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Retained earnings are the profits that a company has earned to date, less any dividends or other distributions paid to investors. A large retained earnings balance implies a financially healthy organization. The formula for ending retained earnings is: Beginning retained earnings + Profits/losses - Dividends = Ending retained earnings
Accrual basis is a method of recording accounting transactions for revenue when earned and expenses when incurred. An example of accrual basis accounting is to record revenue as soon as the related invoice is issued to the customer.
A debtor is a person or enterprise that owes money to another party. The party to whom the money is owed might be a supplier, bank, or other lender who is referred to as the creditor. A creditor is a person, bank, or other enterprise that has lent money or extended credit to another party. The party to whom the credit has been granted is the debtor.
A contingent liability is defined as a liability which may arise depending on the outcome of a specific event. It is a possible obligation which may or may not arise depending on how a future event unfolds. A contingent liability is recorded when it can be estimated, else it should be disclosed.
Accounting principles are the rules and guidelines that companies must follow when reporting financial data. The Financial Accounting Standards Board (FASB) issues a standardized set of accounting principles in the U.S. referred to as generally accepted accounting principles (GAAP).
The accounting and financial reporting of a regular corporation's income taxes is complicated because the accounting principles are likely to be different from the income tax laws and regulations. Generally, a profitable regular corporation's financial statements will report both income tax expense and a current liability such as income taxes payable.
The statement of financial position, often called the balance sheet, is a financial statement that reports the assets, liabilities, and equity of a company on a given date. In other words, it lists the resources, obligations, and ownership details of a company on a specific day. You can think of this like a snapshot of what the company looked like at a certain time in history.
An impairment, in accounting, is a loss of value of an intangible asset like a copyright or patent that should be reflected on future financial statements in the form of an impairment loss.
The current ratio is probably the best known and most often used of the liquidity ratios, which analysts and investors use to evaluate the firm's ability to pay its short-term debt obligations, such as accounts payable (payments to suppliers) and taxes and wages. Short-term notes payable to a bank, for example, may also be relevant.
Materiality therefore relates to the significance of transactions, balances and errors contained in the financial statements. Materiality defines the threshold or cutoff point after which financial information becomes relevant to the decision making needs of the users. Information contained in the financial statements must therefore be complete in all material respects in order for them to present a true and fair view of the affairs of the entity.
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