equation will remain in balance. (The accounting equation is: Assets = Liabilities + Stockholders’ Equity.) Types of General Ledger Accounts The accounts in the general ledger of a corporation consist of two major...
equation will remain in balance. (The accounting equation is: Assets = Liabilities + Stockholders’ Equity.) Types of General Ledger Accounts The accounts in the general ledger of a corporation consist of two major...
Long-term assets that are reported under the classification of property, plant, and equipment on a company’s balance sheet. These assets are depreciated over their useful life.
The ratio of total liabilities to total assets. For example, a company with total assets of $800,000 and total liabilities of $200,000 will have a debt ratio of 0.25 to 1, or 25% ($200,000 divided by $800,000).
of depreciation over the asset’s useful life is the asset’s cost minus an estimated salvage value at the end of the useful life. The result of this calculation is sometimes referred to as the asset’s depreciable...
asset (other than cash) has decreased it usually means that cash was provided. Therefore, the SCF will report the amount of the asset’s decrease as a positive amount. For instance, if the asset Accounts Receivable has...
Our Explanation of Working Capital and Liquidity provides you with an in-depth look at the components of working capital and the challenges of converting current assets to cash before obligations come due. You will see...
The third major section of the statement of cash flows. To learn more, see Explanation of Cash Flow Statement.
Under this method a company records detailed transactions and reports its net income by summarizing and reporting these detailed transactions. (A different approach is called the capital maintenance approach which...
The technique of recording accounts payable at the amount that will be paid after deducting any discount that is available for paying within the discount period. This has a theoretical advantage over the gross method...
A corporation’s net income after income taxes minus the dividends pertinent to the preferred shares of stock (if any).
What are net incremental cash flows? Net incremental cash flows are the combination of the cash inflows and the cash outflows occurring in the same time period, and between two alternatives. For example, a company could...
Under this method, net income is determined by analyzing the change in owner’s equity. The alternative is the transaction approach in which each transaction is recorded, sorted and stored.
The first major section of the statement of cash flows. To learn more, see Explanation of Cash Flow Statement.
What is cash flow net of tax? I view cash flow net of tax as the amount of cash spent minus the income tax savings when the amount is deductible on the corporation’s income tax return. To illustrate this, let’s...
The net amount of revenues and gains minus expenses and losses for the current year for the sole proprietorship owned by R. Smith. After the financial statements are prepared for the year, this amount will be transferred...
A measurement of net income arrived at by comparing the amount of total equity at the end of a period to the amount of total equity at the beginning of the period. For example, if Al Capone had $5 million of equity at...
The second major section of the statement of cash flows. To learn more, see Explanation of Cash Flow Statement.
In the context of inventory this means that the inventory should be reported at the lower of its cost or its net realizable value (NRV). The rule is associated with the conservatism guideline or principle. Net realizable...
This is a valuation account for the asset Inventory. A credit balance should be reported in this account for the amount that the net realizable value of inventory is less than the cost reported in the Inventory account....
What is the discounted value of expected net receipts? Let’s first define expected net receipts. These are future receipts after deducting any related payments. For example, if you are likely to receive $1,200 one year...
The net amount of revenues and gains minus expenses and losses for the sole proprietorship owned by Matt Jones. After the financial statements are prepared for the year, this amount will be transferred to Matt Jones,...
Obligations due within one year of the balance sheet date. (If a company’s operating cycle is longer than one year, an item is a current liability if it is due within the operating cycle.) Another condition is that...
be divided up as follows: The correct portion of the total costs that pertain to the items in the current period’s ending inventory must be reported as a current asset on the company’s balance sheet The remainder of...
Our Explanation of Accounting Equation (or bookkeeping equation) illustrates how the double-entry system keeps the accounting equation in balance. You will see how the revenues and expenses on the income statement are...
A form of accelerated depreciation which means that in the early years of an asset’s life there is more depreciation expense than under the straight-line method. However, in the later years of the asset’s...
The amount needed to replace an asset such as inventory, equipment, buildings, etc. If an asset’s replacement cost is greater than the asset’s carrying amount, the cost principle prohibits the use of the...
The remainder or difference. In depreciation the residual value is the estimated scrap or salvage value at the end of the asset’s useful life. In the accounting equation, owner’s equity is considered to be...
period's net income is part of the corporation's ___________ earnings reported on the balance sheet. RETAINED DRTNIEAE Unscramble RETAINED TIRNEEAD Unscramble 18. The costs expiring during the current...
Why can a retailer record its purchase of merchandise as a debit to purchases within the cost of goods sold, instead of the asset inventory? Before we explain why companies will record the purchases of merchandise in the...
of the division’s headquarters or executive’s office.) With that in mind, ROCE is calculated as follows: The division’s Operating Income (before income taxes and before interest expense) divided by the Assets...
How can working capital be improved? Definition of Working Capital Working capital is defined as the amount by which a company’s current assets exceed its current liabilities. How Working Capital Can be Improved Some...
for the cost principle. If a company is a going concern (and therefore liquidation is not relevant), reporting its long term assets at cost is sufficient and there is no need to report the long term assets at their...
What is the debt ratio? Definition of Debt Ratio The debt ratio is also known as the debt to asset ratio or the total debt to total assets ratio. Hence, the formula for the debt ratio is: total liabilities divided by...
associated with plant assets. The use of the word reserve led some readers of the financial statements to conclude that money was set aside for replacing plant assets or the uncollectible accounts or loans. To avoid...
What is the working capital ratio? Definition of Working Capital Ratio The working capital ratio is defined as the amount of a company’s current assets divided by the amount of its current liabilities. Hence, the...
with significant amounts of inventory and plant assets. For example, when inventory is measured by using the first-in, first-out cost flow assumption under US GAAP, the actual historical cost of inventory that is...
Our Explanation of the Balance Sheet provides you with a basic understanding of a corporation's balance sheet (or statement of financial position). You will gain insights regarding the assets, liabilities, and...
Our Explanation of Accounts Receivable and Bad Debts Expense helps you understand the accounting for the losses associated with selling goods and providing services on credit. You will understand the impact on the...
, revenue recognition). The accrual method results in a better picture of a corporation’s net income during a specified period of time and it results in a better picture of a corporation’s assets and liabilities at...
expense over the life of the asset cannot exceed the asset’s cost regardless of the depreciation method. In other words, the difference between accelerated depreciation and straight-line depreciation is a “timing...
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