The main difference between the direct method and the indirect method involves the cash flows from operating activities, the first section of the statement of cash flows. (There is no difference in the cash flows reported in the investing and financing activities sections.)

Under the direct method, the cash flows [...] Continue Reading…

A sole proprietorship is a form of business organization that is owned by one person. The owner is referred to as a sole proprietor.

In accounting, the balance sheet of the sole proprietorship reflects the accounting equation: Assets = Liabilities + Owner’s Equity. Owner’s Equity consists of the owner’s capital [...] Continue Reading…

The interest paid on bank loans is included in the operating activities section of the statement of cash flows. This is the case for both short-term and long-term bank loans. However, the principal amounts that were borrowed and the amounts that were repaid are reported separately under financing activities.

Under [...] Continue Reading…

Depreciation is the assigning or allocating of a plant asset’s cost to expense over the accounting periods that the asset is likely to be used. For example, if a business purchases a delivery truck with a cost of $100,000 and it is expected to be used for 5 years, [...] Continue Reading…

The cash inflows from new short-term bank loans and the cash outflows to repay the principal amount of short-term bank loans are reported in the financing activities section of the statement of cash flows. This is also true for long-term bank loans.

The interest payments for short-term and long-term bank [...] Continue Reading…

You can find the amount of income taxes paid by a corporation by reading its statement of cash flows and its notes to the financial statements.

US GAAP requires corporations to report the amount of income taxes paid. The AICPA’s Accounting Trend and Techniques indicates that approximately half of the [...] Continue Reading…

The maximum amount of an employee’s 2012 earnings that is subject to the Social Security tax is $110,100. That amount is an increase from the 2011 taxable maximum of $106,800.

The combination of the Social Security tax and the Medicare tax is often referred to as the FICA tax. However, [...] Continue Reading…

In accounting, a valuation account is usually a balance sheet account that is used in combination with another balance sheet account in order to report the carrying amount of an asset or liability.

An example of a valuation account that is associated with an asset is the Allowance for Doubtful [...] Continue Reading…

While general ledger expense accounts are typically debited and have debit balances, there are times when the expense accounts are credited.

Some instances when general ledger expense accounts are credited include:

the end-of-year closing entries
the reversing entry for a previous accrual adjusting entry involving an expense
an adjusting entry to defer part [...] Continue Reading…

Interest expense is a nonoperating expense when it is not part of a company’s main operations. For example, a retailer’s main operations are the purchasing and sale of merchandise, and a manufacturer’s main operations are the production and sale of goods.  Neither the retailer nor the manufacturer has as [...] Continue Reading…