4. Income measurement and accrual accounting Flashcards
Recognition
The process of recording an item in the financial statements as an asset, a liability, a revenue, an expense, or the like.
Historical cost
The amount paid for an asset and used as a basis for recognizing it on the balance sheet and carrying it on later balance sheets.
Current value
The amount of cash or its equivalent that could be received by selling an asset currently.
Cash basis
A system of accounting in which revenues are recognized when cash is received, and expenses are recognized when cash is paid
Accrual basis
A system of accounting in which revenues are recognized when earned and expenses are recognized when incurred (in time adjusting entries are then needed).
Expenses
Outflows of assets or incurrences of liabilities resulting from delivering goods, rendering services, or carrying out other activities.
Revenues
Inflows of assets or settlements of liabilities from delivering or producing goods, rendering services, or conducting other activities.
Revenue recognition principle
Revenues are recognized when a performance obligation is satisfied.
Matching principle
The association of revenue of a period with all of the costs necessary to generate that revenue.
Adjusting entries
Journal entries made at the end of a period by a company using the accrual basis of accounting. This is not just needed in direct relation to the accrual basis of accounting. As assets depreciate adjusting entries are also needed. This is though done through a contra account.
Contra account
An account with a balance that is opposite that of a related account. E.g. to know the original value of an asset, accountants do not decrease the asset as it depreciates, but instead create an account for “accumulated depreciation” – a contra account.
Accrual
Situation where cash has not yet been paid but expense has been incurred, or where cash has not yet been received but revenue has been recognized.
Accrued liability
A liability resulting from the recognition of an expense before the payment of cash.
Accrued asset
An asset resulting from the recognition of a revenue before the receipt of cash.
Deferral
Situation where cash has been paid but expense has not yet been recognized, or where cash has been received but revenue has not yet been recognized.
Deferred expense
An asset resulting from the payment of cash before the incurrence of expense
Deferred revenue
A liability resulting from the receipt of cash before the recognition of revenue.
Accounting cycle
A series of steps performed each period and culminating with the preparation of a set of financial statements.
Work sheet
A device used at the end of the period to gather the information needed to prepare financial statements without actually recording and posting adjusting entries.
Real accounts
The name given to balance sheet accounts because they are permanent and are not closed at the end of the period.
Nominal accounts
The name given to revenue, expense, and dividend accounts because they are temporary and are closed at the end of the period.
Closing entries
Journal entries made at the end of the period to return the balance in all nominal accounts to zero and transfer the net income or loss and the dividends to Retained Earnings.
Interim statements
Financial statements prepared monthly, quarterly, or at other intervals less than a year in duration.
