Accounting ch 4

  1. Revenue recognition principle
    • The principle that companies recognize revenue in the accounting period
    • in which it is earned.
  2. Matching principle
    • 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.
  3. Accrual-basis accounting
    • 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.
  4. Cash-basis accounting
    • Accounting basis in which a company records revenue only when it
    • receives cash, and an expense only when it pays out cash.
  5. Adjusting entries
    • 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.
  6. Prepaid expenses (prepayments)
    • 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).
  7. Useful life
    The length of service of a productive asset.
  8. Depreciation
    • 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.
  9. Book value
    • The difference between the cost of a depreciable asset and its related
    • accumulated depreciation.

    ex: (Equipment) $5,000 - $40 (accumulated depreciation)= book value
  10. Unearned revenue
    • 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.
  11. Accrued revenues
    Revenues earned but not yet received in cash or recorded.
  12. Adjusted Trial Balance
    • A list of accounts and their balances after all adjustments have been
    • made.
  13. Temporary Accounts
    • Revenue, expense, and dividend accounts whose balances a company
    • transfers to Retained Earnings at the end of an accounting period.
  14. Permenant Accounts
    • Balance sheet accounts whose balances are carried forward to the next
    • accounting period.
  15. Closing Entries
    • Entries at the end of an accounting period to transfer the balances of
    • temporary accounts to a permanent stockholders' equity account, Retained
    • Earnings.
  16. Income summary
    A temporary account used in closing revenue and expense accounts.

    Revenue and expense accounts---> Income summary----> Retained Earnings account
  17. Post-closing trial balance
    • A list of permanent accounts and their balances after a company has
    • journalized and posted closing entries.
Card Set
Accounting ch 4
accounting ch 4