#accounting-basics
Foundational accounting concepts, terminology, and principles for small business owners
A 2/10 Net 30 trade discount — 2% off for paying within 10 days instead of 30 — is equivalent to an annualized return of roughly 37%, making it one of the highest guaranteed returns available to a small business's idle cash.
The Cash Over and Short account records the gap between expected and actual cash counts as a debit (shortage) or credit (overage), turning routine till discrepancies into a trackable, auditable pattern instead of a buried miscellaneous expense line.
The indirect method reconciles net income to operating cash flow using existing income-statement and balance-sheet data and is used by roughly 98% of public companies, while the direct method lists actual cash receipts and payments by category, which GAAP and IFRS both explicitly encourage; both always reconcile to the same total but answer different questions.
GAAP requires inventory to be reported at the lower of cost or net realizable value under ASC 330; here's how to identify obsolete and slow-moving stock, calculate the write-down, and record it while satisfying the IRS's stricter subnormal-goods test under Treasury Regulation §1.471-2(c).
Under ASC 606's sales- and usage-based royalty exception, licensors can't recognize royalty revenue until the licensee's underlying sale or usage actually occurs, regardless of invoice or payment date.
Cash accounting records revenue when money is received and expenses when paid; accrual accounting records revenue when earned and expenses when incurred. IRS Section 448 mandates the accrual method once a business's three-year average gross receipts exceed the $32 million threshold for 2026, and changing methods later requires Form 3115 plus a Section 481(a) adjustment.
In consignment, the consignor owns the goods and records the full sale; the consignee books only its commission.
Undeposited funds is a temporary asset account that holds customer payments between receipt and bank deposit, letting individual receipts match a lump-sum bank line. This guide covers the three-step journal pattern, four common ways stuck balances accumulate, and three cleanup methods that preserve audit history.
Accrued payroll records wages, taxes, and PTO employees earned before period-end but are paid after it. Learn how to calculate the accrual, post the month-end journal entry, and reverse it next month to avoid double-counting.
A small-business guide to the forced cash-to-accrual switch: how Form 3115 works, how the Section 481(a) catch-up is calculated and spread over four years, and why the de minimis safe harbor is an annual election rather than a method change.
When a business sells, scraps, or trades in a fixed asset, gain or loss equals proceeds minus book value — both the asset cost and its accumulated depreciation must be cleared, and Section 1245 recapture taxes the gain as ordinary income on Form 4797.
LCNRV requires reporting inventory at the lower of its cost or net realizable value (NRV = selling price − completion costs − selling costs). Once written down under U.S. GAAP, inventory cannot be written back up.
