Preparing the Books for a Small Business

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Determining the Short-Term Solvency of a Business

The current ratio is a test of a business’s short-term solvency — its capability to pay its liabilities that come due in the near future (up to one year). The ratio is a rough indicator of whether cash [more…]

Calculating the Acid-Test Ratio for a Business

Investors and lenders calculate the acid-test ratio— also known as the quick ratio or the pounce ratio — to test a business’s short-term solvency. The acid-test ratio is a more severe test of a business’s [more…]

Return on Assets (ROA) Ratio and Financial Leverage Gain

The first step in determining financial leverage gain for a business is to calculate a business’s return on assets (ROA) ratio, which is the ratio of EBIT [more…]

How to Decipher Footnotes in Annual Financial Reports

Deciphering footnotes in a business’s annual financial report can be challenging. Footnotes provide additional information about the basic figures included in the business’s financial statements. The investment [more…]

Important Warning to Look for in an Auditor's Report

In most cases, the auditor’s report confirms that everything in a financial report is hunky-dory, and you can rely on the financial report. However, sometimes an auditor waves a yellow flag — and in extreme [more…]

Distinguishing Real and Nominal Business Accounts

A real account in a business is a record of the amount of asset, liability, or owners’ equity at a precise moment in time. Nominal accounts summarize a business’s revenue and expenses over a period of [more…]

Fungible Products: Cost of Goods Sold Expense Methods

In deciding on its cost of goods sold expense method of accounting, a business first determines whether the products it sells are fungible or unique. Fungible means that products are interchangeable and [more…]

Analyzing the Return on Capital for a Business

Evaluating the financial performance of a business includes analyzing the return on capital (how its profit stacks up against the capital) used by the business. The figure below presents Company A’s profit [more…]

Tracking Business Finances through Timely Bookkeeping

All businesses need to keep a record of their financial transactions in order to assess their financial health, provide status reports to various bodies and to comply with legal regulations. Use these [more…]

Building Blocks of a Bookkeeping System

Your bookkeeping system is built on a few key elements fundamental to keeping your books in order. With these building blocks, any bookkeeper can set up a solid system for tracking all the business’s transactions [more…]

Key Steps for Keeping the Books

Bookkeeping is, among other things, a step-by-step process that lets you methodically track the transactions in your company’s books. Monitoring a transaction every step of the way helps bookkeepers keep [more…]

How to Write Off Intangibles with Amortization

Amortization mimics depreciation because you use it to move the cost of intangible assets from the balance sheet to the income statement. Most intangibles are amortized on a straight-line basis using their [more…]

How to Impair Intangible Assets

An impairment loss takes place when a company makes a judgment call that the carrying value of an intangible asset on the company balance sheet is less than [more…]

The Costs of Research and Development (R&D)

For accounting, research expenses are ones the company incurs in the discovery of new knowledge, with the hope that such knowledge will be useful in developing a new product or service. Businesses incur [more…]

Notes Payable (N/P) as a Current Liability

Transactions originally booking as accounts payable (A/P) could eventually be reclassified as a short-term note payable. This situation may happen if the company can’t pay the vendor and the vendor wants [more…]

How to Record Accrued Payroll and Taxes

It’s the nature of the beast that most companies will have accrued payroll and related payroll taxes. In other words, a company owes these taxes but has not yet paid them. This topic is easy to understand [more…]

How to Value Bonds Payable

A company can issue bonds either at face value (also known as par value), which is the principal amount printed on the bond; at a discount, which is less than face value; or at a [more…]

How to Account for Discounted Bonds

A bond discount is relevant when a bond issues at less than face value. How do you account for the transaction in the following example? The figure shows how to calculate the discount on bonds payable. [more…]

How to Record Bonds Issued at a Premium

When a bond is issued at a premium, its market value is more than its face value. To make the concept come alive for you, consider a common example you will see in your intermediate accounting textbook [more…]

How to Record Stockholder Interest

Stockholders’ equity represents the claim shareholders of the corporation have to the company’s net assets. Stockholders’ equity has three common components: paid-in capital, treasury stock, and retained [more…]

Permanent Differences in Tax Accounting

A temporary difference eventually smoothes itself out over time, but permanent differences won’t ever be the same in terms of book versus tax. A permanent difference [more…]

How Tax Deferrals Work

If a company has any sort of temporary difference, it has to report on its financial statements any deferred tax effect due to the temporary differences. So the company has to figure out the tax effect [more…]

The Asset-Liability Method of Interperiod Tax Allocation

Interperiod tax allocation means you recognize the tax effect of accounting events in the years in which the events are recognized for financial reporting purposes. By doing this, you’re matching income [more…]

How to Identify Intangible Assets

You’re probably somewhat familiar with intangibles from other accounting classes you’ve taken. However, your intermediate accounting textbook takes a slightly difference approach to the discussion by dividing [more…]

Goodwill As an Intangible Asset

Goodwill as an intangible asset emerges only during the purchase of a business for a price greater than the fair market value of the net assets acquired during the sale. For many assets, like cash, the [more…]


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