Chapter 3: Adjusting the Accounts Flashcards
What is a fiscal year?
An accounting time period that is one year long
What is an interim period?
Accounting time periods that are less than one year long
e.g. month or quarter of a year
What is accrual basis accounting?
A basis for accounting in which revenues are recorded when services are performed and expenses are recorded when incurred
What is cash basis accounting?
A basis for accounting in which revenues are recorded when cash is received and an expense is recorded when cash is paid
What are the two approaches to revenue recognition?
Contract-based approach and earnings approach
When is the contract-approach used to recognize revenue?
When a company follows IFRS
When is the earrings approach used to recognize revenue?
When a company follows ASPE. Requires revenue to be recognized when the performance is complete, the amount can be measured, and collection from the customer is profitable
What basis does the revenue recognition principle follow under both ASPE and IFRS?
Accrual basis of accounting
What is economic life divided into and what does it require?
Economic life is divided into reporting periods and requires the matching principle
Why do revenue and expenses require adjustments?
To be reported in the correct period
What are adjusting entries?
Entries made at the end of an accounting period to ensure that revenue and expense recognition criteria are followed
Why and when are adjusting entries needed?
1) To ensure that revenue is recorded when earned and expenses are recorded as incurred
2) Every time financial statements are prepared
Companies reporting under IFRS must prepare….
Quarterly financial statements. Adjusting entries are required every quarter
Companies reporting under APSE must prepare….
Annually financial statements. Adjusting entries are required annually
Why don’t accountants just record everything as it occurs?
- Some events are not recorded daily as it is not efficient to do so
- Some costs are not recorded during the accounting period because they expire with the passage of time rather than through daily transactions
- Some items may be unrecorded
Every adjusting entry affects…
One income statement and one balance sheet account
What is deprecation?
The allocation of the cost of a long-lived asset to expense over its useful life in a rational and systematic manner
True or False: Long-lived assets do not incur a visible reduction in the “quantity” or value of the asset over-time
True
What is accumulated depreciation?
The cumulative sum of the depreciation expense since the asset was purchased
What is the contra-asset account?
An account with the opposite balance (credit) compared with its related asset account, which has a debit balance
What is the carrying amount?
The difference between the cost of a depreciable asset and its accumulated depreciation. The unallocated or unexpired portion of the depreciable asset’s cost
What is useful life?
The length of service of a depreciable asset
What are prepaid expenses?
Expenses paid in cash and recorded as asset before used
What are accrued expenses?
Expenses incurred but not yet paid in cash or recorded
