Financial Dictionary

A 401(k) is a workplace retirement savings plan in the United States, named after a section of the tax code, that lets employees save part of their pay with tax advantages, often with contributions added by the employer.

The 50/30/20 rule is a simple budgeting guideline that suggests dividing take-home pay into three parts: about 50% for needs, 30% for wants and 20% for savings and extra debt repayment.

A 529 plan is a tax-advantaged savings plan in the United States designed to help families save for education costs, such as college tuition, in which investments grow tax-free and withdrawals for qualified education expenses are not taxed.

An abandonment option is a company's ability to stop a project before its planned end, and recover some value by selling assets or cutting losses, if the project performs worse than expected.

Absolute advantage is the ability of a country, business or person to produce more of a good or service than others using the same amount of resources.

Absorption costing is a method of calculating product costs that includes all manufacturing costs, both variable and fixed, in the cost of each unit produced.

Accelerated depreciation is a method of depreciation that charges more of an asset's cost in the early years of its life and less in later years, compared with spreading the cost evenly.

Accounting is the process of recording, organising and reporting a business's financial transactions so that owners, managers, investors, lenders and governments can understand its financial position and performance.

The accounting equation states that a business's assets equal its liabilities plus its equity. Everything a business owns is financed either by borrowing or by its owners.

An accounting estimate is an approximation of an amount in the financial statements that cannot be measured precisely and depends on judgment about future events, such as bad debts, warranty costs or an asset's useful life.

Accounting fraud is the deliberate manipulation of a company's financial statements to mislead investors, lenders, regulators or others about its financial performance or position.

An accounting policy is a specific principle, rule or practice a company chooses and applies in preparing its financial statements, such as how it values inventory or recognises revenue.

Also known as: Trade Payables

Accounts payable is the money a business owes to its suppliers for goods or services it has received but not yet paid for.

Also known as: Trade Receivables

Accounts receivable is the money customers owe a business for goods or services they have received but not yet paid for.

An accredited investor is a person or organisation that meets financial or professional criteria set by regulators, allowing them to invest in certain private offerings not available to the general public. The term is used mainly in the United States.

Accretion/dilution analysis shows whether an acquisition is expected to increase or decrease the acquiring company's earnings per share.

Accrual accounting records income when it is earned and expenses when they are incurred, regardless of when cash actually changes hands.

Accrual quality is the extent to which a company's accrual-based accounting profits are reliably backed by cash flows, rather than by estimates and adjustments that may later prove wrong.

An accrued expense is a cost a business has already incurred but has not yet paid or been billed for by the end of the reporting period.

Accrued interest is the interest that has built up on a bond, loan or deposit since the last interest payment, but has not yet been paid.

Accrued revenue is income a business has earned by delivering goods or services but has not yet billed or received by the end of the reporting period.

Accumulated depreciation is the total depreciation charged on an asset since it was bought. It is subtracted from the asset's original cost to show its current book value.

In card payments, an acquirer is the bank or financial institution that enables a merchant to accept card payments, processing transactions on the merchant's behalf and depositing the funds into its account.

An acquisition is a transaction in which one company buys a controlling stake in, or all of, another company or its assets.

Active investing is an investment strategy in which a manager or investor selects investments and adjusts holdings in an attempt to outperform a benchmark index.

Active share is a measure of how much a fund's holdings differ from its benchmark index, expressed as a percentage from 0%, identical to the index, to 100%, no overlap at all.

Activity-based costing (ABC) is a method of assigning overhead costs to products or services based on the activities they actually use, such as machine setups, inspections or orders processed, rather than a single broad measure such as labour hours.

An actuary is a professional who uses mathematics, statistics and financial theory to measure and manage risk and uncertainty, especially in insurance, pensions and investments.

Also known as: ARM

An adjustable-rate mortgage (ARM) is a home loan, common in the United States, whose interest rate is fixed for an initial period and then changes at regular intervals in line with a benchmark interest rate.

Adjusted EBITDA is earnings before interest, taxes, depreciation and amortization, further adjusted to exclude items that management considers unusual, non-recurring or non-cash, such as restructuring costs and share-based compensation.