What is a contra account?
A contra account is a general ledger account which is intended to have its balance be the opposite of the
normal balance for that account classification. For instance, a contra asset account is intended to have a
credit balance i
How do we deal with a negative contribution margin ratio when calculating our break-even point?
The negative contribution margin ratio indicates that your variable costs and expenses exceed your sales.
In other words, if you increase your sales in the sam
What is capital surplus?
In the past, capital surplus was used to describe what is now referred to as paid-in capital in excess of
For example, when a corporation issues shares of its common stock and receives more than the par
value of the stock, tw
How do I determine my payroll tax liabilities?
Your payroll tax liabilities will include the following:
Social Security and Medicare taxes that were to be withheld plus your company's matching of those
State and federal unemployment taxes. Your sta
What is the days' sales in accounts receivable ratio?
The days' sales in accounts receivable ratio, also known as the number of days of receivables, tells you
the average number of days it takes to collect an account receivable. Since the days' sales in a
Why can a retailer record its purchase of merchandise as a debit to purchases within the cost of goods
sold, instead of the asset inventory?
Before we explain why companies will record the purchases of merchandise in the Purchases account
instead of the I
Under accrual accounting, how are worker comp premiums handled?
Worker comp insurance premiums should be charged to the areas where the related wages and salaries
Let's assume that the net cost of worker comp insurance after discounts and div
What is the days' sales in inventory ratio?
The days' sales in inventory tells you the average number of days that it took to sell the average
inventory held during the specified one-year period. You can also think of it as the number of days of
What is the current ratio?
The current ratio is a financial ratio that shows the proportion of current assets to current liabilities. The
current ratio is used as an indicator of a company's liquidity. In other words, a large amount of current
assets in r
What is the accounts receivable turnover ratio?
The financial ratio accounts receivable turnover is a company's annual sales divided by the company's
average balance in its Accounts Receivable account during the same period of time.
For example, if a comp
Where do credit card payments get recorded?
The payment to the credit card company will result in a decrease in the Cash account. This is achieved by
crediting Cash. The debit amount or amounts will depend on whether the credit card transactions were
Are insurance premiums a fixed cost?
The cost of the insurance premiums for a company's property insurance is likely to be a fixed cost. The
cost of worker compensation insurance is likely to be a variable cost. Whether a cost is a fixed cost, a
How do you record a check that clears the bank months after it was voided?
Since you had voided the check months earlier, your general ledger no longer reflects 1) the original
credit to the cash account, and 2) the original debit to another account. Now
Why does the fixed cost per unit change?
Fixed costs such as rent or a supervisor's salary will not change in total within a reasonable range of
volume or activity. For example, the rent might be $2,500 per month and the supervisor's salary might
Is contributed capital a noncurrent asset or a current asset, and is it a debit or credit?
The account Contributed Capital is part of stockholders' equity and it will have a credit balance.
Contributed capital is also referred to as paid-in capital.
What is a burden rate in inventory?
I assume that the burden rate in inventory refers to a manufacturer's indirect manufacturing costs, which
are also referred to as factory overhead, indirect production costs, and burden. In the U.S., a
What is the profit margin (after tax) ratio?
The after tax profit margin ratio tells you the profit per sales dollar after all expenses are deducted from
sales. In other words, the after tax profit margin ratio shows you the percentage of net sales that
What are debits and credits?
Debits and credits are terms used in accounting and bookkeeping (and have been used for centuries).
They are a key part of the double entry system, which means that every business transaction will affect a
minimum of two accou
How do the income statements of a sole proprietorship and a regular corporation differ?
The income statement of a sole proprietorship will not report any salary expense for the sole proprietor
who works in the business. However, if the business is a regul
What are some tips to make learning debits and credits easy?
Here are five tips to make learning debits and credits easier:
1. The accounts for expenses are nearly always debited. For example, when a company pays its monthly
rent, it debits Rent Expense.
Can you help me understand the golden rules of accounting?
The golden rules of accounting are not presented in any of the U.S. accounting books that I have
reviewed. I assume the reason for omitting the golden rules of accounting is that short phrases suc
How are the balance sheet and income statement connected?
The balance sheet reports a company's assets, liabilities, and owner's equity as of the last instant of an
accounting year. Generally, the amount of the owner's equity will have changed from the pr
Should a cash discount be recorded as a reduction to an expense?
Yes, a cash discount should be a reduction to an expense. After all, accountants define cost as the cash
amount (or cash equivalent amount) at the time of the transaction.
To illustrate, let
What are the ways to value inventory?
Generally, the balance sheet of a U.S. company must value inventory at cost. In other words, a
company's inventory is not reported at the sales value. (An exception occurs when a company's
inventory consists of readil
What is the times interest earned ratio?
The times interest earned ratio is an indicator of a company's ability to meet the interest payments on its
debt. The times interest earned calculation is a corporation's income before interest and income tax
What is the inventory turnover ratio?
The calculation for the inventory turnover ratio is: Cost of Goods Sold for a Year divided by Average
Inventory during the same 12 months.
To illustrate the inventory turnover ratio, lets assume 1) that during the mos
What is the difference between entries in a general journal versus a general ledger?
In short, transactions are first recorded in journals. From the journals the amounts are posted to the
specified accounts in the general ledger.
Let's illustrate the diff
What is the difference between a trial balance and a balance sheet?
A trial balance is an internal report that will remain in the accounting department. It is a listing of all of
the accounts in the general ledger and their balances. However, the debit ba
What is the acid test ratio?
The acid test ratio is similar to the current ratio except that Inventory, Supplies, and Prepaid Expenses are
excluded. In other words, the acid test ratio compares the total of the cash, temporary marketable
securities, and a
What is meant by the term relevance in accounting?
In accounting, the term relevance means it will make a difference to a decision maker.
For example, in the decision to replace equipment that has been used for the past six years, the original
cost of the