Chapter 6 Flashcards
What is a profit and loss statement?
It (P and L) is an income statement providing an accurate accumulation of profit or loss via accrual accounting.
What is accrual basis accounting?
An accounting system in which income and expenses are reported when they are earned or incurred rather than when received or paid.
What happens if revenue recorded by the accrual method proves to be uncollectable?
Since the accrual method means that the rent was already reported as income, an expense equal to the income should be recorded.
What is expense accrual?
It is the act of recording an expense when incurred rather than when paid.
What is matching?
It is the recording of expenses incurred in income revenues regardless of whether cash has been disbursed in their payment. This is another term for expense accrual.
What are prepaid expenses?
They are expenses paid in one lump sum that apply to future periods up to one year.
What is amortization?
The systematic allocation of the cost of an intangible asset from the balance sheet to an expense account on the cash basis income statement.
What is inventory?
Recording supplies purchased in bulk for use in future periods as assets on the balance sheet.
What is charging out?
It is the method used to transfer inventory from the balance sheet to the cash basis income statement.
How is the process of inventory and charging out applied?
1) Supplies are added to the balance sheet
2) Supplies are used
3) The cost value of the supplies used is transfered from the balance sheet to the cash basis income statement.
What is capitalization?
It is the transferring of items purchased for use over an extended period of time from the cash basis income statement and recording them as assets on the balance sheet.
What is depreciation?
It is transfering the costs of long term assets to the cash basis income statement over an estimated useful life.
What is the goal of depreciation?
It is to properly allocate the cost of tangible revenue generating assets to the revenue it generates.
What is the Modified Accelerated Cost Recovery System (MACRS)?
It (MACRS) is a method of calculating depreciation which assumes a building useful life of 39 years. Accelerated Cost Recovery System (ACRS) assumes a useful life of 15-19 years.
What are intangible assets?
Assets that have no physical exsistance but have value because of rights conferred as a result of ownership or possesion.
How do you list early payment, security deposits, and other credits or cash that must ultimately be repaid or are not yet earned?
They must be held on the balance sheet as a liability until they are repaid.
What is a mortgage?
A lien securing a note payable using real assets as colateral.
What is a deed of trust?
An agreement between the loan issuer and holder covering assets.
What is owner’s equity?
The owners contribution as either an initial investment or subsequent cash infusions.
What is the balance sheet equation?
Assets=Liabilities + Owner’s Equity
How are asets, liabilities, and owner’s equity listed on the balance sheet?
Assets are debit accounts.
Liabilities and Owner’s Equity are listed as credits.
What are journal entries?
They are the transfers of cash transactions between the cash basis income statement and the balance sheet.
Fill in the blanks: Prepaid expenses, such as insurance or supplies purcahsed in bulk, should be removed from the __________ statement and recorded as _________ on the balance sheet.
Cash basis income
assets
Define capitalizion and depreciation.
Capitalization is the transfer of of long term assets from the cash basis income statement to the balance sheet as assets. Depreciation is the the transfer of the cost of assets to the cash basis income statement over an estimated useful life.
