What does amortization mean?
In accounting we use the word amortization to mean the systematic allocation of a balance sheet item to
expense (or revenue) on the income statement. Conceptually, amortization is similar to depreciation and
depletion. An exam
What is the gross profit method?
The gross profit method is a technique used to estimate the amount of ending inventory. The technique
could be used for monthly financial statements when a physical inventory is not feasible. (However, it is
Why does our company's balance sheet report its land at cost when it is so much more valuable?
Accountants are guided by the cost principle. This requires accountants to report assets at their cost
when acquirednot their replacement cost or market value.
What is the 13 point average for inventory?
The 13 point average for inventory for the calendar year 2012 would be the sum of the inventory amount
at December 31, 2011 plus the 12 end-of-the-month amounts in 2012 divided by 13.
The reason for using these
What are mixed costs?
The term mixed costs often refers to the behavior of costs and expenses. Mixed costs consist of a fixed
component and a variable component. The annual expense of operating an automobile is a mixed cost.
Some of the expenses are fixed
What are phantom profits?
The terms phantom profits or illusory profits are often used in the context of inventory (but can also
pertain to depreciation) during periods of rising costs. The amount of phantom or illusory profit is the
difference between th
What does crossfoot mean?
Accountants use the word foot to mean adding a column of numbers. To crossfoot means to verify that
the sum of the totals in various columns also agrees to a grand total.
For example, assume you have a table of numbers that shows
What is the difference between Social Security and Medicare taxes?
The Social Security tax is 6.2% and is based on each employee's wages (including salaries, bonuses,
commissions, etc.) up to the first $94,200 of annual wages in the year 2006. (The base a
What are adjusting entries?
Adjusting entries are usually made on the last day of an accounting period (year, quarter, month) so that
the financial statements reflect the revenues that have been earned and the expenses that were
incurred during the accoun
What are some examples of financing activities?
Financing activities involve long-term liabilities, stockholders' equity (or owner's equity) , and changes to
short-term borrowings. Financing activities are reported in its own section of the financial stat
What is the difference between a general ledger and a general journal?
Journals are referred to as books of original entry. Accounting entries are recorded in a journal in order
by date. A company might use special journals (sales, purchases, cash disburs
Why are the amounts on the financial statements rounded to thousands or millions?
Amounts on financial statements are often rounded in order to emphasize the important digits. As a
result of rounding, the financial statements are more attractive in appear
What is a provision for discounts allowable?
The provision for discounts allowable is likely to be a balance sheet account that serves to reduce the
asset account Accounts Receivable. The provision account's counter part (remember double entry
What is the purpose of the Allowance for Doubtful Accounts?
The Allowance for Doubtful Accounts is used when Bad Debt Expense is recorded prior to knowing the
specific accounts receivable that will be uncollectible. For example, a company might have 500
Is there a difference between work-in-process and work-in-progress?
It depends on the user of the terms. I use the term "work-in-process" to mean a manufacturer's
inventory that is not yet completed. I think of work-in-process as the goods that are on the
What is a T-account?
A T-account is a visual aid used to depict an account in a general ledger. Above the top portion of the T
would be the account title. On the left-side of the base of the T would be any debit amounts; on the
right-side would be the cre
What is the accounting journal entry for depreciation?
The journal entry for depreciation contains a debit to the income statement account Depreciation
Expense and a credit to the balance sheet account Accumulated Depreciation.
The purpose of the journal
Is sales tax an expense or a liability?
If a company sells $100,000 of product that is subject to a state sales tax of 7%, the company will collect
$107,000. It will record sales of merchandise of $100,000 and will record a liability for sales tax of
What is a service department?
A service department is usually associated with a manufacturer. A service department is part of the
factory operations, but does not produce the factory's output. Rather, it provides services to the
factory's production depar
Where do you account for payroll taxes on the income statement?
The only payroll taxes that will appear on the income statement are the ones that the employers must
pay: the employers' matching portion of the Social Security and Medicare taxes (FICA) and
What is the Allowance for Doubtful Accounts?
The allowance for doubtful accounts is a balance sheet account that reduces the reported amount of
accounts receivable. (A change to the balance in the allowance for doubtful accounts also affects bad
What is a bank reconciliation?
A bank reconciliation is a process performed by a company to ensure that the company's records (check
register, general ledger account, balance sheet, etc.) are correct and that the bank's records are also
What is a deposit in transit?
A deposit in transit is cash (currency, coins, checks, electronic transfers) that a company has received and
is rightfully reported as Cash on its balance sheet, but does not appear on the bank statement until a
What is the carrying amount?
The term carrying amount is often used in place of book value. The carrying amount refers to the
amounts that the company has on its books for an asset or a liability. For example, the carrying amount
of a company's truck is t
Where is treasury stock reported on the balance sheet?
Under the cost method of recording treasury stock, the cost of treasury stock is reported at the end of
the Stockholders' Equity section of the balance sheet. Treasury stock will be a deduction from t
Why do you separate current liabilities from long-term liabilities?
Current liabilities are separated from long-term liabilities on classified balance sheets. (You don't have to
prepare a classified balance sheet, but it is the norm. Classified balance sh
What is the accounting equation?
The accounting equation is Assets = Liabilities + Owner's Equity. This is the same format used in a sole
proprietorship's balance sheet. (A corporation's balance sheet will use Stockholders' Equity instead of
What is the FUTA tax?
FUTA (Federal Unemployment Tax Act) tax is a payroll or employment tax paid solely by the employer.
While the FUTA tax is paid by the employer, it is based on each employee's wages or salary. Generally,
the FUTA tax ends up being 0.6
What does it mean to replenish the petty cash fund?
Replenishing the petty cash fund means the petty cash custodian requests and receives cash from the
company's regular checking account in order to have the cash on hand equal to the amount reported in
What is a deferred expense?
The term "deferred expense" is used to describe a payment that has been made, but it won't be
reported as an expense until a future accounting period.
For example, a corporation might spend $500,000 in accounting, legal, and ot
What is the difference between biweekly and semimonthly payroll?
Biweekly payroll involves paydays that occur 26 times per year, such as every other Friday.
Semimonthly payroll refers to paydays that occur 24 times per year, such as paydays that occur on
How do you record the sale of land?
If a company sells land that it was holding for future use, the company will 1) debit Cash for the amount
it receives, 2) credit Land for the amount in the general ledger account that applies to the land being
Why isn't a corporation's dividend shown on its income statement?
A dividend paid by a corporation is a distribution of previously earned net income (profits). A dividend is
not an expense or a loss. Therefore, dividends declared and/or paid are not part
How does revenue affect the balance sheet?
Generally, revenues (sales, fees earned) will increase a corporation's stockholders' equity and its assets.
More specifically, revenues will increase the retained earnings section of stockholders' equity. The ass