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Factoring of Accounts Receivable

Factoring of accounts receivable means selling of invoices to a third party called factor (usually a factoring company or a bank). Since the invoices have been factored, factor is entitled to collect receivables ...

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Assignment of Accounts Receivable

Assignment of accounts receivable is a written agreement between a lender and a borrower in which the borrower pledges accounts receivable as collateral. Depending on the terms of the agreement, the borrowing company records it as ...

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Bad Debts Expense as Percentage of Sales Method

The matching principle of accounting requires companies to report income and related expenses in the same accounting period. That is why many financial accounting standards, such as US GAAP and IFRS, require companies to apply ...

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Sum of the Years’ Digits Depreciation Method

The sum of the years’ digits depreciation method refers to an accelerated depreciation method. The assumption is that assets have higher productivity in early years of useful life than in later years ...

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Straight-line Depreciation Method

The straight-line depreciation method implies that each full financial year charges the same amount of an asset’s initial cost. To find the annual depreciation expense, it is necessary ...

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Accounts Receivable Aging Method

Accounts receivable aging is a technique in accounting used to estimate bad debts under the allowance method and to improve control over unpaid invoices. The idea behind this technique ...

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Bad Debts Direct Write-off Method

The direct write-off method is a widely used technique for bad debts accounting. Under this method, the specific account receivable is written off to the expense directly when it is identified as uncollectable ...

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Bad Debts Allowance Method

Selling goods or services on credit means that the seller takes an unsecured credit risk. In other words, there is always a possibility that a client will not be able to pay ...

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Accounts Receivable Accounting

Accounts receivable represents the amount of money a company has a right to receive from its clients based on goods delivered or services performed. Receivables can be classified as ...

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Periodic Inventory System

Under the periodic inventory system, the Inventory account is updated only once at the end of the accounting period rather than after each sale and purchase of merchandise ...

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Perpetual Inventory System

The perpetual inventory system is used in accounting to keep inventory records. This system assumes that the inventory account and the cost of goods sold (COGS) account are updated after each transaction. Common examples of such transactions are purchase ...

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Average Cost Inventory Method, AVCO

The average cost inventory method is an accounting technique used to calculate the cost of goods sold and ending inventory. The idea behind it is to assign a weighted average unit cost to the cost of a product ...

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LIFO Inventory Method

Last-in, first-out or LIFO inventory method is applied to calculate the cost of goods sold (COGS) and the inventory account balance at the end of the accounting period. It assumes that inventories bought last should be sold first. In other words ...

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FIFO Inventory Method

The first-in, first-out or FIFO inventory method is used to compute the cost of goods sold (COGS) and the inventory account balance at the end of the relevant period. The idea behind this method is that inventories bought first should be sold first ...

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Revaluation Model

If the revaluation model is used by an entity as an accounting policy, assets are carried at their fair value. In other words, the carrying amount of an asset can be adjusted both upward and downward if there is an indication that it differs materially ...

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Cost Model

The cost model is used as an accounting policy to report carrying an amount of property, plant, and equipment (fixed assets) in the balance sheet. It requires an asset to be carried at its initial cost (also referred to as historical cost) less any ...

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Asset Impairment Accounting

Asset impairment occurs when the carrying amount of an asset exceeds its recoverable amount. The impairment test is required when there are some indications or reasonable assumption that the recoverable amount of an asset declines rapidly ...

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Asset Disposal

Accounting for asset disposal (also known as derecognition) removes the cost or fair value of a specific asset, related accumulated depreciation, and accumulated impairment losses from the balance sheet. Asset disposal can happen either at the end of the useful life of an asset when ...

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Property, Plant, and Equipment

Property, plant, and equipment are tangible assets that are used for economic benefit during more than one period. Common examples include office buildings, land, machinery, office furniture, and computers ...

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