What Is An Accounting Period?

An accounting period is a period of time such as the 12 months of January 1 through December 31, or the month of June, or the three months of July 1 through September 30. It is the period for which financial statements are prepared. For example, the income statement and the cash flow statement report the amounts occurring during the accounting period, and the balance sheet reports the amounts of assets and liabilties as of the final moment of the accounting period.

While companies are required to prepare financial statements for each annual accounting period, most companies also prepare financial statements for each monthly accounting period. This monthly feedback can be valuable for the company's management but only if it reflects:

• accrual accounting


• the matching principle


• adjusting entries

For instance, if a company prepares monthly financial statements, there needs to be adjusting entries as of the last day of every month to:

• accrue expenses and liabilities that occurred but have not yet been recorded. Examples include maintenance, repairs, wages of hourly paid employees, utilities used, property taxes, interest, etc.


• record the depreciation for the 30 days of the month.


• adjust prepaid expenses for the amounts that have expired and to defer the expenses that have not expired as of the end of the month.

Popular accounting software will allow you to specify any period of time and the financial statements will be generated for that period. For example, you could specify a 7-day period. However, if you have not entered adjusting entries as of the last day of that short accounting period, I believe that the financial statements will be more misleading than helpful. 

What Is An Account Payable?

An account payable is an obligation to a supplier or vendor for goods or services that were provided in advance of payment.

To illustrate an account payable let's assume that Joe's Plumbing Service provides XCorp with repair services on August 29 and agrees to bill XCorp. On August 31 XCorp receives an invoice from Joe's for $900. The invoice states that the $900 is due within 30 days. After reviewing and approving the invoice, XCorp enters Joe's invoice into its accounting records with a credit to Accounts Payable and debit to Repairs and Maintenance Expense.

Until the invoice from Joe's Plumbing Service is paid, Joe's invoice serves as the supporting document for XCorp's accounts payable and also as a supporting document for Joe's accounts receivable. 

What Is A Promissory Note?

A promissory note is a written promise to pay an amount of money by a specified date (or on demand). The promissory note could involve a loan from a bank, a loan from a relative, a replacement for an account payable, etc.

The written amount of money is referred to as the face amount. The face amount will be recorded in the promisor's (borrower's) general ledger with a credit to the liability account Notes Payable or Loans Payable. The promisee (lender) will record the face amount with a debit to its asset account Notes Receivable.

If the promissory note specifies a fair interest rate, it is used to accrue interest expense and interest payable on the books of the borrower. The lender will accrue interest revenue or income and interest receivable.

If the promissory note does not specify interest, it should be assumed that the face amount includes some interest. The estimated future amount of interest should be recorded by the borrower in the contra accountDiscount on Notes Payable. The lender should record the same amount in a contra account Discount on Notes Receivable. The discount is then amortized over the life of the note to Interest Expense (borrower) and Interest Revenue (lender). (source)

What Is Net?

In accounting, net usually refers to the combination of positive and negative amounts. For example, the amount ofnet sales is the combination of the amount of gross sales (a positive amount) and some negative amounts such as sales returns, sales allowances, and sales discounts. Hence, if gross sales are 990 and sales returns are 10, sales allowances are 5, and sales discounts 20, the net sales are 955 (990 minus 35).

Here are some additional examples of net:

• net realizable value. The amount to be received in the ordinary course of business minus the costs of completion and disposal.


• net property, plant and equipment. The recorded costs of the tangible noncurrent assets used in the business minus the related accumulated depreciation.


• accounts receivable, net. The recorded amount of accounts receivable minus the allowance for doubtful accounts.


• net cash provided by operating activities. The combination of the cash inflows and the cash outflows from a company's operations (activities outside of its investing and financing activities).


• loss on disposal, net of tax. An accounting loss on the sale of a business segment minus the income taxes that were saved (avoided, sheltered) because the loss was also deductible on the company's income tax return.


• net income. Revenues and gains minus expenses and losses.             (source)

What Is Inventory?

I think of inventory as a company's goods on hand, which is often a significant current asset. Inventory serves as a buffer between a company's sales of goods and its production or purchase of goods. Companies strive to find the proper amount of inventory to avoid lost sales, disruptions in production, high holding costs, etc.

Manufacturers usually have the following categories of inventories: raw materials, work-in-process, finished goods, and manufacturing supplies. The amounts of these categories are usually listed in the notes to its balance sheet.

A company's cost of inventory is related to the company's cost of goods sold that is reported on the company's income statement.

Since the costs of the items purchased or produced are likely to likely to change, companies must elect a cost flow assumption for valuing its inventory and its cost of goods sold. In the U.S. the common cost flow assumptions are FIFO, LIFO, and average.

Sometimes a company's inventory of goods is referred to as its stock of goods, which is held in its stockroom or warehouse. [source] 

Cost of Sales

What is the Cost of Sales?

Cost of sales is the caption commonly used on a manufacturer's or retailer's income statement instead of the caption cost of goods sold or cost of products sold.

The cost of sales for a manufacturer is the cost of finished goods in its beginning inventory plusthe cost of goods manufactured minus the cost of finished goods in ending inventory.

The cost of sales for a retailer is the cost of merchandise in its beginning inventory plus the net cost of merchandise purchased minus the cost of merchandise in its ending inventory.

The cost of sales does not include selling expenses or general and administrative expenses, which are commonly referred to as SG&A. 

Credit Memo

What is a Credit Memo?

One type of credit memo is issued by a seller in order to reduce the amount that a customer owes from a previously issued sales invoice. For instance, assume that SellerCorp had issued a sales invoice for $800 for 100 units of product that it shipped to BuyerCo at a price of $8 each. BuyerCo informs SellerCorp that one of the units is defective and SellerCorp issues a credit memo for $8. The credit memo will cause the following in SellerCorp's accounting records: 1)  adebit of $8 to Sales Returns and Allowances, and 2) a credit of $8 to Accounts Receivable. In other words, the credit memo reduced SellerCorp's net sales and its accounts receivable. When BuyerCo records the credit memo, the following will occur in its accounting records: 1) a debit of $8 to Accounts Payable, and 2) a credit of $8 to Purchases Returns and Allowances (or Inventory).

Another type of credit memo, also referred to as a credit memorandum, is issued by a bank when it increases a depositor's checking account for a certain transaction. 

Petty Cash

What is Petty Cash?

Petty cash is a small amount of cash on hand that is used for paying small amounts owed, rather than writing a check. Petty cash is also referred to as a petty cash fund. The person responsible for the petty cash is known as the petty cash custodian.

Some examples for using petty cash include the following: paying the postal carrier the 17 cents due on a letter being delivered, reimbursing an employee $9 for supplies purchased, or paying $14 for bakery goods delivered for a company's early morning meeting.

The amount in a petty cash fund will vary by organization. For some, $50 is adequate. For others, the amount in the petty cash fund will need to be $200.

When the cash in the petty cash fund is low, the petty cash custodian requests a check to be cashed in order to replenish the cash that has been paid out. 

Provision for Bad Debts

What is the Provision for Bad Debts?

The provision for bad debts might refer to the balance sheet account also known as the Allowance for Bad Debts, Allowance for Doubtful Accounts, or Allowance for Uncollectible Accounts. In this case Provision for Bad Debts is a contra asset account (an asset account with a credit balance). It is used along with the account Accounts Receivable in order to report the net realizable value of the accounts receivable.

Provision for Bad Debts might also be an the income statement account also known as Bad Debt Expense or Uncollectible Account Expense. In this situation, the Provision for Bad Debts reports the credit losses that pertain to the period shown on the income statement. 

Difference Between a Trial Balance and a Balance Sheet

What is the Difference Between a Trial Balance and a Balance Sheet?

A trial balance is an internal report that will remain in the accounting department. It is a listing of all of the accounts in the general ledger and their balances. However, the debit balances are entered in one column and the credit balances are entered in another column. Each column is then summed to prove that the total of the debit balances is equal to the total of the credit balances.

A balance sheet is one of the financial statements that will be distributed outside of the accounting department and is often distributed outside of the company. The balance sheet is organized into sections or classifications such as current assets, long-term investments, property, plant and equipment, other assets, current liabilities, long-term liabilities, and stockholders' equity. Only the asset, liability, and stockholders' equity account balances from the general ledger or from the trial balance are then presented in the appropriate section of the balance sheet. Totals are also provided for each section to assist the reader of the balance sheet. The balance sheet is also referred to as the statement of financial position or the statement of financial condition.   source

Credit Balance

What is a Credit Balance?

In accounting, a credit balance is the ending amount found on the right side of a general ledger account or subsidiary ledger account.

A credit balance is normal and expected for the following general ledger and subsidiary ledger accounts:

• Liability accounts. These include Accounts Payable, Notes Payable, Wages Payable, Interest Payable, Income Taxes Payable, Customer Deposits, Deferred Income Taxes, and so on. For instance, a credit balance in Accounts Payable indicates the amount owed to vendors. (Therefore, a debit balance in a liability account indicates that the company has paid more than the amount owed, has made an incorrect entry, etc.) Since liability accounts are permanent accounts, their balances are not closed at the end of the accounting year.


• Equity accounts. Four examples of equity accounts are Common Stock, Paid-in Capital in Excess of Par Value, Retained Earnings, and M. Smith, Capital. These are also permanent accounts and their balances are not closed at the end of the accounting year.


• Revenue accounts and gain accounts. Examples include Sales Revenues, Service Revenues, Interest Revenues, Gain on Disposal of Equipment, Gain from Lawsuit, etc. Since these accounts are temporary accounts, their balances will be transferred to Retained Earnings or to the proprietor's capital account at the end of each accounting year.


• Contra-asset accounts. Two examples are Allowance for Doubtful Accounts and Accumulated Depreciation. The credit balances in these accounts will allow for the reporting of both the gross and net amounts for accounts receivable and for property, plant and equipment. These are permanent accounts and therefore their balances will not be closed at the end of the accounting year.


• Contra-expense accounts. These include Purchases Discounts, Purchases Returns and Allowances, and Expenses Reimbursed by Employees, etc. The credit balances in these accounts allow the company to report both the gross and net amounts. The credit balances in these temporary accounts will be transferred to Retained Earnings or to the proprietor's capital account at the end of the accounting year.    source

Debit Balance

What is a Debit Balance?

In accounting, a debit balance is the ending amount found on the left side of a general ledger account or subsidiary ledger account.

A debit balance is normal and expected for the following accounts:

• Asset accounts such as Cash, Accounts Receivable, Inventory, Prepaid Expenses, Buildings, Equipment, etc. For example, a debit balance in the Cash account indicates a positive amount of cash. (Therefore, a credit balance in Cash indicates a negative amount likely caused by writing checks for more than the amount of money currently on hand.)


• Expense accounts and loss accounts including Cost of Goods Sold, Wages Expense, Rent Expense, Interest Expense, Loss on Disposal of Equipment, Loss from Lawsuit, etc. (The debit balances in these accounts will be transferred to Retained Earnings or to the proprietor's capital account at the end of each accounting year.)


• Contra-revenue accounts including Sales Discounts, Sales Returns, etc. (The debit balances in these accounts allow for the reporting of both the gross and net amounts of sales. These balances will also be transferred to an equity account at the end of each accounting year.)


• Contra-liability accounts such as Discount on Bonds Payable. (This debit balance allows for the presentation of both the maturity value and the book or carrying value of the bonds.)


• Contra-equity accounts such as the owner's drawing account and Treasury Stock. (The debit balance in the drawing account will be closed to the owner's capital account thereby reducing its balance at the end of each year. The debit balance in Treasury Stock serves as a reduction to the total amount of Stockholders' Equity.)    source

Journal Entry

What is a Journal Entry?

In manual accounting or bookkeeping systems, business transactions are first recorded in a journal...hence the term journal entry.

A manual journal entry that is recorded in a company's general journal will consist of the following:

• the appropriate date


• the amount(s) and account(s) that will be debited


• the amount(s) and account(s) that will be credited


• a short description/memo


• a reference such as a check number

These journalized amounts (which will appear in the journal in order by date) are then posted to the accounts in the general ledger.

Today, computerized accounting systems will automatically record most of the business transactions into the general ledger accounts immediately after the software prepares the sales invoices, issues checks to creditors, processes receipts from customers, etc. The result is we will not see journal entries for most of the business transactions.

However, we will need to process some journal entries in order to record transfers between bank accounts and to record adjusting entries. For example, it is likely that at the end of each month there will be a journal entry to record depreciation. (This will include a debit to Depreciation Expense and a credit to Accumulated Depreciation.) In addition, there will likely be a need for journal entry to accrue interest on a bank loan. (This will include a debit to Interest Expense and a credit to Interest Payable.) 

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