ch 4

Question 1

Periodicity assumption

Answer 1

accountants divide the economic life of a business into artificial time periods

• Generally a month, quarter, or year
• Calendar year vs. fiscal year

Question 2

General rules for accrual basis

Answer 2

Revenue is recognized when EARNED

Expenses are recognized when INCURRED

Question 3

General rules for cash basis

Answer 3

Revenue is recognized when cash is COLLECTED

Expenses are recognized when cash is DISBURSED

Question 4

Revenue Recognition Principle

Answer 4

Revenue is recognized when it is earned without regard to when payment (cash) is received

Question 5

Expense Recognition Principle

Answer 5

expenses are the cost of the goods and services used up in the process of earning revenue

Question 6

Matching principle

Answer 6

revenue earned should be matched (offset) with the expenses incurred in the same period

Question 7

Interest expense

Answer 7

$ borrowed X interest rate X # months / 12

Question 8

Depreciation expense

Answer 8

(cost - salvage) / useful life

Question 9

Closing entries

Answer 9

at the end of the year you must “move” (close) the balances in all Income Statement accounts (revenues, expenses, gains, or losses) and the Dividend account into Retained Earnings

• Means that the income statement (temporary) accounts start the next year with $0 balances (zero out income statement accounts at the end of each period)
• Do NOT close any of the Balance Sheet (these are permanent accounts)