Chapter 3

Question 1

Accrual

Answer 1

A revenue that has been earned or an expense that has been incurred but has not been recorded.

Example: Sales revenue earned in December but not recorded until January.

Question 2

Accrual basis of accounting

Answer 2

A basis of accounting under which revenues and expenses are reported on the income statement in the period in which they are earned or incurred.

Example: Recognizing expenses when they are incurred, not when cash is paid.

Question 3

Accumulated Depreciation

Answer 3

The contra asset account credited when recording the depreciation of a fixed asset.

Example: Accumulated Depreciation - Equipment.

Question 4

Adjusted trial balance

Answer 4

The trial balance prepared after all the adjusting entries have been posted.

Example: Ensures total debits equal total credits after adjusting entries.

Question 5

Adjusting entries

Answer 5

The journal entries that bring the accounts up to date at the end of the accounting period.

Example: Recording depreciation expense for the period.

Question 6

Adjusting process

Answer 6

An analysis and updating of the accounts when financial statements are prepared.

Example: Reviewing accounts to ensure accuracy before finalizing financial statements.

Question 7

Book value of the asset (or net book value)

Answer 7

The difference between the cost of a fixed asset and its accumulated depreciation.

Example: Book value = Cost of Equipment - Accumulated Depreciation.

Question 8

Cash basis of accounting

Answer 8

A basis of accounting under which revenues and expenses are reported on the income statement in the period in which cash is received or paid.

Example: Recognizing revenue when cash is received, not when services are performed.

Question 9

Contra accounts (or contra asset accounts)

Answer 9

An account offset against another account.

Example: Accumulated Depreciation is a contra account to Equipment.

Question 10

Deferral

Answer 10

A future revenue or expense initially recorded as a liability or asset.

Example: Prepaid insurance recorded as an asset until it is used.

Question 11

Depreciate

Answer 11

To lose value or usefulness over time.

Example: Equipment depreciates over its useful life.

Question 12

Depreciation

Answer 12

The systematic periodic transfer of the cost of a fixed asset to an expense account during its expected useful life.

Example: Recording depreciation expense for a building over 20 years.

Question 13

Depreciation expense

Answer 13

The portion of the cost of a fixed asset that is recorded as an expense each year of its useful life.

Example: Annual expense for the depreciation of equipment.

Question 14

Expense recognition principle

Answer 14

A principle, sometimes called the matching principle, that requires expenses to be recorded in the same period as the related revenue; a concept of accounting in which expenses are matched with the revenue generated during a period by those expenses.

Example: Recognizing cost of goods sold in the same period as sales revenue.

Question 15

Fixed assets (or plant assets)

Answer 15

Physical resources that are owned and used by a business and are permanent or have a long life; long-term or relatively permanent tangible assets such as equipment, machinery, buildings, and land that are used in normal business operations.

Example: Buildings, vehicles, and equipment owned by a company.

Question 16

Matching principle

Answer 16

A concept of accounting in which expenses are matched with the revenue generated during a period by those expenses.

Example: Matching expenses of producing goods with the revenue from selling those goods.

Question 17

Prepaid expense

Answer 17

Assets created by making advanced payments for expense items, such as insurance premiums or supplies, that will be used in the business in the future.

Example: Prepaid rent for office space.

Question 18

Revenue recognition principle

Answer 18

A concept of accounting that states that revenues are recorded when earned, which is when the services have been performed or products have been delivered to customers.

Example: Recognizing revenue when services are completed, not when cash is received.

Question 19

Unearned revenue

Answer 19

The liability created by receiving revenue in advance.

Example: Advance payments for services not yet rendered.

Question 20

Vertical analysis

Answer 20

An analysis that compares each item in a current statement with a total or key amount within the same statement.

Example: Analyzing each expense as a percentage of total expenses on the income statement.