Chapter 3 Financial Accounting Flashcards
What are 3 common accrued expenses?
Salaries
Interest
Taxes
Unearned revenues
Customer pays in advance for good or service
What are 3 examples of non cash transactions?
Sales on account
Purchases on account
Using prepaid expenses, such as supplies
Closing the Books
Done after financial statements are prepared
In a permeant account what happens in terms of period?
Ending balance of one period carries over to following period
How long do you have to pay off current liabilities?
Must be paid in the next 12 months
When you close the books what 3 things do you do?
Set temporary accounts to zero
- Transfer balances to retained earnings account
- Journal activity in Statement of Retained Earnings
Revenue Principle
Revenue is recorded when earned
What are the 2 purposes of Adjusting Entries?
Measure Income
Update Balance Sheet
Depreciation of Plant Assets never involves what?
Cash
In a temporary account, balance represents what?
A period of time
What are 4 examples of cash transactions?
Collecting from customers
Paying for expense
Borrowing money
Issuing Stock
When is revenue recorded?
When it’s earned
How should expenses be recorded?
Recorded in the time period in which they are incurred
Accumulated Depreciation Amount Definition
The sum of all depreciation from using an asset
Time Period Concept Definition
Makes sure accounting information is reported on regular intervals
What are 3 different ways that an expense can arise?
Cash Expense
Using up an asset
Creating a liability
Permeant account is associated with
Balance sheet
Book Value Definition
Cost minus accumulated depreciation
How is revenue recorded?
At the cash value of goods or services provided
Trial balance
End balance before adjustment process
What are examples of the time-period concept?
Quarterly
Annually
What are 3 things a business has to be sure of before preparing financial statements?
All revenue that has been earned has been recorded
- All expenses that have been incurred are matched to revenues
- Asset and liability accounts are up to date
Permanent Accounts include what 3 types of accounts ?
Assets
Liabilities
Equity Accounts
How many months does a company report on consistently?
12
Fiscal year
Not starting a reporting period on January 1st
Deferral Definition
An adjustment for an item that the business paid or received cash for in advance
Temporary Accounts are closed or not closed
Closed
Cash-Basis Accounting Definition
Only cash transactions recorded
How is a prepaid expense recorded?
Recorded when the asset is purchased
Depreciation of Plant Assets
Allocation of plant assets cost over their useful lives
What is an example of an expense when using up an asset?
Using supplies previously purchased
Accumulated Depreciation
Account that shows the sum of depreciation expense of the plant asset
What 3 things does accrual accounting do?
- Records business transactions when they occur
- Complies with GAAP
- Presents accurate financial picture
Balance Sheet Deficit Definition
When assets do not equal liabilities + owner’s equity
What is an example of a cash expense?
Paying monthly rent
What adjustment needs to be made for a prepaid expense?
Adjustment needed to record amount used
What adjustment has to be done for unearned revenues?
To adjust the amount of revenue earned
Temporary account is associated with
Income statement
How are unearned revenues recorded?
Recorded as a liability when company receives payment
Permanent Accounts are closed or not closed?
Not closed
Each adjusting entry affects what 2 things?
1 Income statement account
1 balance sheet account
What 3 things does Cash- Basis Accounting do?
Records transactions only when cash is received or paid
- Only used by very small businesses
- omits important information
Contra asset has what 2 things?
Always has a companion account
Normal credit balance
When is the trial balance prepared?
After adjustments are made and posted
Liquidity
How quickly something can be turned into cash
Accrued Expenses
Expenses incurred before cash is paid
What do accrued expenses result in?
A Liability
Temporary Accounts include what 3 types of accounts?
Revenue
Expenses
Dividends
What’s you always close in closing entries (RED)
Revenues
Expenses
Dividends
What is an example of an expense that can arise from creating a liability?
Receive a bill from a supplier
In the recording process what are the 2 differences between accrual and cash basis accounting?
Accrual Accounting
- when sale is made
- when bill is received
Cash Basis Accounting
- when customer pays for product or service
- when bills are paid
Accrual Accounting Definition
Cash and non-cash transactions recorded
The Matching Principle Definition
Match expenses with the revenue earned
Where do you always close your revenue, expenses and dividends?
Retained Earnings
What 2 things does the revenue principle say?
When to record revenue in a journal entry
The amount of revenue to record
