Prepaid expenses are future expenses that have been paid in advance. You can think of prepaid expenses as costs that have been paid but have not yet been used up or have not yet expired.

The amount of prepaid expenses that have not yet expired are reported on a company’s [...] Continue Reading…

You can think of work-in-process (WIP) inventory as the goods that are on the factory floor. The manufacturing of these goods has begun but has not yet been completed.

You can also think of work-in-process inventory as the general ledger current asset account that reports the cost of the goods [...] Continue Reading…

Public accounting can be viewed as firms of accountants that serve clients such as businesses (retailers, manufacturers, service companies, etc.), individuals, nonprofits and governments. The services provided by public accounting firms will vary by the size and the expertise of the firm. Here are some of the public accounting [...] Continue Reading…

For a business, the full disclosure principle requires a company to provide the necessary information so that people who are accustomed to reading financial information can make informed decisions concerning the company.

The required disclosures can be found in a number of places including the following:

- the company’s financial statements [...] Continue Reading…

An outstanding check is a check that has been written by a company (and deducted from the appropriate general ledger cash account) but it has not yet cleared the bank account on which it is drawn. Hence, outstanding checks will mean that the balance in the bank account will [...] Continue Reading…

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 instead of the debit balance normally found in an asset [...] Continue Reading…

Income smoothing refers to reducing the fluctuations in a corporation’s earnings. Income smoothing can range from good business methods to fraudulent reporting.

Some business practices are ethical and will result in income smoothing. For example, a corporation might have an employee bonus plan, a deferred profit sharing plan, and a [...] Continue Reading…

In accounting, periodicity means that accountants will assume that a company’s complex and ongoing activities can be divided up and reported in annual, quarterly and monthly financial statements. For example, some earth-moving equipment may require two years to manufacture but the activities will be divided up and reported in [...] Continue Reading…

The cost principle is one of the basic underlying guidelines in accounting. It is also known as the historical cost principle.

The cost principle requires that assets be recorded at the cash amount (or its equivalent) at the time that an asset is acquired. For example, if equipment is acquired [...] Continue Reading…

The matching principle is one of the basic underlying guidelines in accounting. The matching principle directs a company to report an expense on its income statement in the same period as the related revenues.

To illustrate the matching principle, let’s assume that all of a company’s sales are made through [...] Continue Reading…