Chapter 3

Question 1

cash basis accounting

Answer 1

records revenues/expenses only when they actually occur.

Question 2

accrual basis accounting

Answer 2

records revenues/expenses as they are incurred but before they are paid

Question 3

Time Period Concept

Answer 3

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.

Question 4

fiscal year

Answer 4

any 12 consecutive months used as an accounting period

Question 5

5 Steps of Revenue Recognition

Answer 5

1. Identify the contract(s) w/ the customer
2. Identify the separate performance obligation in the contract
3. Determine the transaction price
4. Allocate the transaction price to separate obligations
5. Recognize revenue when each performance obligation is satisfied.

Question 6

matching principle

Answer 6

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.

Question 7

Adjusting Entry

Answer 7

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

Question 8

revenue recognition principle

Answer 8

requires companies to record revenue when or as the entity satisfies each performance
obligation

Question 9

deferral

Answer 9

cash paid or received before expense occurs or revenue is earned

Question 10

accrual

Answer 10

records expenses and revenue before cash is paid or received

Question 11

deferred expenses

Answer 11

asset created when a business makes advance payments of future expenses

prepaid expenses

Question 12

deferred expense adjustment

Answer 12

decreases the asset(cr), increases the expense (dr) over time.

Question 13

Property, Plant, Equipment

Answer 13

also called plant assets

long-lived, tangible assets like land, buildings, and equipment used in business operation

Question 14

depreciation

Answer 14

allocation of an asset’s cost over its useful life

Question 15

residual value

Answer 15

expected value of a depreciable asset at the end of its useful life

Question 16

straight line method

Answer 16

depreciation= (cost-residual value)/Useful life

Question 17

useful life

Answer 17

the expected length of use of an asset

Question 18

accumulated depreciation account

Answer 18

keeps track of depreciation without changing the cost value of an asset.

accumulates the total amount of depreciation to date.

(maintains cost principle)

Question 19

Contra Assets

Answer 19

Asset with a normal credit balance

Question 20

Contra account

Answer 20

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

Question 21

Book Value

Answer 21

=Asset cost-accumulated depreciation

represents the cost invested in an asset that has not yet been expensed

Question 22

deferred revenues

Answer 22

unearned revenues

received payment for service/ goods not yet received

liability

Question 23

accrued expenses

Answer 23

an expense incurred but not yet paid

for example:

Salary Expense

Payables

Question 24

accrued interest expense

Answer 24

amount of interest= principle * interest rate * time (accrued)

Question 25

accrued revenues

Answer 25

revenue earned, not yet collected

receivables

Question 26

Adjusted Trial Balance

Answer 26

A list of accounts and their balances after all adjustments have been made

Question 27

effect of deferred expense adjusting entries

Answer 27

Entry always:
Expense DR
Asset CR

corrects:

understated expenses and overstated income on the income statement

overstated assets & equity on the balance sheet

Question 28

effects of deferred revenue adjusting entries

Answer 28

Entry always:
Liability DR

Revenue CR

corrects:

understated revenues & income on the income statement

overstated liabilities & understated equity on the balance sheet

Question 29

effects of accrued expense adjusting entries

Answer 29

Entry always:
Expense DR

Liability CR

corrects:

understated expenses and overstated income on the income statement

understated liabilities & overstated equity on the balance sheet

Question 30

effects of accrued revenue adjusting entries

Answer 30

Entry always:
Asset DR

Revenue CR

corrects:

understated revenues & income on the income statement

understated assets & equity on the balance sheet

Question 31

adjusting entries never

Answer 31

adjust the cash account