Accounting Conservatism, Explained: Why Your Books Recognize Losses Early and Gains Late
GAAP books losses now, gains only when realized: allowance reserves, inventory write-downs, ASC 450 contingencies, and where prudence becomes manipulation.
#accounting-basics
Accounting Basics
Foundational accounting concepts, terminology, and principles for small business owners
Purchase Price Variance, Explained: The Formula That Tells You Whether Procurement Beat the Budget
Purchase price variance is (actual price minus standard price) times quantity purchased: positive means you overpaid, negative means you beat the budget.
Sum-of-the-Years'-Digits Depreciation, Explained: The Accelerated Fraction Method
Sum-of-the-years'-digits front-loads depreciation with a falling fraction — remaining life over n(n+1)/2 — landing exactly on salvage value.
What Counts as Gross Income? Section 61's All-Inclusive Rule, Explained
Section 61 taxes all income from whatever source derived — wages, barter, canceled debt, found money — unless a named exclusion takes it out.
Contra Accounts, Explained: Why Your Lender Reads the Net Number, Not the Gross One
Contra accounts offset their parents without erasing them: lenders underwrite net receivables, net equipment value, and net sales — not gross.
LIFO Reserve and LIFO Liquidation, Explained: The Footnote That Restates LIFO Inventory to FIFO
The LIFO reserve is FIFO inventory minus LIFO inventory; liquidating old layers books phantom profit that Section 472 still taxes in full.
How the Three Financial Statements Connect: Net Income Into Retained Earnings, Balance-Sheet Changes Into Cash, and Closing Cash Back to the Balance Sheet
Net income flows into retained earnings and opens operating cash flow; ending cash must tie to the balance sheet to the dollar.
Trading vs. Available-for-Sale vs. Held-to-Maturity Securities: How ASC 320 Classification Works
ASC 320 sorts bonds by intent — trading gains hit earnings, AFS gains wait in OCI, HTM stays at amortized cost, and one early HTM sale taints the whole book.
Bill of Materials (BOM), Explained: Single-Level vs. Multilevel BOMs, Engineering vs. Manufacturing BOMs, and How an Accurate BOM Drives Costing, Purchasing, and Inventory Control
Your BOM sets your product cost, purchasing plan, and inventory relief — a stale one silently eats margin. Single-level vs. multilevel, EBOM vs. MBOM.
Depreciation Methods Compared: Straight-Line, Declining-Balance, Units-of-Production, and Sum-of-the-Years'-Digits
All four depreciation methods expense the same total — they differ only in timing. Compare formulas, salvage-value handling, and when each fits.
Encumbrance Accounting, Explained: How Purchase Orders Reserve Budget Before the Money Is Spent
An encumbrance reserves budget when a purchase order is issued, before any invoice arrives — the entry, liquidation, and year-end treatment explained.
Financial Statement Footnotes, Explained: What the Notes Reveal That the Numbers Hide
Footnotes disclose the policies, contingencies, and related-party deals behind your numbers — lenders read them before approving your loan.