Companies expense costs related to the business which offsets revenue, but there are instances where companies will record costs as an asset on the balance sheet. This is what you call “capitalizing”. Note that this is completely different to capitalization/capital structure, which is how a firm finances its overall operations and growth by using different sources of funds.
Aggressive Accounting: Reserves, Allowances, Contingent Liabilities
Most companies will have a number of horrible customers who do not pay on time. To account for this, companies must write down accounts receivables each period by recording an estimated amount for likely bad debts. This amount is recorded as a “bad debts expense” on the income statement and at the same time, the accounts receivables amount is also reduced on the balance sheet with an “allowance for doubtful accounts” which offsets gross receivables.
Understanding the Straight Line and Accelerated Depreciation Methods
The simplest and most commonly used method of depreciation is the straight line method. The straight line depreciation method takes the purchase or acquisition price, subtracts the salvage value and then divides it by the total estimated life in years. For example, an equipment worth $1m with an estimated life of five years and salvage value of $100,000 would have the following depreciation schedule and asset value after each year as shown below.
Details of the FIFO LIFO Inventory Valuation Methods
This article will help you learn how to calculate FIFO LIFO for easy inventory valuation. Plus, how profits and assets affect inventory valuation.
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