Monday, January 28, 2008

What are Current Liabilities

Definition of Current Liabilities:

Current liabilities include those that will be paid within one operating cycle, which mainly are accounts payable and accrued expenses payable. Also, notes payable and any other liabilities that will be paid within one year from the balance sheet date are included in current liabilities.

The subtotals of current assets and current liabilities appear in a balance sheet so that the reader can compare these two amounts. Dividing current assets by current liabilities gives the current ratio.

They are expected to be paid within one year or the company’s operating cycle, whichever is longer. For example, inventory purchased on credit is often a short term liability. These are expected to be paid quickly in the short term.

Additional Accounting Examples:

Friday, January 25, 2008

Calculating Direct Labor Variances

The process of determining direct labor variances is the same as for determining the direct materials variances.

Direct Labor (DL) Rate Variance =
(actual hrs used x actual rate per hr) – (actual hrs used x standard rate per hr)

Direct Labor (DL) Efficiency Variance =
(actual hrs used x standard rate per hr) – (standard hrs allowed x standard rate per hr)

Additional Accounting Problem:

Calculate Accounting Variance Problem

Wednesday, January 23, 2008

Assumptions of CVP Analysis

Cost behavior analysis is the study of how specific costs respond to changes in the level of business activity.

Cost-volume-profit (CVP) analysis is the study of the effects of changes in costs and volume on a company’s profits. CVP analysis is important in profit planning. A prerequisite to understanding cost volume- profit (CVP) relationships is knowledge of how costs behave.

Assumptions of CVP Analysis

1. Selling price is constant.
2. Costs are completely linear.
3. In multi-product companies, the sales mix is constant.
4. In manufacturing companies, inventory accounts do not change,units produced = units sold.

For purposes of CVP analysis, mixed costs must be classified into their fixed and variable elements.

Cost Behavior Analysis

  • Variable costs
  • Fixed costs
  • Relevant range
  • Mixed costs
  • Identifying variable and fixed costs

Cost-Volume-Profit Analysis

  • Basic components
  • CVP income statement
  • Break-even analysis
  • Target net income
  • Margin of safety

Additional Accounting Examples and Accounting Links:

Friday, January 18, 2008

Online Accounting Tax Links

A list of Online Tax Accounting Links for Accountants and Accounting Students:

  1. Tax Resources
  2. The Tax Zone
  3. Tax Sites Directory
  4. Tax Resources Site Seeker
  5. Essential Tax Links
  6. Tax Library

These links are very useful for accountants and accounting students.

Thursday, January 17, 2008

What is Extraordinary Loss?

What is an extraordinary loss?

An extraordinary loss is a loss that is unpredictable, infrequent in occurrence, and completely unforeseen. Extraordinary Losses are reported separately, less applicable taxes, in the company's income statement. GAAP requires that these losses be reported to outside parties. Sometimes, companies have gains or losses that do not reflect normal operations and that are not likely to happen again.

Examples of Extraordinary Loss:

  • Certain Acts of Terrorism
  • A Hurricane on Lake Erie
  • An earthquake in New York City
  • Monsoon in Chicago
  • Pirate Attacks
  • Meteor
These extraordinary loss items still must be reflected on financial statements. 

See Also Extraordinary Items

Manufacturing Overhead

Manufacturing costs are typically classified as either (1) direct materials, (2) direct labor, or (3) manufacturing overhead.

Fixed manufacturing overhead costs present certain problems in determining product cost
and operating profit (that is, profit before interest and income tax expenses). Manufacturing overhead consists of costs that are indirectly associated with the making of a finished product. These costs may also be manufacturing costs that cannot be classified as direct materials or direct labor.

Manufacturing overhead typically includes indirect materials, indirect labor, depreciation on factory buildings and machines, and insurance, taxes, and maintenance on factory facilities.While manufacturing overhead costs are indirect manufacturing costs they, nonetheless, increase the cost of producing a product and need to be properly managed to avoid cost overruns and ensure that a competitively priced product can be brought to market.

What is the predetermined overhead rate (POHR)?

The predetermined overhead rate used to apply overhead to finished jobs is determined before the period begins. Are any of the accounting records affected at this point in time?

Estimated total manufacturing overhead cost for the coming period
Estimated total units in the allocation base for the coming periodThe next important step is to apply manufacturing overhead to production that has occurred....

Overhead applied = POHR × Actual activity

Extra Accounting Examples and Practice Problems

Wednesday, January 16, 2008

Merchandising Accounting Journal Entry

What is Merchandising Company?

Companies that earn revenue by selling inventory are either manufacturing or merchandising companies. Inventory includes items a company intends for sale to customers.

Journal Entry for Merchandising Company

The follow is an accounting example to show how to record the sale of an item in a merchandising company. An item is sold for $45 while the actual cost expense is $25.

Accounting Ledger






Accounting Ledger



Cost of Goods Sold



Additional Accounting Examples:

Tuesday, January 15, 2008

Journal Entry for Net Loss

What is accounting journal entry for a net loss?

The journal entries to close revenues and expenses for a company which suffers a net loss (opposite of net income) must include a:
A. Debit to retained earnings C. Credit to Retained Earnings
B. Debit to salaries expense D. Credit to sales revenue

Correct Answer: A

Explanation for Journal Entry Accounting Problem:

Unfortunately, for some companies, expenses sometimes are more than revenues, so a net loss rather than net income is recorded. Just as net income increases retained earnings, a net loss decreases retained earnings.

To close revenues and expenses with a net loss, on must credit the temporary account and debit retained earnings.

Additional Accounting Examples and Explanations:

Monday, January 14, 2008

Financial Statements

Financial statements (or financial reports) are a record of a business' financial flows (revenues/expenses) and levels (assets/liabilities). The big four statements are :
  1. Balance sheet which describes a company's assets, liabilities and net equity at both a specific point of time and at the beginning of the period of time. The balance sheet is the longest established of the main financial statements produced by a business.
  2. Income statement which describes a company's income, expenses and net income/loss over a period of time.
  3. Cash flow statement which describes how much cash was used in corporate operating, investment, and financing activities over a period of time.
  4. Statement of changes in shareholder equity which reconciles the difference between the equity at the two different points in time.

Purposes of Financial Statements

Financial Statements generally have two purposes. They help managers manage the profit, cash flows, and financial condition of a business. They also serve as a pipeline of information to business lenders and investors. Without this financial information, lenders would balk at loaning money to a business and investors would refuse to invest their hard-earned money in a business.

Consistency requires that a company should use the same rules of measurement and valuation from year to year in its financial statements.

Additional Links to Accounting Problems and Examples:

Sunday, January 13, 2008

Operating Rent Expense Journal Entries

Accounting Name Debit Credit
Operating Rent Expense 6000
Cash 5000
Liability 1000

Saturday, January 12, 2008

What are Direct Materials?

Direct Materials (DM) are raw materials that become a specific part of a product and that can be specifically traced directly to it. Direct material cost is the cost of the raw materials and components used to create a product. One easily be able to identify a direct material as part of the finished product. The opposite of a direct material is an indirect material and is typically only a smaller part of the finished product.

Examples of Direct Materials (DM)

  • Iron
  • Aluminum
  • Wood
  • Nuts and Bolts
  • Glass

Additional Accounting Example and Information:

Tuesday, January 1, 2008

Calculating Job order costing and process costing in a manufacturing company

What are the differences between Job order and process costing:

Under a job order cost system, the company assigns costs to each job or to each batch of goods. It is best practice to use the job order costing when the products being manufactured are unique and each are different. The main objective is to compute the exact cost per job.

There are two different cost accounting systems; Job Order Cost System and Process Cost System.

Similarities between Job Order and Process Costing

  • Objectives (accumulating production costs, assigning costs to products)
  • Flow of costs
  • Use of factory overhead accounts (normal costing system)
  • Need to keep accurate records

Differences between Job Order and Process Costing

  • Manufacturing environment
  • Cost object used for cost accumulation (departments not jobs as in job order costing)
  • Usually have multiple WIP accounts (includes transferred in costs included in product costs)
  • Company making large quantities of similar product

Example Job Order Costing Practice Problem

A Business Card company, reported the following operations results for last period.

Direct material purchased $160,000
Direct material used 79,000
Direct labor charges 170,000
Manufacturing overhead incurred 100,000
Manufacturing overhead applied 90,000

During the year, products costing $310,000 were completed, and products costing $316,000 were sold for $455,000.

1. Prepare separate journal entries for each of the following based on the above information:

a. Purchase of raw materials on account.
b. Use of direct materials in production.
c. Direct labor charges.
d. Application of manufacturing overhead to production.

2. Compute gross profit as reported on the period’s income statement for the company.

1a. RM Inventory Debit 160,000
Accounts Payable Credit 160,000

1b. WIP Debit 79,000
RM Inventory Credit 79,000

1c. WIP Debit 170,000
Wages Payable Credit 170,000

1d. WIP Debit 90,000
MOH Credit 90,000

2. MOH
100,000 90,000

COGS 10,000
MOH 10,000

Sales 455,000
Unadjusted COGS (316,000)
JE to close MOH (10,000)
Gross Profit 129,000

Extra Accounting Examples and Practice Problems:

Popular Accounting Problems

The information on this site is for informational purposes only and should not be used as a substitute for the professional advice of an accountant, tax advisor, attorney, or other professional.