paid-in surplus: The amount received by a corporation for its stock in excess of the par or stated value.

par value of stock: The face amount of a stock share of a corporation as stated in the corporate charter.

parent company: A company that owns or maintains control over other companies, known as subsidiaries, which are themselves separate legal entities; control generally refers to more than 50 percent ownership of the stock of another company.

partnership: An association of two or more individuals or organizations to carry on economic activity.

partnership agreement: A legal agreement between partners; it usually specifies, among other things, the capital contributions to be made by each partner, the ratios in which partnership earnings and losses will be distributed, the management responsibilities of the partners, and the partners' rights to transfer or sell their individual interests.

par-value stock: Stock that has a nominal value assigned to it in the corporation's charter and printed on the face of each share of stock.

passive activity: The income tax treatment for passive activity income and losses is very specific. The IRS states the following; "Generally, you are in a passive activity if 1) you have a trade or business activity in which you do not materially participate during the tax year, or 2) you have a rental activity, even if you do materially participate in it (unless you are a real estate professional)." We will gladly assist you with tax planning concerning your investment activities.

patent: An exclusive right granted for 17 years by the federal government to manufacture and sell an invention.

patronage dividend: These are not true dividends. They represent a refund of part of your purchase of items from a cooperative. If you purchased items for personal use, the dividends are not taxable. If you purchased business items from the cooperative, dividends are taxable income to the business.

payee: The person (entity) to whom payment on a note is to be made.

P/E (price earnings) ratio: A measure of growth potential, earnings stability, and management capabilities; computed by dividing market price per share by earnings per share.

pension plan: A contract between a company and it employees whereby the company agrees to pay benefits to employees after their retirement.

periodic inventory method: A system of accounting for inventory in which cost of goods sold is determined and inventory is adjusted at the end of the accounting period, not when merchandise is purchased or sold.

perpetual inventory method: A system of accounting for inventory in which detailed records of the number of units and the cost of each purchase and sales transactions are prepared throughout the accounting period.

petty cash fund: A small amount of cash kept on hand for making miscellaneous payments.

physical safeguards: Physical precautions used to protect assets and records, such as locks on doors, fireproof vaults, password verification, security guards.

post-closing trial balance: A listing of all real account balances after the closing process has been completed; provides a means of testing whether total debits equal total credits for all real accounts prior to beginning a new accounting cycle.

posting: The process of transferring amounts from the journal to the ledger.

preemptive right: The right of current stockholders to purchase additional shares of stock in order to maintain their same percentage of ownership if new shares are issued.

preferred stock: A class of stock that usually provides dividend and liquidation preferences over common stock.

premium on stock: The excess of the issuance (market) price of stock over its par or stated value.

prepaid expenses: Payments made in advance for items normally charged to expense.

present value of $1: The value today of $1 to be received or paid at some future date given a specified interest rate.

present value of an annuity: The value today of a series of equally spaced, equal-amount payments to be made or received in the future given a specified interest rate.

price-earnings (P/E) ratio: A measure of growth potential, earnings stability, and management capabilities; computed by dividing market price per share by earnings per share.

primary financial statements: The balance sheet, income statement, and statement of cash flows, used by external groups to assess a company's economic standing.

prime interest rate: The interest rate that commercial banks charge their most credit-worthy customers for short-term, unsecured loans. This rate would generally be given to large corporations. The prime rate is used by many banks as the base from which they set rates for other loans.

principal (face value or maturity value): The amount that will be paid on a bond at a maturity date.

principal on a note: The face amount of a note; the amount (excluding interest) that the maker agrees to pay the payee.

prior-period adjustments: Adjustments made directly to Retained Earnings in order to correct errors in the financial statements of prior periods.

private mortgage insurance (PMI): Private mortgage insurance is a financial guaranty that protects lenders against loss in the event that a borrower defaults. It is the reason so many young families today can afford homeownership without waiting half their lives to save the amount required for a down payment.

probate: A process whereby a court validates one's will and oversees the distribution of the assets in accordance with the provisions of the will. Probate is a public event, and assets passing through probate are a matter of public record.

profitability: A company's ability to generate revenues in excess of the costs incurred in producing those revenues.

profit margin: Gross profit margin equals sales revenue minus cost of goods sold.

proforma (projected) statements: The traditional proforma statements were financial statements based on assumptions of future events in a business. In other words, the income statement and balance sheet would look like this or that if certain events happened. They were prepared by accountants and management to review the financial effects of proposed or estimated transactions.

progressive tax: A tax system under which the percentage of tax paid increases as the level of income being taxed increases. For example, the tax rate on up to $20,000 of taxable income is 15%, but the tax rate on $20,000 to $50,000 is 28%. The U.S. tax system is a progressive system.

promissory note: A written promise to pay a certain sum of money by a given date or to make payments at specific dates to another person or company. If the promissory note does not state a rate of interest, the Internal Revenue Service may impute (compute) an interest rate that creates interest income to the payee and an interest expense to the payer.

proof of loss: The submission of adequate information to an insurance company to allow it to determine the amount of money to be paid to the insured for a loss.

proper authorization: Policy regarding either a general class of transactions such as inventory or a specific transaction to achieve control objectives.

property dividend: The distribution to shareholders of assets other than cash.

property, plant, and equipment: Tangible, long-lived assets acquired for use in business operations; includes land, buildings, machinery, equipment, and furniture.

property, plant, and equipment turnover: A measure of how well property, plant, and equipment are being utilized in generating a period's sales; computed by dividing net sales by average property, plant and equipment.

proprietorship: A business owned by one person.

pro rata: A term describing an allocation that is based on a proportionate distribution of the total.

public companies: Entities whose stock is publicly traded.

purchase discount: A reduction in the purchase price, allowed if payment is made within a specified period.

purchase method: A method used to prepare consolidated financial statements when one company has acquired a controlling interest in another company with similar activities by exchanging cash or other assets for more than 50 percent of the acquired company's outstanding voting stock.

Purchase Returns and Allowances: A contra-purchase account used for recording the return of, or allowances for, previously purchased merchandise.

purchases account: An account in which all inventory purchases are recorded; used with the periodic inventory method.

purchases journal: A special journal in which credit purchases are recorded.

public accountant (PA): A designation used in some states for a person who is licensed to provide accounting services to the general public, but who is not a certified public accountant (CPA). In some states, PA is used to designate a Professional Association (Corporation), so you will see firm names such as "Jones and Smith CPAs, PA."

public offering: The sale of securities to the public as opposed to a private offering. Public offerings are regulated by state and federal securities laws. See also IPO.

pyramid scheme: Pyramid schemes, as currently defined by the Federal Trade Commission (FTC): "generally ignore the marketing and selling of products and services, and concentrate on the commissions you could earn just for recruiting new distributors." Pyramid schemes may or may not involve the sale of products. Some multi-level marketing (MLM) programs fall under this category. The term "pyramid" refers to illegal schemes.