Econ 25 Chapter 4 – Flashcards
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Periodicity Assumption
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Accounting periods divide the economic life of a business into artificial time periods generally a month, quarter, or year.
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Revenue Recognition principle
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Requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied.
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Expense Recognition Period
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Efforts (expenses) are matched with results (revenues), in the same period that the company makes efforts to generate those revenues. (matching principle)
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Accrual basis accounting
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Means that transactions that change a company's financial statements are recorded in the periods in which the events occur, even if cash was not exchanged.
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Cash Basis accounting
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Companies record revenue when they receive cash, not a generally accepted accounting principle
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Adjusting Entries
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Ensure that the revenue recognition and expense recognition principles are followed.
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Adjusting entries are necessary because the trial balance, the pulling together of the transaction data may not contain up to date and complete data.
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Adjusting entries are necessary because the trial balance, the pulling together of the transaction data may not contain up to -- and -- data.
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Adjusting entries are required every time a company prepares a financial statement. Every adjusting entry will include one income statement account and one balance sheet account.
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Adjusting entries are required -- time a company prepares a financial statement. Every adjusting entry will include one -- statement account and one -- -- account.
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Prepaid Expenses or Prepayments
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Expenses paid in cash before they are used or consumed. Costs that expire either with the passage of time or through use.
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Debit Expense account +
Credit Asset account -
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Adjusting entries for prepaid expenses
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Debit Supplies Expense +
Credit Supplies account (asset) -
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Adjusting entries for supplies used
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Debit Insurance Expense +
Credit Prepaid Insance -
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Adjusting entries for insurance
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Useful life
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The period of service that an asset is useful within
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Depreciation
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The process of allocating the cost of an asset to expense over its useful life.
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Depreciation is an allocation concept, not a valuation concept. Depreciation allocates an asset's cost to the periods in which it is used. Depreciation does not attempt to report the actual change in value of the asset.
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Depreciation is an -- concept, not a -- concept. Depreciation allocates an asset's cost to the -- in which it is used. Depreciation does not attempt to report the actual -- in -- of the asset.
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Accumulated depreciation
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Contra asset account, offset against an asset account on the balance sheet.
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Debit Depreciation Expense +
Credit Accumulated depreciation -
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Adjusting entries of depreciation
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Book Value
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The difference between the cost of any depreciable asset and its related accumulated depreciation. The purpose of depreciation
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Unearned revenues
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Companies record cash received before services are performed by increasing a liability account called this.
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Debit: Liability -
Credit: Revenue +
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Adjusting entry for unearned revenue
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Accrued Revenues
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Revenues for services performed but not yet recorded at the statement date (because customers are NOT billed)
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Debit: Asset account +
Credit: Revenue account -
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Adjusting entries for accrued revenues
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Accrued Expenses
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Interest, taxes, utilities that are incurred expenses but not yet paid or recorded at the statement date.
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Debit: Expense +
Credit Liability +
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Adjusting Entry for accrued expenses
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debit: Interest Expense +
Credit: Interest payable +
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Adjusting entries for accrued interest
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Debit: Salaries and wage expense +
Credit: Salaries and Wages payable +
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Adjusting entries for accrued salaries
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Adjusted Trial Balance
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After a company has journalized and posted all adjusting entries, it prepares another trial balance from ledger accounts. This is called....
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Companies can prepare financial statements directly from an adjusted trial balance
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Companies can prepare -- statements directly from an adjusted -- --
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Earnings management
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The planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income.
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Quality of earnings
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A company that is high in this provides full and transparent information that will not confuse or mislead users of the financial statements.
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One time items
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Items used to prop up earnings such as the sale of dividends
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Inflating revenue
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Sending companies incentive to purchasing something toward the end of a quarter to boost the look of the comapny's performance
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Temporary Accounts
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Revenues, expenses, and dividends, relate only to a given accounting period. These are called this type of account.
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Permanent accounts
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All balance sheet accounts are considered this type of accounts because they are carried into future accounting periods.
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Closing entries
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Transfers net income or net loss and dividends to retained earnings, so the balance in the Retained earnings agrees with the retained earnings statement.
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Closing entries produce a zero balance in each temporary account. Permanent accounts are not closed.
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Closing entries produce a -- balance in each temporary account. Permanent accounts are not --.
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Income Summary
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Companies close the revenue and expense into another temporary account called this.
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Post closing trial balance
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This is a list of all permanent accounts and their balances after closing entries are journalized and posted.
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The purpose of a post closing trial balance is to prove the equality of the total debit balances and total credit balances of the permanent account balances that the company carries forward into the next accounting period.
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The purpose of a post closing trial balance is to prove the -- of the total debit balances and total credit -- of the permanent account -- that the company carries forward into the next accounting period.
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The post closing trial balance will contain only permanent balance sheet accounts.
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The post closing trial balance will contain only -- balance sheet accounts.
