Chapter 3 Flashcards
Accrual Basis Accounting
Records revenues when cash is received and products are delivered and records expenses when incurred (matched with revenues)
Cash Basis Accounting
Records revenues when cash is received and records expenses when cash is paid. Cash basis income is cash receipts minus cash payments.
Prepaid Expenses (Deferred Expenses)
Assets paid for in advance of receiving their benefits. When these assets are used, those advanced payments become expenses.
Depreciation
The allocation of the costs of assets over their expected useful lives.
Depreciation expense
Straight Line Depreciation
Allocates equal amounts of an asset’s net cost to depreciation over its useful life
Accumulated Depreciation
a separate contra account; has a normal credit balance
Contra Account
An account linked with another account; has an opposite normal balance and is reported as a subtraction from that other account’s balance
Book Value
An asset’s cost minus its accumulated depreciation
Unearned Revenue
Cash received in advance of providing products and services; liability
Accrued Expenses
Costs that are incurred in a period that are both unpaid and unrecorded. Accrued expenses are reported on the income statement for the period when incurred.
Ex: salaries, interest, rent, taxes
Accrued Revenues
Revenues earned in a period that are both unrecorded and not yet received in cash (or other assets).
Deferrals
Paid (or received) cash BEFORE expense (or revenue) recognized
Accruals
Paid (or received) cash AFTER expense (or revenue) recognized
Unadjusted Trial Balance
A list of accounts and balances BEFORE adjustments are recorded
Adjusted Trial Balance
A list of accounts and balances AFTER adjusting entries have been recorded and posted to the ledger.
