Accounting ch 4

• The principle that companies recognize revenue in the accounting period
• in which it is earned.

• The principle that dictates that companies match efforts (expenses) with
• accomplishments (revenues).

• “Let the expenses follow the revenues.” Thus, expense recognition
• is tied to revenue recognition. Applied to the preceding example, this
• means that the salary expense Conrad incurred in performing the cleaning
• service on June 30 should be reported in the same period in which it
• recognizes the service revenue. The critical issue in expense
• recognition is determining when the expense makes its contribution to
• revenue. This may or may not be the same period in which the expense is
• paid. If Conrad does not pay the salary incurred on June 30 until July,
• it would report salaries payable on its June 30 balance sheet.

• Accounting basis in which companies record, in the periods in which the
• events occur, transactions that change a company's financial statements,
• even if cash was not exchanged.

• Accounting basis in which a company records revenue only when it
• receives cash, and an expense only when it pays out cash.

• Entries made at the end of an accounting period to ensure that the
• revenue recognition and matching principles are followed.

• Adjusting entries are necessary because the trial balance—the first pulling
• together of the transaction data—may not contain up-to-date and complete
• data. This is true for several reasons:

• 1. Some events
• are not recorded daily because it is not efficient to do so. Examples
• are the use of supplies and the earning of wages by employees.
• 2. Some costs are
• not recorded during the accounting period because these costs expire
• with the passage of time rather than as a result of recurring daily
• transactions. Examples are charges related to the use of buildings and
• equipment, rent, and insurance.
• 3. Some items may
• be unrecorded. An example is a utility service bill that will not be
• received until the next accounting period.

• Adjusting entries are required
• every time a company prepares financial statements. The company
• analyzes each account in the trial balance to determine whether it is
• complete and up to date for financial statement purposes. Every adjusting entry will include one income
• statement account and one balance sheet account.

• Assets that result from the payment of expenses that benefit more than
• one accounting period. (ex. prepaid insurance)

• Prepaid expenses are costs that expire
• either with the passage of time (e.g., rent and insurance) or through use (e.g., supplies).

The length of service of a productive asset.

• he process of allocating the cost of an asset to expense over its useful
• life.

• One very important point to understand: Depreciation
• is an allocation concept, not a valuation concept. That is,
• depreciation allocates an asset's cost
• to the periods in which it is used. Depreciation does not attempt to
• report the actual change in the value of the asset.

• The difference between the cost of a depreciable asset and its related
• accumulated depreciation.

ex: (Equipment) $5,000 - $40 (accumulated depreciation)= book value

• Cash received before a company earns revenues and recorded as a
• liability until earned.

• Companies record cash received before revenue is earned by increasing
• (crediting) a liability account called unearned
• revenues.

• Unearned revenues are the opposite of prepaid expenses. Indeed, unearned
• revenue on the books of one company is likely to be a prepayment on the
• books of the company that has made the advance payment. For example, if
• identical accounting periods are assumed, a landlord will have unearned
• rent revenue when a tenant has prepaid rent.

Revenues earned but not yet received in cash or recorded.

• A list of accounts and their balances after all adjustments have been
• made.

• Revenue, expense, and dividend accounts whose balances a company
• transfers to Retained Earnings at the end of an accounting period.

• Balance sheet accounts whose balances are carried forward to the next
• accounting period.

• Entries at the end of an accounting period to transfer the balances of
• temporary accounts to a permanent stockholders' equity account, Retained
• Earnings.

A temporary account used in closing revenue and expense accounts.

Revenue and expense accounts---> Income summary----> Retained Earnings account

• A list of permanent accounts and their balances after a company has
• journalized and posted closing entries.