Chapter 3: The Adjusting Process

Question 1

the process of updating the accounts at the end of the period is called..

Answer 1

adjusting the books which requires special journal entries called adjusting journal entries

Question 2

Accrual-Basis Accounting

Answer 2

accounting that records revenues when earned and expenses when incurred

Records the effect of each transaction as it occurs

Question 3

Cash-Basis Accounting

Answer 3

Accounting that records transactions only when cash is revieced or paid

Question 4

In the cash basis, cash receipts are treated as ______ and cash payments are treated as _______.

Answer 4

Cash receipts are treated as REVENUES

Cash payments are treated as EXPENSES

Question 5

The Accounting Period Concept

Answer 5

Because businesses need periodic reports on thier affairs, accountants slice time into small segments and prepare financial statements for specific periods, such as a month, quarter, or year

The basic accounting period is one year (Jan 1- Dec 31)

Other companies use a fiscal year (the year-end date is usually the low point in business activity for the year)

Question 6

Revenue Recognition Principle

Answer 6

The basis for recording revenues: tells accountants…

When to record revenue - when earned

The amount of revenue to record - actual calue of item or service

Question 7

The Matching Principle

Answer 7

Guide to accounting for expenses.

1. Measures all the expenses incurred during the period

2. Matches the expenses against the revenues of the period.

to “match expenses against revenues” = to subtract expenses from revenues in that month

the goal is to compute net loss or net income

Identify all expenses incurred during the period, measure the expenses, and match them against the revenues earned during that same time period

Question 8

The Time-Period Concept

Answer 8

Ensures that information is reported at least annually

to measure income - companies update thier accounts at the end of each period, usually monthly.

Question 9

Adjusting Entries

Answer 9

Entries made at the end of the period to assign revenues to the period in which they are earned and expenses to the period in which they are incurred.

Adjusting entries help measure the period’s income and bring the related asset and liability accounts to correct balances for the financial statements

Needed to properly measure two things:

1. Net income (loss) on the income statement
2. Assets and liabilities on the balance sheet

Question 10

Prepaid

Answer 10

the cash payment occurs before an expense is recorded

or

the cash is recieved before the revenue is earned

also called a deferral

Question 11

Accural

Answer 11

The cash payment occurs after an expense is recorded

or

the cash is received after the revenue is earned

Question 12

Plant assets

Answer 12

long lived tangible assets used in the operation of a business: land buildings, equiptment, furniture, and automobiles.

Question 13

Depreciation