Does the accrual method apply to the purchase of equipment?
The accrual method does apply to the purchase of equipment (as well as applying to revenues and
To illustrate, let's assume that on December 29 a company ordered and received some equi
Is a manufacturer's product warranty part of its manufacturing overhead or is it part of its SG&A
The costs associated with a manufacturer's product warranty are part of its selling expenses and
therefore part of its SG&A expenses.
If the future
What is a cash discount?
A cash discount is a deduction allowed by the seller of goods or by the provider of services in order to
motivate the customer to pay within a specified time. The seller or provider often refers to the cash
discount as a sales dis
What does an accountant do?
Some accountants are directly involved in preparing an organization's financial statements. This is likely
to include maintaining the general ledger and supervising some employees.
Other accountants work with a corporation's ma
What does it mean to report expenses by function?
To report expenses by function means to report them according to the activity for which the expenses
For a business, the reporting of expenses by function means the income statement will rep
What is a cost center?
A cost center is often a department within a company. The manager and employees of a cost center are
responsible for its costs but are not responsible for revenues or investment decisions.
A manufacturer's cost centers include each
What is a dividend and why is it needed?
A dividend paid by a corporation is a distribution of profits to the owners of the corporation. The owners
of a corporation are known as stockholders or shareholders. (In a sole proprietorship, the distribution of
What is a cost driver?
Ideally, a cost driver is an activity that is the root cause of why a cost occurs.
In the past century, the root cause of indirect manufacturing costs has changed from a single cost driver
(such as direct labor hours) to several cos
What is a compilation?
A compilation refers to financial statements that were prepared or compiled by an organization's outside
accountant. A compilation is often the result of an accounting service known as write-up work. With
compilations, or compiled f
What is a controller's cushion?
A controller's cushion or controller's reserve involves temporarily recording too much expense for an
item that the controller calculates. For example, the controller might budget $48,000 per year for
depreciation and then
What is a contra liability account?
A contra liability account is a liability account where the balance will be either a debit balance or a zero
balance. Since a debit balance in a liability account is contrary to the normal or expected credit balance,
What is a condensed income statement?
A condensed income statement is one that summarizes much of the income statement detail into a few
captions and amounts.
For example, a retailer's condensed income statement will summarize hundreds of categories of sa
What is a budget?
A budget is a financial plan for future activities. The budgets used in business often include a sales or
revenues budget detailed by products or services, production budgets, budgets for each department in
the company, cash budget, capi
What is a contra expense account?
A contra expense account is a general ledger expense account that is expected to have a credit balance
instead of the usual debit balance. In other words, the account's credit balance is contrary to (or
opposite of) the u
What is a fringe benefit rate?
A fringe benefit rate is the cost of an employee's benefits divided by the wages paid to an employee for
the hours working on the job. The following is a sample calculation of the fringe benefit rate for a
What is a liability?
A liability is an obligation and it is reported on a company's balance sheet. A common example of a
liability is accounts payable. Accounts payable arise when a company purchases goods or services on
credit from a supplier. When the c
What is a petty cash voucher?
A petty cash voucher is usually a small form that is used to document a disbursement (payment) from a
petty cash fund. Petty cash vouchers are also referred to as petty cash receipts and can be purchased
from office supply st
What is a comparative income statement?
A comparative income statement will consist of two or three columns of amounts appearing to the right
of the account titles or descriptions. For example, the income statement for the year 2012 will report the
What does overstated mean?
When an accountant states that a reported amount is overstated, it means two things:
The reported amount is incorrect, and
The reported amount is more than the true or correct amount.
For example, a company reports that its prep
In standard costing, how is the purchase price variance reclassified to arrive at actual cost?
I assume that the purchase price variance was recorded at the time that the raw materials were
purchased. If that price variance is significant, it should be re
What are inventoriable costs?
Inventoriable costs are 1) the costs to purchase or manufacture products which will be resold, plus 2) the
costs to get those products in place and ready for sale. Inventoriable costs are also known as product
What are out-of-pocket costs?
Out-of-pocket costs are those costs or expenses that require a cash payment in the current period or
during a project.
For example, the wages of the person setting up a machine for a new production run are an out-ofpocket cos
How do you divide the cost of real estate into land and building?
We will use the following example to illustrate how to divide the cost of real estate into the cost of the
land and the cost of the building. Assume that the entire cost of a real estate pu
How do you compute a selling price if you know the cost and the required gross margin?
To compute the selling price, let's assume that a product has a cost of $100 and the seller wants to have
a 30% gross margin on its selling price, or 30% of SP. The rel
How do you calculate opportunity costs?
First, you will not find opportunity costs in the general ledger. The reason is that opportunity costs are
the profits associated with a missed or lost opportunity. For example, if a company has a limited number
What does understated mean?
When an accountant says that an amount is understated, it means two things:
The amount is not the correct amount, and
The amount is less than the true amount. In other words, the amount is too small.
To illustrate the term unde
What are the disclosures for a manufacturer's inventory?
A manufacturer should disclose the following categories of inventory: raw materials, work-in-process,
finished goods, manufacturing supplies, and packaging supplies. When some of these amounts are n
What are manufacturing costs?
Manufacturing costs are the costs necessary to convert raw materials into products. All manufacturing
costs must be attached to the units produced for external financial reporting under US GAAP. The
resulting unit costs are u
How do I write off old outstanding checks?
Years ago when a check appeared on the bank reconciliation's list of outstanding checks for a lengthy
period the answer was easy:
Void the check and add the amount to your checkbook balance.
Debit the general led
What are the accounting entries for a fully depreciated car?
If the car continues to be used after it is fully depreciated, there will be no further depreciation entries.
If you sell the car after it is fully depreciated, you 1) debit Cash for the amount