What are the two methods for recording prepaid expenses? Definition of Prepaid Expenses Prepaid expenses refers to payments made in advance and part of the amount will become an expense in a future accounting period. A...
What are the two methods for recording prepaid expenses? Definition of Prepaid Expenses Prepaid expenses refers to payments made in advance and part of the amount will become an expense in a future accounting period. A...
What are sales taxes? In the United States, most of its 50 States assess a sales tax, which is a tax on sales to the end user. For example, in the state of Wisconsin a retailer must collect a 5% sales tax and perhaps...
Are transportation-in costs part of the cost of goods sold? Definition of Transportation-in Costs Transportation-in costs, which are also known as freight-in costs, are part of the cost of goods purchased. The reason is...
How do you record the sales tax on the purchase of an asset? Accountants define the cost of an asset as all of the costs that are necessary to obtain the asset and to get it ready for use. If your state does not allow an...
What is meant by nonoperating revenues and gains? Nonoperating revenues are the amounts earned by a business which are outside of its main or central operations. Nonoperating revenues are also described as incidental or...
How do I write off old outstanding checks? Definition of an Old Outstanding Check We will assume that an outstanding check has appeared on the outstanding check list that is part of the company’s bank reconciliation...
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...
What is the effective interest rate for a bond? Definition of Effective Interest Rate of a Bond The effective interest rate of a bond is usually the market interest rate and the bond’s yield-to-maturity (as opposed to...
How should the cost of a yearly subscription for a newspaper be recorded? Definition of Recording a Yearly Subscription Typically, yearly subscriptions are paid in advance or at the start of the subscription period. If...
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...
If a mortgage payment is due by December 31, but the payment is not made until the following month, should the loan payment be accrued at December 31? The interest portion of the mortgage payment should be accrued as of...
What is the difference between dividends and interest expense? Definition of Dividends Dividends are a distribution of a corporation’s earnings to its stockholders. Dividends are not an expense of the corporation and...
What is deferred revenue? Deferred Revenue Deferred revenue is money received by a company in advance of having earned it. In other words, deferred revenues are not yet revenues and therefore cannot yet be reported on...
Why do purchases appear as expenses on an income statement? Definition of Purchases In the context of companies that sell merchandise, the term purchases refers to the purchases of goods that are intended to be sold to...
What is the conservatism principle? Definition of Conservatism Principle In accounting, the conservatism principle (or accounting constraint) directs an accountant, who is faced with doubt between two possible...
How is working capital defined and measured? Definition of Working Capital Working capital is defined as the amount of a company’s current assets minus the amount of its current liabilities usually as of the final...
If inventory is understated at the end of the year, what is the effect on net income? Definition of Inventory is Understated If inventory is understated at the end of the year, it means that the amount of inventory being...
What should be the entry when goods are purchased at a discount? Definition of Goods Purchased at a Discount There are two common types of discounts for companies buying goods to resell: Trade discount Early payment...
What is carriage outwards? Definition of Carriage Outwards Carriage outwards refers to the transportation costs that a seller must pay when it sells merchandise with the terms FOB Destination. Carriage outwards is also...
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...
Where is a contract with a customer reported on the balance sheet? A contract to perform future services for a customer is not reported on the balance sheet of the company that will be providing the services. For...
What is an intangible asset? Definition of Intangible Asset An intangible asset is an asset that you cannot touch, since it lacks physical substance. Accountants record intangible assets at their cost when they are...
How many years is the appropriate time for depreciating leasehold improvements? Leasehold improvements should be depreciated or amortized according to the lessee’s normal depreciation policy except that the time period...
What is a trade discount? Definition of Trade Discount A trade discount is a routine reduction from the regular, established price of a product. The use of trade discounts allows a company to vary the final price based...
Are income taxes affected by accelerated depreciation? Definition of Accelerated Depreciation Accelerated depreciation means the cost of an asset used in a business will be charged to Depreciation Expense at a faster...
What if an employee's actual vacation payment is greater than the amount that has been accrued? Let’s assume that a company’s accounting year ends on December 31 and the company has only one employee who worked the...
How is the account Cash Short and Over used? Definition of Cash Short and Over Account The account Cash Short and Over is an income statement account (within a company’s general ledger) in which shortages or overages...
What is the procedure for preparing a trial balance? Definition of a Trial Balance A trial balance consists of the following information: The title of each general ledger account that has a balance To the right of the...
What is a contra liability account? Definition of Contra-Liability Account A contra-liability account is a liability account in which the balance is expected to be a debit balance. Since a debit balance in a liability...
What journal entries are prepared in a bank reconciliation? Definition of Journal Entries in a Bank Reconciliation Journal entries are required in a bank reconciliation when there are adjustments to the balance per...
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...
What is bank balance and book balance? Definition of Bank Balance The term bank balance is commonly used when reconciling the bank statement. It is also known as the balance per bank or balance per bank statement....
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...
How do you amortize goodwill? Definition of Amortize Goodwill Prior to 2001, to amortize goodwill meant to consistently and in uniform increments move the reported amount of the intangible asset goodwill from the balance...
What is a defined contribution pension plan? A defined contribution pension plan is one in which the employer contributes an amount into each eligible employee’s account within an established plan. The employee decides...
Does collecting a customer's accounts receivable affect net income? Definition of Accounts Receivable Accounts receivable is a current asset that results when a company reports revenues from sales of products or the...
What is the aging method? Definition of Aging Method The aging method usually refers to the technique for estimating the amount of a company’s accounts receivable that will not be collected. The estimated amount that...
What conditions cause a discount on bonds payable? Discount on bonds payable occurs when a bond’s stated interest rate is less than the bond market’s interest rate. If a $1,000,000 bond issue promises to pay interest...
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 the entry for an employee's personal phone calls included in the company's bill? Let’s assume that an employee has made personal phone calls of $20 which are included in the company’s phone bill of $100....
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