Revenue recognition refers to the accounting rules that govern the amount of revenue which a company can recognize in a given period.  Under U.S. GAAP, the general principal for recognizing revenue is to record revenues when they are earned – i.e., when the services have been performed or the goods have been provided to customers.  […]

Petty cash refers to a currency fund companies use for small purchases.   The petty cash fund is a convenient way for companies to account for incidental expenditures.  Because the petty cash fund can be highly susceptible to theft, companies generally designate an employee to oversee the fund. The employee responsible for the petty cash fund

Prepaid expenses are payments made for expenses which have not yet been consumed.  Because prepaid expenses reflect goods or services which are owed to the company, prepaid expenses are recognized as assets. Prepaid expenses are generally recognized as current assets, since most prepaid expenses are consumed within one year. However, some expenses may be prepaid

Preferred stock is a class of stock that has preference over common stock in respect to dividends and liquidation proceeds.  Preferred stock generally pays a fixed percentage of par value.  The four most common types of preferred stock are cumulative preferred stock, non-cumulative preferred stock, participating preferred stock, and convertible preferred stock.  With cumulative preferred

Paid-in capital refers to the amount of monetary capital that shareholders have contributed to the company.  Paid-in capital is one of the two main sources of shareholders’ equity. The other source of shareholders’ equity is retained earnings.  When individuals or companies contribute monetary capital to a corporation, they are issued stock shares in the corporation

Other revenue is a classification for revenue produced from sources outside of the company’s normal operations.  Other revenue is disclosed as a separate line item on a company’s profit and loss statement.   The items which constitute other revenue depend on the nature of the business. For example, a retailer will likely not consider interest income

Owners’ equity is the portion of a company’s balance sheet which represents the shareholders’ claim on the assets of the business.  Owner’s equity is calculated by subtracting liabilities from assets.  The three basic components of owners’ equity are (1) capital contributed from shareholders, (2) retained earnings, and (3) treasury stock.  Capital contributed from shareholders is

Outstanding stock refers to the number of common stock shares that are in the hands of shareholders.   When a corporation is formed, one of the documents which the individuals forming the corporation must file with the state is the articles of incorporation. The articles of incorporation specify, among other items, the maximum number of shares

A note receivable is a loan which a company has extended via a formal written agreement.   Because a note receivable represents funds owed to the company, the note receivable is an asset. Notes receivable expected to be settled within one year are classified as current assets. Notes receivable which are not expected to be settled

Operating income refers to the income derived from the firm’s normal business activities.  Operating income excludes interest expense, since interest expense is a financing cost rather than an operating cost. Operating income also excludes taxes, and any expenses or income derived from non-operating sources. Operating income differs from net income in that net income is