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Engineering economy Terminologies

Accounting Equation

Assets=Liabilities+Owners' Equity+Revenue-Cost


Something of value that is woned

Balance Sheet

This statement shows Assets equal to Liabilities plus Owners' Equity at a point in time

Cash Flow Statement

This statement shows the receipts and disbursements to the cash account-the operating, investing, and
financing flows.


Expenses for materials, labor services, overhead, and other expenses. Costs are deductions from the
Income Statement; they are money flowing from the organization.

Direct Labor

A means of adding value to the product by changing the material, assembly, or other operation.

Direct Material

Direct material is found in the finished products.


Paid to shareholders after expenses and taxes have been paid.

Financial Statements

Reports derived from historical accounting records. The primary financial statements are the Income
Statement, the Balance Sheet, and the Cash Flow Statement. They show the financial health of the

Income Statement

This statement, also called a Profit and Loss Statement, shows Revenue less Costs, which equals Profit or
net income over a period of time.

Indirect Labor

Assists direct labor to perform its tasks. Indirect labor does not add value directly to the product.
Includes material-handling operators, inspectors, and maintenance.

Indirect Material

Necessary for making the product, but not found in the finished product. Examples are cutting fluid for
machine tools, bins and trays for moving and storing material, or wax paper or aluminum foil used in a
restaurant to prepare food.


A chronological record of financial events


A classification of financial events by individual accounts or categories in the Accounting Equation


Debt or obligation to pay for services or products

Net Profits or Net Income

Revenue less Costs or Expenses for a period of time. This may be a loss if costs are greater than revenues
for the period


Sometimes called burden. Costs other than material and labor necessary for producing and delivering
services and products. Includes such items as taxes, advertising, rent, management salaries, and
administration costs

Owners' Equity or Net Worth

The net value of an organization measured by subtracting liabilities from assets at a point in time

Retained Earnings

Funds kept in the organization after dividends are paid


Income from the sale of products or services. Other revenue may include interest and dividend income,
sale of assets, or other sources. It is money flowing into the organization.

Accelerated Cost Recovery System

A depreciation method based on a schedule created by Congress in the early 1980s to replace previous
accelerated methods such as SOYD and DB

Accounting Equation

Assets=Owners' Equity+Liabilities+Revenue-Cost
Accrual System

Recognizing sales and expenses when they occur even though they are credit transactions


The reduction in value over time of intangible assets such as patents, copyrights, leasehold
improvements, franchise rights, or other nonphysical assets.

Appraised Value

The estimated market value of an asset

Book Value

The value of the asset determined by subtracting the accumulated depreciation expenses from the
asset's initial value.


First recognizing expenditures as assets and then reducing them in value over time. The value reduction
creates an expense on the Income statement.

Cash Accounting system

Recording the financial event only when cash is received or disbursed.

Declining Balance Method

A mathematical depreciation method that creates high depreciation expense in the early years and lower
amounts in the later years by multiplying the straight-line depreciation amount by a factor between 1
and 2

The reduction in value of natural resources occurring with land, such as oil, minerals, gas or timber.


Reducing fixed assets such as equipment or buildings in value over time. The reduction in value is
entered as an expense in the cost category of the Income Statement.


Creating expenses in the cost category of the Income statement as soon as the expenditures are made.

Group Depreciation

Combining similar assets to calculate total depreciation expenses.

Intangible Assets

Economic and legal rights in long-life, nonphysical assets, including copyrights, patents, franchises, and
leasehold improvements

Market Value

The actual price/value when an asset is sold.


Attempting to have expenses and associated revenues for products and services sold appear on the
financial statements during the same period.

Modified Accelerated Cost Recovery Systems

A system that replaced ACRS in the 1986 Tax Code Revisions. It is based on a schedule of lives and
categories of assets to determine the annual depreciation expense values.

Financial percentages or fractions from financial statements used to analyze and compare statements of
different organizations or the same organization at different periods.

Salvage Value

The estimated value of the asset when it is no longer used by the organization. Approximates the future
market value of the asset.

Straight-line Method

A depreciation method that reduces the asset value at a constant rate over its life.


A mathematical depreciation method that creates high depreciation expense in the early years of the
asset's life and low depreciation expense in the later years.

Unit-of-Output or Use Method

Depreciation expenses calculation based on the fractional use of the asset's estimated total output or
capacity during its life.