Quiz (CH 2/3) Flashcards
when is accrual revenue and expenses recorded?
when the transaction occurs, and is earned or incurred, regardless of the the payment happens, like cash.
what is the revenue recognition rule?
revenue should be recognized when it is earned, and the expense recognition principle (matching principle) dictates that expenses should be matched with the revenues they help to generate.
when are adjusting entires recorded?
Adjusting accounts involves updating the balances of accounts at the end of an accounting period
What does it mean to close the books?
Closing the books involves transferring the balances of temporary accounts (revenues, expenses, and dividends) to permanent accounts (retained earnings) to prepare the accounts for the next period.
what are the final steps in the accounting cycle?
- Unadjusted trial balance 2. Adjusting the accounts 3. Constructing the financial statements 4. Closing the books
Cash base accounting?
Cash-basis accounting records only cash transactions, meaning revenues are recorded when cash is received, and expenses are recorded when cash is paid.
what is liquidation?
Liquidation involves shutting down a business, selling assets, paying liabilities, and returning leftover cash to owners, but ongoing businesses need regular progress reports.
expense recognition rule?
The principle involves two steps: identifying all expenses incurred during the accounting period and measuring and recognizing them in the same period as related revenues.
what is a prepaid expenses?
Prepaid expenses are assets because they provide future benefits. Examples include prepaid rent and supplies.
what are plant assets?
Plant assets are long-lived tangible assets like land, buildings, furniture, and equipment. All plant assets except land decline in usefulness over time, which is accounted for as an expense.
