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…

A purchase discount is a deduction that may be available to a buyer if the buyer pays an invoice within a prescribed time. For example, a supplier’s invoice for $10,000 with the credit terms 2/10 net 30 indicates that the buyer will be allowed a purchase discount of $200 [...] Continue Reading…

I view cash flow net of tax as the amount of cash spent minus the income tax savings when the amount is deductible on the corporation’s income tax return.

To illustrate this, let’s assume that a U.S. corporation pays a combined federal and state income tax rate of 40% on [...] Continue Reading…

To start a petty cash fund you need to open a general ledger account entitled Petty Cash. This will be an additional cash account that you could report either separately or have its balance included with other cash accounts when preparing a balance sheet.

Next you need to write a [...] Continue Reading…