What is the Cost Method? The cost method of accounting is used for recording certain investments in a company’s financial statements. This method is used when the investor exerts little or no influence over the investment that it owns, which is typically represented as owning less than 20% of the company. The investment is recorded…
What is a Bank Reconciliation? A bank reconciliation statement is a document that compares the cash balance on a company’s balance sheet to the corresponding amount on its bank statement. Reconciling the two accounts helps identify whether accounting changes are needed. Bank reconciliations are completed at regular intervals to ensure that the company’s cash records…
Financial Statements for Banks While the general structure of financial statements for banks isn’t that much different from a regular company, the nature of banking operations means that there are significant differences in the sub-classification of accounts. Banks use much more leverage than other businesses and earn a spread between the interest income they generate…
What are Permanent/Temporary Differences in Tax Accounting? As described in CFI’s income tax overview, the difference in accounting for taxes between financial statements and tax returns creates permanent and temporary differences in tax expense on the income statement. The financial statements will arrive at a tax expense, but the actual tax payable will come from…
What is Gross vs Net? Gross means the total or whole amount of something, whereas net means what remains from the whole after certain deductions are made. For example, a company with revenues of $10 million and expenses of $8 million reports a gross income of $10 million (the whole) and net income of $2…
What is a Homogeneous Cost Pool? A homogeneous cost pool is essentially an accounting term used by the management of a company to group together costs that show a similar cause and effect, or benefits received, or relationship in terms of the allocation base of costs. In short, homogeneous cost pools are a way of…
What are Equity Accounts? There are several types of equity accounts that combine to make up total shareholders’ equity. These accounts include common stock, preferred stock, contributed surplus, additional paid-in capital, retained earnings, other comprehensive earnings, and treasury stock. Equity is the amount funded by the owners or shareholders of a company for the initial…
What is Cash Flow from Financing Activities? Cash Flow from Financing Activities is the net amount of funding a company generates in a given time period. Finance activities include the issuance and repayment of equity, payment of dividends, issuance and repayment of debt, and capital lease obligations. Companies that require capital will raise money by…
R&D Capitalization vs Expense Under the United States Generally Accepted Accounting Principles (GAAP), companies are obligated to expense Research and Development (R&D) expenditures in the same fiscal year they are spent. It often creates a lot of volatility in profits (or losses) for many companies, as well as difficulty in measuring their rates of return…
