What is a trial balance? Definition of a Trial Balance A trial balance is a bookkeeping or accounting report that lists the balances in each of an organization’s general ledger accounts. (Often the accounts with zero...
What is a trial balance? Definition of a Trial Balance A trial balance is a bookkeeping or accounting report that lists the balances in each of an organization’s general ledger accounts. (Often the accounts with zero...
Is the cost of goods sold an expense? Why the Cost of Goods Sold is an Expense We often think of expenses as salaries, advertising, rent, commissions, interest, and so on. However, the cost of goods sold is also an...
What is inventory? Definition of Inventory Inventory is a very significant current asset for retailers, distributors, and manufacturers. Inventory serves as a buffer between 1) a company’s sales of goods, and 2) its...
What is cash from operating activities? Definition of Cash from Operating Activities Cash from operating activities usually refers to the first section of the statement of cash flows. Cash from operating activities...
What is the free cash flow ratio? Definition of Free Cash Flow Free cash flow for a year is an amount (as opposed to a ratio or percentage) usually defined as: net cash provided by operating activities for the year minus...
Why is there a large difference between share value and stockholders' equity? There can be many reasons why the market value of a corporation’s stock is much greater than the amount of stockholders’ equity reported...
How can a company with a net loss show a positive cash flow? Definition of Net Loss A net loss occurs when a company’s revenues and gains are less than its operating expenses, other expenses and losses. The net loss or...
Why will some asset accounts have a credit balance? Definition of Asset Account Balances In accounting, asset accounts normally have debit balances. That is, the general ledger accounts for assets typically have their...
What causes a corporation's market value to be greater than its book value? One cause of a corporation’s market value being greater than its book value is the accountant’s cost principle. In order for an item to be...
What is the accrual basis of accounting? Definition of Accrual Basis of Accounting Under the accrual basis of accounting (or accrual method of accounting), revenues are reported on the income statement when they are...
What is comprehensive income? Definition of Comprehensive Income Comprehensive income for a corporation is the combination of the following amounts which occurred during a specified period of time such as a year,...
Is income tax an expense or liability? Definition of Income Tax In the accounting for a regular U.S. corporation, income tax usually refers to the federal, state, local, and foreign countries’ taxes that are levied...
How do you account for the rebate on an automobile? The rebate on the purchase of an automobile should be recorded as a reduction of the automobile’s cost. The lower automobile cost will result in lower depreciation...
Does a dividend reduce profit? Definition of Dividend A dividend declared by a corporation is a distribution to its stockholders of the profits the corporation had earned. Since the dividends are not an expense, the...
What is principles of accounting? Three meanings come to mind when you ask about principles of accounting… Principles of accounting was often the title of the introductory course in accounting. It was also common for...
Why is an amount in the cash flows from investing activities shown in parenthesis? An amount shown in parenthesis within the investing activities section of the cash flow statement indicates that cash was used to...
What is work-in-process inventory (WIP)? Definition of Work-in-process Inventory Work-in-process (WIP) inventory pertains to the goods for which the manufacturing has begun, but not yet completed. In other words, WIP is...
At what point are revenues considered to be earned? Revenues, which are derived from an entity’s main activities such as the sale of merchandise or the performance of service, are considered to be earned when the...
What is a temporary account? Definition of Temporary Account A temporary account is a general ledger account that begins each accounting year with a zero balance. Then at the end of the year its account balance is...
What is Additional Medicare Tax? Definition of Additional Medicare Tax The Additional Medicare Tax is one of the U.S. government’s payroll withholding taxes that is paid solely by employees and the self-employed. In...
Is there a difference between the accounts Purchases and Inventory? Purchases Account Under the Periodic Inventory System The general ledger account Purchases is used to record the purchases of inventory items under the...
What are the notes to the financial statements? Definition of Notes to Financial Statements The notes to the financial statements are a required, integral part of a company’s external financial statements. They are...
How do I record exterior cement work? Is it an asset or an expense? If the cement work was done to repair or maintain existing cement work, then the expenditure should be recorded as an expense. Even if the cost is very...
Why are some expenses deferred? Definition of Deferred Expenses Under the accrual basis of accounting, an expense is a cost that is used up, has expired, or is directly related to revenues reported on a company’s...
What are sundry expenses? Definition of Sundry Expenses In accounting and bookkeeping, sundry expenses are expenses that are small in amount and rare in occurrence. For these rare and insignificant expenses, a company...
What does it mean to replenish the petty cash fund? Definition of Replenishing Petty Cash Replenishing the petty cash fund means the petty cash custodian requests and receives cash from the company’s regular checking...
How are the balance sheet and income statement connected? Connection between Balance Sheet and Income Statement The connection between the balance sheet and the income statement results from: The use of double-entry...
What is a nominal account in accounting? Definition of Nominal Account In accounting, nominal accounts are the general ledger accounts that are closed at the end of each accounting year. The closing process transfers...
What is a cash cow? A cash cow is often a profitable product or service that dominates a market and generates far more cash than is needed to maintain its market position. Companies may use the money from the cash cow to...
How are dividends paid when there are dividends in arrears? Definition of Dividends in Arrears Dividends in arrears exist when a corporation has: Cumulative preferred stock Omitted past dividends on the cumulative...
What is burn rate? In business, burn rate is usually the monthly amount of cash spent in the early years of a start-up business. Burn rate is an important metric since the new business must spend time and money...
How do you calculate the cost of goods sold for a retailer? Formula for Calculating a Retailer’s Cost of Goods Sold A retailer’s cost of goods sold is: The cost of the retailer’s beginning inventory Plus the cost...
Is a utility bill an expense? The utility bill for a retailer or for a service company is an expense. Under the accrual basis of accounting, the utility bill is an expense for the period indicated by the meter reading...
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...
Why would a business change its chart of accounts? There can be several reasons for a business to change its chart of accounts. One reason for changing the chart of accounts is to better match how the business is...
Is the drawing account a capital account? Definition of Drawing Account A sole proprietorship will have a drawing account in which the owner’s withdrawals or draws of cash or other assets are recorded. The amounts of...
What are accrued revenues and when are they recorded? Definition of Accrued Revenues Accrued revenues include service revenues, interest income, sales of goods, etc. which have been earned by a business, but the...
Are sales discounts reported as an expense? Definition of Sales Discounts Sales discounts are also known as cash discounts or early payment discounts. Sales discounts (along with sales returns and allowances) are...
What to do with the balance in Allowance for Doubtful Accounts? Definition of Allowance for Doubtful Accounts The Allowance for Doubtful Accounts is a contra asset account that is used with the balance in Accounts...
How do you record bonds that are issued? Definition of Bonds Payable Bonds payable is a form of long-term debt often issued by large corporations especially public utilities when constructing large, expensive power...
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