In cost accounting, an outlier could be a cost or its related level of activity that is out of line with other observations.

An outlier can be detected by plotting each observation’s cost and related level of activity onto a graph or scatter diagram. If one of those points deviates [...] Continue Reading…

Prime cost is the combination of a manufactured product’s costs of direct materials and direct labor. In other words, prime cost refers to the direct production costs.  Indirect manufacturing costs are not part of prime cost.

An amount shown in parenthesis within the investing activities section of the cash flow statement indicates that cash was used to purchase a long-term asset. For example, if a company spent $350,000 to purchase property, plant and equipment, it will be reported in the cash flows from investing activities [...] Continue Reading…

LIFO is the acronym for last-in, first-out. It is a cost flow assumption that can be used by U.S. companies in moving the costs of products from inventory to the cost of goods sold.

Under LIFO the latest or more recent costs of products purchased (or produced) are the first [...] Continue Reading…

The phrase cost flow assumptions often refers to the methods available for moving the costs of a company’s products from its inventory to its cost of goods sold. In the U.S. the cost flow assumptions include FIFO, LIFO, and average. (If specific identification is used, there is no need [...] Continue Reading…

Owner’s equity is one of the three main components of a sole proprietorship’s balance sheet and accounting equation. Owner’s equity represents the owner’s investment in the business minus the owner’s draws or withdrawals from the business plus the net income (or minus the net loss) since the business began.

Mathematically, [...] Continue Reading…

The two methods for recording prepaid expenses have to do with the general ledger account that is initially debited at the time of the cash payment. The two methods or approaches are:

1. debit an asset account (such as Prepaid Insurance) which is the balance sheet method, or

2. debit an [...] Continue Reading…

In bookkeeping, revenues are credits because revenues cause owner’s equity or stockholders’ equity to increase.

Recall that the accounting equation, Assets = Liabilities + Owner’s Equity, must always be in balance. The asset accounts are expected to have debit balances, while the liability and owner’s equity accounts are expected to [...] Continue Reading…

A purchase allowance is a reduction in the buyer’s cost of merchandise that it had purchased. The purchase allowance is granted by the supplier because of a problem such as shipping the wrong items, the incorrect quantity, flaws in the goods, etc. In the case of a purchase allowance, [...] Continue Reading…

A purchase return occurs when a buyer returns merchandise that it has purchased from a supplier.

Under the periodic inventory system, the cost of the merchandise that was returned is recorded as 1) a credit to the general ledger account Purchase Returns or the account Purchase Returns and Allowances, and [...] Continue Reading…