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ACCT110 Ch 3 & 4

Adjusting Accts & Prep Fin Stmnts; Completing Accting Cycle

QuestionAnswer
Accounting Period Length of Time Covered by financial statements; also called reporting period.
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 Trial 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 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 time periods in which they are used; represents the expense of using an asset.
Expense Recognition (Matching) Principle Prescribes expenses to be reported in the same period as the revenues that were earned as a result of the 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 with a company's sales activities are at their lowest point.
Plant Assets 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". Net income divided by net sales.
Straight-Line Depreciation 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 account 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.
Accounting Cycle Recurring steps performed each accounting period, starting with analyzing transactions and continuing through the post-closing trial balance (or reversing entries).
Classified Balance Sheet Balance sheet that presents assets and liabilities in relevant subgroups, including current and noncurrent classifications.
Closing Entries Entries recorded at the end of each accounting period to transfer end-of-period balances in revenue, gain, expense, loss, and withdrawal (dividend for a corporation) accounts to the capital account (or to retained earnings for a corporation).
Closing Process Necessary end-of-period steps to prepare the accounts for recording the transactions of the next period.
Current Assets Cash and other assets expected to be sold, collected, or used within one year or the company's operating cycle, whichever is longer.
Current Liabilities Obligations due to be paid or settled within one year or the company's operating cycle, whichever is longer.
Current Ratio Ratio used to evaluate a company's ability to pay its short-term obligations, calculated by dividing current assets by current liabilities.
Income Summary Temporary account used only in the closing process to which the balances of revenue and expense accounts (including any gains or losses) are transferred; its balance is transferred to the capital account (or retained earnings for a corporation).
Intangible Assets Long-term assets (resources) used to produce or sell products or services; usually lack physical form and have uncertain benefits.
Long-Term Investments Long-term assets not used in operating activities such as notes receivable and investments in stocks and bonds.
Long-Term Liabilities Obligations not due to be paid within one year or the operating cycle, whichever is longer.
Operating Cycle Normal time between paying cash for merchandise or employee services and receiving cash from customers.
Permanent Accounts Accounts that reflect activities related to one or more future periods; balance sheet accounts whose balances are not closed; also called real accounts.
Post-Closing Trial Balance List of permanent accounts and their balances from the ledger after all closing entries are journalized and posted.
Proforma Financial Statements Statements that show the effects of proposed transactions and events as if they occurred.
Reversing Entries Optional entries recorded at the beginning of a period that prepare the accounts for the usual journal entries as if adjusting entries had not occurred in the prior period.
Temporary Accounts Accounts used to record revenues, expenses and withdrawals (dividends for a corporation); they are closed at the end of each period; also called nominal accounts.
Unclassified Balance Sheet Balance sheet that broadly groups assets, liabilities and equity accounts.
Working Papers Analyses and other informational reports prepared by accountants and managers when organizing information for formal reports and financial statements.
Worksheet Spreadsheet used to draft an unadjusted trial balance, adjusting entries, adjusted trial balance, and financial statements.
Created by: slk