Chapter 4 Flashcards
Accounting cycle
The accounting process that begins with analyzing and journalizing transactions and ends with the post-closing trial balance.
Example sentence: The company follows a strict accounting cycle to ensure accurate financial reporting.
Accrual basis of accounting
A basis of accounting under which revenues and expenses are reported on the income statement in the period in which they are earned or incurred.
Accrual basis provides a more accurate representation of a company’s financial position.
Cash basis of accounting
A basis of accounting under which revenues and expenses are reported on the income statement in the period in which cash is received or paid.
Small businesses often use cash basis accounting for its simplicity.
Closing entries
The journal entries that transfer the balances of temporary accounts to permanent accounts at the end of the accounting period.
Closing entries help prepare the financial statements for the next accounting period.
Closing process
The process of transferring the balances of temporary accounts to permanent accounts at the end of the accounting period.
The closing process ensures all temporary accounts are closed before the new accounting period begins.
Closing the books
The process of transferring the balances of temporary accounts to permanent accounts at the end of the accounting period.
Closing the books is an essential part of the accounting cycle.
Current assets
Cash and other assets that are expected to be converted to cash or sold or used up, usually within one year or less, through the normal operations of the business.
Current assets include cash, accounts receivable, and inventory.
Current liabilities
Liabilities that will be due within a short time (usually one year or less) and that are to be paid out of current assets.
Current liabilities include accounts payable and short-term loans.
Current ratio
A financial ratio that expresses the relationship between current assets and current liabilities, computed by dividing current assets by current liabilities.
A current ratio of 2:1 is considered healthy for a company.
Fixed (plant) assets
Physical resources that are owned and used by a business and are permanent or have a long life; long-term or relatively permanent tangible assets such as equipment, machinery, buildings, and land that are used in normal business operations.
Fixed assets are recorded on the balance sheet at their historical cost.
Liquidity
A company’s ability to convert assets into cash.
High liquidity means a company can easily meet its short-term obligations.
Long-term liabilities
Liabilities that will not be due for a long time (usually more than one year).
Long-term liabilities include bonds payable and long-term loans.
Notes receivable
A customer’s written promise to pay an amount and possibly interest at an agreed-upon rate; amounts that customers owe for which a formal, written instrument of credit has been issued.
Notes receivable are recorded as an asset on the balance sheet.
Permanent (real) accounts
Term for balance sheet accounts because they are relatively permanent with balances that carry forward from year to year.
Permanent accounts include assets, liabilities, and equity accounts.
Property, plant and equipment
Long-term or relatively permanent tangible assets such as equipment, machinery, and buildings that are used in normal business operations.
Property, plant, and equipment are often referred to as fixed assets.
