Accounting Concepts and Principles

Accounting is the measurement of economic activity for a business operation. It is customarily reported via financial information. Learn about the basic concepts and the associated principles used in accounting to report financial information.

Cash Flow From Operations – Understanding Cash Flow (Part II)

There are two fundamental basis of accounting – accrual and cash basis.  In cash basis of accounting, a cash flows statement is unnecessary as the income statement will clearly identify the change in cash.  But there is a significant drawback to cash basis accounting.  In general, it does not convey the true financial performance of …

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Cash Flow From Operations – Basic Formula

The cash flows statement in accounting is broken out into three major sections as follows: 1) Cash Flow from Operations 2) Cash Flow from Investing 3) Cash Flow from Financing Of the three, cash flow from operations is the most prominent.   It identifies if the company is making money from its regular ongoing purpose.   …

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Working Trial Balance

The accounting profession uses various tools to generate accurate accounting information at the close of accounting cycles (monthly, quarterly and annually). The primary document is the working trial balance.  It is very similar to the traitional trial balance except there are additional columns used to identify various adjustments and the corresponding source documents (work papers).   The …

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Amortization of Financing Costs

When a business acquires a loan there are typically closing costs involved.   Generally Accepted Accounting Principles (GAAP) require these costs to be amortized (allocated) over the life of the loan.  There are several principles the reader needs to understand to properly calculate and assign these costs to the financial statements.  This lesson explains the basic …

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Breakeven Analysis – Fundamentals

Breakeven analysis is a managerial (cost) accounting tool used to examine the relationship of price to cost of a product.   It also considers various sales volumes and the effect on profit given the different relationships of price to cost.   The breakeven analysis is an essential tool in maximizing profit with the least amount of resources.   It …

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Treasury Stock

Those corporations doing well and flush with cash sometimes buy back stock from their investors. Once purchased back by the company the stock is called treasury stock. In large corporations the buy back often involves a small percentage of stockholders and rarely affects the voting rights or ownership structure.  However, in small business, buying back …

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Cost of Sales – Various Formats

Many business owners misunderstand the use of term ‘Cost of Sales’ by restricting it to just simply ‘Cost of Goods Sold’.  Basically, most business entrepreneurs and even accountants don’t realize that it has several different names and presentation formats.  But it is essentially costs of sales.  Cost of Sales is the generic term used.  However, …

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Various Sets of Accounting Books

Accounting’s primary purpose is to measure economic activity.  There are several different methods to determine the economic value generated in your business each year.  In accounting this is referred to as sets of books.  There are four basic sets of accounting books.  Each has a different purpose and end goal.  This article is written to …

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Fixed Costs – Explanation and Examples

‘Fixed costs’ is a business term used mostly in cost accounting.  It has several meanings based on its usage.  The most common definition associated with fixed costs is expenses that must be paid regardless of production or sales volume.  The best example is rent for a company.  It doesn’t matter whether you produce or sell …

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