Accounting Terms (E)

Earned

Under accrual accounting an item has been "earned" and is reported as revenue when a service has been performed or the ownership to a product has been transferred from the seller to the buyer (not when cash is received).

Earnings per share (EPS)

This financial statistic is the net income of a corporation after income tax (less any preferred dividends) divided by the weighted average number of shares of common stock outstanding during the same period of time.

Earnings quality

See quality of earnings.

Economic entity assumption

An accounting principle/guideline that allows the accountant to keep the sole proprietor's business transactions separate from the owner's personal transactions even though a sole proprietorship is not legally separate for the owner.

Economic life

Also referred to as the useful life. This differs from the physical life of an asset. For example, a computer may have a physical life of 50 years, but its economic or useful life might be five years.

Economic lot size

The optimum purchase (or production) quantity which minimizes the combined total cost of carrying inventory and processing additional purchase orders (or production setups).

Economic order quantity (EOQ) model

A formula that calculates the optimum quantity to be purchased (or produced) so as to minimize the combined total cost of carrying inventory and processing additional purchase orders (or production setups). The formula for the EOQ model is the square root of [(2 X Units of Annual Demand X Cost to Place an Order or Setup) divided by Carrying Cost per Unit].

Effective interest rate method of amortization

The preferred method for systematically moving bond discount or premium from the balance sheet over to interest expense on the income statement over the life of the bond. This method is superior to the straight-line method of amortization, because it causes interest expense to be in tandem with the book value of the bonds. In other words, under this method bond interest expense on the income statement will decrease when the book value of the bonds decreases on the balance sheet. Bond interest expense will increase as the book value of the bonds increases. For an illustration of the effective interest rate method of amortizing the discount on notes receivable click here.

Efficiency variance

See direct labor efficiency variance and variable manufacturing overhead efficiency variance.

eighty/twenty rule

An observation that oftentimes 20% of the quantity account for 80% of the value. Examples: 20% of the people may have 80% of the wealth; 20% of the members do 80% of the work; 20% of the items in inventory account for 80% of the sales; 20% of your customers generate 80% of your sales; 20% of your customers cause 80% of your headaches, etc.

This rule allows managers to monitor 80% of the value by monitoring approximately 20% of the items.

EFT

See electronic funds transfer.

Electronic funds transfer (EFT)

A method of payment used in place of a paper check.

Employee fringe benefits

Benefits given to employees that is in addition to wages and salaries. Examples include health, dental, life, vision, and disability insurances, employer's portion of social security and Medicare tax, paid absences (sick days, holidays, and vacation days), pension or retirement contributions, unemployment tax, worker compensation insurance, profit sharing, and other benefits. These benefits often are equal to 50% of the wages and salaries.

Employer payroll taxes

Employer payroll taxes include an employer's portion of social security and Medicare taxes and the state and federal unemployment taxes.

EOM

End of month.

EOQ

Economic order quantity (EOQ) model.

EPS

Earnings per share.

Equipment

Equipment is a noncurrent or long-term asset account which reports the cost of the equipment. Equipment will be depreciated over its useful life by debiting the income statement account Depreciation Expense and crediting the balance sheet account Accumulated Depreciation (a contra asset account).

Equipment rental expense

The expense incurred during the time interval indicated on the income for using rented equipment.

Equivalent units of production

A term used in cost accounting to arrive at the cost per unit. The term is associated with the units that are not completed at the end of an accounting period. For example, if 500 units are completed as far as materials, but are only 40% completed as far as direct labor and manufacturing overhead, the equivalent units are 500 for materials and 200 (40% of 500) for direct labor and manufacturing overhead.

escrow

Money set aside for a specific purpose. An individual's monthly mortgage payment might include $300 per month for the real estate taxes due at the end of the year. The $300 is said to be put into escrow each month.

estimates

Approximate amounts. Accountants use estimates for depreciation expense, warranty expense, bad debt expense, monthly accruals for utilities, bonuses, income taxes, etc. Also see change in accounting estimate.

estimating inventory

To learn more, see Explanation of Inventory & Cost of Goods Sold.

exchange of dissimilar nonmonetary assets

The exchange or trade-in of a long-term asset for a completely different long-term asset. For example, exchanging an antique car for land.

exchange of similar nonmonetary assets

The exchange or trade-in of a long-term asset for a similar long-term asset. For example, trading the old delivery truck for a new delivery truck; trading a two-family rental unit toward an eight-family rental unit.

undivided

The day after the record date for a cash dividend on shares of stock. Theoretically, the market price of the stock should drop on this day by the amount of the dividend.

expanded accounting equation

See Explanation of Accounting Equation.

expected value

The sum of future amounts multiplied by their respective probabilities of occurrence.

expenditure

A payment. The expenditure might be for a significant long term asset (capital expenditure), a short term asset (prepaid insurance), a reduction in a liability, or for an immediate expense such as rent.

expenses

Costs that are matched with revenues on the income statement. For example, Cost of Goods Sold is an expense caused by Sales. Insurance Expense, Wages Expense, Advertising Expense, Interest Expense are expenses matched with the period of time in the heading of the income statement. Under the accrual basis of accounting, the matching is NOT based on the date that the expenses are paid.

Expenses associated with the main activity of the business are referred to as operating expenses. Expenses associated with a peripheral activity are nonoperating or other expenses. For example, a retailer's interest expense is a nonoperating expense. A bank's interest expense is an operating expense.

Generally, expenses are debited to a specific expense account and the normal balance of an expense account is a debit balance. When an expense account is debited, the account credited might be Cash, Accounts Payable, or Prepaid Expense depending on whether cash was paid at the time of the expense, the payment will be made after the expense was incurred, or the expense was paid in advance. To learn more, see Explanation of Income Statement.

expenses and losses

A classification on a single-step income statement for both operating and nonoperating expenses and losses that pertain to the time interval shown in the heading of the income statement.

expired

Costs that have been used up or consumed. Expired costs are reported as expenses. (Costs that have not yet expired are reported as assets.)

exploding the bills of materials

Multiplying the individual items contained in each bill of material times the number of units expected to be produced during a specified time period. The result is the total quantity of each input that will be needed for the expected production.

extension or extend

In accounting this refers to the multiplication of quantity times price, or (number of units) times (price or cost per unit).

extinguishment of debt

To eliminate debt such as a company's repurchase or retirement of its outstanding bonds.

extraordinary item - gain

A gain that is unusual in nature and infrequent in occurrence. This item is reported in a separate section of the income statement. The amount reported is net of (reduced by) the associated income tax expense.

extraordinary items

These are income statement items that are unusual in nature and infrequent in occurrence. Examples include a loss from an earthquake in Wisconsin and a loss from a country taking over a company's oil refinery.

The amounts shown on the income statement will include the gross amount and the net amount after deducting the income tax expense or savings associated with the item. Extraordinary items will appear on the income statement near the end of the income statement after discontinued operations and before the cumulative effect from a change in an accounting principle. Extraordinary items will also be shown on a per share basis, if the company's stock is publicly traded.

extraordinary loss

A loss that is unusual in nature and infrequent in occurrence. This item is reported in a separate section of the income statement and is reported at an amount that is net of (reduced by) the associated reduction in income tax expense.

extraordinary repair

A major repair such as an engine overhaul, which will extend the useful life of the asset. The amount should be recorded in the asset account and then depreciated over the remaining life of the asset. This should not be confused with an extraordinary item.