Chapter 4

Question 1

Revenue recognition

Answer 1

The process of recording revenue when there is an inflow of future economic benefits, resulting from an increase in an asset or a decrease in a liability, in the course of ordinary activities.

In addition, five conditions must be met:

• A contract must exist;
• The performance obligations are identified;
• The transaction price is determined;
• The transaction price is allocated to the performance obligations;
• Revenue is recognized when the performance obligation is satisfied.

Question 2

Expense recognition

Answer 2

The process of recording an expense when there is a decrease in future economic benefits, resulting from a decrease in an asset or an increase in a liability, in the course of ordinary activities.

Expense recognition is linked to revenue recognition, in that expenses are recognized in the period in which a company makes efforts to generate revenues.

Question 3

Accrual basis accounting

Answer 3

An accounting basis in which transactions that change a company’s financial statements are recorded in the periods in which the events occur, rather than in the periods in which the company receives or pays cash.

Question 4

Cash basis accounting

Answer 4

An accounting basis in which revenue is recorded only when cash is received, and an expense is recorded only when cash is paid.

Question 5

Adjusting entries

Answer 5

Journal entries made at the end of an accounting period to update the accounts, in order to ensure the proper recognition of revenues and expenses.

Question 6

Unadjusted trial balance

Answer 6

A list of accounts and their balances before adjusting journal entries have been made.

Question 7

Useful life

Answer 7

The length of service of a depreciable asset.

Question 8

Depreciation (aka amortization)

Answer 8

The process of allocating the cost of a depreciable asset (for example, buildings and equipment) over its useful life.

Question 9

Carrying amount (aka book value)

Answer 9

Amount at which an asset is recognized in the statement of financial position. Can be used to describe the assets of a company as a whole, or individual assets such as:

• Accounts receivable (cost - allowance for doubtful accounts);
• Depreciable assets (Cost - Accumulated depreciation);
• Amortizable assets (Cost - Accumulated amortization);
• Investments; and
• Bonds.

Question 10

Accrued expenses

Answer 10

Expenses incurred but not yet paid in cash that are recorded at the end of the period by an adjusting entry.

Question 11

Accrued revenues

Answer 11

Revenues earned but not yet received in cash that are recorded at the end of an accounting period by an adjusting entry.

Question 12

Adjusted trial balance

Answer 12

A list of accounts and their balances after all adjusting journal entries have been recorded and posted.

Question 13

Prepaid expenses

Answer 13

Expenses paid in cash and recorded as assets before they are used.

Question 14

Unearned revenues

Answer 14

Cash received and recorded as liabilities before revenue is earned.