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Accounting 121
Chapter 3
| Term | Definition |
|---|---|
| time period assumption | assumption that an organization's activities can be divided into specific time periods such as months, quarters, or years |
| accounting period | length of time covered by financial statements also called reporting period |
| 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 |
| interim financial statements | financial statements covering periods of less than one year, usually based on one, three or six-month periods |
| fiscal year | consecutive 12-month (or 52 week) period chosen as the organization's annual accounting period |
| natural business year | twelve-month period that ends when a company's sales activities are at their lowest point |
| accrual basis accounting (part 1) | accounting system that recognizes revenues when goods or services are provided and expenses when incurred (matched with revenues), the basis for GAAP |
| accrual basis accounting (part 2) | improves comparability of financial statements from period to period; reflects better business performance than cash basis accounting |
| cash basis accounting | accounting system that recognizes revenues when cash is received and records expenses when cash is paid, cash basis income is cash receipts minus cash payments; does not follow GAAP |
| revenue recognition principle | the principle prescribing that revenue is recognized when goods or services are delivered to customers; recording revenue early overstates current period income; recording it late understates current period income |
| expense recognition (or matching) principle | prescribes expenses be reported in the same time period as the revenues that were earned as a result of the expenses; recording expenses early understates current-period income; recording it late overstates current-period income |
| Four types of adjustments that extend over more than one period | deferral of expense; deferral of revenue; accrued expense; accrued revenue |
| Three step process for adjusting entries | Step 1: Determine what the current account balance equals Step 2: Determine what the current account balance should equal Step 3: Record and adjusting entry to get from step 1 to step 2 |
| adjusting entry (part 1) | 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 |
| adjusting entry (part 2) | it affects one or more income statement accounts and one or more balance sheet accounts (but never the cash account) |
| prepaid expenses | deferred expenses; items paid for in advance of receiving their benefits; classified as assets |
| plant assets | tangible long-lived assets used to produce or sell products and services; also called property, plant, and equipment, (PP&E); provide benefits for more than one period |
| PP&E | property, plant, and equipment |
| plant assets (examples) | buildings, machines, vehicles and fixtures; all assets, (excluding land) wear out or become less useful |
| plant assets (benefits records) | the reports of the costs as expenses in the income statement over the asset's useful lives |
| 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 |
| straight-line depreciation | method that allocates an equal portion of the depreciate cost of plant asset (cost minus salvage) to each accounting period in its useful life |
| accumulated depreciation | cumulative sum of all depreciation expense recorded for an asset |
| contra account | an account linked with another account and having an opposite normal balance reported as a subtracted from the other account's evidence |
| depreciable basis | net cost of equipment |
| book value | net amount; asset's acquisition costs less its accumulated depreciation (or depletion, amortization); also sometimes used synonymously as the carry value of an account; also called asset book value |
| unearned revenue | liability created when customers pays in advance for products or services; earned when the products are later delivered. |
| defer (revenues) | to postpone; postpone reporting amounts received as revenues until the product or service is provided |
| 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; Costs incurred in a period that are both unpaid and unrecorded |
| bankers' rule | a 360-day year for interest computations |
| formula for computing accrued interest | principal owed * annual interest rate * fraction of year since last payment |
| accrued expenses (examples) | salaries, interest, rent, and taxes |
| 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; |
| accrued revenues (examples) | services, products, interest, and rent; use service fees and interest to show how to adjust for accrued revenues |
| straight line depreciation expense equation | straight-line depreciation expense = asset cost - salvage cost/useful life |
| accumulated depreciation (flash card) | contra-asset account with a normal credit balance, thus increase (+) with a credit (Cr.), and decreases with a debit (Dr.); BS |
| unadjusted trial balance | list of accounts and balances prepared before accounting adjustments are recorded and posted to the ledger |
| adjusted trial balance | list of accounts and balances prepared after period-end adjustments are recorded and posted to the ledger |
| closing process | necessary end-of-period steps to prepare the accounts for recording the transactions of the next period; (1) identify accounts for closing; (2) record and post the closing entries; (3) prepare a post-closing trial balance |
| closing process (steps) | 1. identify accounts for closing 2. record and post the closing entries 3. prepare a post-closing trial balance |
| temporary accounts | accounts used to record; transactions, events, revenues, expenses, and withdrawals (dividends for a corporation), for that period, and they are closed at the end of each period; the accounts are opened at the beginning of the period |
| income summary | temporary account used only in the closing process to which the balance of revenue and expense accounts (include any gains or losses) are transferred; its balance is transferred to the capital account (or retained earnings for a corporation) |
| temporary accounts (examples) | revenues; expenses; dividends; income summary; have ending balances equal to zero |
| permanent accounts | accounts that reflect activities related to one or more future periods; balance sheet accounts whose balances are not closed each period; carry their ending balance into future period |
| permanent accounts (examples) | assets; liabilities; common stock; retained earnings (equity accounts) (called balance sheet accounts) |
| closing entries (part 1) | entries recorded at the end of each accounting period to transfer end-of-period balances in revenue gain, expense, loss and withdrawals (dividends for a corporation); accounts to the capital account (or retained earnings for a corporation) |
| closing entries (part 2) | necessary at the end of each period after financial statements are prepared because: revenue, expense, and dividends accounts begin each period with zero balances retained earnings must reflect prior periods' revenues, expenses, and dividends |
| Four step closing process | 1. close income statement by debiting income 2. close income statement by crediting expenses 3. close income summary account to retained earnings 4. close dividends account to retained earnings |
| Step 1: Close Credit balances in revenue accounts to income summary (Part 1) | The first closing entry transfer credit balances in revenue (and gain) accounts to the income summary account, We bring account with credit balances to zero by debiting them. |
| Step 1: Close Credit balances in revenue accounts to income summary (Part 2) | This leaves revenue accounts with zero balances and they are now ready to record revenues for the next period |
| Step 2: Close Debit Balance in Expenses Accounts to Income Summary (Part 1) | The second closing entry transfers debit balances in expense (and loss) accounts to the income summary account, We bring expense accounts' debit balances to zero by crediting them. |
| Step 2: Close Debit Balance in Expenses Accounts to Income Summary (Part 2) | With a balance of zero, these accounts are ready to record expenses for the next period |
| Step 3: Close Income Summary to Retained Earnings (Part 1) | The third closing entry transfer the balance of the Income Summary account to the retained earnings account. This entry closes the income summary account. |
| Step 3: Close Income Summary to Retained Earnings (Part 2) | (If a net loss occurred because expenses exceeded revenues, the third entry is reversed: debit Retained Earnings and credit Income Summary) |
| Step 4: Close Dividends Account to Retained Earnings | The fourth closing transfers any debit balance in the Dividends account to the the retained earnings account. This entry gives the Dividends account a zero balance, and the account is now ready to record the next period's dividends |
| post-closing trial balance (part 1) | list of permanent accounts and their balances from the ledger after all closing entries are journalized and posted; verifies (1) total debits equal total credits for permanents accounts; (2) all temporary accounts have zero balances |
| post-closing trial balance (part 2) | only balance sheet (permanent) accounts are on a post-closing trial balance |
| accounting cycle | recurring step performed each accounting period, starting with analyzing transactions and continuing through the post-closing trial balance (or optional reversing entries) |
| 1. analyze transactions | analyze transactions to prepare for journalizing |
| 2. journalize | record accounts, including debits and credits, in a journal |
| 3. post | transfer debits and credits from the journal to the ledger |
| 4. prepare unadjusted trial balance | summarize unadjusted ledger accounts and amounts |
| 5. adjust and post | record adjustments to bring adjustments to bring account balances up to date; journalize and post adjustments |
| 6. prepare adjusted trial balance | summarize adjusted ledger accounts and amounts |
| 7. prepare financial statements | use adjusted trial balance to prepare financial statements |
| 8. close accounts | journalize and post entries to temporary accounts |
| 9. prepare post closing trial balance | test clerical accuracy of the closing procedures |
| 10. reverse and post (optional) | reverse certain adjustments in the next period optional step |
| unclassified balanced sheet | balance sheet that broadly groups assets, liabilities, and equity accounts |
| classified balance sheet | balance sheet that presents assets and liabilities in relevant subgroups, including current and noncurrent classifications |
| operating cycle | normal time between paying cash for merchandise or employee services and receiving cash from customers; assume a year |
| 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 assets (examples) | cash, short-term investments, accounts receivable, short-term notes receivable, goods for sale (called merchandise or inventory) and prepaid expenses |
| current | short term; within the year, or within the operating cycle, whichever is longer |
| long-term (or non-current) investments | long-term assets not used in operating activities, such as notes receivable and investments in stocks and bonds |
| noncurrent | long term; more than a year or more than the operating cycle whichever is longer |
| plant assets | tangible assets are both long-lived and used to produced or sell products and services |
| plant assets (examples) | equipment, machinery, buildings, land; also called fixed assets; property, plant, and equipment (PP&E) or long lived assets (noncurrent assets) |
| intangible assets | long-term assets, or resources used to products or services, usually lack physical form and have uncertain benefits |
| intangible assets (examples) | patents, trademarks, copyrights, franchises, and goodwill; value comes from the privileges or rights granted to or held by the owner |
| current liabilities | obligations due to be settled within one year or the company's operating cycle, which is longer |
| current liabilities (examples) | accounts payable, notes payable, wages payable, taxes payable, interest payable and unearned revenue |
| long term liabilities | obligations not due to be paid within on year or the operating cycle, whichever is longer |
| profit margin or return on sales | 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 |
| profit margin or return on sales (equation) | profit margin = net income/net sales |
| current ratio | ratio used to evaluate a company's ability to pay it's short term obligations, calculated by dividing current assets by current liabilities |
| current ratio (equation) | current ratio = current assets/current liabilities |
| PP&E | Plants, Property and Equipment |
| expired | the expense; what you have used up or consumed; AJE |
| unexpired | what you have (unused) on the remaining balance |
| worksheet | spreadsheet used to draft an unadjusted trial balance, adjusting entries, adjusted trial balance, and financial statements |
| pro forma financial statments | statements that show the effects of proposed transactions and events as if the had 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 |
| current assets | any asset expected to be "used up" within one year |
| current assets (examples) | cash short-term investments A/R Prepaid (e.g. Prepaid Rent, Prepaid Insurance, etc.) Inventory Office Supplies Short-term N/R (due w/in the year) |
| current liabilities | any liability due within one year |
| current liabilities (examples) | A/P Unearned Revenue Short-term N/P (if due w/in one year) Accrued liabilities (interest payable, salaries payable, wages payable, taxes payable) "Current portion of long term debt" |
| retained earnings (normal balance) | normal credit balance (+); thus increases with a Cr. and decreases with a Dr. (-); SRE |
Created by:
ryanriggs18
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