What is the Specific Identification Method? The specific identification method relates to inventory valuation, specifically keeping track of each specific item in inventory and assigning cost individually instead of grouping items together – the manner of calculation that is typically done in the first in, first out (FIFO) and last in, first out (LIFO) methods….
What is Impairment? The impairment of a fixed asset can be described as an abrupt decrease in fair value due to physical damage, changes in existing laws creating a permanent decrease, increased competition, poor management, obsolescence of technology, etc. In the case of a fixed-asset impairment, the company needs to decrease its book value in…
What is Income Summary? The income summary account is an account that receives all the temporary accounts of a business upon closing them at the end of every accounting period. This means that the value of each account in the income statement is debited from the temporary accounts and then credited as one value to…
What are Accounting Transactions? Accounting transactions refer to any business activity that results in a direct effect on the financial status and financial statements of the business. Such transactions come in many forms, including: Sales in cash and credit to customers Receipt of cash from a customer by sending an invoice Purchase of fixed assets…
What are Financial Statements? Financial statements are the records of a company’s financial condition and activities during a period of time. Financial statements show the financial performance and strength of a company. The three core financial statements are the income statement, balance sheet, and cash flow statement. The three statements are linked together to create…
What is Depletion? Depletion is the reduction in the quantity of a factor of production as a result of the production process. Companies use existing goods and services to create new goods and services. The conversion of existing goods into new goods is known as a production process. Depletion in Accounting The tax codes of…
What is Book Value? Book value is a company’s net worth as recorded on its balance sheet, calculated by subtracting total liabilities from total assets. Book value represents the accounting value of a business based on historical costs and appears on a company’s balance sheet as total shareholder equity. Investors compare book value to market…
What is a Temporary Account? A temporary account is an account that is closed at the end of every accounting period and starts a new period with a zero balance. The accounts are closed to prevent their balances from being mixed with the balances of the next accounting period. The objective is to show the…
What is Incremental Cash Flow? Incremental cash flow refers to cash flow that is acquired by a company when it takes on a new project. To estimate an incremental cash flow, businesses must compare projected cash flow if it takes on a new project to when it doesn’t, putting into consideration how accepting such project…
What is Accumulated Other Comprehensive Income (AOCI)? Accumulated Other Comprehensive Income (AOCI) are special gains and losses that are listed as special items in the shareholder equity section of a company’s balance sheet. The AOCI account is the designated space for unrealized profits or losses on items that are placed in the other comprehensive income…
