Glossary of Terms

Amortization: refers to the expensing of acquisition costs (minus residual value) or an intangible asset. The term is also used to refer to the schedule of payments for a loan or mortgage. These are frequently referred to as loan amortization schedules. The schedules detail outstanding loan balance, payment per period, principal paid per period, and interest expense per period – through maturity or end of the lending period. See also depreciation.

Accrual accounting: reports on a transaction when it has an economic impact, regardless of whether it spends or receives cash. Said differently, under the accrual basis of accounting, revenues are reported when earned and expenses are reported when incurred, regardless of when payment is received or made. See also modified accrual  basis.

Adverse opinion: is an opinion made by an auditor that states that the financial statements do not fairly present the entity’s financial position, results of operations, or cash flows in conformity with generally accepted principles. Also see unqualified opinion,  qualified opinion, and  disclaimer of opinion.

Allocation basis: is an observable metric we can use to measure the relationship between direct and indirect costs within a cost center. For example, square footage is a metric that can be used to allocate rent or depreciation costs.

Assets: a resource with economic value owned by an individual, company, or government with the expectation it will provide future benefits. Assets are reported in the balance sheet in reducing order of liquidity

Bad debt expense: also known  as allowance for doubtful accounts  or allowance for uncollectable, is an estimate of receivables management expects will not be paid. Bad debt expense reduces the number of accounts receivable reported in the balance sheet and provides a more realistic picture of the amount management should expect will turn to cash as payments come due.

Balance sheets: present a summary of an organization’s assets, liabilities, and equity position at a particular point in time (e.g., as of December 31, 20XX). Also known as Statement of Financial Position or Statement of Net Position.

Bankruptcy: proceedings provide financially distressed municipalities with protection from creditors by creating a plan between the municipality and its creditors to resolve the outstanding debt.

Board-designated endowment: also known as a quasi-endowment, is a fund that functions like an endowment but without external restrictions. A nonprofits board may designate a portion of the nonprofit’s investments to a fund with a specific objective in mind (e.g., capital campaign, working-capital reserve). Boarddesignated funds will be reported under net assets “without donor restrictions.” See also net assets, true endowment, and term endowment.

Book value: reports the historical cost of an asset, net of depreciation. Book value is always less than historical cost. See also historical cost. 

Budgetary solvency:  refers to the government’s ability to create a balanced budget that provides enough revenues to pay for expenses that occur within the budget period. See also cash solvency.

Business-type activities:  also known as proprietary activities, are supported by user charges and fees for the goods and services it delivers. 

Budget resolutions: establish overall revenue and spending totals, allocate spending among major functions of government (e.g., national defense, transportation, health, and agriculture), set limits on resources for discretionary spending programs, and establish target levels for mandatory spending. Since the congressional budget resolution is an act of Congress, it does not require the President‘s signature. Since it does not go to the President, it also cannot enact spending or tax law. It, therefore, serves as a blueprint for the actual appropriation process and sets targets for other congressional committees that can propose legislation directly. 

Budget stabilization funds  (BSFs): also known as rainy-day funds (RDFs), allow state or local governments to set aside surplus revenue for use during unexpected deficits.  

Capital budget: is a state or local government’s budget that accounts for the acquisition of property and equipment and all costs related to infrastructure investments. See also operating budget. 

Capital improvement plan (CIP): is a physical and fiscal planning document that coordinates the timing and financing of capital improvements. CIPs identify long-term capital spending needs over a three-year or five-year period based on a review of existing infrastructure’s age, condition, degree of use, and capacity with recommendations to either renew, replace, expand, or retire capital improvements. See also operating budget and capital budget.

Capital Projects funds:  are used to account for and report financial resources that are restricted, committed, or assigned to the expenditure of capital outlays. Restricted or committed revenues may be initially received in another fund (e.g., General Fund), but must be subsequently transferred to the Capital Projects fund. See also, General Fund. 

Cash equivalents:  are investment securities that are meant for shortterm investing. They are highly liquid and of high credit quality. They include commercial paper andmarketable securities like money market mutual funds and overnight repurchase agreements (Repos). 

Cash Flow Statement:  presents a summary of how an organization receives and uses cash to fulfill its mission for a financial period (e.g., for the year ending December 31, 20XX). Also known as Statement of Cash Flows.

Cash solvency: is the government’s ability to generate and maintain cash balances to pay all its expenditures as they come due. See also budgetary solvency. 

Commercial paper: an unsecured promissory note issued by large corporations, with excellent credit ratings, with a fixed maturity rarely more than 270 days. 

Continuing resolution: a temporary measure that Congress uses to fund the federal government and avoid a government shutdown. 

Contingent liability: is a probable obligation that may or may not arise depending on how a future event (e.g., a lawsuit) unfolds. A contingent liability should be recorded as an expense or loss on the income statement and liability on the balance sheet, or otherwise disclosed in the notes to the financial statements. 

Cost accounting: also known as managerial accounting, is the process of creating information about costs to inform management decisions. Managers need good information about costs to set prices, determine how much of a good or service to deliver and manage costs in ways that make their organization more likely to achieve its mission.

Cost driver:  a factor that affects the cost of an activity. A good cost driver is a reliably observable quantity that shares a consistent relationship with the indirect cost in question and the basis for allocating indirect costs.  

Credit rating: an independent assessment a rating agency assigns to an issuer (or related bond) to indicate the likelihood the obligor will make payments on time and in full. Ratings range from Aaa/AAA to D – the lowest rating, typically indicating the issuer or obligor is in default 

Current assets:  are all the assets that are expected to be sold, used, or converted to cash within a year. Current assets include cash, shortterm investments, receivables, and inventory. See also non-current assets. 

Current liabilities: are all liabilities that need to be paid within a year. Current liabilities include accounts payable, accrued salaries (or wages payable), and the current portion of long-term debt. See also non-current liabilities.

Debt issuance costs: are costs paid by the issuer for services relating to the selling of municipal securities including general obligation bonds, revenue bonds, and notes payable to investors and managing elements of the transaction. Issuance costs include fees paid to a municipal advisor, credit rating agency, bond insurance, underwriter or underwriting syndicate, and bond counsel, to name a few. 

Debt  service: is the sum of principal and interest to be paid in the current period, given outstanding long-term debt obligations. On the occasion that the government issues municipal securities, the cost associated with debt issuance would be reported as debt service in the period incurred. 

Debt Service funds:  are used to account for and report financial resources that are restricted, committed, or assigned to principal and interest expenditures. Restricted or committed revenues may be initially received in another fund (e.g., General Fund), but must be subsequently transferred to the Debt Service fund. See also, General Fund. 

Deduction: is a dollar amount that reduces taxable income. Taxpayers have a choice of either taking a standard deduction or itemizing their deductions. 

Defaults: include technical default (failure to comply with bond contract provisions), pre-monetary default (unscheduled draws on debt service reserves), and the most severe type of default,  monetary default (failure to pay interest or principal). 

Deficit: or budget deficit, occurs when expenditures in the budget exceed revenues. A cyclical deficit is the result of a decline in revenues as a result of fluctuations in the economic cycle (e.g., an economic recession), and the expected increase in expenditures. A structural deficit is when a government‘s long-term spending exceeds its long-term revenues. It represents a mismatch between revenues generated by a government’s current tax laws to fund ongoing essential public services. A fundamental change in taxing and spending policies is required to eliminate a structural deficit. 

Deferrals: include  deferred inflow of resources and deferred outflow of resources. A deferred inflow of resources is the acquisition of net assets that apply to a future period, whereas a deferred outflow of resources is the consumption of net assets that apply to a future period. Deferred inflows are substantively different from unearned revenue.

Depreciation:  is the loss in value of a fixed asset (including improvements on land – such as site preparation, buildings, and infrastructure, office furniture, equipment, computers, and vehicles) with time, due to wear and tear. There are a wide variety of ways of estimating depreciation expense, including straight-line depreciation, accelerated method, declining balance, and sum-of-the-years method – all of which would produce different estimates of depreciation expenses. Depreciable assets include improvements on land, equipment, leased assets, etc. Non-depreciable assets include construction-in-progress, art, and land (except land bought for mining or extraction).  

Differential cost accounting: sometimes called marginal cost analysis , is the process of determining how a good or service’s full cost changes when we deliver more or less of it 

Disclaimer of opinion: states that the auditor does not express an opinion on the financial statements. Also see unqualified opinion, qualified opinion, and  adverse opinion 

Discretionary spending:  is government spending controlled in annual appropriation acts approved by Congress. See also  mandatory spending. 

Direct costs:  also known as traceable costs or controllable costs, are directly attributable to a cost center. They include salaries for staff who work entirely within a cost center, facilities and supplies used only by that cost center, training for cost center-specific staff, etc. Many public organizations further stipulate that a cost is direct to a cost center only if it can be controlled by that center’s management. See also indirect costs. 

Dividends:  represent payments made by a company to owners of the company’s stock. They represent the distribution of net income to investors and one of the ways investors earn a return from investing in stock. 

Effective tax rate: is the ratio of tax liability divided by taxable base (e.g., taxable income or market value of a property).

Fiduciary Fund Statements:  are prepared on a full accrual basis and include a Statement of Net Position and Statement of Changes in Net Position.

Fiscal accountability: is the government’s responsibility to justify that their actions in the current period have complied with public decisions concerning the raising and spending of public money in the short-term (usually one budgetary cycle or one year). See also operational accountability  (from GASB Statement No. 34).  

Fund:  a stand-alone, self-balancing set of accounts with a specific purpose. A fund is classified as a major fund if government officials believe that fund is particularly important to financial statement users (e.g., the General Fund) or whose revenues, expenditures/expenses, assets, or liabilities are at least 10 percent of corresponding totals for governmental or enterprise funds. See also,  General Fund. 

Filibuster: when an individual Senator kills a proposed bill by “talking it to death,” taking advantage of Senate rules allowing unlimited debate. Filibusters allow legislators to debate over a proposed piece of legislation to delay or entirely prevent a decision from being made on the proposal. 

Full cost accounting:  is the process of identifying a good or service’s full cost. The full cost of any service is the direct costs plus the indirect costs.

General Fund:  is a major fund  reported in the Governmental Fund Statements (GFS). The General Fund is frequently the largest fund reported in the GFS. It is used to account for unrestricted resources or resources that are not required to be accounted for in other funds. For a majority of state and local governments, it is the fund that will account for a large proportion of expenditures related to spending priority areas like education, public safety (police and fire), public health, and transportation. These are services that are paid for using unrestricted property and sales taxes.

General obligation bonds: are borrowing by state or local government, backed by its full faith and credit, which essentially means taxing powers. For local governments (and some state governments), voter approval via referendum is required for that entity to issue general obligation bonds. See also Revenue bonds. 

Governmental activities: are supported by taxes and other non-exchange revenues.

Governmental Fund Statements (GFS): are prepared on a modified accrual  basis and include a Balance Sheet and Statement of Changes in Revenues, Expenditures, and Fund Balances. Activities reported in the GFS are those that are generally financed with revenues from taxes, intergovernmental transfers, and other non-exchange or non-market transaction-based revenue sources. The General Fund is a major fund reported in the Governmental Fund Statements. See also Proprietary Fund Statements and Fiduciary Fund Statements.

Gross Domestic Product  (GDP): is a measure of the value of all the final goods and services produced in a specific period

Historical cost: costs incurred in the acquisition of non-financial assets. See also book value and market value. 

Indirect costs:  apply to more than one cost center. Some managers call them service center costs, internal service costs, or overhead costs because they are usually for support services provided within an organization. See also  direct costs.

In-kind contributions: are goods or services provided for free or at discounted rates. The market value of the in-kind contribution is recognized as revenue and expense in the budget period.

Income Statements: present a summary of an organization’s revenues, expenses, and profitability (or change in net assets) for a financial period (e.g., for the year ending December 31, 20XX). Also known as an Operating Statement, Profit and Loss Statement, Statement of Activities, Statement of Revenues, Expenditures, and Changes in Fund Balances, or Statement of Revenues, Expenses, and Changes in Net Position.  

Individual/interpersonal racism: pre-judgment, bias, stereotypes, or generalizations about an individual or group based on race. The impacts of racism on individuals include internalized privilege and oppression. Individual racism can result in illegal discrimination (source: Race and Social Justice Initiative, City of Seattle). See also institutional racism and structural racism. 

Institutional racism: Policies, practices, and procedures that work to the benefit of white people and the detriment of people of color, usually unintentionally or inadvertently (source: Race and Social Justice Initiative, City of Seattle). See also structural racism and individual/interpersonal racism. 

Intangible asset:  an asset, other than a financial asset, that lacks physical form. Examples include intellectual property, patents, copyrights, franchises, goodwill, trademarks, and software, to name a few. See also tangible asset.

Inventory: goods an organization intends to use, sell, or give away as part of delivering its services. 

Liability: sum of money an individual, company, or government owes to others. Liabilities are incurred as a result of general operations (e.g., accounts payable or accrued salaries) or the result of an investment in tangible assets (e.g., mortgages, loans, and bonds). Liabilities are reported in the balance sheet in increasing order of maturity. Maturity refers to the moment in time when payment is due. 

Line-item veto: Power possessed by an elected chief executive (e.g., governor) to reduce or reject selected items in an appropriation bill before signing the bill into law.  

Line of credit (LOC): sometimes referred to as a credit line  or overdraft facility, is a preset amount of money that a financial institution has agreed to lend either unsecured or secured (using fixed assets or receivables as collateral). Users can draw on the LOC as needed, up to the maximum amount. Interest expense is based on the amount borrowed and the period of use. To be liquid, organizations have to zero out (clean-up or clean-down) for at least 30 consecutive days. 

Liquidity: the ease with which an asset can be converted into cash with minimal loss in value. 

Long-run solvency: refers to the governments ability to pay for its long-term liabilities given its current taxing or revenue authority. See also budgetary solvency and service-level solvency. 

Mandatory spending: is government spending that is governed by existing law; it is not set by annual appropriation acts. That said, changes in the level of benefits have to be approved by Congress. See also  discretionary  spending 

Matching principle: is an accounting principle associated with the accrual basis of accounting that requires we recognize expenses in the income statement in the period in which the related revenues were earned. Additionally, if those expenses created a liability, that liability should appear in the balance sheet at the end of the accounting period.  

Market value: estimated value of an asset that a willing buyer would pay, and a willing seller would accept, in an open and competitive market. See also historical cost.    

Modified accrual accounting: is a hybrid of cash basis and full accrual basis of accounting. Under the modified accrual basis of accounting, revenues are recognized when they are both measurable (i.e., cash flow from the revenue can reasonably be estimated) and available (i.e., revenues are available to finance current expenditures within 60 days). Expenditures are to be recognized in the accounting period in which the fund liability is incurred, if measurable, except for interest on long-term liabilities, which should be recognized when due. The governmental fund statements are prepared using the modified accrual basis of accounting. See also accrual basis of accounting.

Money market mutual fund:mutual fund that invests in fixed-income securities with short maturities and minimal credit risk (i.e., high credit quality). Securities frequently include U.S. Treasury bills and commercial paper. Returns from money market funds are minimal but retain value with minimal volatility.  

Mortgage: is a debt instrument, secured with collateral of specified real estate property.

Municipal bond: isdebt security issued by the government or a governmental agency to finance capital improvements. Governments can issue two types of bonds:general obligation bonds which are backed by the taxing authority of the issuer or revenue bonds which are supported with a specific revenue stream (e.g., utility revenues, tuition fees or dormitory rents, patient revenues, or tolls). Nonprofits can issue revenue bonds via a special agency or public authority, including healthcare facility authorities, housing finance agencies, higher education facility authorities, and industrial development finance authorities.  

Mutual fund: investment instruments that pool money from multiple investors to invest in a diversified portfolio of financial investments (stocks and bonds).  

Net assets: represent the difference between assets and liabilities. Nonprofits will report net assets “without donor restrictions” and net assets “with donor restrictions.” The latter represents net resources the organization holds that are subject to a donor provision over time or use. These were previously reported as either temporarily restricted (over time or use) net assets or permanently restricted  (restricted in perpetuity) net assets. 

Net pension liability: represents the net obligation of retirement benefits a government owes its current employees, retirees, and beneficiaries. It represents the difference between the present value of projected retiree benefits and the assets, most investments, reported at fair value. If accumulated assets exceed projected benefits, a net pension asset  is reported instead.  

Net position:  represents the differences between assets and liabilities. Governments will report net position as net investment in capital assets, restricted net assets, and unrestricted net assets. Net investment in capital consists of capital assets, net of accumulated depreciation, reduced by outstanding balances of bonds, mortgages, notes, or other borrowings that are attributable to the acquisition, construction, or improvement of those assets. Restricted net position  consists of restricted assets reduced by liabilities and deferred inflows of resources related to those assets. The balance is reported under unrestricted net position,  which represents the sum of net assets, deferred outflows, liabilities, and deferred inflows that are not included in the determination of net investment in capital or restricted component of net position (see GASB Statement 63). 

Non-current assets: include assets that are not expected to be sold, used, or converted to cash within a year. Non-current assets include long-term receivables, investments (including restricted investments), and fixed assets. See also current assets. 

Non-current liabilities:  all liabilities that do not need to be paid within the current year. This will include long-term debt payable (net of the current portion) and pension liabilities. See also current liabilities. 

Notes payable:  unsecured short-term loans with maturities ranging from 18 months up to 60 months.  

Notes to the Financial Statements:  also known as footnotes to the financial statements, allow additional information and clarification to items presented in the basic financial statements (balance sheet, income state, and cash flow statement). It presents a summary of required disclosures, including accounting assumptions and any modifications that are material and relevant to financial disclosures, a discussion of financial policies, and a summary of upcoming transactions that may affect the organization’s long-term financial position. 

Operational accountability: is the governments responsibility to report the extent to which it has met its operating objectives efficiently and effectively, using all resources available for that purpose, and whether it can continue to meet objectives for the foreseeable future. See also fiscal accountability  (from GASB Statement No. 34). 

Operating budget:  a state or local government’s budget that accounts for recurring agency or program expenditures. See also capital budget.

Other financing sources:  reported in the governmental fund statements account for inflows and outflows of resources that affect fund balance that are neither a revenue nor expenditure. Other financing sources and uses include proceeds from the sale of assets, insurance recoveries, bond or loan proceeds, and transfers in from or out to other funds.  

Other Postemployment Benefits (OPEB):  are benefits (other than pensions) that state and local governments provide to retired employees. Benefits principally involve healthcare benefits (including dental, vision, and hearing), but may also include death benefits, life insurance, disability, and long-term care.  

Program revenue:  includes fees linked to programs for “exchange-like” transactions (e.g., fees the government charges for the goods and services it delivers) and grants and contributions (i.e., revenues from other governments). Grants are further broken out into operating grants and contributions and capital grants and contributions, with the latter dedicated to capital improvements and investments in infrastructure. See also general revenue. 

Proprietary Fund Statements: are prepared on a full accrual basis and include a Statement of Net Position and Statement of Revenues, Expenses, and Changes in Net Position.

Qualified opinion:  is an opinion made by an auditor that states that, except for a few issues to which the qualification applies, the financial statements present fairly, in all material respects, the entity’s financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. Also see unqualified opinion, adverse opinion, and  disclaimer of opinion. 

Race equity: if race can no longer be used to predict life outcomes, and outcomes for all groups improved (source: Race and Social Justice Initiative, City of Seattle). See also Racial inequity. 

Racial inequity: race can be used to predict life outcomes, e.g., disproportionality in education (high school graduation rates), jobs (unemployment rate), criminal justice (arrest and incarceration), etc. (source: Race and Social Justice Initiative, City of Seattle). See also Racial equity. 

Receivables: including accounts receivable, pledges receivable, and grants receivable,  represent monies owed to an organization as a result of a sale of goods or services (accounts receivable), promise to give (pledges receivable), or grant award (grants receivable). Receivables will be reported under current assets if payment is expected within the year; otherwise, they would be reported as non-current assets. 

Rescission:  The cancellation of budget authority previously provided by Congress. The Impoundment Control Act of 1974 specifies that the president may propose to Congress that funds be rescinded. If both Houses have not approved a rescission proposal (by passing legislation) within 45 days of continuous session, any funds being withheld must be made available for obligation. 

Realized gain (loss):  results from the selling of a financial asset at a price higher (lower) than the original purchase price or value of the financial asset at the start of the financial period.   

Repurchase agreement  (Repos): short-term borrowing, mainly in government securities. Specifically, one part sells an asset (usually fixedincome government securities) to another at one price and commits to buying them back, usually the following day, at a slightly higher price. 

Revenue bonds: borrowing by state or local government, government enterprises (e.g., water and sewer districts), and nonprofits (e.g., hospitals, museums, and private universities) that is secured with non-tax revenues of the issuer. Unlike general obligation bonds, revenue bonds do not require voter approval and governments do not guarantee repayment of bonds with revenues other than those included in the contract. See also general obligation bonds.  

Sequestration:  automatic spending cuts that occur through funding withdrawal for certain (but not all) government programs.  

Service-level solvency:  a governments ability to pay for all the costs of providing services at the level and quality that are required for the community’s health, safety, and welfare. See also budgetary solvency and  long-run solvency. 

Special Revenue funds:  used to account for and report on activities related to the use of resources that are restricted or committed for specified purposes other than debt service and capital projects. Those restricted or committed revenues may be initially received in another fund (e.g., General Fund), but must be subsequently transferred to a designated Special Revenue fund. Special Revenue funds should not be used to account for resources held in trust for individuals, private organizations, or other governments. These are reported under fiduciary funds. See also, General Fund. 

Statement of Functional Expenses:  an ancillary financial report used to show the relationship between expenses by type (e.g., salaries, payroll taxes) and key functional areas (e.g., programs, management and administration, and fundraising and development). Following the FASB issuance of Accounting Standards Update (ASU) 2016-14, all nonprofits are now required to present a functional expense report.  

Straight-line depreciation:   estimated by dividing the difference between the assets historical cost and its expected salvage value (or value at write-off) by the number of years it is expected to be used.  

Structural racism: The interplay of policies, practices, programs, and differing institutions leads to adverse outcomes and conditions for communities of color compared to white communities. It occurs within the context of racialized, historical, and cultural conditions (source: Race and Social Justice Initiative, City of Seattle). See also institutional racism and  individual/interpersonal racism.  

Supplemental appropriations: Appropriations bill that adds to an existing appropriation and is frequently adopted after the start of the budget year. Legislative bodies may find it necessary to approve additional budget authority for unforeseen contingencies such as natural disasters. 

Tangible asset:  an asset that has a finite monetary value and usually a physical form (e.g., property and equipment). See also intangible asset. 

Tax preference:  a provision in tax law that allows preferential treatment for certain taxpayers. They include exclusions, exemptions, deductions, preferential tax rates, credits, and deferrals. 

Unearned revenue: sometimes referred to as deferred revenue, represents revenue the organization has received for services it has yet to provide or goods that have not yet been delivered. If for any reason the organization is unable to deliver the goods or services, it will need to issue a refund to its customers or clients. That is why we recognize that revenue as a liability – the organization owes either goods/services or a refund. 

Unrealized gain (loss): records the change in the value of the financial assets if the price is higher (lower) than the original purchase price or value of that financial asset at the start of the financial period. Unrealized gains or losses exist on paper, as the financial assets have not been sold.

Unqualified opinion:  also known as a clean report, is an opinion made by an auditor that states that the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the entity in conformity with generally accepted accounting principles. Also see qualified opinion, adverse opinion, and  disclaimer of opinion 

Working capital: sometimes known as net working capital, is a measure of an organization’s liquidity position. It is the difference between current assets (such as cash, cash equivalents, investments, and receivables) and current liabilities (such as accounts payable and wages payable). Every organization needs working capital. It is the excess cash that allows the organization to pay its obligations as they come due, invest in new opportunities as they become available, and have the necessary cushion when payments by clients, donors, grantors, or taxpayers are not received on time or there is a decline in operations.  


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Financial Strategy for Public Managers Copyright © 2023 by Sharon Kioko and Justin Marlowe is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.