Chapter 4 Flashcards
What is the time period assumption?
Assumes that the economic life of a business can be divided into artificial time periods
What is the revenue recognition principle?
This dictates that revenue will be recognized in the accounting period in which it is earned
What is the matching principle?
This dictates that expenses are matched with revenues. Meaning, revenues earned in a month are offset against expenses incurred in that same month
What is accrual basis accounting?
Transactions that change a companies financial statements are recorded in the periods in which the events occur
What principles are under the accrual method?
Revenue recognition and matching principle
What is cash basis accounting?
Revenue is recorded when cash is received, and expenses are recorded when cash is paid
What are adjusting entries?
Are entries for which there may or may not be “source documents” such as invoices or sales receipts
What is classified under deferrals?
Prepaid expenses or unearned revenues
What is classified under accruals?
Accrued revenues or accrued expenses
What is depreciation?
The allocation of the cost of an asset to expense over its useful life in a rational and systematic manner
What are prepaid expenses?
Expenses paid in cash and received and recorded as assets before they are used or consumed
What are Unearned revenues?
Revenues received in cash and recorded as liabilities before service are performed
What are accrued revenues?
revenues for services performed but not yet recorded at the statement date
What are accrued expenses?
expenses incurred but not yet paid or recorded at the statement date
Prior to adjustment, how are prepaid expense accounts stated?
- Assets are over stated
- Expenses are understated
Where do the adjusting entries go for prepaid expenses?
- Debit to an expense account
- Credit to an asset account
Where do adjusting entries go for recording depreciation?
- Debit depreciation expense
- Credit accumulated depreciation (which is a contra asset account)
What is the book value of an asset?
The difference between the cost of any depreciable asset and its related accumulated depreciation
Prior to adjustment, how are unearned revenue accounts stated?
- Liabilities are overstated
- Revenues are understated
Where do adjusting entries go for unearned revenue accounts?
- Debit to a liability account
- Credit to a revenue account
What will an adjusting entry to accrual accounts do?
It will increase both a balance sheet and income statement account
Prior to adjustment, how are accrued revenues stated?
They are both understated
Where do adjusting entries go for accrued revenues?
- Debit to an asset account
- Credit to a revenue account
Prior to adjustment, how are accrued expenses stated?
Both are understated
Where do adjusting entries go for accrued expenses?
- Debit to an expense account
- Credit to a liability account
What is the purpose of the adjusted trial balance?
To prove the equality of the total debit and credit balances in the ledger after all adjustments have been made
Where is the income statement prepared from?
The revenue and expense accounts
Where is the retained earnings statement derived from?
Retained earnings account, dividends account, and net income
Where is the balance sheet prepared from?
From the asset, liability, and equity accounts
What is the order for financial statements?
1) Income statements
2) Retained earnings Statement
3) Balance Sheet
What do closing entries do?
They transfer the temporary or nominal account balances to the permanent stockholder’s equity account (retained earnings)
What do temporary accounts consist of?
- Revenue, expenses, and dividends
What do permanent accounts consist of?
- Assets, liabilities, and stockholder’s equity
What is the closing process?
1) Revenue and expense accounts are closed to the income summary
2) Income summary and dividends are closed to the retained earnings
What are the 9 steps to the accounting cycle?
1) Analyze business transactions
2) Journalize 3) Ledger accounts 4) Trial balance 5) Adjusting entries 6) Adjusted trial balance 7) Financial statements 8) Closing entries 9) Post-closing trial balance
