financial accounting textbook terms (chapter 3) – Flashcards
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Time period assumption
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An assumption that accountants can divide the economic life of a business into artificial time periods
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Interim periods
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Monthly or quarterly accounting time periods
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typical length of accounting time periods
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a month, a quarter, or a year
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Fiscal year
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An accounting period that is one year in length
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Calendar year
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An accounting period that extends from January 1 to December 31
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Accrual-basis accounting
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Accounting basis in which companies record transactions that change a company's financial statements in the periods in which the events occur
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Cash-basis accounting
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Accounting basis in which companies record revenue when they receive cash and an expense when they pay cash (not in accordance with generally accepted accounting principles (GAAP))
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Revenue recognition principle
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The principle that companies recognize revenue in the accounting period in which the performance obligation is satisfied (accrual basis accounting)
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Expense recognition principle (matching principle)
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The principle that companies match efforts (expenses) with accomplishments (revenues)
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Adjusting entries
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Entries made at the end of an accounting period to ensure that companies follow the revenue recognition and expense recognition principles
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Deferrals
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Adjusting entries for either prepaid expenses or unearned revenues
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Types of Adjusting Entries
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deferrals or accruals
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Accruals
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Adjusting entries for either accrued revenues or accrued expenses
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subcategories of deferrals
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prepaid expenses and unearned revenues
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subcategories of accruals
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accrued revenues and accrued expenses
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prepaid expense (pre payments)
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expenses paid in cash before they are used or consumed
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unearned revenues
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cash received before services are performed
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accrued revenues
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revenues for services performed but not yet received in cash or recorded
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accrued expenses
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expenses incurred but not yet paid in cash or recorded
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adjusting entry for prepaid expenses
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results in an increase (a debit) to an expense account and a decrease (a credit) to an asset account
