What is Creditworthiness? Creditworthiness, simply put, is how “worthy” or deserving one is of credit. If a lender is confident that the borrower will honor her debt obligation in a timely fashion, the borrower is deemed creditworthy. If a borrower were to evaluate their creditworthiness on her own, it would result in a conflict of…
What are the 5 Cs of Credit? The 5 Cs of Credit is a framework used by financial institutions and other non-bank lenders to evaluate the creditworthiness of a borrower, as well as the strength of an overall borrowing request. The 5 Cs are: The 5 Cs of credit impact pricing, structure, and the general…
What is the Accrual Principle? The accrual principle is an accounting concept that requires transactions to be recorded in the time period in which they occur, regardless of when the actual cash flows for the transaction are received. The idea behind the accrual principle is that financial events are properly recognized by matching revenues against…
What is GAAP? GAAP, or Generally Accepted Accounting Principles, is a commonly recognized set of rules and procedures designed to govern corporate accounting and financial reporting in the United States (US). The US GAAP is a comprehensive set of accounting practices that were developed jointly by the Financial Accounting Standards Board (FASB) and the Governmental Accounting…
What is Other Comprehensive Income? Other comprehensive income consists of revenues, expenses, gains, and losses that, according to the GAAP and IFRS standards, are excluded from net income on the income statement. Revenues, expenses, gains, and losses that are reported as other comprehensive income are amounts that have not been realized yet. What’s included in Other…
What is Goodwill? In accounting, goodwill is an intangible asset. The concept of goodwill comes into play when a company looking to acquire another company is willing to pay a price premium over the fair market value of the company’s net assets. The elements or factors that a company is paying extra for or that…
What is the Accounts Payable Turnover Ratio? The accounts payable turnover ratio, also known as the payables turnover or the creditor’s turnover ratio, is a liquidity ratio that measures the average number of times a company pays its creditors over an accounting period. The ratio is a measure of short-term liquidity, with a higher payable…
What is the High-Low Method? In cost accounting, the high-low method is a technique used to split mixed costs into fixed and variable costs. Although the high-low method is easy to apply, it is seldom used because it can distort costs, due to its reliance on two extreme values from a given data set. High-Low…
What is Variable Costing? Variable costing is a concept used in managerial and cost accounting in which the fixed manufacturing overhead is excluded from the product-cost of production. The method contrasts with absorption costing, in which the fixed manufacturing overhead is allocated to products produced. In accounting frameworks such as GAAP and IFRS, variable costing…
What is Accelerated Depreciation? Accelerated depreciation is a depreciation method in which a capital asset reduces its book value at a faster (accelerated) rate than it would using traditional depreciation methods such as the straight-line method. Therefore, under accelerated depreciation, an asset faces greater deductions in its value in the earlier years than in the…
