Accounting Definitions: Income & Expenses - Part 1

Accounting Definitions: Income  & Expenses - Part 1
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Understanding the Concepts of Accounting Terms for Income and Expenses

A segregated list of the accounting definitions of income and expense terminologies furnishes the reader with a more organized resource for looking up meanings. As one is allowed to stay focused with the income and expense related terminologies, the learner will find it easier to grasp the principles and concepts related to cost incurrence and revenue generation.

Basically, income and expense accounts are classified as nominal accounts, which denote that their nature is temporary and that their account titles are based on the appropriate descriptions for a particular transaction.

At the end of the accounting period, these nominal accounts will be zeroed-out and are transferred to the Profit and Loss Summary. This is where the result of the business operations is determined as favorable or not, either as a Net Income or Net Loss. Once this has been established, the resulting amount will be taken up as an increase or decrease of the Capital (Single Proprietorships) or the Retained Earnings accounts.

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Abatement – Denotes an approved reduction of the amount of taxes, penalties, and surcharges to be paid.

Accelerated Cost Recovery System (ACRS) – This was a previously recommended method of depreciation using the declining balance as basis for recognizing depreciation expenses during the estimated useful life of a fixed asset. However, this method was later modified as MACRS (See Modified Accelerated Cost Recovery System)

Accelerated Depreciation – This refers to the declining balance depreciation method which was later modified into double-declining or 200% declining balance method. (See Modified Accelerated Cost Recovery System.)

Ad Valorem Tax – This tax is based on the value of the commodity; in the present taxation system, this is more popularly known as Value-Added Tax (VAT).

Adjusted Gross Income (AGI) – The taxable income that was established after all allowable deductions and adjustments have been applied as reductions to the gross earnings of a taxpayer, but before applying any exemptions. Thereafter, the AGI shall be the basis for calculating the income tax still due for payment.

Allocate/Allocation – An expense treatment for spreading out the costs over a specific period of time, usually extending beyond the current accounting period. Depreciation of fixed assets is the most popular method of cost allocation.

Amortization – This is also a method of cost allocation that is used if the expense it pertains to is not a fixed asset. It is also commonly used to refer to the periodic payments made to settle a long-term obligation. Example of an amortization not related to fixed assets is the cost allocation of pre-operating expenses incurred as start-up costs that will benefit future years.


Bad Debt/Bad Debts Expense – This refers to the total accounts receivable already classified as past due and having very little chance of being recovered or collected. The related expense account to recognize the loss is Bad Debts Expense.

Barter – A method of trading one’s goods or assets in exchange for something that has relatively the same value as the commodity traded. No cash outlay or in-flow should be booked, since it is not considered a selling or purchasing activity.

Cafeteria Plan – A cafeteria plan is an IRS-approved system of providing supplemental employee benefits by giving the employee the freedom to choose the benefit that would serve him best. The mechanics of this system makes use of a flexible fund that is set up particularly for the said purpose.


Canceled Check – Checks issued as a means of payment. It is honored by the bank by charging the check issuer’s deposit account. Thereafter, the check is considered as canceled or no longer negotiable and will be returned to the issuer along with the bank statement.

Capitalized Cost or Expenditure – A method of deferring expense recognition usually employed for fixed assets procurement, in observance of the matching of income and expense principle and the future years’ benefit rule. Instead of treating the acquisition cost as outright expense, it becomes a fixed asset account; hence, the price paid for its procurement becomes a capitalized cost.

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Accounting Definitions (Income) and Accounting Definitions (Expenses) - C, Continuation

Capital Gain – Income realized from selling a capitalized asset. This is when an asset is sold for more than its booked value; hence, resulting in a realization of income, which under IRS rules should be taxed.

Capitalization – In accounting for the amount initially put up by the business owner or the founders of the corporation, the funds used to procure the assets that will be utilized in operating the business will be recognized as the capitalization of the business entity.

Cash on Delivery or COD – A term of payment in which the buyer will hand over money equivalent to the full value of the goods purchased at the same time that the goods are physically transferred to the buyer.

Cash Receipts – As an accounting source document, this refers to the pre-numbered form used as official acknowledgment of cash or checks received as payment.

As a classification of an accounting book, this refers to the register of cash receipts that contains a master list of receipts issued in proper sequential and chronological order. It furnishes all the details of the transaction for which the cash or check payment was received.

Ceiling or Ceiling Price – In accounting calculations, ceiling refers to the maximum amount allowed to be recognized as earnings or incurred as expense or obligation. Ceiling price, on the other hand, is the maximum amount by which the price of a commodity can be quoted.


Debit Memo or Advice – A non-accountable form used as a source document for an accounting entry that will increase an asset or decrease a liability or income. This is in lieu of a legal deed as the original source document, since it has to be filed or stored properly as reference for other related legal transactions.

Depreciation – A method of cost allocation used for capitalized fixed assets.

Discretionary Cost – Expenditures that a business can do without, after management has made careful analysis that the non-incurrence of such expenses will not affect the quality of the business operations. Instead, it will help lessen the burden it creates on the revenue. An example of this is a preventive maintenance cost or an advertising expense.

Disposable Income – This term is applicable to the wages earned by an employee, as the amount of personal income or earnings available for personal deductions. This is after all prescribed taxes and government regulatory deductions have been taken out of the employee’s gross pay.

Donation – An expense that does not necessarily contribute to the profit generation activities of a business, since it is given or bestowed without any consideration expected or received in return. However, donations that are properly documented may be used as allowable deductions for tax purposes.

Double Declining Balance MethodSee Accelerated Depreciation.

Dual Pricing – This refers to the method of selling a commodity at two different prices in two different outlets.


Earned Income/Earnings – In a business entity, this is the income derived from its business operations; it is also used to denote the wage or salary earned by an employee.

Effective Interest Rate – The rate actually earned by a loan or deposit if based on the compounded method of computing interest, since the base amount used for its computation is the cumulative balance of the account. As opposed to the nominal rate, which is based on the principal balance, without taking into account any increase or decrease affecting the deposit or loan balance.

Ending Inventory – This is the dollar value of the entire physical stock remaining in the stockroom or warehouse as of year-end; it is accounted for by way of physical inventory. As on-hand items, they represent the unsold goods.

Estate Tax –The tax imposed on the value of the property or estate bestowed by a deceased to his heirs as their inheritance The said tax will be collected or deducted against the funds of the estate before they are actually transferred to the rightful heirs.

Exchange Gain or Loss – This refers to the income or deficit realized from selling the value of one currency denomination at the converted value of another currency with a higher or lower conversion value.

Excise Tax –This is a federal or statutory tax imposed on goods considered as non-essential or luxury items. Its manufacture or purchase is being taxed as an additional source of government revenue, to be used for providing basic necessities or services to the community as a whole. In principle, it is a way of distributing wealth or income to benefit the rest.

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Accounting Definitions (Income) and Accounting Definitions (Expenses) - E, Continuation

Expense – Cost incurred for purposes of carrying out the business operation as it is expected to bring about a gain or revenue.

Extraordinary Item – An expense or cash outlay that materially affects the results of the business operation. Its materiality has to be explained or disclosed as part of the financial report, inasmuch as its occurrence is not normal to the operating trend of the business.

Electronic Fund Transfer (EFT) System - This is a system of payment that makes use of the electronic facilities of the bank (ATM or online banking) by simply making a fund transfer from one account to another, without the need to exchange paper or money.


Federal Income Taxes – These are levies or duties imposed by the IRS on the gross earnings or wages of employees or on the net income of a business entity.

Federal Insurance Contribution Act (FICA) – These are the social security taxes and Medicare contributions deducted from the wages of employees. The employer is required to add a certain amount based on a specified rate, thereby increasing the employee’s monthly contributions.

Federal Unemployment Tax Act (FUTA) – A federally imposed tax to be paid by employers. It serves as a contribution to the unemployment insurance benefit of employees as administered by state workforce agencies.

First-In First-Out (FIFO) – A method of inventory valuation in which the unit prices of goods that were purchased during the earlier period of the accounting cycle will be assigned as values of the cost of goods sold during a particular period.

Fixed Price – The quoted value or selling price of a commodity that can no longer be negotiated for discounts or rebates.

Flat Tax – A single tax rate levied without consideration of income brackets or progression of income but simply applicable as the rate of tax collectible. This is also known as flat rate tax.

Free On Board/Freight on Board (FOB) – This term indicates that the costs incurred for shipping the purchased goods have been shouldered by the seller until the goods arrive at a specific destination. If FOB stands for Freight on Board, an additional phrase such as FOB Shipping Point or FOB Destination is added to best describe up to what point the shipping charges shall be borne by the seller.

Freight-in – This shipping term denotes that the cost of shipment is included in the amount billed against the buyer as part of the selling price.

Freight-out – A shipping term which denotes that the buyer will be billed separately for whatever shipping costs incurred to deliver the goods to his end.

Fringe Benefit – Supplemental salary paid in the form of privileges or cost-free services; if said benefit is not added to the employee’s salary, the cost would cause additional burden on the employee’s wages.

Front-End Loading Fee – This refers to a non-recurring charge or imposition collected by the service provider at the onset of an arrangement. This is usually paid as a form of processing or mobilization fee in order to proceed with the business agreement.

Futures Contract – This refers to pre-arranged trade deals that will take effect at some specified date in the future and shall have no effect on the books of the company until the commencement of the specified date takes place.


General and Administrative Expenses – These are the expenditures incurred by the business that are not at all related to manufacturing or selling transactions but are likewise necessary in order to sustain the managerial and clerical aspects of the entire business operations.

Gift Tax – Levy imposed on the value of a property transferred to another person as a form of gift or cost-free benefit; reference should be made with the prevailing state laws to determine who will pay for the said tax imposition. The rationale for this tax is to avoid using the act of gift-giving as a form of tax-shelter or tax avoidance.

Gross Income – This term refers to the total wages and other income earned and received by an employee before any salary deductions have been applied as reductions.

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Accounting Definitions (Income) and Accounting Definitions (Expenses) - H


Historical Cost – This is an accounting term to denote actual price or costs paid in procuring or booking an asset of the company.

Holding Costs - Charge imposed by the carrier of goods for providing docking services to the shipper of the goods.

Imputed Interest – The amount that increases the present value of the note or bond from its original value. The difference is considered as the imputed interest as it was already added in the computation of final amount paid as debt settlement.

Income – Gain or profit realized through trading activities, whether by reselling goods purchased at wholesale prices or by manufacturing the goods sold to the resellers or distributors.

Income Account – The generic term used to classify a transaction in the general ledger books or in the financial statement to denote that the amount reported is a revenue item.


Income Statement – The financial report that discloses the results of the business operations by presenting the total gross receipts and the total expenses incurred whether directly (cost of goods sold) or indirectly (administrative and operating expenses), in order to arrive at the net income or net loss for the period indicated as the statement date.

Income TaxSee Federal Income Tax

Installment Sale – Goods sold on credit for which a partial payment has been received and the remaining amount shall be settled in a series of payments. This is all in accordance with the terms and conditions stipulated by the seller and to which the buyer agrees.

Insurance – The assurance of a company that an individual or group of individuals or a business entity will be reimbursed for losses that resulted from bodily harm, injury, or death, or from theft, burglary, damages, or destruction of property. Such assurance will prevail for as long as they are covered by a policy governed by the terms and conditions stipulated by the insurance company and that the insured does not violate any of those conditions. The latter includes the payment of premiums by the person/s whose body/bodies or property/properties are protected.

Interest Expense – The cost of borrowing funds from a financing institution or credit company to compensate the opportunity lost had the lender invested the money in a more secured form of investment.

Interest Rate – The percentage by which an interest expense or income is computed, but it is regulated by law; hence, it should not exceed the ceiling stipulated as the maximum rate.

Interim Financial Statement – This refers to a financial report prepared within an accounting cycle, usually for management’s purposes, and does not require the closing of the general ledger book as part of its preparation.

Internal Revenue Service (IRS) – The authorized US government agency in charge of administering all tax rules and regulations, including collections and assessments, to determine if the taxes are being paid correctly and / or dutifully.

Internal Service Fund – In government accounting, this is the amount set-up as a provision to meet the expenses specified in the approved budget allocation of a government agency, arm, office, or unit. All expenses incurred to carry out their respective governmental functions or services are all paid by way of reimbursements duly supported by documents considered as valid.

Itemized Deductions – These represent the amount allowed as reductions against the gross income of a taxpayer in order to arrive at the Adjusted Gross Income for tax payment or filing purposes; they should be provided with details and supported by receipts, inasmuch as their validity is subject to review and/or assessment by the IRS.

Levy – Tax or duty to pay a certain amount as provided under the taxation rules and regulations of the Internal Revenue Code.

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Accounting Definitions (Income) and Accounting Definitions (Expenses) - M-N-O-P


MACRS or Modified Accelerated Cost Recovery System – This is the official title of the double-declining method of depreciation deemed as the more practical method of allocating the cost of the fixed assets throughout the years that it will be put in service. See Accelerated Cost Recovery System and Double-Declining Method.

Maintenance Expense – The costs incurred by a business entity to keep its assets or its premises working productively or in ways that would result in better performance or better services. This is to maintain an image of a business that is operating efficiently and capable of rendering or delivering the goods and services it promises to furnish its customers.

Miscellaneous Expenses – These are minor and incidental expenses, which cannot be classified as part of a major expense, since their accumulation could result in an overcharge or amount beyond what is considered reasonable.


Net Income/Profit – This is the positive result of an income statement, derived after deducting the cost of goods sold and all administrative and operating expenses from the gross revenue or net sales.

Net Loss – The negative results of an income statement, inasmuch as the total deductions exceed the total gross revenue. It indicates that the business is incurring more costs to operate the business over the benefits realized from business operations.

Net of tax – Net Income after the applicable or estimated tax has been deducted.

Net Sales – These are gross sales reduced by the sales discounts granted and the refunds paid for returned merchandise.

Nominal Interest Rate – The percentage by which interests on loans or deposits are computed based on the principal balance.

Nominal Account – This refers to the income and expense accounts that are by nature temporary and are maintained in name only for purposes of classifying the type of income earned and the expenses incurred during the operation of the business for a specific period.


Operating Expenses – The costs incurred in relation to the activities being carried out for the business operations of a specific period.

Operating Budget – This is the company’s pre-planned expenses as a means of controlling costs and limiting the incurrence of expenditures within the amount estimated or planned as reasonable. The aim is to realize the targeted profit by controlling the reductions against the revenue generated.

Operating Capital – Also known as working capital or money derived from capital funds, set aside and dedicated for the sole purpose of meeting business-related expenditures, with the intention of recovering the funds used by generating revenues.


Personal Exemption – The allowed tax deductions to reduce the taxable income of an individual without the necessity of showing proof or receipt, as they are considered the basic costs of living expenses or costs of the basic necessities incurred by the taxpayer either as a single or married individual.

Paper Profit/Loss – The comparison of an investment’s book value against the market value. The excess of the market price over the book value is considered as paper profit, in which case the investment is expected to bring in additional funds if traded in the securities market. As opposed to a resulting paper loss, if the investment’s market price is lower than the booked value. This then denotes that trading the securities will bring in fewer funds.

Passive Income – This refers to the income or earnings derived from a business strategy that is not related to the main operational activities of a business. Examples of passive income include interest earned by investments in securities.

Paycheck – A check issued as payment of an employee’s net wages for a particular payroll period, or the voucher, which the employee will sign to acknowledge that he has received his net pay for the period indicated.

Paystub – The portion of a payroll form held by the employee as proof of the net wages received for a particular payroll period.

Payroll – A system of calculating the gross wages from which the mandatory deductions will be based. The process is completed by deducting all mandatory and authorized deductions from the gross wages of the employee whether taxable or non-taxable, in order to arrive at the employee’s net pay.

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Accounting Definitions (Income) and Accounting Definitions (Expenses) - P, Continuation

Payroll TaxesSee Withholding Tax and FICA

Profit – The amount imputed in the selling price after the unit cost of the goods sold and other related expenses incurred in a business’s trading activities have been considered.

Profit and Loss Account/Summary – This is the temporary account to which all the income and expense accounts will be transferred as a way of zeroing-out their balances. It serves as a summary that will generate the results of the business operations, in terms of net income or net loss. The end result will then be transferred to the capital account or retained earnings, whichever is applicable.

Profit Margin – The allowable limit by which operating expenses will be incurred, after deducting the cost of goods sold from the gross revenues. This is to ensure the realization of income after all expenses have been considered.

Progressive Tax – A tax system in which the amount of tax due increases as the amount of gross revenue or salary likewise increases.

Property Tax – The amount of tax due and imposed by the local government on a property located in its territorial jurisdiction and collected from the owner of the property.

Prorate – The method of dividing or allocating income or expense in relation to the size or percentage of a fractional part of a whole.

Purchase – The act of buying or acquiring an asset where monetary considerations are involved.


Sale/Sales – The term or account used to record the income account related to the payments received in exchange for the goods or services traded.

Sales Discount – The reduction or rebate on the selling price, offered as incentive to customers for buying goods at wholesale or in bulk quantity; or to offer the reduction as the benefit of buying goods at COD terms.

Sales Return – This refers to the amount of sale realized from consignment transactions wherein the reseller is a consignor and will pay only the goods he is able to sell, albeit previously delivered or already physically transferred to his end. The physical transfers are recorded in the form of inventory location classification and do not necessarily entail recognition of cost of goods sold unless reported as sales by the consignor.

Sales Tax – This is the tax imposed by the government on specific goods or commodities other than those considered as basic necessities. They are added to the selling price paid for by the buyer as a means of collecting the tax payment on behalf of the government. The seller will be responsible for remittance of all sales tax collected and due to the government.

Service – A performance of an act which a business may pay and treat as expense. In some cases, the business may engage in rendering such acts as the main purpose of its business, and therefore any payments received in exchange for the services rendered will be treated as sales.

Social Security and Medicare Taxes – This refers to the amount of contributions paid by the employee and employer, set aside by the federal government as future retirement funds or for the medical or hospitalization bills of elderly workers, or those workers that are sick, injured,or disabled and in need of funds. The benefits extend to their qualified dependents. See FICA.

Surcharge – A fee that is non-recurring and is added to the regular fees in cases where certain conditions or regulations are not met or have been violated.


Tax -- A general term that denotes a levy imposed by the government on certain goods, services, or income coming from different types of sources.

Tax Credit – A reduction on income tax due, usually offered by the government as an incentive to taxpayers in exchange for the performance of or adherence to certain federal policies.

Tax Evasion – The act of avoiding tax payments or even attempting to avoid tax payments considered as illegal by the federal government inasmuch as they involve the commission of fraudulent acts. Tax evasion is considered a criminal act and is punishable by incarceration and payment of substantial fines.

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Accounting Definitions (Income) and Accounting Definitions (Expenses) - T, Continuation, Through Z

Tax Lien – This refers to the local government’s sequestration of a private property located within its territorial jurisdiction, with the intention of selling the same to public bidders as a means of collecting the unpaid real property taxes owed by the owner of the sequestered estate .

Tax Rate – The rate by which the applicable tax is computed after considering all allowable deductions and maximum limit of income to be recognized for certain transactions.

Tax Return – The government-prescribed form which every taxpayer is required to accomplish and submit before its designated deadline, as it contains all the details of the gross income, allowable deductible expenses, and exemptions reported and claimed by the taxpayer in order to arrive at his AGI.

Tax-Exempt – A condition that renders the income, goods, or services as non-taxable or tax-free.

Transaction – A trade or deal that transpires, resulting in an exchange of cash and commodities in which one party will gain an asset while the other party incurs an expense or liability.

U- V- W

Unearned Revenue – This refers to the payment received by a business not yet considered as income because of certain conditions that require completion before the transaction can be considered as fully negotiated. As an unearned revenue account, income is temporarily treated as a liability.

Voucher – An accounting form used as a basis for accounting entries generated by the act of replenishing and reporting all disbursements made using a particular fund (e.g. petty cash) or for liquidating travel advances and, in some cases, the payroll of a smaller unit.

W2 Form – The prescribed IRS tax form prepared by the employer to provide in detail the total gross salaries paid to every employee, including bonuses, commission, and profit shares as well as the total amount of withholding taxes, state taxes, and FICA taxes deducted from the total gross salaries. This shall be the employee’s source of information when filling out his Form 1040.

W4 Form – The prescribed IRS tax form prepared by the employee to provide the employer with up-to-date information about his Social Security number, his current status, his claims for exemptions, and number of tax allowances.

Warranty – A guarantee that comes along with a newly purchased product that the item can be returned in exchange for a replacement or a refund in case certain defects are discovered or a malfunction occurs after the purchase but within a specified period of time–unless the warranty is aptly described as a “lifetime warranty,” which denotes that there is no prescribed period.

Waste – Spoilage or unnecessary costs incurred as a result of errors or mishandling.

Windfall Profit – An unexpected income or gain which may be caused by a sudden change that does not affect the ordinary activities of the business.

Window Dressing – Term used to describe an illicit act of inflating the revenues of the company because the appearance of higher profits or positive results will bring substantial monetary benefits to the person committing such acts.

Withholding Tax –These are the income taxes due on the wages earned by the employee or of any payments made to external parties or contractors as said payments would form part of their income. The employer or payer is required to withhold said taxes to ensure their collection in favor of the government.

Additional Resource: See also this writer’s Glossary of Basic Accounting Terms: Balance Sheet Accounts and Transactions