Chapter 3 Notes Flashcards
Accounting Cycle
Process of recording and processing financial transactions.
Measurement Process
Recording assets, liabilities, revenues, and expenses.
Reporting Process
Preparation of financial statements for stakeholders.
Closing Process
Finalizing accounts at the end of the accounting period.
Cash-Basis Accounting
Records transactions when cash is received or paid.
Accrual-Basis Accounting
Records transactions when they occur, regardless of cash.
Assets
Resources owned by a company, recorded when obtained.
Liabilities
Obligations owed by a company, recorded when incurred.
Revenues
Income earned from providing goods/services, recorded when provided.
Expenses
Costs incurred in operations, recorded when used.
Economic Events
Transactions affecting financial position, recorded as they occur.
Deferred Revenue
Cash received before services are provided, recorded as liability.
Service Revenue
Income from services rendered, recorded when service is provided.
Transaction Description
Details of financial transactions for accurate recording.
Concept Check 3-1
Identifies correct timing for recording expenses.
Accrual vs Cash Basis
Comparison of two accounting methods for transactions.
Financial Statements
Reports summarizing financial performance and position.
Adjusting Entries
Entries made to update account balances before financial statements.
Closing Entries
Entries to transfer balances to retained earnings at period end.
External Transactions
Transactions between the company and outside parties.
Internal Transactions
Transactions occurring within the company.
Learning Objectives
Goals for understanding key accounting concepts.
Transaction Posting
Process of transferring journal entries to ledger accounts.
Prepaid Rent
Rent paid in advance recorded as an asset.
Supplies
Items purchased recorded as an asset until used.
Accrual-Basis Accounting
Records revenues and expenses when earned or incurred.
Cash-Basis Accounting
Records revenues and expenses when cash is received or paid.
Timing Differences
Discrepancies in recording revenues and expenses timing.
GAAP
Generally Accepted Accounting Principles for financial reporting.
Revenue Recognition
Accrual: when goods/services provided; Cash: when cash received.
Expense Recognition
Accrual: when costs are incurred; Cash: when cash paid.
Utilities Expense
Recorded when utilities are used, under accrual accounting.
Supplies Expense
Recorded when supplies are purchased, under cash accounting.
Financial Reporting
Requires adherence to GAAP for accuracy and consistency.
Office Supplies
Purchased supplies recorded as an asset until used.
Salaries Expense
Recorded when salaries are paid to employees.
Cash Payment
Transaction recorded when cash is exchanged.
Accrual Recognition
Revenues recognized upon delivery of goods/services.
Cash Recognition
Revenues recognized upon cash receipt.
Expense Incurred
Costs recognized when utilized in operations.
Concept Check
Questions assessing understanding of accounting principles.
Borrowing Equipment
Acquisition of equipment through bank loans.
Current Period
Refers to the ongoing accounting period.
Asset
Resource owned by a company with future economic benefits.
Liability
Obligation of a company to pay debts.
Equity
Owner’s residual interest in the assets of a company.
Accrual-Basis Accounting
Records expenses when incurred to generate revenue.
Utilities Expense
Cost incurred for utilities to generate revenue.
Adjusting Entries
Updates balances of assets and liabilities.
Timing Differences
Discrepancies between cash flows and revenues/expenses.
Assets and Liabilities
Reported differences under accrual-basis accounting.
Prepayments
Payments made in advance for future expenses.
Adjusting Entry Purpose
To recognize expenses as assets are used.
Prepaid Expenses
Cash paid for assets not yet used.
Rent Expense
Cost recognized for expired prepaid rent.
Supplies Expense
Cost recognized for used supplies.
Common Stock Sale
Funds raised by selling shares for $200,000.
Bank Loan
$100,000 borrowed, repayable in three years.
Equipment Purchase
$120,000 spent on training equipment.
Advance Rent Payment
$60,000 paid for one year of rent.
Supplies Purchase
$23,000 bought on account for supplies.
Cash Revenue
$43,000 earned from cash training services.
Accounts Receivable Revenue
$20,000 earned on account for training.
Unearned Revenue
$6,000 received in advance for future services.
Salaries Expense
$28,000 paid to employees for services.
Dividends Paid
$4,000 distributed to shareholders.
Prepaid Rent Adjustment
Decrease asset and recognize rent expense.
Supplies Adjustment
Recognize expense as supplies are consumed.
Supplies Remaining
Total supplies left at month-end: $13,000.
Supplies Expense
Cost of supplies used during the period: $10,000.
Adjusting Entry
Entry to update accounts at period-end.
Prepaid Expense
Payment made for future expenses, like equipment.
Depreciation Expense
Monthly expense for asset wear: $2,000.
Accumulated Depreciation
Total depreciation recorded against an asset.
Book Value
Asset cost minus accumulated depreciation.
Deferred Revenues
Liability for cash received before services rendered.
Cash Received in Advance
Cash received before providing goods/services: $6,000.
Services Provided
Revenue recognized after fulfilling service obligation: $2,000.
Equipment Cost
Initial purchase price of equipment: $120,000.
Monthly Depreciation Calculation
$120,000 divided by 60 months equals $2,000.
Balance Sheet
Financial statement showing assets, liabilities, and equity.
Liability
Obligation to pay or provide services in future.
Contra Account
Account that offsets another account’s balance.
Net Property and Equipment
Total property value after depreciation: $33,608.
Partial Balance Sheet
Section of balance sheet showing specific assets.
Cash on Account
Cash transactions recorded for future services.
Adjusting Entry for Prepaid Expense
Debit expense, credit asset or contra account.
Equipment Use Expired
Portion of equipment cost allocated as expense.
Remaining Deferred Revenue
Amount owed to customers after services provided: $4,000.
Service Obligation
Company’s duty to deliver services for cash received.
Revenue Recognition Principle
Revenue recorded when earned, not when cash received.
Deferred Revenue
Liability for services paid in advance.
Service Revenue
Income from services provided to customers.
Accrued Expenses
Costs incurred but not yet paid.
Salaries Payable
Liability for salaries earned but unpaid.
Salaries Expense
Cost of salaries incurred in the period.
Utilities Expense
Cost of utilities used but unpaid.
Interest Expense
Cost of interest incurred on borrowed funds.
Adjusting Entry
Journal entry to update account balances.
Current Liabilities
Obligations due within one year.
Balance Sheet
Financial statement showing assets and liabilities.
Current Operating Lease Liabilities
Liabilities from lease agreements due within one year.
Accounts Payable
Liabilities for goods/services received but unpaid.
Accrued Compensation
Liabilities for employee compensation earned.
Short-term Borrowings
Loans due within one year.
Current Maturities of Long-term Debt
Portion of long-term debt due this year.
Total Current Liabilities
Sum of all current liabilities.
Adjusting Entry for Salaries
Records salaries incurred but not paid.
Adjusting Entry for Utilities
Records utilities incurred but not paid.
Adjusting Entry for Interest
Records interest incurred on borrowed funds.
Salary Adjustment Calculation
Accrual based on days worked in the period.
Utilities Owed
Liability for unpaid utility costs.
Interest Owed
Liability for unpaid interest costs.
Interest Expense
Cost incurred for borrowed funds during a period.
Interest Payable
Liability for interest owed but not yet paid.
Adjusting Entry
Journal entry to update accounts at period-end.
Accrued Revenues
Revenues earned but not yet received in cash.
Accounts Receivable
Asset representing amounts owed by customers.
Service Revenue
Income earned from providing services to customers.
Accrual
Recording revenues or expenses when earned or incurred.
Prepayment
Cash paid before receiving goods or services.
Annual Interest Rate
Percentage charged for borrowing money annually.
Fraction of the Year
Proportion of the year for interest calculation.
Adjusting Entry Example
Interest Expense $200, Interest Payable $200.
Common Mistake
Misclassifying interest payable as notes payable.
Interest Calculation Formula
Note Payable × Annual Rate × Fraction of Year.
Interest Expense Calculation
$20,000 × 6% × 2/12 = $200.
Billed Services
Services provided and invoiced to customers.
Unbilled Services
Services provided but not yet invoiced.
Revenue Recognition
Recording revenue when earned, not when received.
Liability
Obligation to pay money to another party.
Cash Flow
Movement of cash in and out of a business.
Adjusting Entries Necessity
Required for accrued or prepaid transactions.
Non-Adjusting Transactions
Do not require adjustments for revenue or expenses.
Concept Check
Review questions to reinforce understanding of material.
December 31 Adjustments
End-of-year entries for accurate financial reporting.
Adjusted Trial Balance
List of accounts with updated balances.
Adjusting Entries
Entries made to update account balances.
Cash
Asset representing liquid funds available.
Accounts Receivable
Money owed by customers for services.
Supplies
Inventory of materials for business operations.
Prepaid Rent
Rent paid in advance for future periods.
Equipment
Long-term asset used in business operations.
Accumulated Depreciation
Total depreciation expense allocated to an asset.
Accounts Payable
Liabilities owed to suppliers for purchases.
Deferred Revenue
Payments received before services are rendered.
Salaries Payable
Wages owed to employees at period end.
Utilities Payable
Outstanding utility bills to be paid.
Interest Payable
Interest expense incurred but not yet paid.
Notes Payable
Written promises to pay a specified amount.
Common Stock
Equity raised from shareholders’ investments.
Retained Earnings
Cumulative profits retained in the business.
Dividends
Payments made to shareholders from profits.
Service Revenue
Income earned from providing services.
Rent Expense
Cost incurred for using rental properties.
Supplies Expense
Cost of supplies used during the period.
Depreciation Expense
Allocation of asset cost over its useful life.
Salaries Expense
Total wages paid to employees during the period.
Utilities Expense
Costs incurred for utility services used.
Income Statement
Financial report summarizing revenues and expenses.
Interest Expense
Cost incurred on borrowed funds.
Statement of Stockholders’ Equity
Shows changes in equity over a period.
Common Stock
Equity ownership in a corporation.
Dividends
Payments made to shareholders from earnings.
Net Income
Total revenue minus total expenses.
Balance Sheet
Snapshot of assets, liabilities, and equity.
Current Assets
Assets expected to be converted to cash within a year.
Cash
Liquid currency available for use.
Accounts Receivable
Money owed by customers for sales.
Supplies
Consumable items used in operations.
Prepaid Rent
Rent paid in advance for future use.
Accounts Payable
Money owed to suppliers for purchases.
Deferred Revenue
Payments received before services are performed.
Utilities Payable
Unpaid utility bills at period end.
Interest Payable
Interest owed on borrowed funds.
Long-term Liabilities
Obligations due beyond one year.
Notes Payable
Written promises to pay a specific amount.
Closing Entries
Entries that reset temporary accounts to zero.
Temporary Accounts
Accounts that are closed at period end.
Cash Flow Statement
Reports cash inflows and outflows.
Closing Entries
Transfer temporary account balances to Retained Earnings.
Temporary Accounts
Accounts closed at period-end; include revenues, expenses.
Retained Earnings
Permanent account reflecting cumulative earnings over time.
Dividends
Distributions to shareholders reducing Retained Earnings.
Post-Closing Trial Balance
List of accounts after closing entries are posted.
Salaries Expense
Cost incurred for employee compensation during the period.
Utilities Expense
Costs for services like electricity and water.
Interest Expense
Cost incurred on borrowed funds during the period.
Supplies Expense
Cost of supplies used during the accounting period.
Rent Expense
Cost incurred for using property or space.
Closing Process
Steps to finalize accounts for the next period.
Revenue Accounts
Accounts representing income earned during the period.
Expense Accounts
Accounts representing costs incurred during the period.
Common Mistake
Belief that Retained Earnings is closed to zero.
Permanent Accounts
Accounts that carry balances into future periods.
Zero Balance
Temporary accounts reset to zero after closing.
General Ledger
Complete record of all financial transactions.
Accumulated Depreciation
Total depreciation expense recognized against an asset.
Accounts Payable
Liabilities owed to suppliers for goods/services received.
Deferred Revenue
Liabilities for services not yet performed.
Trial Balance
List of account balances to verify correctness.
Interest Revenue
Income earned from lending funds.
