Debit versus Credit (Accounting Acronyms)

Accounting Acronyms

In accounting we often use abbreviations or acronyms. For example, GAAP (Generally Accepted Accounting Principles), AICPA (American Institute of Certified Public Accountants), etc. In addition, we oftentimes see abbreviations for debit and credit. We use dr for debit and cr for credit.

Learn more about accounting terms, accounting principles, and the accounting equation

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Accounting Terms, Accounting Principles and the Accounting Equation

Accounting Terms, Accounting Principles, Accounting Equation

Accounting is the language of business that reports financial data in the form of reports. These reports are also referred to as financial statements. There are four financial statements that are required by GAAP (generally accepted accounting principles): Income Statement, Statement of Retained Earnings, Balance Sheet and the Statement of Cash Flows.  

Learn more about the operating activities section of the Statement of Cash Flows (with video)

The area of financial accounting deals with providing information to users outside the business to assist those users in decision making about a business. GAAP requires that useful information must be relevant, reliable and comparable.

What is Activity-Based Costing? A Managerial Accounting topic

What is Activity Based Costing?

In a traditional costing system, sometimes referred to as simple costing, costs are distributed evenly to the users of the costs. This can be not only an unfair process but also can lead management to make wrong decisions regarding product sustainability for the business.

For example, let us say there are three roommates: David, Matt and Brian. They began sharing the costs ($900 per months) equally but were not participating in the activities of living there equally. The activities that each roommate may have partook were eating, watching TV, and surfing the Internet.

The Statement of Cash Flows: Operating Activities Example (with video)

The Statement of Cash Flows

There are four financial statements that are used by investors for decision making: income statements, statement of retained earnings, balance sheet and statement of cash flows. The latter of these can be used by management in decision making for the business. The statement of cash flows shows where a businesses cash is going (cash outflows/use of cash) and what activities are creating cash inflows (source of cash) for the business.

The statement of cash flows is unmistakably the most difficult of the financial statements to prepare. With three sections, operating activities, investing activities, and financing activities, students often find this statement a bit challenging to master. Students first have to assimilate to the idea of accrual accounting where revenues are recorded when earned and expenses are recorded when incurred. When students finally have this topic concurred they are asked to complete the statement of cash flows that only represents cash inflows and outflows. Therefore, instead of taking balances from the ledger accounts (t-accounts) and placing them on a financial statement (i.e. balance sheet, income statement) we have to look at the changes in the account balances (i.e. change from beginning of the period to the ending of the period).

What is Capital Budgeting: Introduction - Managerial Accounting

What is Capital Budgeting?

Capital budgeting is the process of budgeting for the acquisition of "capital assets." In accounting, capital assets are assets that are depreciable (i.e. have a useful life beyond one accounting period). Four capital budgeting models that can be used to determine whether or not a capital investment is a viable investment: payback period, accounting rate of return, net present value and internal reate of return.

When a business is deciding on an investment, the business must consider and incorporate the concept of time-value-of-money (TVM). Time-value-of-money is simply the concept that money earns money over time.

The payback period and the accounting rate of return are used when making short-term investment decisions. These two models do not incorporate the time-value-of-money as these are short-term decisions and the time-value-of-money would not be relevant.

The money that will be used to purchase an investment can be earning money (i.e. interest). Therefore, businesses, when considering long-term investment decisions, must incorporate the time-value-of-money concept in long-term business decision making.

The net present value and internal rate of return models incorporate the time-value-of-money concepts.

When a business is considering a capital investment, the business must take into consideration any cash inflows and cash outflows.

Recording Business Transactions: Rules of Debits and Credits; T-Accounts

Recording Business Transactions: Rules of Debits and Credits; T-Account

There are very few things in accounting that I encourage my students to memorize. However, the rules of debits and credits is one that ultimately comes down to memorization. When learning the rules of debits and credits let's think about the accounting equation: Assets = Liabilities + Owners' Equity. Imagine each category of accounts as a t-account. All assets are increased with debits and decreased with credits. One asset that students sometimes has issues with is Cash. They recall that when they make a deposit into their bank account that the deposit slip states their account was credited for the amount of the deposit. What we have to understand is that the bank is keeping their books, not our books. Therefore, when you give them money, they owe that money back to you; this creates a liabilities for the bank. The account the bank is crediting is an account payable with your name on it.

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Retirement of Preferred Stock

I recently had a twitter question that I want to share.

"Purchased and retired 20,000 preferred shares at $130 per share (assume par value of $100 and we issued the 20,000 shares at $150) -- what's the journal entry?"

The Chart of Accounts

When a company is formed, the accountant will produce the chart of accounts. In its most basic terms the chart of accounts is a listing of all a company's accounts with a corresponding number assigned to it.

These numbers are not randomly assigned to the accounts of a business. In most cases the numbers are assigned in order that they appear on the financial statements beginning with the balance sheet and then moving to the income statement accounts.

This is seemingly a basic and elementary task. However, most companies expect and plan to grow at some point in the future. Therefore, the accountant must ensure that the books posess the ablity to grow along with the company's growth (i.e. the ability to add additional accounts as needed).