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Presumes that an organization's activities can be divided into specific time periods such as a month, a three-month quarter, a six month interval, or a year

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Time Period Assumption

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Reports covering a one-year period

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Annual Financial Statements

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Reports covering one, three, or six month of activity

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Interim Financial Statements

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Consists of any 12 consecutive months

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Fiscal year

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When sales activities are at their lowest level for the year

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Natural Business Year End

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Uses the adjusting process to recognize revenues when earned and expenses when incurred

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Accrual Basis Accounting

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Recognizes revenues when cash is received and records expenses when cash is paid

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Cash Basis Accounting

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Aims to record expenses in the same accounting period as the revenues that are earned as a result of those expenses

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Expense Recognition (Matching) Principle

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The three step process for adjusting accounts is...

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1) Determine what the current account balance equals 2) Determine what the current account balance should equal 3) Record an adjusting entry to get from step 1 to step 2

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Made at the end of an accounting period to reflect a transaction or even that is not yet recorded

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Adjusting Entry

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What do adjusting entries affect?

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1) Income statements 2) Balance sheets NEVER CASH ACCOUNT

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Paid or received cash BEFORE expense or revenue is recognized

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1) Prepaid (deferred) expenses 2) Unearned (deferred) revenues

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Paid or received cash AFTER expense or revenue is recognized

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1) Accrued Expenses 2) Accrued Revenues

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Items paid for in advance of receiving their benefits

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Prepaid Expenses

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What are prepaid expenses in the accounting equation? What do they become after they are used?

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Assets to Expenses

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Refers to long-term tangible assets used to produce and sell products and services- they are expected to provide benefits for more than one period

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Plant Assets

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The process of allocating the costs of these assets over their expected useful lives

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Depreciation

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An account linked with another account, it has an opposite normal balance, and it is reported as a subtraction from that other account's balance

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Contra Account

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The asset's costs minus its accumulated depreciation

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Book value (aka net amount)

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Refers to cash received in advance of providing products and services

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Unearned Revenues aka Deferred Revenues

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What happens when an unearned revenue becomes an earned revenue in the accounting equation?

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Liabilities to Revenue

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Refer to costs that are incurred in a period but are both unpaid and unrecorded

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Accrued Expenses

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Refers to revenues earned in a period that are both unrecorded and not yet received in cash (or other assets)

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Accrued Revenues

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A list of accounts and balances prepared before adjustments are recorded

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Unadjusted Trial Balance

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A list of accounts and balances prepared after adjusting entries have been recorded and posted to the ledger

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Adjusted Trial Balance

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Important step at the end of an accounting period after financial statements have been completed- it prepares accounts for recording the transactions and the events of the next period

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Closing Process

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What are the steps in the closing process?

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1) Identify accounts for closing 2) Record and post the closing entries 3) Prepare a post-closing trial balance

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Accumulate data related to one accounting period

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Temporary (nominal) Accounts

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What are types of temporary accounts?

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Income Statement Accounts, Dividends Account, and the Income Summary Account (Revenues and Expenses)

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Report on activities related to one or more future accounting periods

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Permanent (real) Accounts

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What are types of permanent accounts?

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Balance Sheet Accounts and Asset, Liabilities, and Equity (common stock and retained earnings) Accounts

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To transfer the end-of-period balances in revenue, expense, and dividends accounts to the permanent retained earnings accounts

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Record and Post Closing Entries

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A temporary account that contains a credit for the sum of all revenues and a debit for the sum of all expenses (Its balance equals net income or net loss and it is transferred to retained earnings)

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Income Summary

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What is the 4-step closing process?

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1) Close income statement credit balances (revenue) 2) Close income statement debit balances (expense) 3) Close income summary account 4) Close dividends account

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A list of permanent accounts and their balances from the ledger after all closing entries have been journalized and posted

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Post-Closing Trial Balance

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What should happen in a post-closing trial balance?

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1) Total debits equal total credits for permanent accounts 2) All temporary accounts have zero balances

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The steps in preparing financial statements

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Accounting Cycle

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One whose items are broadly grouped into assets, liabilities, and equity

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Unclassified Balance Sheet

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Organizes assets and liabilities into important subgroups that provide more information to decision makers

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Classified Balance Sheet

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The time span from when cash is used to acquire goods and services until cash is received from the sale of goods and services

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Operating Cycle

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What is on a classified balance sheet?

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1) Current and noncurrent assets 2) Current and noncurrent liabilities 3) Equity

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Cash and other resources that are expected to be sold, collected, or used within one year or the company's operating cycle, whichever is longer

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Current Assets

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Assets that are expected to be held for more than the longer of one year or the operating cycle

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Long-Term (Noncurrent) Investments

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Long-Term resources that benefit business operations, usually lack physical form, and have uncertain benefits (trademarks, patents, franchises, etc)

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Intangible Assets

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Obligations due to be paid or settled within one year or the operating cycle, whichever is longer

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Current Liabilities

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Obligations not due within one year or the operating cycle, whichever is longer

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Long-term Liabilities

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2 main categories of equity

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Common stock & retained earnings

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