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Imagine that you and your friend own a grocery store together. The place was found by you, the supplies were arranged, and everything was set up by you. Your friend invested some money and worked at the counter. Both of you agree that since you worked harder, you should get more money from the store’s […]
Meaning and Formula Goodwill refers to the prestige or reputation attached to a brand name. Additionally, the goodwill of a firm is the result of a firm’s past efforts, which puts it in a profitable position to gain higher revenue without investing any extra amount of capital & effort. It is because goodwill adds value […]
Invoice or Bill An invoice is a document created by the seller as evidence of a sales transaction between a buyer and the seller. It is often prepared in case of a credit sale. Nowadays invoices are prepared with the help of ERPs i.e. in a digital format yet they can also be prepared on […]
Cash Memo In accounting, all transactions are properly documented as evidence of the financial trail. Cash Memo is a source document used in case of a cash transaction between the seller and a buyer. In case of a cash sale, the seller prepares the cash memo and hands it over to the purchaser. It acts as […]
Notes to Accounts Also known notes to financial statements, footnotes, notes to accounts are supporting information that is usually provided along with a company’s final accounts or financial statements. Many such notes are required to be provided by law, including details related to provisions, reserves, depreciation, investments, inventory, share capital, employee benefits, contingencies, etc. Other […]
Off-Balance Sheet (OBS) Also known as Off-Balance sheet items, Off-Balance sheet assets or liabilities, and Incognito Leverage. They are either a liability or an asset which are not shown on a company’s balance sheet as the business is not a legal owner of the respective item. Off-Balance sheet items are generally shown in the notes to […]
Source Documents or Source Vouchers Source documents are the first document to record a transaction which works as an evidence containing details of a transaction. They are external documents or documents related to external activities which are first input in the accounting source systems. Examples of source documents are invoice or bill, cash memo, cheque, sales order, purchase […]
Meaning Bill of exchange is a financial instrument in writing containing an unconditional order signed by the maker, directing another person to pay a specific sum of money. The amount may be paid in any of the following ways; to the bearer of the instrument, (or) to the order of a particular person, (or) to […]
Trade Discount in Purchase Book or Purchase Journal A discount granted by a seller of goods or services on the retail price is called a trade discount. It is provided as a business consideration such as trade practices, large quantity orders, etc. Trade discount in the purchase book is shown in a separate row as […]
Different Types of Purchase Orders A purchase order (PO) is an official document generated by a buyer of goods/services as an offer for the seller. It becomes a “legal document of contract” once the seller accepts the purchase order. There are mainly 4 different types of purchase orders; Standard PO Contract PO Blanket PO Planned […]
Three-Way Matching Three-way matching is a procedure used in accounts payable to authenticate and verify the disbursal of payment to a creditor. This type of match involves matching Purchase Order (PO), Goods Receipt Note (GRN) & Invoice. Various departments work together to check things like price billed, quantity billed, quality & quantity of goods received etc. Three-way […]
Meaning of Purchase Order A purchase order (PO) is an official document generated by a buyer of goods or services as an offer for the seller. It becomes a legal document of the contract once the seller accepts the purchase order. It describes the types of products/services, quantities, and prices that a buyer agrees to pay […]
Promissory Note A promissory note is a financial instrument, in which one party promises in writing to pay a pre-determined sum of money to the other party subject to agreed terms. It can either be payable on demand or at a specific time. It may be paid to or to the order of the authorized […]
Definition and Meaning In the business world, a lot of sales transactions happen on credit, i.e. after a specified period of time. In this scenario, there are two main types of discounts allowed to customers. One is trade discount and the other is a cash discount. Now, after anticipating the amount of cash discount allowable to debtors, […]
Meaning and Example Doubtful debts, as the name suggests, are those receivables which might become bad debts at some point in future. In other words, they are doubtful in recovery. By analyzing the past trend, a business can ascertain the approximate percentage that becomes uncollectible every year out of the total credit allowed to buyers. This amount, […]
Profit Center Profit Center is a section of a company that is treated as a separate sub-business within a company to which revenues can be traced. It directly adds to the profits of the company, hence it is responsible for its own costs and revenues. Each profit centre or a few are managed by profit centre […]
Definition of Cost Center A function or department in the organization that does not directly add to the profit, but costs the organization money to operate is known as a cost center. The cost center indirectly adds to the profitability of the business. The cost center operates on a budget decided by the organization. By […]
Days Payable Outstanding (DPO) Days payable outstanding or DPO is the average number of days that a company takes to pay its outstanding suppliers after a credit purchase has been recorded. It is used for the estimation of an average payment period and helps to determine the efficiency with which the company’s accounts payable are being managed. Days […]
Service Center A service center is an organizational unit which provides services to other departments within an organization. Its main task is to serve other departments within the organization, such as other service centers, cost centers and profit centers. A service center can be further divided into sub service centers. Example Technology department, Real […]
Prepare Trial Balance from Ledger Balances Preparing a trial balance from ledger balances is the next step of posting and balancing ledger accounts. The trial balance is a statement of debit and credit balances that are extracted from ledger accounts on a specific date. The trial balance is prepared with two different techniques: Total Method and […]
Charging Depreciation on Land If you’re an accounting student or executive you might have been often asked: “Why is depreciation not charged on land?”. The reason why depreciation is not charged on land is that the useful life of land can’t be found. A necessity for an asset to be depreciated is that it needs to […]
Meaning Days sales outstanding or DSO is also known as days receivables, it measures the average number of days that a company takes to collect the payment after a credit sale has been recorded. It is used for the estimation of the average collection period and helps to determine the efficiency with which the company’s […]
SOX or Sarbanes Oxley Act The SOX act refers to a United States federal law that came into existence in 2002. It has set standards which are expected to be followed in corporate governance, financial reporting and auditing for all publicly listed companies under the SEC (Securities and Exchange Commission). The law was passed as […]
Closing Stock Not Shown in Trial Balance The reason why closing stock is not shown in trial balance takes into consideration whether or not the closing stock has been adjusted with purchases or not. It is important to understand and endure so that a correct trial balance is prepared and the ledger balances are accurately checked. […]
Accumulated Depreciation Total cumulative depreciation of a tangible asset up to a specific date is called Accumulated Depreciation. It is the total depreciation already charged as expense in different accounting periods. It is a contra-asset account which, unlike an asset account, has a credit balance. It is shown on the balance sheet as a deduction […]