Adjusting Entries Why Adjusting Entries Are Necessary Adjusting entries are required at the end of each accounting period so that a company’s financial statements reflect the accrual method of accounting. Without...
Adjusting Entries Why Adjusting Entries Are Necessary Adjusting entries are required at the end of each accounting period so that a company’s financial statements reflect the accrual method of accounting. Without...
How does petty cash affect expenses? Definition of Petty Cash Petty cash is a small amount of currency and coins that a company has available to make very small payments instead of requesting and processing a company...
Where does revenue received in advance go on a balance sheet? Definition of Revenue Received in Advance Under the accrual basis of accounting, revenues received in advance of being earned are reported as a liability. If...
What is net purchases? Definition of Net Purchases Net purchases refers to the combination of the amounts found in the following general ledger temporary accounts: Purchases (gross amount for goods purchased) Purchases...
How do you record the interest that is unpaid on a note payable? Definition of Interest Unpaid on Note Payable Interest that has occurred, but has not been paid as of a balance sheet date, is referred to as accrued...
What is the difference between revenue, income, and gain? Definition of Revenue Revenue is the amount earned from a company’s main operating activities, such as a retailer selling merchandise or a law firm providing...
What is ERP? Definition of ERP In accounting, ERP is the acronym for enterprise resource planning. ERP could be described as a database software package that supports all of a business’s processes and operations...
What is the meaning of pro rata? Pro rata is a Latin term that means in proportion. Pro rata is related to prorate, a term used in cost accounting. To illustrate the term pro rata, let’s assume that a company’s...
Our Explanation of Payroll Accounting discusses the taxes and benefits which are withheld from employees' pay as well as the taxes and benefits that are expenses for the employers. Also provided are examples of the...
What are prepaid expenses? Definition of Prepaid Expenses Prepaid expenses are future expenses that have been paid in advance. In other words, prepaid expenses are costs that have been paid but are not yet used up or...
What is petty cash? Definition of Petty Cash Petty cash or a petty cash fund is a small amount of money available for paying small expenses without writing a check. Petty Cash is also the title of the general ledger...
What is the working capital turnover ratio? Definition of Working Capital Turnover Ratio The working capital turnover ratio is also referred to as net sales to working capital. It indicates a company’s effectiveness in...
What is SG&A? Definition of SG&A SG&A is the acronym for selling, general and administrative. SG&A are the operating expenses incurred to 1) promote, sell, and deliver a company’s products and services, and 2) manage...
How do I record a loan payment which includes paying both interest and principal? Definition of a Loan Payment A loan payment is likely to consist of three amounts: Total payment amount Interest payment Principal payment...
What is the difference between an invoice and a voucher? Definition of an Invoice An invoice received from a vendor is a billing for goods or services that it had provided. The vendor’s invoice will include the...
What is a classified balance sheet? Definition of Classified Balance Sheet A classified balance sheet arranges the amounts from a company’s balance sheet accounts into a format that is useful for the readers. For...
What is the quick ratio? Definition of Quick Ratio The quick ratio is a financial ratio used to gauge a company’s liquidity. The quick ratio is also known as the acid test ratio. The quick ratio compares the total...
What is a budget? A budget is a financial plan for future activities. The budgets used in business often include a sales or revenues budget detailed by products or services, production budgets, budgets for each...
Is it acceptable for companies to use two methods of depreciation? Definition of Depreciation Methods There are various methods of depreciating assets that are used in a business. It is acceptable and common for...
What is carriage inwards? Definition of Carriage Inwards Carriage inwards refers to the transportation costs required to be paid by the purchaser when it receives merchandise it ordered with terms FOB shipping point....
How is petty cash reported on the financial statements? Definition of Petty Cash Petty Cash is a small amount of money that a company has available to pay small amounts without writing a company check. The money might be...
Is a postdated check considered to be currency? A postdated check—a check with a date that is later than the current date—is not considered to be currency. Further, the postdated check should not be reported as part...
What is meant by reconciling an account? Definition of Reconciling an Account Reconciling an account is likely to mean proving or documenting that an account balance is correct. Examples of Reconciling an Account When a...
What is the carrying amount? Definition of Carrying Amount The term carrying amount is also known as book value or carrying value. The term carrying amount is often used when there is a valuation account associated with...
What is NPV? Definition of NPV NPV is the acronym for net present value, which can be calculated as follows: The present value of the future cash inflows Minus the cash investment Example of NPV Assume that a company...
How do you reduce the break-even point? Definition of Break-even Point The break-even point is the number of units or amount of revenues needed for the company’s income statement to report zero net income or zero net...
How do you reduce a company's break-even point? Definition of Break-even Point The break-even point is the level of sales where a company’s income statement will report exactly zero net income. The level of sales can...
How is a voucher used in accounts payable? Definition of Voucher A voucher is often a prenumbered form used in the accounts payable department to standardize and enhance a company’s internal control over payments to...
Where is the discount on the purchase of office furniture recorded? Definition of Discount on Purchase of Office Furniture The discount on the purchase of office furniture that will be used by a company (as opposed to...
Our Explanation of Activity Based Costing illustrates how manufacturing overhead costs for a product will differ when costs are allocated using only the number of machine hours, as opposed to being allocated using the...
Our Explanation of Debits and Credits describes the reasons why various accounts are debited and/or credited. For the examples we provide the logic, use T-accounts for a clearer understanding, and the appropriate general...
Our Explanation of Bookkeeping provides you with a rich understanding of the recording of transactions. It then discusses the additional steps necessary for preparing accurate financial statements. This is great for...
Adjusting Entries For multiple-choice and true/false questions, simply press or click on what you think is the correct answer. For fill-in-the-blank questions, press or click on the blank space provided. If you have...
What is the difference between adjusting entries and closing entries? Definition of Adjusting Entries Adjusting entries are made at the end of the accounting period (but prior to preparing the financial statements) in...
Why does an inventory error affect two periods? Definition of Inventory Error An inventory error could be the result of any of the following: Omitting some items when physically counting inventory Double counting some...
What causes a reduction in Accumulated Depreciation? Definition of Accumulated Depreciation Accumulated Depreciation is a general ledger contra asset account associated with a company’s property, plant and equipment....
What is the accounting equation? Definition of Accounting Equation The accounting equation of a sole proprietorship is assets = liabilities + owner’s equity. For a corporation, the accounting equation is assets =...
What is payroll accounting? Definition of Payroll Accounting Payroll accounting involves a company’s recording of its employees’ compensation including: gross wages, salaries, bonuses, commissions, and so on that...
What is the difference between a bookkeeper and an accountant? Before I provide a distinction, you should be aware that some people use the words interchangeably. Even though I was the accountant, treasurer, and CFO of a...
Why are sales a credit? Definition of Sales In accounting, sales are revenues earned when a company transfers ownership of its goods to its customers. Under the accrual basis or method of accounting, the sale occurs when...
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