AccountingCoach.com Q&A

Accrued income is an amount that has been 1) earned, 2) there is a right to receive the amount, and 3) it has not yet been recorded in the general ledger accounts. One example of accrued income is the interest earned on a bond investment. To illustrate, let’s assume that a...

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Subchapter S refers to a section of Chapter 1 of the U.S. Internal Revenue Code. A subchapter S corporation, which is also referred to as an S corporation, is a corporation that does not pay the income taxes on its income. Rather, the owners of the S corporation are responsible for...

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The purpose of the cash flow statement or statement of cash flows is to provide information about a company’s gross receipts and gross payments for a specified period of time. The gross receipts and gross payments will be reported in the cash flow statement according to one of the following classifications:...

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The term cash and cash equivalents includes: currency, coins, checks received but not yet deposited, checking accounts, petty cash, savings accounts, money market accounts, and short-term, highly liquid investments with a maturity of three months or less at the time of purchase such as U.S. treasury bills and commercial paper....

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Internal rate of return and net present value are discounted cash flow techniques. To discount means to remove the interest contained within the future cash amounts. If the net present value of an investment or project is more than $0, the project is earning more than the interest rate used to...

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The payback period is calculated by counting the number of years it will take to recover the cash invested in a project. Let’s assume that a company invests $400,000 in more efficient equipment. The cash savings from the new equipment is expected to be $100,000 per year for 10 years. The...

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Debit means left or left side. For example, every accounting entry will have a debit and credit amount. The debit amount is usually listed first and will be entered on the left side of the general ledger account indicated. (The credit amount will be entered on the right side of...

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I would define a toxic asset as an investment whose value has dropped significantly and there is no market in which to sell the asset. To illustrate, let’s assume that at the peak of the real estate market you lent $150,000 to someone who was purchasing a house for $170,000. In...

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The materials presented on AccountingCoach.com are based on U.S. GAAP. Since the accounting materials on AccountingCoach.com are generally introductory concepts, the differences between U.S. GAAP and IFRS at this level are minimal. The differences become wider in more advanced accounting topics, which are not presented on AccountingCoach.com. Related QuestionsWhat is IFRS?What are...

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It is possible for owner’s equity to be a negative amount. The following illustrates how it might occur. In 2005, a sole proprietorship was begun with the owner investing $100,000. During the years 2005 through 2008 the owner withdrew most of each year’s net income. As a result, the total owner’s...

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Gross profit is sales revenues minus the cost of goods sold. The term net profit might have a variety of definitions. I assume that net profit means all revenues minus all expenses including the cost of goods sold, the selling, general, and administrative (SG&A) expenses, and the nonoperating expenses. At a...

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In accounting, overhead usually refers to the indirect manufacturing costs. These are the manufacturing costs other than direct materials and direct labor. The actual overhead refers to the indirect manufacturing costs actually occurring and recorded. These include the manufacturing costs of electricity, gas, water, rent, property tax, production supervisors, depreciation, repairs,...

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An expense is reported on the income statement. An expense is a cost that has expired, was used up, or was necessary in order to earn the revenues during the time period indicated in the heading of the income statement. For example, the cost of the goods that were sold...

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The owner’s equity of a sole proprietorship will change only if the disposal of an asset causes a gain or loss to be reported on the income statement. To illustrate this, let’s assume that a truck that was used in the business is sold for $5,000. If the truck had a...

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Interest that has occurred, but has not been paid as of a balance sheet date, is referred to as accrued interest. Under the accrual basis of accounting, the amount that has occurred but is unpaid should be recorded with a debit to Interest Expense and a credit to the current...

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You need to adjust the balance in the contra asset account Allowance for Doubtful Accounts to be your best estimate of the amount in Accounts Receivable which are not collectible. In other words, adjust the credit balance in the allowance account to become the amount of the receivables that is...

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In accounting there are several meanings of a credit. In the context of debits and credits, a credit is an entry made on the right side of an account. For example, accountants will state that a payment on a company’s outstanding bills will be recorded with a credit to Cash and...

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The deposit for a booth at a future trade show is an asset until the trade show occurs. Once the trade show occurs the deposit amount should be moved from the balance sheet asset account to an income statement expense account. Learn more about Accounting Principles. Related QuestionsIs a security deposit for a...

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A balance sheet reports the dollar amounts of a company’s assets, liabilities, and  owner’s equity (or stockholders’ equity) as of a previous date. Assets include cash, accounts receivable, inventory, investments, land, buildings, equipment, some intangible assets, and others. Generally assets are reported at their cost or a lower amount due to...

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Yes, a reversing entry is permanent. To illustrate, let’s assume that a company had accrued interest expense of $10,000 as of December 31, the end of its accounting year. The accrual adjusting entry will record an additional $10,000 of expense to be reported on the December income statement and an additional...

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Net working capital or working capital is defined as current assets minus current liabilities. Therefore, a change in the total amount of current assets without a change of the same amount in current liabilities will result in a change in the amount of working capital. Similarly, a change in the...

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The departmentalizing of manufacturing overhead costs allows for better planning and control if the head of each department is held responsible for the costs and productivity of his or her department. The departmentalizing of manufacturing overhead costs also allows for the computation and application of several departmental overhead cost rates instead...

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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 earning process has been substantially completed. For example, a merchandiser’s sales revenues are considered earned when the goods have been shipped or delivered to...

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An escrow payment is an amount deposited with another party and it is to be released only for its specified purpose.  The following is one example of an escrow payment. A borrower and lender arrange for the borrower’s monthly mortgage payment to include an amount equal to one-twelfth of the property’s...

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No. A fully depreciated asset cannot be revalued because of accounting’s cost principle, matching principle, and going concern assumption. For instance, let’s assume that a company purchased a building 30 years ago at a cost of $600,000. The company then depreciated the building at a rate of $20,000 per year for...

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The standard rate allowed by the Internal Revenue Service for the business use of an automobile in the year 2010 is 50 cents per mile. (This is lower than the rate allowed in the year 2009.) In addition to the standard rate of 50 cents per mile, you are also...

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We will resume posting questions and answers in January 2010. By using the search box to the right, you can search over 500 questions that have already been answered on our blog. You can also search our entire website by using the search box located at the top right of every page. Thank...

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Accrual adjusting entries are needed monthly only if a company issues monthly financial statements. Two reasons for the monthly accrual adjusting entries are: 1. To report the revenues and receivables which were earned during the month, but the transactions had not been recorded in the accounts as of the end of...

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A monthly adjustment to the current portion of long term debt is necessary when: 1. the company issues monthly balance sheets, and 2. the amount to be paid on a loan’s principal balance during the next 12 months is different from the amount presently shown as a current liability. The amount reported as...

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Sundry can mean various, miscellaneous, or diverse. Sundry debtors might refer to a company’s customers who rarely make purchases on credit and the amounts they purchase are not significant. I suspect that the term sundry was more common when bookkeeping was a manual task. In other words, prior to the low...

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An expense is a temporary account which reduces owner’s equity or stockholders’ equity. The decrease in owner’s equity will offset the increase in the liability account. Learn more about the Accounting Equation. Related QuestionsAre utility bills an expense or a liability?Is the reversal of a previous year’s accrued expense permanent?How do you...

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Liquidity usually refers to a company’s ability to pay its bills when they become due. Liquidity is often evaluated by comparing a company’s current assets to its current liabilities. Working capital, the current ratio, and the quick ratio are referred to as liquidity ratios or short-term solvency ratios, since their...

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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 standard costing system has an unfavorable materials price variance of $400,000. If that amount is significant, the company...

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Financial accounting has its focus on the financial statements which are distributed to stockholders, lenders, financial analysts, and others outside of the company. Courses in financial accounting cover the generally accepted accounting principles which must be followed when reporting the results of a corporation’s past transactions on its balance sheet,...

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When a company purchases goods or services on credit, it will increase its accounts payable (a current liability). When a company sells goods or services on credit, it will increase its accounts receivable (a current asset). Just as one company’s purchase is another company’s sale, the accounts payable of one company...

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The outstanding checks of the previous month will have either cleared the bank in the current month or will remain on the list of outstanding checks. If an outstanding check of the previous month clears the bank (is paid by the bank) in the current month, you simply remove that check...

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Since Accounts Payable is a liability account, it should have a credit balance. The credit balance indicates the amount that company or organization owes to its suppliers or vendors. The Accounts Payable account is credited when goods or services are purchased on credit terms (as opposed to being purchased for cash)....

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When loan costs are significant, they must be amortized because of the matching principle. In other words, all of the costs of a loan must be matched to the accounting periods when the loan is outstanding. To clarify this, let’s assume that a company incurs legal, accounting, and registration fees of...

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Repairs to office equipment are period costs. That is, the cost of the repairs to office equipment will be reported as a selling, general and administrative (SG&A) expense in the period in which the repairs take place. Repairs to factory equipment are not period costs. Rather, the costs of repairs to...

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Most companies will not use the double-declining balance method of depreciation on their financial statements. The reason is that it causes the company’s net income in the early years of an asset’s life to be lower than it would be under the straight-line method. One reason for using double-declining balance depreciation...

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