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Accounting Ch.3


Accounting period Length of time covered by financial statements; also called reporting period.
Accrual basis accounting Accounting system that recognizes revenues when earned and expenses when incurred; the basis for GAAP.
accrued expenses Costs incurred in a period that are both unpaid and unrecorded; adjusting entries for recording accrued expenses involve increasing expenses and increasing liabilities.
accrued revenues Revenues earned in a period that are both unrecorded and not yet received in cash (or other assets); adjusting entries for recording accrued revenues involve increasing assets and increasing revenues.
adjusted trail balance List of accounts and balances prepared after period-end adjustments are recorded and posted.
adjusting entry Journal entry at the end of an accounting period to bring an asset or liability account to its proper amount and update the related expense or revenue account.
annual financial statements Financial statements covering a one-year period; often based on a calendar year, but any consecutive 12-month (or 52-week) period is acceptable.
book value Asset's acquisition costs less its accumulated depreciation (or depletion, or amortization); also sometimes used synonymously as the carrying value of an account.
cash basis accounting Accounting system that recognizes revenues when cash is received and records expenses when cash is paid.
Contra account Account linked with another account and having an opposite normal balance; reported as a subtraction from the other account's balance.
Depreciation Expense created by allocating the cost of plant and equipment to periods in which they are used; represents the expense of using the asset.
Expense recognition (or matching) principle aims to record expenses in the same accounting period as the revenues that are earned as a result of those expenses.
Fiscal year Consecutive 12-month (or 52-week) period chosen as the organization's annual accounting period.
Interim financial statements Financial statements covering periods of less than one year; usually based on one-, three-, or six-month periods.
Natural business year Twelve-month period that ends when a company's sales activities are at their lowest point.
Plant assests Tangible long-lived assets used to produce or sell products and services; also called property, plant and equipment (PP&E) or fixed assets.
Prepaid expenses Items paid for in advance of receiving their benefits; classified as assets.
Profit margin Ratio of a company's net income to its net sales; the percent of income in each dollar of revenue; also called net profit margin
Straight-line depreciation method Method that allocates an equal portion of the depreciable cost of plant asset (cost minus salvage) to each accounting period in its useful life.
Time period assumption Assumption that an organization's activities can be divided into specific time periods such as months, quarters, or years.
Unadjusted trial balance List of accounts and balances prepared before accounting adjustments are recorded and posted.
Unearned revenues Liability created when customers pay in advance for products or services; earned when the products or services are later delivered.
Created by: 1205581920