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Flashcards in Chapter 4 Deck (37):
1

Cash Basis accounting

Only record revenues and expenses done in CASH. Recognize when you get cash not when you do the service.---not very reliable

2

Accrual accounting

Recognize revenue and expenses ONLY when service is preformed or when expense takes place. Recognize service even if cash isn't received--ex: pay for school but do not record until semester is finished and service is preformed.

3

Adjusting entries

Ensures that revenue recognition and expense recognition principles are followed-Never include cash

4

Deferrals

Cost of revenues that are recognized at a date later than the point when cash was originally exchanged- example: pay for school

5

Types of Deferrals

Prepaid expense and Unearned revenue

6

Prepaid expense

Expenses paid in cash and recorded as asset before they are used or consumed

7

Unearned revenue

Cash has been received for services that still need to be preformed---when service is preformed liability decreases because the obligation was already previously recorded

8

Accruals

Increase both balance sheet and income statement

9

Types of accruals

Accrued revenues and accrued expenses

10

Accrued revenues

revenues for serviced preformed but not yet received in cash or recorded
Example: preform golf lesson but havent received cash or recorded it

11

Accrued expenses

Expenses incurred but not yet paid in cash or recorded
interest on a loan have not paid or recorded it

12

Prepaid expenses examples

Insurance, supplies, advertising, rent, depreciation

13

Prepaid expense

Cash payment BEFORE expense recorded
Adjusting results in an increase (debit) to an expense account and a decrease (credit) to an asset account

14

Depreciation and accumulated depreciation recording

recorded as assets and CONTRA ASSET ACCOUNT accumulated depreciation is credited

15

Unearned revenue examples

Rent, magazine subscription, customer deposits for future service

16

Recording unearned revenue

Decrease (debit) liability account and increase (credit) revenue account
Company has performed obligation

17

Accrued Revenue examples

Interest, rent, services performed

18

Recording Accrued revenues

Revenue is recorded BEFORE cash is received
Increase (debit) assets account
Increase (credit) revenue account

19

Accrued expense examples

Interest, rent, salaries

20

Recording accrued expense

Expense recorded BEFORE cash payment
Increase (debit) expense account
Increase (credit) liability account

21

Revenue recognition principle

Requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied.--record revenue when service is performed

22

Book value

Difference between the cost of any depreciable asset and its related accumulated depreciation

23

Depreciation expense

Identifies the portion of an assets cost that expired during the period

24

Accounts before prepaid expense adjustment

Assets overstated Expenses understated

25

Accounts before unearned revenue adjustments

Liabilities overstated Revenues understated

26

Accounts before accrued revenue adjustments

Assets understated Revenues understated

27

Accounts before accrued expense adjusting

Expenses understated Liabilities understated

28

Adjusting trial balance

Shows debit/credit balances, including those adjusted, at the end of the accounting period

29

Closing the books

After the end of the account period companies transfer the temporary account balances to the permeant stockholders equity account

30

Temporary accounts

Revenue, Expenses, Dividends

31

Permanent accounts

Assets, Liabilities, Stockholders equity

32

Income summary

Temporary account to close revenue and expense accounts. The final balance is the net income/loss
Credit Revenue
Debit Expense

33

Retained Earnings

Final closing account which takes the income summary and credits dividends giving a final owners equity??

34

Post- closing trail balance

list of all permanent accounts and their balances after closing entries and journalized and posted. Proves equality of total debit balances and total credit balances of permeant accounts

35

Periodicity Assumption

Divides economic life of a business into time periods-month, quarter (3 months) or a year

36

Expense recognition principle (matching principle)

Expenses must be matched with revenues in the end of the period when company is trying to generate revenue

37

Fiscal year

Accounting period that is 1 year long