J. Ott, Capital
This is an owner's equity account. The balance in this account reflects the owner's investment in this sole proprietorship plus the net income and minus the owner's draws since the company began. (The current year net income and draws may not yet be recorded in this account. The net income may still be in the temporary revenue and expense accounts and the draws may still be in J. Ott, Drawing, also a temporary account. The temporary accounts will be closed to J. Ott, Capital after the year's financial statements are prepared.)
J. Ott, Drawing
This is a contra owner's equity account, because it has a debit balance if draws were made. Even though it is a balance sheet account, it is a temporary account. At the end of each year the account's debit balance is closed to J. Ott, Capital.
JIT
Just-in-time.
job order cost sheet
This is a record on an individual job (product, batch) within the job costing system. For items in process this is a subsidiary record to the general ledger account work-in-process inventory.
job order costing
See job order system.
job order system
The cost accounting system where costs are recorded by individual job (versus process costing system). The job order system can use standard costs or actual costs.
joint cost
A common cost. Often used to refer to the costs prior to the point where several products emerge.
joint product
The products with significant value that emerge at a split-off point in a process. When a joint product has little value it is referred to as a by-product.
journal
The record of journal entries appearing in order by date. Some refer to the journal as the book of original entry, since the entries are first recorded in a journal. From the journal the entries will be posted to the designated accounts in the general ledger. With manual systems there are likely to be a sales journal, purchases journal, cash receipts journal, cash disbursements journal, and the general journal. With computerized accounting systems, it is likely that the general journal will be used sparingly. The software is likely to record the other transactions automatically as invoices are entered, checks are prepared, receipts processed, etc.
journal entry
The entry made in a journal. It will contain the date, the account name and amount to be debited, and the account name and amount to be credited. Each journal entry must have the dollars of debits equal to the dollars of credits.
journalize
To record accounting entries into a journal.
just-in-time
An effort to have materials delivered by suppliers just as the materials is needed, thereby eliminating the need for the buyer to store inventories of component parts. Obviously, the buyer is relying on the dependability of the supplier.
Accounting Terms (K)
kiting
This activity, which involves playing the float, is sometimes used when a company is facing an overdrawn checking account. Assume that a company has a checking account at NY Bank that is about to overdraw. To prevent the NY Bank checking account from overdrawing, the company deposits one of its checks drawn on its PA Bank. However, its PA Bank checking account does not have sufficient funds to cover the check that the company deposited in the NY Bank. To avoid its PA Bank checking account from overdrawing, the company deposits into its PA Bank checking account a check drawn on its NY Bank checking account. Of course there are not sufficient funds in the NY Bank account, so the company deposits into its NY Bank account a check drawn on its PA Bank account. This pattern will require the writing and depositing of much check until the company gets some money or until the scheme is detected. Banks have reduced the opportunity for kiting by clearing checks more quickly and by not paying checks until deposited checks have been in an account for several days.
Accounting Terms (L)
labor efficiency variance
See direct labor efficiency variance.
labor rate variance
See direct labor rate variance.
labor variances
See direct labor efficiency variance and direct labor rate variance.
land
A long-term asset account that reports the cost of real property exclusive of the cost of any constructed assets on the property. Land usually appears as the first item under the balance sheet heading of Property, Plant and Equipment. Generally, land is not depreciated.
land improvements
A long-term asset which indicates the cost of the constructed improvements to land, such as driveways, walkways, lighting, and parking lots. Land Improvements will be depreciated over their useful life by debiting the income statement account Depreciation Expense and by crediting the balance sheet account Accumulated Depreciation.
last in, first out (LIFO)
A cost flow assumption where the last (recent) costs are assumed to flow out of the asset account first. This means the first (oldest) costs remain on hand. To learn more, see Explanation of Inventory & Cost of Goods Sold.
A liability account that reports the amount payable as of the balance sheet date. For the account to show a balance a loss/obligation must be probable and the amount can be estimated. If the lawsuit is remote or only possible, it will not be shown as a liability. If the lawsuit is possible but not probable, it should be disclosed in the notes.
LCM
lead time
The time from when goods are ordered until the time when the goods are received.
learning curve
An expectation that as a task is repeated there will be significant time reductions during the early repetitions. The time savings will dissipate after continuous performance. This is important to consider when setting the direct labor standard cost.
lease
A legal agreement to pay rent to the lessor for a stated period of time. Sometimes the lease is in substance a purchase of an asset and a financing arrangement. For example, if a company agrees to lease a forklift truck for 60 months and the agreement cannot be canceled without purchasing the asset, it is possible the arrangement is more than a mere rental of equipment. See capital lease and operating lease.
leaseback
A company might construct a building and then sell the building to an investor who in turn leases the building back to the company.
leasehold improvements
Additions or changes to a rented building that are made by the tenant rather than by the landlord. The tenant will record the cost of these changes in the long term asset account Leasehold Improvements. The cost of these additions or changes should be depreciated over the remaining life of the lease.
least squares regression method
A mathematical technique that determines the best-fitting line through a series of points. This is used in regression analysis.
ledger
A "book" containing accounts. For example, there is the general ledger that contains the balance sheet and income statement accounts. There is a subsidiary ledger that contains the detailed, customer account balances for the general ledger account Accounts Receivable.
legal capital
The par value of common and preferred stock.
lessee
The person paying rent for using but not owning the asset.
lessor
The party owning an asset and receiving rent from another party (the lessee).
letter of credit
This is granted by banks only to very creditworthy customers. It states that the bank will guarantee amounts that its customer incurred when purchasing goods. A letter of credit might be necessary for a U.S. company wishing to purchase significant amounts of goods on a buying trip to the Pacific rim.
leverage
Using debt in order to control more assets.
liabilities
Obligations of a company or organization. Amounts owed to lenders and suppliers. Liabilities often have the word "payable" in the account title. Liabilities also include amounts received in advance for a future sale or for a future service to be performed. To learn more, see Explanation of Balance Sheet.
lien
A claim on another party's assets. For example, the bank will likely put a lien on your automobile if you want to borrow money and have no other collateral.
LIFO
LIFO conformity rule
A rule that requires that the same inventory cost flow be used on the financial statements as is used on the income tax return.
LIFO liquidation of layer
See liquidation of LIFO layer.
LIFO reserve
Usually the difference between the cost of inventory at LIFO versus the cost of inventory at FIFO.
limited liability company
A business organization different from a sole proprietorship, partnership, and corporation. As the name implies it provides the limited liability protection usually associated with a corporation. To learn more about this business structure, you should discuss this with a tax and legal professional.
line of credit
The amount that a bank commits to lend a borrower during a specified purpose.
linear programming
A mathematical tool to optimize profits (contribution margin) given a limited amount of inputs.
liquidation of LIFO layer
The reduction in inventory quantities resulting in the removal of older layers. With continuously higher costs, the older layers will have had the old, low costs under LIFO. Removing these old, low costs will cause an increase in profits and in taxable income. Therefore, it is important to be intentionally removing those old, low costs since this is likely to create an income tax payment that could have been avoided by not liquidating the old costs.
liquidity
The ability to generate cash.
liquidity ratios
Financial ratios such as current ratio, quick ratio, receivables turnover ratio, and inventory turnover ratio. To learn more, see Explanation of Financial Ratios.
LLC
See limited liability company.
loan amortization schedule
A multicolumn listing of each payment required during the period of a loan. Each payment is detailed by the amount of interest, the principal payment, and the remaining unpaid principal balance. The interest portion of the payment is based on the unpaid principal balance after the previous payment. Usually the total payment remains constant and each period the interest portion of the payment decreases and the principal portion of the payment increases.
loans receivable
An asset account in a bank's general ledger that indicates the amounts owed by borrowers to the bank as of a given date.
lock-box system
Usually involves a company's customers remitting amounts to a bank account close to the customers in order for the company to have collected funds sooner. For example, a company with its headquarters in the Midwest might have a bank account in New York for its east coast customers to mail in amounts owed. Similarly, the company may also have its west coast customers remit to a bank account in California. The company would have access to bank funds several days sooner with such an arrangement instead of all remittances being mailed to the Midwest.
long term assets
Noncurrent assets. Assets that are not intended to be turned into cash or be consumed within one year of the balance sheet date. Long term assets include long term investments, property, plant, equipment, intangible assets, etc.
long term investments
The balance sheet classification that is reported immediately after current assets and before property, plant, and equipment.
long term liabilities
Obligations of the enterprise that is not payable within one year of the balance sheet date. Two examples are bonds payable and long term notes payable.
loss
The result of the sale of an asset for less than its carrying amount; the write-down of assets; the net result of expenses exceeding revenues.
loss contingency
See contingent loss.
loss from reducing inventory to LCM
An income statement account used to record the amount that the asset Inventory is reduced when the current cost of items in inventory is less than the original cost of those items. To learn more, see Explanation of Lower of Cost or Market.
loss from labor strike
This loss is not an extraordinary item, since it is not unusual in nature. However, it can appear as a separate line item in the main portion of the income statement. It will be reported at its gross amount (not net of the tax savings).
loss from lawsuit
A non-operating or "other" reduction in net income resulting from a judgment against the company. It is shown in the accounting period when the amount is determined to be probable and the amount can be estimated. This means that the loss is likely to be shown earlier than the date that the payment is made. If the "loss" is only possible (not probable) it is disclosed in the notes to the financial statements rather than a reduction on the income statement and a liability on the balance sheet. If the "loss" is remote it is neither noted nor entered on the financial statements.
loss on sale of assets
This is a non-operating or "other" item resulting from the sale of an asset (other than inventory) for less than the amount shown in the company's accounting records.
loss on sale of computer
A non-operating item resulting from the sale of this long-term asset for less than its carrying amount (or book value).
loss on sale of equipment
A non-operating item resulting from the sale of this long-term asset for less than its carrying amount (or book value).
loss on sale of land
A non-operating item resulting from the sale of this long-term asset for less than its carrying amount (or book value).
loss on sale of truck
A non-operating item resulting from the sale of this long-term asset for less than its carrying amount (or book value).
losses
Losses result from the sale of an asset (other than inventory) for less than the amount shown on the company's books. Since the loss is outside of the main activity of a business, it is reported as a nonoperating or other loss. To learn more, see Explanation of Income Statement. The term losses are also used to report the write-down of asset amounts to amounts less than cost. It is also used to refer to several periods of net losses caused by expenses exceeding revenues.
lower of cost or market
In the context of inventory this means that the inventory should be reported at the lower of its cost or its replacement cost. The rule is associated with the conservatism guideline or principle. To learn more, see Explanation of Lower of Cost or Market (LCM).
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