Chapter 3 Flashcards
Recurring steps performed each accounting period, starting with analyzing transactions and continuing through the post-closing trial balance (or reversing entries).
ACCOUNTING CYCLE
Length of time covered by financial statements.
ACCOUNTING PERIODS or REPORTING PERIODS
Accounting system that recognizes revenues when earned and expenses when incurred; basis for GAAP.
ACCRUAL BASIS ACCOUNTING
Costs incurred in a period that are both unpaid and unrecorded; adjusting entries for recording accrued expenses involve increasing expenses and increasing liabilities.
ACCRUED EXPENSES
List of accounts and balances prepared after period-end adjustments are recorded and posted.
ADJUSTED TRIAL BALANCE
Journal entry at the end of an accounting period to bring an asset or liability account to its proper amount and update the related expense or revenue account.
ADJUSTING ENTRY
Financial statements covering a one-year period; often based on a calendar year, but any consecutive 12-month (or 52-week) period is acceptable.
ANNUAL FINANCIAL STATEMENTS
Asset’s acquisition costs less its accumulated depreciation (or depletion or amortization); also sometimes used synonymously as the carrying value of an account.
BOOK VALUE
Accounting system that recognizes revenues when cash is received and records expenses when cash is paid.
CASH BASIS ACCOUNTING
Balance sheet that presents assets and liabilities in relevant subgroups, including current and noncurrent classifications.
CLASSIFIED BALANCE SHEET
Entries recorded at the end of each accounting period to transfer end-of-period balances in revenue, gain, expense, loss, and withdrawal (dividend for a corporation) accounts to the capital account (to retained earnings for a corporation).
CLOSING ENTRIES
Necessary end-of-period steps to prepare the accounts for recording the transactions of the next period.
CLOSING PROCESS
Account linked with another account and having an opposite normal balance; reported as a subtraction from the other account’s balance.
CONTRA ACCOUNT
Cash and other assets expected to be sold, collected, or used within one year or the company’s operating cycle, whichever is longer.
CURRENT ASSETS
Obligations due to be paid or settled within one year or the company’s operating cycle, whichever is longer.
CURRENT LIABILITIES
Ratio used to evaluate a company’s ability to pay its short-term obligations, calculated by dividing current assets by current liabilities.
CURRENT RATIO
= current assets / current liabilities
Expense created by allocating the cost of plant and equipment to periods in which they are used; represents the expense of using the asset.
DEPRECIATION
Prescribes expenses to be reported in the same period as the revenues that were earned as a result of the expense.
EXPENSE RECOGNITION (or MATCHING) PRINCIPLE
Consecutive 12-month (or 52-week) period chosen as the organization’s annual accounting period.
FISCAL YEAR
Temporary account used only in the closing process to which the balances of revenue and expense accounts (including any gains or losses) are transferred; its balance is transferred to the capital account (or retained earnings for a corporation).
INCOME SUMMARY
Long-term assets (resources) used to produce or sell products or services; usually lack physical form and have uncertain benefits.
INTANGIBLE ASSETS
Financial statements covering periods of less than one year; usually based on one, three or six month periods.
INTERIM FINANCIAL STATEMENTS
Long-term assets not used in operating activities such as notes receivable and investments in stocks & bonds.
LONG-TERM INVESTMENTS
Obligations not due to be paid within one year or the operating cycle, whichever is longer.
LONG-TERM LIABILITIES
Twelve-month period that ends when a company’s sales activities are at their lowest point.
NATURAL BUSINESS YEAR
Normal time between paying cash for merchandise or employee services and receiving cash from customers.
OPERATING CYCLE
Accounts that reflect activities related to one or more future periods; balance sheet accounts whose balances are not closed; also called REAL ACCOUNTS.
PERMANENT ACCOUNTS
Tangible long-lived assets used to produce or sell products and services; also called PROPERTY, PLANT AND EQUIPMENT (PP&E) or FIXED ASSETS.
PLANT ASSETS
List of permanent accounts and their balances from the ledger after all closing entries are journalized and posted.
POST-CLOSING TRIAL BALANCE
Items paid for in advance of receiving their benefits; classified as assets
PREPAID EXPENSES
Ratio of a company’s net income to its net sales; the percent of income in each dollar of revenue; also called NET PROFIT MARGIN.
PROFIT MARGIN
= current assets / current liabilities
Statements that show the effects of proposed transactions and events as if they had occurred.
PRO-FORMA FINANCIAL STATEMENTS
Optional entries recorded at the beginning of a period that prepare the accounts for the usual journal entries as if adjusting entries had not occurred in the prior period.
REVERSING ENTRIES
Method that allocates an equal portion of the depreciable cost of plant asset (cost minus salvage) to each accounting period in its useful life.
STRAIGHT-LINE DEPRECIATION METHOD
Accounts used to record revenues, expenses, and withdrawals (dividends for a corporation); they are closed at the end of each period; also called NOMINAL ACCOUNTS.
TEMPORARY ACCOUNTS
Assumption that an organization’s activities can be divided into specific time periods such as months, quarters, or years.
TIME PERIOD ASSUMPTIONS
List of accounts and balances prepared before accounting adjustments are recorded and posted.
UNADJUSTED TRIAL BALANCE
Balance sheet that broadly groups assets, liabilities and equity accounts.
UNCLASSIFIED BALANCE SHEET
Liability created when customers pay in advance for products or services; earned when the products or services are later delivered.
UNEARNED REVENUES
Analyses and other informal reports prepared by accountants and managers when organizing information for formal reports and financial statements.
WORKING PAPERS
Spreadsheet used to draft an unadjusted trial balance, adjusting entries, adjusted trial balance, and financial statements.
WORK SHEET
First step in closing
REVENUES Dr
INCOME SUMMARY Cr
Second step in closing
INCOME SUMMARY Dr
EXPENSES Cr
Third step in closing process
for net income
INCOME SUMMARY Dr
RETAINED EARNINGS Cr
Fourth step in closing process
RETAINED EARNINGS Dr
DIVIDENDS Cr
