Chapter 4: Accrual Accounting Flashcards Preview

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Flashcards in Chapter 4: Accrual Accounting Deck (27)
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1
Q

Accrual‐basis accounting

A

Accounting basis in which companies record, in the periods in which the events occur, transactions that change a company’s financial statements, even if cash was not exchanged.

  • Records revenues and expenses before cash is received or paid
  • Also called revenue recognition principle
  • Requires that sales revenues be recognized when the goods are transferred from the seller to the buyer
2
Q

Accrued expenses

A

Expenses incurred but not yet paid in cash or recorded.
- Accruals are always a receivable for one party and a payable for the other party of a service or benefit provided
- Increase debit expense, decrease credit liability
- Ex: Interest
taxes
utilities
salaries

3
Q

Accrued revenues

A

Revenues for services performed but not yet received in cash or recorded.
- Increase debit asset, decrease credit revenue, increase revenues
- Ex: rent
interest
services performed

4
Q

Adjusted trial balance

A

A list of accounts and their balances after all adjustments have been made.

5
Q

Adjusting entries

A

Entries made at the end of an accounting period to ensure that the revenue recognition and expense recognition principles are followed.
- In order for revenues to be recorded in the period in which the services are performed, and for expenses to be recognized in the period in which they are incurred:

6
Q

Book value

A

The difference between the cost of a depreciable asset and its related accumulated depreciation.

7
Q

Cash‐basis accounting

A

Accounting basis in which a company records revenue only when it receives cash and an expense only when it pays cash.

  • Does not follow GAAP
  • Records revenues when cash is received
  • Records expenses when cash is paid
8
Q

Closing entries

A

Entries at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders’ equity account, Retained Earnings.

9
Q

Contra asset account

A

An account that is offset against an asset account on the balance sheet.
- Ex: Accumulated Depreciation

10
Q

Depreciation

A
The process of allocating the cost of an asset to expense over its useful life.
- Ex of Special Long term deferrals:
Truck
        Cash or Note payable
Depreciation expense
          Accumulated depreciation-Truck
- Equation:
Depreciation Lost Per Year = Cost - Salvage value/Number of years
11
Q

Earnings management

A

The planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income.

12
Q

Expense recognition principle (matching principle)

A

The principle that matches expenses with revenues in the period when the company makes efforts to generate those revenues.

13
Q

Fiscal year

A

An accounting period that is one year long.

14
Q

Income Summary

A

A temporary account used in closing revenue and expense accounts.

15
Q

Periodicity assumption

A

An assumption that the economic life of a business can be divided into artificial time periods.

16
Q

Permanent accounts

A

Balance sheet accounts whose balances are carried forward to the next accounting period.

17
Q

Post‐closing trial balance

A

A list of permanent accounts and their balances after a company has journalized and posted closing entries.

18
Q

Prepaid expenses (prepayments)

A

Expenses paid in cash before they are used or consumed.
- Ex: Prepaid rent, prepaid insurance, supplies
- Increase debit expense, decrease credit asset
Insurance
supplies
advertising
rent
Depreciation:
equipment
buildings

19
Q

Quality of earnings

A

Indicates the level of full and transparent information that a company provides to users of its financial statements.

20
Q

Revenue recognition principle

A

The principle that companies recognize revenue in the accounting period in which the performance obligation is satisfied.

21
Q

Reversing entry

A

An entry made at the beginning of the next accounting period; the exact opposite of the adjusting entry made in the previous period.

22
Q

Temporary accounts

A

Revenue, expense, and dividend accounts whose balances a company transfers to Retained Earnings at the end of an accounting period.

23
Q

Unearned revenues

A

Cash received and a liability recorded before services are performed.
- Both deferrals and liabilities
- Decrease debit liabilities, increase credit revenue
- Ex: rent
airline tickets
magazine subscriptions
customer deposits

24
Q

Useful life

A

The length of service of a productive asset.

25
Q

Deferals

A
Recognizing Revenue/expenses AFTER cash is received/paid
- Deferred (Unearned) Revenue
- Deferred (Prepaid) Expense
- Ex: Cash
              Deferred Rent Revenue
         Prepaid Rent
               Cash
26
Q

Accruals

A
Recognizing Revenue/expenses BEFORE cash is 
- Accrued Revenue
- Accrued Expense
- Ex: Interest Receivable
              Interest Revenue
         Accounts receivable 
                Revenues fees
          Interest Expense
                 Interest Payable
          Free expense
                  Accounts payable
27
Q

Contra revenue account

A

An account that is offset against a revenue account on the balance sheet.
- Ex: Sales returns and allowances