Companies use equity as a method of raising funds. Most people associate equity finance with ordinary or common stock. However, companies may also use preference shares as an alternative to obtaining funds from investors. The accounting treatment of these shares differs from that used for ordinary stock. Before discussing that, …

A swap is a derivative instrument that allows two parties to “swap” the cash flows from financial instruments. However, it does not involve exchanging the underlying liabilities in most cases. It is a part of a hedging strategy followed by entities to mitigate their risks. Two common examples of these …

Financial statements provide crucial information about a company’s finances to its stakeholders. Most users prefer the balance sheet and income statement. However, they do not provide essential information about cash transactions during the year. Therefore, companies also prepare a cash flow statement that satisfies this requirement. Accounting standards require companies …

Accounting profit is the net income companies receive after deducting expenses from revenues. It provides a base to measure financial performance during a financial period. However, companies may also use other metrics internally to gauge it. One includes contribution margin, which companies can translate into contribution per unit. The base …

When a financial transaction occurs, companies record it in the books of prime entry. Some companies also record it as a journal entry. As these transactions occur, companies accumulate them and post the cumulative amount in the general ledger. It happens through a process known as posting in accounting. It …

Companies and businesses employ several employees who perform tasks to achieve organizational goals. In exchange, employees receive salaries, wages, and other benefits. For companies, these payments are expenses that fall under the payroll system. Companies record these expenses using payroll journal entries. What is a Payroll Journal Entry? The term …

What is Deferred Rent? Deferred rent usually arises when a rent agreement grants a tenant free rent for one or several periods. In most cases, this period falls at the start of the lease agreement between the tenant and landlord. Accounting standards require companies to record this transaction as deferred …

Companies use various costing techniques to derive the cost of their products. Once they do so, they can apply a markup or margin to that cost to determine the sale price for a specific item. However, companies may also work with fixed prices in the market to stay competitive. It …

Notional principal contracts (NPCs) are a type of derivative contract that allow two parties to exchange payments based on the changes in an underlying asset. The IRS has specific rules in place for the taxation of NPCs, and it’s important to understand how they are treated in order to make …

Accounting principles define an expense as an outflow of economic resources during a period. Although it may sound adverse, expenditure is crucial to running any business. Most companies incur expenses in various areas, which they charge for a specific period. These items become a part of the income statement and …