Chapter 3 Terms Flashcards
Accrual-Basis Accounting
Accounting basis in which companies record transactions that change a company’s financial statements in the periods in which the events occur
Accruals
Adjusting entries for either accrued revenues or accrued expenses
Accrued Expenses
Expenses incurred but not yet paid in cash or recorded
Accrued Revenues
Revenues for services performed but not yet received in cash or recorded
Adjusted Trial Balance
A list of accounts and their balances after the company has made all adjustments
Adjusting Entries
Entries made at the end of an accounting period to ensure that companies follow the revenue recognition and expense recognition principles
Book Value
The difference between the cost of a depreciable asset and its related accumulated depreciation
Calendar Year
An accounting period that extends from January 1 to December 31
Cash-Basis Accounting
Accounting basis in which companies record revenue when they receive cash and an expense when they pay out cash
Comparability
Ability to compare the accounting information of different companies because they use the same accounting principles
Consistency
Use of the same accounting principles and methods from year to year within a company
Contra Asset Account
An account offset against an asset account on the balance sheet
Cost Constraint
Constraint that weighs the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available
Deferrals
Adjusting entires for either prepaid expenses or unearned revenues
Depreciation
The process of allocating the cost of an asset to expense over it useful life
Economic Entity Assumption
An assumption that every economic entity can be separately identified and accounted for
Expense Recognition Principle
The principle the companies recognize expenses in the period in which the companies make efforts (consume assets or incur liabilities) to generate revenue
Fair Value Principle
An accounting principle that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability)
Faithful Representation
Information that accurately depicts what really happened
Fiscal Year
An accounting period that is one year in length
Full Disclosure Principle
An accounting principle that dictates that companies disclose circumstances and events that make a difference to financial statement users
Going Concern Assumption
The assumption that the company will continue in operation for the foreseeable future
Historical Cost Principle
An accounting principle that states that companies should record assets at their cost
Interim Periods
Monthly or quarterly accounting time periods
Materiality
A company-specific aspect of relevance. An item is material when its size makes it likely to influence the decision of an investor or creditor
Monetary Unit Assumption
An assumption that requires that only those things that can be expressed in money are included in the accounting records
Prepaid Expenses (Prepayments)
Future expenses paid in cash before they are used or consumed
Relevance
The quality of information that indicates the information makes a difference in decision
Revenue Recognition Principle
The principle that companies recognize revenue in the accounting period in which the performance obligation is satisfied
Timely
Describes information that is available to decision-makers before it loses its capacity to influence decisions
Time Period Assumption
An assumption that accountants can divide the economic life of a business into artificial time periods
Understandability
Describes information that is presented in a clear and concise fashion so that users can interpret it and comprehend its meaning
Unearned Revenues
A liability recorded for cash before services are performed
Useful Life
The length of service of a long-lived asset
Verifiable
Describes information that occurs when independent observers, using the same methods, obtain similar results
