Ability to pay

Refers to the borrower's ability to make interest and principal payments on debts. See: Fixed charge coverage ratio. In context of municipal bonds, refers to the issuer's present and future ability to create sufficient tax revenue to fulfill its contractual obligations, accounting for municipal income and property values. In context of taxation, notion that tax rates should be determined according to income or wealth.

Abnormal returns

The component of the return that is not due to systematic influences (market-wide influences). In other words, abnormal returns are above those predicted by the market movement alone. Related: excess returns.

Absolute priority

Rule in bankruptcy proceedings requiring senior creditors to be paid in full before junior creditors receive any payment.

Absorbed

Used in context of general equities. Securities are "absorbed" as long as there are corresponding orders to buy and sell. The market has reached the absorption point when further assimilation is impossible without an adjustment in price. See: Sell the book.

Abusive tax shelter

A limited partnership that the IRS judges to be claiming tax deductions illegally.

Accelerated cost recovery system (ACRS)

Schedule of depreciation rates allowed for tax purposes.

Acceleration clause

A contract stating that the unpaid balance becomes due and payable if specific actions transpire, such as failure to make interests payments on time.

Accelerated depreciation

Any depreciation method that produces larger deductions for depreciation in the early years of a asset's life. Accelerated cost recovery system (ACRS), which is a depreciation schedule allowed for tax purposes, is one such example.

Acceptance

Contractual agreement instigated when the drawee of a time draft "accepts" the draft by writing the word "accepted" thereon. The drawee assumes responsibility as the acceptor and for payment at maturity. See: Letter of credit and banker's acceptance.

Accommodative monetary policy

Federal Reserve System policy to increase the amount of money available to banks for lending. See: Monetary policy.

Account

In the context of bookkeeping, refers to the ledger pages upon which various assets, liabilities, income, and expenses are represented. In the context of investment banking, refers to the status of securities sold and owned or the relationship between parties to an underwriting syndicate. In the context of securities, the relationship between a client and a broker/dealer firm allowing the firm's employee to be the client's buying and selling agent. See: Account executive; account statement.

Account balance

Credits minus debits at the end of a reporting period.

Account executive

The brokerage firm employee who handles stock orders for clients. See: Broker.

Account reconciliation

The reviewing and adjusting of the balance in a personal checkbook to match your bank statement.

Account statement

In the context of banking, refers to a summary of all balances.

In the context of securities, a summary of all transactions and positions (long and short) between a broker/dealer and a client. See also: Option agreement.

Accountant's opinion

A signed statement from an independent public accountant after examination of a firm's records and accounts. The opinion may be unqualified or qualified. See: Qualified opinion.

Accounting earnings

Earnings of a firm as reported on its income statement.

Accounting exposure

The change in the value of a firm's foreign currency-denominated accounts due to a change in exchange rates.

Accounting insolvency

Total liabilities exceed total assets. A firm with a negative net worth is insolvent on the books.

Accounting liquidity

The ease and quickness with which assets can be converted to cash.

Accounts payable

Money owed to suppliers.

Accounts receivable

Money owed by customers.

Accounts receivable financing

A short-term financing method in which accounts receivable are collateral for cash advances. See: Factoring.

Accounts receivable turnover

The ratio of net credit sales to average accounts receivable, which is a measure of how quickly customers pay their bills.

Accredited investor

Refers to a wealthy investor (net worth $7 million or annual income >200,000) who does not count to the maximum of 35 people allowed to invest in a private limited partnership.

Accretion (of a discount)

In portfolio accounting, a straight-line accumulation of capital gains on a discount bond in anticipation of receipt of par at maturity.

Accrual basis

In the context of accounting, practice in which expenses and income are accounted for as if they are earned or incurred, whether or not they have been received or paid. Antithesis of cash basis accounting.