Chapter 3 Flashcards
Accounting cycle
Recurring steps performed each accounting period, starting with analyzing transactions and continuing through the post-closing trial balance (or optional reversing entries)
Accounting period
Length of time covered by financial statements; also called reporting period
Accrual basis accounting
Accounting system that recognizes revenues when goods or services are provided and expenses when incurred; the basis for GAAP
Accrued expenses
Costs incurred in a period that are both unpaid and unrecorded; adjusting entries for recording accrued expenses involve increasing expenses and increasing liabilities
Accrued revenues
Revenues earned in a period that are both unrecorded and not yet received in cash (or other assets); adjusting entries for recording accrued revenues involve increasing assets and increasing revenues
Accumulated depreciation
Cumulative sum of all depreciation expense recorded for an asset
Adjusted trial balance
List of accounts and balances prepared after period-end adjustments are recorded and posted
Adjusting entry
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
Annual financial statements
Financial statements covering a one-year period; often based on a calendar year, but any consecutive 12-month (or 52-week) period is acceptable
Book value
Asset’s acquisition costs less its accumulated depreciation (or depletion, or amortization); also sometimes used synonymously as the carrying value of an account; also called asset book value
Cash basis accounting
Accounting system that recognizes revenues when cash is received and records expenses when cash is paid
Classified balance sheet
Balance sheet that presents assets and liabilities in relevant subgroups, including current and noncurrent classifications
Closing entries
Entries recorded at the end of each accounting period to transfer end-of-period balances in revenue, gain, expense, loss, and withdrawals (dividends for a corporation) accounts to the capital account (or retained earnings for a corporation)
Closing process
Necessary end-of-period steps to prepare the accounts for recording the transactions of the next period
Contra account
Account linked with another account and having an opposite normal balance; reported as a subtraction from the other account’s balance
Current assets
Cash and other assets expected to be sold, collected, or used within one year or the company’s operating cycle, whichever is longer
Current liabilities
Obligations due to be paid or settled within one year or the company’s operating cycle, whichever is longer
Current ratio
Ratio used to evaluate a company’s ability to pay its short-term obligations, calculated by dividing current assets by current liabilities
Depreciation
Expense created by allocating the cost of plant and equipment to periods in which they are used; represents the expense of using the asset
Expense recognition (or matching) principle
Prescribes expenses to be reported in the same period as the revenues that were earned as a result of the expenses
Fiscal year
Consecutive 12-month (or 52-week) period chosen as the organization’s annual accounting period
Income summary
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 balances is transferred to the capital account (or retained earnings for a corporation
Intangible assets
Long-term assets (resources) used to produces or sell products or services; usually lack physical form and have uncertain benefits
Interim financial statements
Financial statements covering periods of less than one year; usually based on one-, three-, or six-month periods
Long-term investments
Long-term assets not used in operating activities such as notes receivable and investments in stocks and bonds
Long-term liabilities
Obligations not due to be paid within one year of the operating cycle, whichever is longer
Natural business year
Twelve-month period that ends when a company’s sales activities are at their lowest point
Operating cycle
Normal time between paying cash for merchandise or employee services and receiving cash from customers
Permanent accounts
Accounts that reflect activities related to one or more future periods; balance sheet accounts whose balances are not closed
Plant assets
Tangible long-lived assets used to produce or sell products and services; also called property, plant and equipment (PP&E) or fixed assets
Post-closing trial balance
List of permanent accounts and their balances from the ledger after all closing entries are journalized and posted
Prepaid expenses
Items paid for in advance of receiving their benefits; classified as assets
Pro forma financial statements
Statements that show the effects of proposed transactions and events as if they had occurred
Profit margin
Ration of a company’s net income to its net sales; the percent of income in each dollar of revenue; also called net-profit margin
Revenue recognition principle
The principle that revenue is recognized when goods or services are delivered to customers
Reversing entries
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
Straight-line depreciation
method that allocates an equal portion of the depreciable cost of plant asset (cost minus salvage) to each accounting period in its useful life
Temporary accounts
Accounts used to record revenues, expenses, and withdrawals (dividends for a corporation); they are closed at the end of each period
Time period assumption
Assumption that an organization’s activities can be divided into specific time periods such as months, quarters, or years
Unadjusted trial balance
List of accounts and balances prepared before accounting adjustments are recorded and posted
Unclassified balance sheet
Balance sheet the broadly groups assets, liabilities, and equity accounts
Unearned revenue
Liability created when customers pay in advance for products or services; earned when the products or services are later delivered
Work sheet
Spreadsheet used to draft an unadjusted trial balance, adjusting entries, adjusted trial balance, and financial statements
