Chapter 3 Flashcards
cash basis accounting
records revenues/expenses only when they actually occur.
accrual basis accounting
records revenues/expenses as they are incurred but before they are paid
Time Period Concept
Assumes that a business’s activities can be sliced into small time segments and that financial statements can be prepared for specific periods, such as a month, quarter, or year.
fiscal year
any 12 consecutive months used as an accounting period
5 Steps of Revenue Recognition
- Identify the contract(s) w/ the customer
- Identify the separate performance obligation in the contract
- Determine the transaction price
- Allocate the transaction price to separate obligations
- Recognize revenue when each performance obligation is satisfied.
matching principle
Guides accounting for expenses, ensuring that all expenses are recorded when the are incurred, during the period, and matches those expenses against revenues for that same period.
Adjusting Entry
An entry made at the end of the accounting period that is used to record revenues to the period in which they are earned, and expenses to the period in which they occur
revenue recognition principle
requires companies to record revenue when or as the entity satisfies each performance
obligation
deferral
cash paid or received before expense occurs or revenue is earned
accrual
records expenses and revenue before cash is paid or received
deferred expenses
asset created when a business makes advance payments of future expenses
prepaid expenses
deferred expense adjustment
decreases the asset(cr), increases the expense (dr) over time.
Property, Plant, Equipment
also called plant assets
long-lived, tangible assets like land, buildings, and equipment used in business operation
depreciation
allocation of an asset’s cost over its useful life
residual value
expected value of a depreciable asset at the end of its useful life
straight line method
depreciation= (cost-residual value)/Useful life
useful life
the expected length of use of an asset
accumulated depreciation account
keeps track of depreciation without changing the cost value of an asset.
accumulates the total amount of depreciation to date.
(maintains cost principle)
Contra Assets
Asset with a normal credit balance
Contra account
an account paired with and listed immediately after its related account in the chart of accounts and financial statements. Normal balance is the opposite of the related account.
Furniture Expense= normal DR Balance
Accumulated Depreciation-Furniture = normal CR Balance
Book Value
=Asset cost-accumulated depreciation
represents the cost invested in an asset that has not yet been expensed
deferred revenues
unearned revenues
received payment for service/ goods not yet received
liability
accrued expenses
an expense incurred but not yet paid
for example:
Salary Expense
Payables
accrued interest expense
amount of interest= principle * interest rate * time (accrued)
