Dictionary of...Accounting Terms
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labor efficiency variance
- See direct labor efficiency variance.
labor rate variance
- See direct labor rate variance.
labor variances
- See direct labor efficiency variance and direct labor rate variance.
land
- A long-term asset account that reports the cost of real property exclusive of the cost of any constructed assets on the property. Land usually appears as the first item under the balance sheet heading of Property, Plant and Equipment. Generally, land is not depreciated.
land improvements
- A long-term asset which indicates the cost of the constructed improvements to land, such as driveways, walkways, lighting, and parking lots. Land Improvements will be depreciated over their useful life by debiting the income statement account Depreciation Expense and by crediting the balance sheet account Accumulated Depreciation.
last in, first out (LIFO)
- A cost flow assumption where the last (recent) costs are assumed to flow out of the asset account first. This means the first (oldest) costs remain on hand. To learn more, see Explanation of Inventory & Cost of Goods Sold.
lawsuit payable
- A liability account that reports the amount payable as of the balance sheet date. For the account to show a balance, a loss/obligation must be probable and the amount can be estimated. If the lawsuit is remote or only possible, it will not be shown as a liability. If the lawsuit is possible but not probable, it should be disclosed in the notes.
LCM
- See lower of cost or market.
lead time
- The time from when goods are ordered until the time when the goods are received.
learning curve
- An expectation that as a task is repeated there will be significant time reductions during the early repetitions. The time savings will dissipate after continuous performance. This is important to consider when setting the direct labor standard cost.
lease
- A legal agreement to pay rent to the lessor for a stated period of time. Sometimes the lease is in substance a purchase of an asset and a financing arrangement. For example, if a company agrees to lease a forklift truck for 60 months and the agreement cannot be canceled without purchasing the asset, it is possible the arrangement is more than a mere rental of equipment. See capital lease and operating lease.
leaseback
- A company might construct a building and then sell the building to an investor who in turn leases the building back to the company.
leasehold improvements
- Additions or changes to a rented building that are made by the tenant rather than by the landlord. The tenant will record the cost of these changes in the long term asset account Leasehold Improvements. The cost of these additions or changes should be depreciated over the remaining life of the lease.
least squares regression method
- A mathematical technique that determines the best-fitting line through a series of points. This is used in regression analysis.
ledger
- A "book" containing accounts. For example, there is the general ledger that contains the balance sheet and income statement accounts. There is a subsidiary ledger that contains the detailed, customer account balances for the general ledger account Accounts Receivable.
legal capital
- The par value of common and preferred stock.
lessee
- The person paying rent for using but not owning the asset.
lessor
- The party owning an asset and receiving rent from another party (the lessee).
letter of credit
- This is granted by banks only to very creditworthy customers. It states that the bank will guarantee amounts that its customer incurred when purchasing goods. A letter of credit might be necessary for a U.S. company wishing to purchase significant amounts of goods on a buying trip to the Pacific rim.
leverage
- Using debt in order to control more assets.
liabilities
- Obligations of a company or organization. Amounts owed to lenders and suppliers. Liabilities often have the the word "payable" in the account title. Liabilities also include amounts received in advance for a future sale or for a future service to be performed. To learn more, see Explanation of Balance Sheet.
lien
- A claim on another party's assets. For example, the bank will likely put a lien on your automobile if you want to borrow money and have no other collateral.
LIFO
- See last in, first out (LIFO).
LIFO conformity rule
- A rule that requires that the same inventory cost flow be used on the financial statements as is used on the income tax return.
LIFO liquidation of layer
- See liquidation of LIFO layer.
LIFO reserve
- Usually the difference between the cost of inventory at LIFO versus the cost of inventory at FIFO.
limited liability company
- A business organization different from a sole proprietorship, partnership, and corporation. As the name implies it provides the limited liability protection usually associated with a corporation. To learn more about this business structure, you should discuss this with a tax and legal professional.
line of credit
- The amount that a bank commits to lend a borrower during a specified purpose.
linear programming
- A mathematical tool to optimize profits (contribution margin) given a limited amount of inputs.
liquidation of LIFO layer
- The reduction in inventory quantities resulting in the removal of older layers. With continuously higher costs, the older layers will have had the old, low costs under LIFO. Removing these old, low costs will cause an increase in profits and in taxable income. Therefore, it is important to be intentionally removing those old, low costs since this is likely to create an income tax payment that could have been avoided by not liquidating the old costs.
liquidity
- The ability to generate cash.
liquidity ratios
- Financial ratios such as current ratio, quick ratio, receivables turnover ratio, and inventory turnover ratio. To learn more, see Explanation of Financial Ratios.
LLC
- See limited liability company.
loan amortization schedule
- A multicolumn listing of each payment required during the period of a loan. Each payment is detailed by the amount of interest, the principal payment, and the remaining unpaid principal balance. The interest portion of the payment is based on the unpaid principal balance after the previous payment. Usually the total payment remains constant and each period the interest portion of the payment decreases and the principal portion of the payment increases.
loans receivable
- An asset account in a bank's general ledger that indicates the amounts owed by borrowers to the bank as of a given date.
lock-box system
- Usually involves a company's customers remitting amounts to a bank account close to the customers in order for the company to have collected funds sooner. For example, a company with its headquarters in the Midwest, might have a bank account in New York for its east coast customers to mail in amounts owed. Similarly, the company may also have its west coast customers remit to a bank account in California. The company would have access to bank funds several days sooner with such an arrangement instead of all remittances being mailed to the Midwest.
long term assets
- Noncurrent assets. Assets that are not intended to be turned into cash or be consumed within one year of the balance sheet date. Long term assets include long term investments, property, plant, equipment, intangible assets, etc.
long term investments
- The balance sheet classification that is reported immediately after current assets and before property, plant, and equipment.
long term liabilities
- Obligations of the enterprise that are not payable within one year of the balance sheet date. Two examples are bonds payable and long term notes payable.
loss
- The result of the sale of an asset for less than its carrying amount; the write-down of assets; the net result of expenses exceeding revenues.
loss contingency
- See contingent loss.
loss from reducing inventory to LCM
- An income statement account used to record the amount that the asset Inventory is reduced when the current cost of items in inventory is less than the original cost of those items. To learn more, see Explanation of Lower of Cost or Market.
loss from labor strike
- This loss is not an extraordinary item, since it is not unusual in nature. However, it can appear as a separate line item in the main portion of the income statement. It will be reported at its gross amount (not net of the tax savings).
loss from lawsuit
- A non-operating or "other" reduction in net income resulting from a judgment against the company. It is shown in the accounting period when the amount is determined to be probable and the amount can be estimated. This means that the loss is likely to be shown earlier than the date that the payment is made. If the "loss" is only possible (not probable) it is disclosed in the notes to the financial statements rather than a reduction on the income statement and a liability on the balance sheet. If the "loss" is remote it is neither noted nor entered on the financial statements.
loss on sale of assets
- This is a non-operating or "other" item resulting from the sale of an asset (other than inventory) for less than the amount shown in the company's accounting records.
loss on sale of computer
- A non-operating item resulting from the sale of this long-term asset for less than its carrying amount (or book value).
loss on sale of equipment
- A non-operating item resulting from the sale of this long-term asset for less than its carrying amount (or book value).
loss on sale of land
- A non-operating item resulting from the sale of this long-term asset for less than its carrying amount (or book value).
loss on sale of truck
- A non-operating item resulting from the sale of this long-term asset for less than its carrying amount (or book value).
losses
- Losses result from the sale of an asset (other than inventory) for less than the amount shown on the company's books. Since the loss is outside of the main activity of a business, it is reported as a nonoperating or other loss. To learn more, see Explanation of Income Statement. The term losses is also used to report the writedown of asset amounts to amounts less than cost. It is also used to refer to several periods of net losses caused by expenses exceeding revenues.
lower of cost or market
- In the context of inventory this means that the inventory should be reported at the lower of its cost or its replacement cost. The rule is associated with the conservatism guideline or principle. To learn more, see Explanation of Lower of Cost or Market (LCM).
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