Chapter 3 Flashcards
OPERATING CYCLE
Operations begin with some cash on hand.
Cash is used to purchase supplies and to pay expenses.
Revenue is earned as services are completed for customers.
Cash is collected from customers.
The process of recording revenue in the accounting period in which it was earned; this is not necessarily when cash is received.
REVENUE RECOGNITION
A trial balance where the accounts have not yet been adjusted; it is used to review accounts at the end of an accounting period and before financial statements are prepared
UNADJUSTED TRIAL BALANCE
Ensures both the balance sheet and the income statement faithfully represent the account balances for the accounting period.
ADJUSTING ENTRIES
Revenue that has been earned but has not been collected or recorded.
ACCRUED REVENUE
An expense that has been incurred but has not yet been paid or recorded.
ACCRUED EXPENSE
An asset or liability account requiring adjustment at the end of an accounting period and includes both a balance sheet portion and an income statement portion. The income statement portion must be removed from the account by an adjusting entry.
MIXED ACCOUNT
The process of allocating the cost of a plant and equipment asset over the period of time it is expected to be used.
DEPRECIATION
An estimate of how long a plant & equipment asset will actually be used by the business regardless of how long the asset is expected to last.
USEFUL LIFE
An estimate of what the plant and equipment asset will be sold for when it is no longer used by a business; can be $0.
RESIDUAL VALUE
EQUATION USED TO CALCULATE DEPRECIATION
Cost - Estimated Residual Value / Estimated Useful Life = Depreciation Expense per year
Name of the equation used to calculate depreciation that allocates the depreciable cost equally over the asset’s estimated useful life.
STRAIGHT-LINE METHOD OF DEPRECIATION
An account that is related to another account and typically has an opposite normal balance that is subtracted from the balance of its related account on the financial statements.
CONTRA ACCOUNT
Records the amount of the asset’s cost that has been expensed since it was put into use; has a normal credit balance that is subtracted from a Plant and Equipment asset account on the balance sheet.
ACCUMULATED DEPRECIATION
Subtracting the accumulated depreciation account balance from the Plant and Equipment asset account balance on the balance sheet.
CARRYING AMOUNT/NET BOOK VALUE
The formula for calculating interest when the term is expressed in days
Interest = Principal X Interest rate X Elapsed time in days / 365
THE FIVE STEPS OF ADJUSTING ENTRIES
PREPAID ASSETS; UNEARNED LIABILITIES; PROPERTY, PLANT, & EQUIPMENT ASSETS; ACCRUED EXPENSES; ACCRUED REVENUES
A financial statement that reports account balances after adjusting entries have been recorded and posted.
ADJUSTED TRIAL BALANCE
SEVEN STEPS OF THE ACCOUNTING CYCLE
Step 1: Transactions are analyzed and recorded in the general journal
Step 2: The journal entries in the general journal are posted to accounts in the general ledger
Step 3: An unadjusted trial balance is prepared to ensure total debits equal total credits
Step 4: The unadjusted account balances are analyzed and adjusting entries are journalized in the general journal and posted to the general ledger
Step 5: An adjusted trial balance is prepared to prove the equality of debits and credits
Step 6: The adjusted trial balance is used to prepare financial statements
Step 7: Closing entries are journalized and posted
Step 8: Prepare a post-closing trial balance
A single compound closing entry used to transfer revenue account balances
INCOME SUMMARY
The process of recognizing revenues when earned and expenses when incurred regardless of when cash is exchanged
ACCRUAL ACCOUNTING
Transfers each revenue and expense account balance, as well as any balance in the dividend account, into retained earnings.
CLOSING ENTRIES
