exam 1 Flashcards
Monetary unit assumption-
requires the companies include in the accounting records only transaction data that can be expressed in money terms
Economic entity assumption-
requires that the activities of the entity be kept separate and distinct from the activities of its owners and all other economic entities
Historical cost principle (or cost principle)-
dictates the companies record assets at their cost
Fair value principle-
states that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability)
Income statement
Reports the profitability of the company’s operations over a specific period
Lists revenues first, followed by expenses
Shows net income (or net loss)
Retained earnings statement
Reports the changes in retained earnings for a specific period of time
Time period is the same as that covered by the income statement
Indicates the reasons why retained earnings increased or decreased during the period
Balance sheet
retained earnings = revenues + expenses and dividends
Reports the assets, liabilities, and stockholders’ equity at a specific date
Lists assets at the top, followed by liabilities and stockholders’ equity
Total assets must equal total liabilities and stockholders’ equity
Is a snapshot of the company’s financial condition at a specific time (usually the month-end or year-end)
Accrual-basis accounting
companies record transactions that change a company’s financial statements in the periods in which the events occur
Companies recognize revenues when they perform services (rather than when they receive cash)
Recognizing expenses when incurred (rather than when paid)
Cash-basis accounting
companies record revenue at the time they receive cash
Simple, but can be misleading
It fails to record revenue for a company that has performed services but
Expense recognition principle
This principle requires the companies recognize expenses in the period in which they make efforts (consumer assets or incur liabilities) to generate revenue
revenue recognition principle
requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied
Deferrals:
Prepaid expenses: expenses paid in cash before they are used or consumed
Unearned revenues: cash received before services performed
Depreciation- process of allocating the cost of an asset to expense over its useful life
Depreciation is an allocation concept, not a valuation concept
Accruals:
Accrued revenues: revenues for services performed but not yet received in cash or recorded
Accrued expenses: expenses incurred but not yet paid in cash or recorded
9 steps
Analyze business transactions
Journalize
Post
Trial balance
Adjusted entries
Adjusted trial balance
Financial statements
Closing entries
Post-closing trial balance
closing process
Close out revenue
Close out expenses
Close out income summary to Retained earnings
Close out dividends to retained earnings
