4. Income measurement and accrual accounting

Question 1

Recognition

Answer 1

The process of recording an item in the financial statements as an asset, a liability, a revenue, an expense, or the like.

Question 2

Historical cost

Answer 2

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.

Question 3

Current value

Answer 3

The amount of cash or its equivalent that could be received by selling an asset currently.

Question 4

Cash basis

Answer 4

A system of accounting in which revenues are recognized when cash is received, and expenses are recognized when cash is paid

Question 5

Accrual basis

Answer 5

A system of accounting in which revenues are recognized when earned and expenses are recognized when incurred (in time adjusting entries are then needed).

Question 6

Expenses

Answer 6

Outflows of assets or incurrences of liabilities resulting from delivering goods, rendering services, or carrying out other activities.

Question 7

Revenues

Answer 7

Inflows of assets or settlements of liabilities from delivering or producing goods, rendering services, or conducting other activities.

Question 8

Revenue recognition principle

Answer 8

Revenues are recognized when a performance obligation is satisfied.

Question 9

Matching principle

Answer 9

The association of revenue of a period with all of the costs necessary to generate that revenue.

Question 10

Adjusting entries

Answer 10

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.

Question 11

Contra account

Answer 11

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.

Question 12

Accrual

Answer 12

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.

Question 13

Accrued liability

Answer 13

A liability resulting from the recognition of an expense before the payment of cash.

Question 14

Accrued asset

Answer 14

An asset resulting from the recognition of a revenue before the receipt of cash.

Question 15

Deferral

Answer 15

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.

Question 16

Deferred expense

Answer 16

An asset resulting from the payment of cash before the incurrence of expense

Question 17

Deferred revenue

Answer 17

A liability resulting from the receipt of cash before the recognition of revenue.

Question 18

Accounting cycle

Answer 18

A series of steps performed each period and culminating with the preparation of a set of financial statements.

Question 19

Work sheet

Answer 19

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.

Question 20

Real accounts

Answer 20

The name given to balance sheet accounts because they are permanent and are not closed at the end of the period.

Question 21

Nominal accounts

Answer 21

The name given to revenue, expense, and dividend accounts because they are temporary and are closed at the end of the period.

Question 22

Closing entries

Answer 22

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.

Question 23

Interim statements

Answer 23

Financial statements prepared monthly, quarterly, or at other intervals less than a year in duration.