Test #1 (Ch.3) – Flashcards

The time period assumption states that the economic life of a business entity can be divided into artificial time periods.

The cash basis of accounting is not in accordance with generally accepted accounting principles.

Expense recognition is tied to revenue recognition.

An adjusting entry always involves two balance sheet accounts.

A liability—revenue account relationship exists with an unearned rent revenue adjusting entry.

Unearned revenue is a prepayment that requires an adjusting entry when services are performed.

Asset prepayments become expenses when they expire.

Financial statements can be prepared from the information provided by an adjusted trial balance.

Consistency in accounting means that a company uses the same accounting principles from one accounting period to the next accounting period.

The expense recognition principle requires that expenses be matched with revenues.

Every adjusting entry affects one balance sheet account and one income statement account.

Monthly and quarterly periods

Accounting time period that is one year in length

January 1 to December 31

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

Transactions recorded in the periods in which the event occurs, Companies recognize revenue when they perform services (rather than when cash is received), & Expenses are recognized when incurred (rather than when paid.)

Revenues are recorded when cash is received, Expenses are recorded when cash is paid, & Not in accordance with GAAP.

Recognize revenue in the accounting period in which the performance obligation is satisfied.

Match expenses with revenues in the period when the company makes efforts to generate those revenues. "Let the expenses follow the revenues."

Ensure that revenue an expense recognition principles are followed; Necessary because the trial balance may not contain up to date and complete date; Required every time a company prepares financial statements; Will include one income statement account and one balance sheet account.

Are expenses or revenues that are recognized at a date later than the point when cash was originally exchanged.

Cash payments before expenses are recorded. Increase (debit) to an expense account, Decrease (credit) to an asset account.

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

For services performed during the period and to show the liability that remains at the end of the accounting period. A decrease (debit) to an expense account, Increase (credit) to an revenue account.

Revenues for services performed but not yet received in cash or recorded. Increase (debit) to an asset account, Increases (credit) to a revenue account.

Expenses incurred but not yet paid in cash or recorded. Increase (debit) to an expense account, Increase (credit) to a liability account.

Provides information that has predictive and confirmatory value.

A company-specific aspect of relevance

Information depicts what really happened

Nothing has ben omitted

Not biased toward one position or another

Results when different companies use the same accounting principles.

If independent observers, using the same methods, obtain similar results.

If it is presented in a clear and concise fashion

Means that a company uses the same accounting principles from year to year

Providing information before it loses capacity to influence decision

Confirms or corrects prior decisions

Not biased toward one position or another

The process of allocating the cost of an asset to an expense over its useful life.

A contra asset account.

Revenues for services performed but not yet recorded at the statement date

Expenses incurred but not yet paid or recorded at the statement date

Requires that companies disclose all circumstances and events that would make a difference to financial statement users.

Normal Balance of Service Revenue

Normal Balance of Rent Expense

Normal Balance of Accounts Receivable

Normal Balance of Accounts Payable

Normal Balance of Retained Earnings

Normal Balance of Supplies

Normal Balance of Insurance Expense

Normal Balance of Dividends

Normal Balance of Buildings

Normal Balance of Notes Payable

An entry that involves three or more accounts.

The side which increases an account.

A list of all the accounts used by an enterprise.

A record of increases and decreases in specific assets, liabilities, and stockholders' items.

An entry that involves only two accounts.

A list of accounts and their balances at a given time.