiable contract in which the seller (writer), for a certain sum of money called the option premium, gives the buyer the right to demand within a specified time the purchase (call) or sale (put) by the option seller of a specified number of bonds, currency units, index units, or shares of stock at a fixed price or rate called the strike price. Many options are settled for cash equal to the difference between the aggregate spot price and the aggregate strike price rather than by delivery of the underlying. In the U.S. and many other countries, stock options are usually written for units of 100 shares. Other units of underlying coverage are standard in other option markets. Options are ordinarily issued for periods of less than one year, but longer-term options are increasingly common. (2) Any financial contract that changes in value like an option (asymmetrically), even if the terms of the contract do not state the price relationship in terms of a right or privilege or in other language usually associated with options.

PUT OPTION is the right but not the obligation to sell an underlying at a particular price (strike price) on or before the expiration date of the contract. Alternatively, a short forward position with an upside insurance policy.

PUT WARRANT is a security that, in contrast to a conventional warrant, gives the holder the right to sell the underlying or to receive a cash payment that increases as the value of the underlying declines. Put warrants, like their call warrant counterparts, generally have an initial term of more than one year.

ACCOUNTING TERMS - ACCOUNTING DICTIONARY - ACCOUNTING GLOSSARY