chapter four notes Flashcards
recognition
formally RECORDING the transaction on the books (through journal entries)
measurement
qualify the transaction in terms of the unit of measure (dollars)
- reliable
- verifiable
- objective
what is the basic difference between cash and accrual accounting?
timing (when revenues and expenses are recorded)
cash basis
revenues are recorded when cash is received
expenses are recorded when cash is paid
accrual basis (required by GAAP)
revenues are recorded when EARNED without regard as to when cash is received
expenses are ACCRUED/INCURRED
when is revenue earned?
when we deliver a product or perform a service
revenue recognition principle (GAAP)
record revenues when the earning process is complete (WHEN to record revenue)
matching concept (GAAP)
match expenses incurred with revenues earned in the same accounting period (the expense helped generate the revenue)
directly matching expenses
cost of goods sold
indirectly matching expenses
depreciation expense
adjusting journal entry
entries at the end of every accounting period that update all revenues (if now earned) and all expenses (if now “used up”)
deferrals
cash is received/paid BEFORE the revenue/expense is recognized
deferred revenues
“unearned revenues”
deferred expenses
“prepaid expenses”
accruals
cash is received/paid AFTER the revenue/expense is recognized
accrued revenues
“receivables”
accrued expenses
“payables” or “accrued expenses”
depreciation, bad debts, and income taxes
deferred
what are the two rules of recording adjusting journal entries?
- a balance sheet AND an income statement account will be affected
- NEVER use the cash account
adjusted trial balance
trial balance AFTER adjustments (up-to-date ending balances)->used to prepare the financial statements
closing entries
zeroing out temporary accounts
temporary accounts
revenue
expenses
dividends
what is the purpose of closing entries?
to transfer the balances in revenue, expenses, gains/losses, and dividends into RETAINED EARNINGS
permanent accounts
all balance sheet accounts
income summary
temporary account used to close revenue and expenses
order of closing entries:
- revenues->income summary
- expenses->income summary
- income summary->retained earnings
- dividends->retained earnings
revenue recognition principle
record revenues when earned
matching principle
record expenses when incurred
what are the seven steps of the accrual accounting cycle?
- record journal entries
- post to t-accounts
- prepare trial balance
- record adjustments
- prepare an adjusted trial balance
- prepare financial statements
- closing entries
