Friday, September 25, 2009

Going Concern Entity Assumption

What is the Going Concern Accounting Assumption?

A company is considered viable and a “going concern” for the foreseeable future and it is assumed that its operations will not end.  Basically, the corporation looks like it will be going forward and assumes that there will be future revenue.  The assumption that entity will continue to remain in business is fundamental to accounting and is required for most calculations. The accounting equation expects a company to realize its assets at the recorded amounts. At the same time, the company should extinguish its liabilities in the normal course of its business.

If the going concern assumption turns out to be incorrect or untenable for a particular company,  then the methods prescribed by Generally Accepted Accounting Principles (GAAP) for accounting for various transactions would need to be adjusted. This would in turn then affect all the revenue for the year.

What is Bill of Materials (BOM)?

A bill of materials (BOM) is generally used by manufacturing companies in their internal accounting system. The BOM starts out with the company's raw materials and looks how it is created into finished goods.

In the manufacturing process, the inventory is called Work in Progress (WIP). The whole workflow starts from Work Order Request which starts from being raw materials --> Work Order in Progress (WIP) --> Work Order Completion which brings you to the final finished good.

During the BOM process, remember these special amounts which must be reflected in the reports; Wastage, BOM usage, BOM Costing.

Thursday, September 24, 2009

Market Value Added and Economic Value Added

What are the differences between Market Value Added and Economic Value Added? 

Market Value Added (MVA) is the difference between the fair market value of the company and actual amount of capital invested by the company's shareholders and bond holders.  MVA is calculated to know the FMV that a company has earned over the current accounting period. If Market Value Added is positive it will increase the book value of company stock.

Furthermore, Economic Value Added (EVA) measures the net economic profit earned by the com pay over the accounting period.  The Economic Value Added equation is considered one of the best performance measure by the investors. It is also termed as “Economic Profit”.

Calculate the Economic Value Added with this equation:

Economic Value Added (EVA) equation = Net Operating Profit – (Capital Invested * Cost of Capital) 

Thursday, September 17, 2009

What is an Administration Cost?

A general administrative cost includes all expenditure incurred in formulating the policy, directing the organization and controlling the operations of an undertaking.

These administration costs are usually not directly related to production, selling and distribution, research and development activity or function of the company.

Examples of Accounting Administration Costs:

  • Accounts office expenses 
  • Audit fees 
  • Legal expenses 
  • Office rent
  • Director's Pay
  • Postage
  • Miscellaneous Supplies
  • Basic Computer Training
  • Small Snacks and Coffee 

Thursday, September 10, 2009

Owner Investment Journal Entry

Accounting Journal Entry for when an owner invests money in company. This is important to keep track of in the accounting ledger because it can show exactly how different owners have contributed money to the company in the past;

Journal Entry Example:

Type of Journal Entry
Account titles
Owner Investment in the company
Owner’s Capital


Monday, September 7, 2009

Measurement of the Elements of Financial Statement

What are some methods of Measurement of the Elements of Financial Statement?

Mainly accountants will use historical costs when computing the financial statements. Sometimes these measurement methods aim to preserve the matching principle, conservatism, comparability and consistency.

The Financial Statements are the best attempt to at mathematical models of business enterprises economic performance over a specific period of time and its economic status at the end of that period. Therefore, all transactional data is recorded and analyzed for that purpose of feeding the mathematical models that lead to the financial statements.

Improving and refining the Financial Statements is an ongoing task important for the allocation of scarce resources in the global economy.

Sunday, September 6, 2009

Thursday, September 3, 2009

Deferred Gross Profit Liability

How is Deferred gross profit a liability on the balance sheet?

Deferred profit is the amount that is received for something to be rendered in the future, which means there was a contract to render service or to deliver goods, that is why it is  considered a liability on the accounting balance sheet.

For example, if the sales receipt received in 2011 is for $100. Use the following journal entries:

DEBIT Cash $100
CREDIT  Sales Debtor  $100

When services have been rendered or goods delivered. Use the following journal entries:

DEBIT Sales Debtor

Wednesday, September 2, 2009

What is a Bond Indenture?

A bond indenture is a written agreement between the company (the borrower) and the bondholders (the lenders/creditors) and generally includes:  

  • The basic terms of the bonds  
  • Face value, 
  • coupon rate, 
  • Maturity, etc  
  • The total amount of bonds issued  
  • A description of property used as security, if applicable 
The bond indenture may also describes collateral (bonds, stocks, etc) and/or mortgage (real property, i.e., land, buildings, etc) used as pledge for repayment.

Bond Call provisions give the issuer the option to repurchase the bond at a specific price prior to maturity.

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.