Companies must record an accurate value for inventory in their financial statements to represent an accurate financial picture. However, this task is not straightforward due to the challenges in evaluating inventory. Therefore, it is crucial to understand what inventory valuation is and how it works. What is Inventory Valuation? Inventory …

Companies use the going concern principle when preparing financial statements. In its absence, these statements may look very different. Therefore, it is crucial to discuss it. What is the Going Concern Principle in accounting? The going concern principle is a foundational accounting concept that assumes a business will continue to …

Companies must adhere to accounting principles to ensure accurate and fair representation of financial records. The matching principle is one of the most crucial accounting principles in accrual accounting. What is the Matching Principle in accounting? The matching principle is a fundamental accounting concept that requires expenses to be recognized …

Manufacturing companies with secondary costs that support primary activities must assign them to their products. Usually, they achieve this by allocating the costs using an allocation method. It allows companies to assign those costs to a specific product or unit. One such technique is known as the direct allocation method. …

For most companies, the cost of goods sold or services rendered constitutes the most significant portion of total expenditure. However, another expense that is often also crucial is organization cost. What are Organizational Costs? Organizational costs encompass expenses related to managing and administering a company rather than its direct production …

An expense is a cash outflow that occurs during a specific period. In accounting, expenses are categorized into several headings. While most companies budget and predict them, some items may not be predictable. Typically, they fall under incidental expenses. What are Incidental Expenses? Incidental expenses are minor, unplanned costs that …

An audit is a systematic and independent examination of financial statements, records, and operations of an organization to ensure accuracy, compliance, and reliability. While there are various types of audits, the one most commonly known is an external audit. What is an External Audit? An external audit is an independent …

The term encumbrance is crucial in accounting. However, it has applications outside finance as well. Before discussing its accounting, it is crucial to define what it means. What is Encumbrance? An encumbrance refers to a claim or liability that affects the ownership or value of an asset. In real estate, …

Prepayments are common for companies that may prepay suppliers or other parties for a promise of future goods or services. Therefore, companies must follow the accounting guidelines for prepayments. However, it is crucial to define what they are first. What is a Prepayment? A prepayment is an advance payment made …

Companies must carry over balances from one year to another for the next accounting period. However, they cannot do so directly to revenue and expense accounts. Therefore, companies must use an income summary account. What is an Income Summary Account? An income summary account is a temporary account used in …