Chapter 3 Flashcards
assumes business activities are sliced into small time segments and that financial statements can be prepared for specific periods, such as a month, quarter, or year.
time period concept
an accounting year of any 12 consecutive months that may or may not coincide with the calendar year.
fiscal year
tells accountants when to record revenue and requires companies follow a five-step process.
revenue recognition principle
5 steps of the revenue recognition principle:
Step 1: Identify the contract with the customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
The transaction price is the amount that the entity expects to be entitled to as a result of transferring goods or services to the customer.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies each performance obligation.
The _____ guides accounting for expenses and ensures all expenses are recorded when they are incurred during the period and that expenses are matched against the revenues of the period.
matching principle
_____ lists the revenues and expenses, but these amounts are incomplete because they omit various revenue and expense transactions.
unadjusted trial balance
_____ are made at the end of the accounting period to record revenues to the period in which they are earned and expenses to the period in which they occur.
Adjusting entries
____ defer the recognition of revenue or expense to a date after the cash is received or paid.
Deferrals
Two types of deferrals:
Deferred expenses
Deferred revenues
___ record an expense before the cash is paid, or records revenue before the cash is received
Accruals
Two types of accruals:
Accrued expenses
Accrued revenues
____ are advance payments of future expenses.
Also called prepaid expenses
Treated as assets until used
Recognized as an expense by an adjusting journal entry when the prepayment is used
Types of deferred expenses:
Prepaid rent
Office supplies
Depreciation
represent long-lived, tangible assets used in the operations of the business.
Property, plant, and equipment
Examples: Land, Buildings, Equipment
The allocation of plant asset’s cost over its useful life is called
depreciation
Accounting for plant assets is similar to prepaid expenses.
The expected value of a depreciable asset at the end of its useful life is called the
residual value
The ____ allocates an equal amount of depreciation each year.
straight-line method
Straight line method calculation:
straight line depreciation = (cost - residual value) / useful life
The ____ account is the sum of all depreciation expense recorded for the depreciable asset to date.
Accumulated Depreciation
It is a contra asset.
A ___ is paired with and is listed immediately after its related account in the chart of accounts and associated financial statement.
contra account
A ____ normal balance (debit or credit) is the opposite of the normal balance of the related account.
contra account
___ is a depreciable asset’s cost minus accumulated depreciation
Book value
Occurs when a company receives cash before it does the work or delivers a product
Deferred revenue
Also called unearned revenue
Is a liability because the business owes the customer the product, the service, or a refund
deferred revenue
are expenses a business has incurred but has not yet paid.
Accrued expenses
Examples of accrued expenses:
Salaries Expense
Interest Expense
Utilities Expense
Formula to compute interest:
amount of interest = principle * interest rate * time
____ arise when a company performs a service but has not yet collected cash or a company delivers a product but has not yet collected cash
accrued revenues
Record accrued revenues with a:
Debit to Accounts Receivable
Credit to Service Revenue
Adjusting entries never involve the ____
Cash account
Adjusting entries either:
Increase a revenue account (credit revenue)/
Increase an expense account (debit expense)
An _____ is a list of all the accounts with their adjusted balances.
adjusted trial balance
The purpose is to ensure total debits equal total credits
Adjusting entry for deferred expense:
Expense DR
Asset CR
(if recorded depreciation: the contra asset, accumulated depreciation, is credited.)
Adjusting entry for deferred revenues:
Liability DR
Revenue CR
Adjusting entry for accrued expenses:
Expense DR
Liability CR
Adjusting entry for accrued revenues:
Asset DR
Revenue CR
A ___ is an internal document that helps summarize data for the preparation of the financial statements.
worksheet
The worksheet has four sections:
Account names
Unadjusted trial balance
Adjustments
Adjusted trial balance
