chapter four notes

Question 1

recognition

Answer 1

formally RECORDING the transaction on the books (through journal entries)

Question 2

measurement

Answer 2

qualify the transaction in terms of the unit of measure (dollars)

• reliable
• verifiable
• objective

Question 3

what is the basic difference between cash and accrual accounting?

Answer 3

timing (when revenues and expenses are recorded)

Question 4

cash basis

Answer 4

revenues are recorded when cash is received

expenses are recorded when cash is paid

Question 5

accrual basis (required by GAAP)

Answer 5

revenues are recorded when EARNED without regard as to when cash is received
expenses are ACCRUED/INCURRED

Question 6

when is revenue earned?

Answer 6

when we deliver a product or perform a service

Question 7

revenue recognition principle (GAAP)

Answer 7

record revenues when the earning process is complete (WHEN to record revenue)

Question 8

matching concept (GAAP)

Answer 8

match expenses incurred with revenues earned in the same accounting period (the expense helped generate the revenue)

Question 9

directly matching expenses

Answer 9

cost of goods sold

Question 10

indirectly matching expenses

Answer 10

depreciation expense

Question 11

adjusting journal entry

Answer 11

entries at the end of every accounting period that update all revenues (if now earned) and all expenses (if now “used up”)

Question 12

deferrals

Answer 12

cash is received/paid BEFORE the revenue/expense is recognized

Question 13

deferred revenues

Answer 13

“unearned revenues”

Question 14

deferred expenses

Answer 14

“prepaid expenses”

Question 15

accruals

Answer 15

cash is received/paid AFTER the revenue/expense is recognized

Question 16

accrued revenues

Answer 16

“receivables”

Question 17

accrued expenses

Answer 17

“payables” or “accrued expenses”

Question 18

depreciation, bad debts, and income taxes

Answer 18

deferred

Question 19

what are the two rules of recording adjusting journal entries?

Answer 19

1. a balance sheet AND an income statement account will be affected
2. NEVER use the cash account

Question 20

adjusted trial balance

Answer 20

trial balance AFTER adjustments (up-to-date ending balances)->used to prepare the financial statements

Question 21

closing entries

Answer 21

zeroing out temporary accounts

Question 22

temporary accounts

Answer 22

revenue
expenses
dividends

Question 23

what is the purpose of closing entries?

Answer 23

to transfer the balances in revenue, expenses, gains/losses, and dividends into RETAINED EARNINGS

Question 24

permanent accounts

Answer 24

all balance sheet accounts

Question 25

income summary

Answer 25

temporary account used to close revenue and expenses

Question 26

order of closing entries:

Answer 26

1. revenues->income summary 2. expenses->income summary 3. income summary->retained earnings 4. dividends->retained earnings

Question 27

revenue recognition principle

Answer 27

record revenues when earned

Question 28

matching principle

Answer 28

record expenses when incurred

Question 29

what are the seven steps of the accrual accounting cycle?

Answer 29

1. record journal entries 2. post to t-accounts 3. prepare trial balance 4. record adjustments 5. prepare an adjusted trial balance 6. prepare financial statements 7. closing entries