WEEK 2 Flashcards
What is the Time Period Assumption in accounting?
It’s the idea that the life of a business can be divided into artificial time periods (like months, quarters, or years) for reporting purposes.
What is a timing issue in accounting?
It’s when a transaction impacts more than one accounting period, making it tricky to decide when to record revenues or expenses.
What are interim periods?
Monthly and quarterly accounting periods used for reporting.
What is accrual-basis accounting?
It records revenues and expenses when they happen, not when cash is received or paid.
What is cash-basis accounting?
It records revenue when cash is received and expenses when cash is paid.
Which basis of accounting does GAAP require?
Accrual-basis accounting
What is the Revenue Recognition Principle?
Companies must record (or “recognize”) revenue when they satisfy a performance obligation — not when cash is received.
What is the Expense Recognition Principle (also called the Matching Principle)?
Expenses should be recorded in the same period as the revenues they help generate.
How are the Revenue and Expense Recognition Principles related?
They work together under accrual accounting to match efforts (expenses) with results (revenue) in the same period to show true profit.
What are the two main types of adjusting entries?
Deferrals
Accruals
What is a deferral?
Cash happens before the revenue or expense is recorded.
What are examples of deferrals?
- Prepaid expenses (e.g., insurance, supplies, depreciation)
- Unearned revenues (cash received before service is done)
What is a prepaid expense?
An asset created when cash is paid for something that will be used in future periods (like insurance or rent). Adjusted later as it’s used.
What is unearned revenue?
A liability created when a company receives cash before performing a service. It becomes revenue as the service is done.
What is an accrual?
Revenue or expense is recorded before cash is received or paid.
What are examples of accruals?
- Accrued revenues (work done but not billed yet)
- Accrued expenses (expenses incurred but not paid yet, like wages or interest)
Depreciation
the process of allocating the cost of an asset to expense over its useful life
Accumulated Depreciation
Equipment is a contra asset account
adjusted trial balance
to prove the equality of the total debit balances and the total credit balances in the ledger after all adjustments
worksheet
multiple-column form used in the adjustment process and in preparing financial statements
is a worksheet a permanent tool or working tool
working tool
What is the first step in preparing a worksheet?
List all account balances from the unadjusted trial balance (taken from the ledger).
What happens in the second step of the worksheet?
Enter all adjusting entries in the adjustments columns, and make sure debits = credits.
What is the third step in the worksheet?
Calculate and list the adjusted trial balance by combining original balances with adjustments.
What is the fourth step in the worksheet?
Transfer (extend) the adjusted balances to the Income Statement and Balance Sheet columns.
What are temporary accounts?
Accounts that relate to only one accounting period, like revenues, expenses, and the drawings account. They are closed at the end of the period.
What are permanent accounts?
Accounts that carry over to the next period — like assets, liabilities, and the owner’s capital. These are not closed.
Why do we make closing entries?
To reset all temporary accounts to zero for the next accounting period and transfer the net income/loss to Owner’s Capital.
What is the Income Summary account?
A temporary account used only during the closing process to collect revenues and expenses before transferring the net result to capital.
drawings
opnames door de eigenaren van geld of gebruik uit de zaak van privegebruik
debit or credit: drawings
debit
explain income summary
Revenues have a credit balance, so you debit them → send to Income Summary.
Expenses have a debit balance, so you credit them → also to Income Summary.
Then you calculate net income or loss in Income Summary and transfer it to Owner’s Capital.
Drawings have a debit balance, so you credit them and send directly to Owner’s Capital (not to Income Summary).
When should a correcting entry be made?
As soon as the error is discovered, and before closing entries are made.
classified balance sheet
groups together similar assets and similar liabilities, using a number of standard classifications and sections
why are these groupings useful?
- whether the company has enough assets to pay its debts as they come due, and
- the claims of short- and long-term creditors on the company’s total assets.
operating cycle
the average time that it takes to purchase inventory, sell it on account, and then collect cash from customers
retailers
Merchandising companies that purchase and sell directly to consumers
wholesalers
Merchandising companies that sell to retailers
A merchandising company has two categories of expenses:
COGS
operating expenses
Multi-step Income Statement
Sales Revenue
− Cost of Goods Sold (COGS)
———————————————
= Gross Profit
Gross Profit
− Operating Expenses
———————————————
= Net Income (or Net Loss)
perpetual inventory system
These records continuously—perpetually—show the inventory that should be on hand for every item
periodic inventory system
they determine the cost of goods sold only at the end of the accounting period.
FOB Shipping Point
the seller places the goods free on board the carrier, and the buyer pays the freight costs.
FOB Destination
the seller places the goods free on board to the buyer’s place of business, and the seller pays the freight
purchase allowance
when someone is not happy with the product but they can keep it but do get a allowance (deduction) from the purchase price
what on the balance sheet changes when a purchase discount is used
inventory
Account Debit / Credit Amount
Accounts Payable Debit $3,500 → You’re paying off the full invoice (reduce liability)
Cash Credit $3,430 → Actual amount paid
Inventory Credit $70 → Discount reduces the cost of inventory
What are Sales Returns and Allowances?
They are transactions where the seller accepts returned goods or gives the buyer a price reduction (allowance) to keep the goods.
Is Sales Returns and Allowances a revenue or contra-revenue account?
contra-revenue account meaning it reduces total sales on the income statement.
whats a contra account
A contra account is an account that goes against another account.
So a contra-revenue account goes against revenue — it reduces it.
What are the journal entries for a sales return (when goods are returned)?
Dr. Sales Returns and Allowances
Cr. Accounts Receivable
Dr. Inventory
Cr. Cost of Goods Sold (COGS)
What if the returned goods are damaged or not worth full value?
Record Inventory and COGS at the fair value of the returned goods, not the original cost.
What is the journal entry for a sales allowance (goods not returned)?
Dr. Sales Returns and Allowances
Cr. Accounts Receivable
✅ No effect on Inventory or COGS
net sales formula
sales revenue - sales returns/allowances - sales discount = net sales
Nonoperating activities
consist of various revenues and expenses and gains and losses that are unrelated to the company’s main line of operations
COGS formula
beginning inventory
+ COGP
—-
COG available for sale
- ending inventory
—–
cost of goods sold
What’s the main difference between periodic and perpetual in how purchases are recorded?
perpetual: Purchases go directly into Inventory
periodic: Purchases go into a Purchases account
