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Questions & Answers (Q&A)

Q&A Archive (1,080)

Is depreciation an operating expense?

Depreciation is an operating expense if the asset being depreciated is used in an organization's main operating activities. (Depreciation is a non-operating expense if the asset being depreciated is used in a peripheral or incidental activity of an organization.) Examples of depreciation… Read More.

What is a transposition error?

A transposition error occurs when an amount is recorded incorrectly as the result of switching the positions of two (or more) digits. The switching of the positions causes a difference (between the recorded amount and the correct amount) that will be evenly… Read More.

Why are wages reported as an expense when the work occurs, but the employees' tax records report them when they are paid?

The short answer is that the corporation's financial statements are prepared using the accrual method of accounting (generally accepted accounting principles), while the payroll records for the government uses the cash method of accounting (IRS rules). To illustrate, let's assume that a… Read More.

Why does an increase in accounts payable appear as an addition on the statement of cash flows?

When the statement of cash flows (SCF, cash flow statement) is prepared using the indirect method, it begins with the company's net income for the accounting period. Assuming that the income statement is prepared using the accrual method of accounting, the net… Read More.

What is other comprehensive income?

Other comprehensive income, or OCI, consists of items that have an effect on the balance sheet amounts, but the effect is not reported on the company's income statement. Instead, these changes are reported on the statement of comprehensive income along with the… Read More.

What is the break-even formula?

The formula for determining the break-even point in units of product sold is: total fixed expenses divided by the contribution margin per unit. For example, if a company's total fixed expenses for a year are $300,000 and it has a contribution margin… Read More.

What is an asset account?

In accounting and bookkeeping an asset account is a general ledger record for sorting and storing the debit and credit amounts from a company's transactions. The balance in an asset account will be part of the amounts reported on a company's balance… Read More.

What does it mean to recognize an expense?

To recognize an expense means to report the proper amount of an expense on the income statement for the appropriate accounting period. This is accomplished by following these steps: When there is a cause-and-effect relationship between a company's revenues and some of… Read More.

What is EBIT?

EBIT is the acronym for earnings before interest and taxes. In other words, EBIT is a corporation's net income assuming it had no interest expense and no income tax expense. (Since the amount of earnings is based on the net income reported… Read More.

What is accumulated other comprehensive income?

Accumulated other comprehensive income is a separate line within the stockholders' equity section of the balance sheet. This line accumulates the effects of items known as other comprehensive income, which are reported in each period's statement of comprehensive income. It is analagous… Read More.