CHAPTER 3 + CHAPTER 4 Flashcards
Cash Basis Accounting
Recognizes revenues when cash is received, and expenses when they are paid.
This method is mainly used by small businesses and personal finance.
Accrual Basis Accounting
Recognizes revenues when they are earned (when performance obligation is satisfied), and expenses when they are incurred or used (known as mathching).
Widely used in financial accounting as it is required under IFRS and GAAP.
Operating vs Non-Operating Expense
Operating expenses refer to expenses related to primary operations of a firm, like salaries, rent, marketing, and depreciation.
Non-operating expenses occur from non-operating or secondary activities, such as interest, income tax, or losses from sales of long-term assets.
Debit vs Credit Balance
If a debit amount exceeds the credit amount, it’s a debit balance.
If a credit amount exceeds the debit amount, it’s a credit balance.
General Journal vs General Ledger
The general journal includes just the simple journal entry.
The general ledger includes the T accounts of the journal entry.
Trial Balance
Serves to prove that debits equal credits after posting transactions.
Recorded at the date occured.
Temporary vs Permanent Accounts
Temporary - revenue, expenses, dividends
Permanent - those on the statements of the financial position
Types of Adjusting Entries
Prepayments, prepaid expenses, and deferred revenues.
Types of Accrual Entries
Accrued expenses and accrued revenues.
How to close the income summary?
Credit retained earnings to balance
How to close dividends declared?
Debit retained earnings
5 Steps of the Revenue Recognition Model
- Is there a contract?
- What performance obligations are included in the contract?
- What is the transaction price?
- How should the transaction price be allocated to the performance obligations?
- Has the performance obligation been satisfied?
