Archives: Glossary

Has two meanings. First, the process of recording, summarizing and reporting financial transactions. Second, in law, an accounting is a detailed statement of transactions that a fiduciary — such as a trustee, executor or partner — must give, and that a court can order as an equitable remedy. Under the Uniform Trust Code, in states that have adopted it, a trustee must keep qualified beneficiaries reasonably informed about the trust’s administration (Uniform Trust Code § 813); state versions vary.

To compare two sets of records — such as a bank statement and a company’s own ledger — to confirm they agree and to identify and explain any differences. A reconciliation is the document or process that does this.

A chronological record that allows a transaction to be traced from its source documents through each step of processing to final reports, showing who did what and when. In electronic systems, audit trails and metadata can help authenticate records, for example by evidence describing a process or system and showing that it produces an accurate result (Fed. R. Evid. 901(b)(9)).

An independent examination of financial statements, records or procedures to determine whether they are accurate and follow applicable standards. Audits of financial statements follow auditing standards such as GAAS or PCAOB standards. A tax audit is an IRS examination of a return; the IRS is authorized to examine books and records to determine the correctness of a return (26 U.S.C. § 7602).

What a party obtains through a lawsuit, settlement or other legal process, such as money damages or the return of property. In accounting, a recovery is an amount collected on a debt that was previously charged off.

An accounting entry in which a creditor writes off a debt as a loss on its books because it does not expect to collect it. Federal banking regulators’ policy generally calls for open-end retail credit, such as credit cards, to be charged off after 180 days past due. A charge-off does not cancel the debt: the borrower still owes it unless it is paid, settled, discharged in bankruptcy or otherwise forgiven, and the creditor may still try to collect it or sell it, subject to limits such as the statute of limitations.

Another word for setoff: reducing one obligation by another. In federal collections, the government can offset — withhold — certain federal payments to collect delinquent debts through the Treasury Offset Program. Agencies may offset federal payments for debts owed to the United States, and, by agreement, certain debts owed to states (31 U.S.C. § 3716). Federal tax refunds may be reduced for debts owed to federal agencies, past-due child support, and certain state income tax and unemployment compensation debts (31 U.S.C. § 3720A; 26 U.S.C. § 6402).

A right to reduce an amount owed to another person by an amount that person owes in return, so that only the difference is paid. For example, a bank may set off a customer’s deposit against a matured debt the customer owes the bank, subject to legal limits. The Bankruptcy Code preserves certain prepetition setoff rights, with exceptions (11 U.S.C. § 553). Also called offset.

A book or electronic record in which a business records its financial transactions by account. A general ledger summarizes all of a business’s accounts. In court, ledgers are often offered as records of a regularly conducted activity, which may be admissible under the hearsay exception in Fed. R. Evid. 803(6) if the foundation requirements are met.

Generally accepted accounting principles — the standards U.S. businesses and nonprofit organizations use to prepare financial statements (state and local governments follow separate GASB standards). They are set by the Financial Accounting Standards Board (FASB) and organized in the FASB Accounting Standards Codification. The Securities and Exchange Commission recognizes FASB’s standards as generally accepted for purposes of the federal securities laws.