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1

recognition

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

2

measurement

qualify the transaction in terms of the unit of measure (dollars)
- reliable
- verifiable
- objective

3

what is the basic difference between cash and accrual accounting?

timing (when revenues and expenses are recorded)

4

cash basis

revenues are recorded when cash is received
expenses are recorded when cash is paid

5

accrual basis (required by GAAP)

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

6

when is revenue earned?

when we deliver a product or perform a service

7

revenue recognition principle (GAAP)

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

8

matching concept (GAAP)

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

9

directly matching expenses

cost of goods sold

10

indirectly matching expenses

depreciation expense

11

adjusting journal entry

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

12

deferrals

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

13

deferred revenues

"unearned revenues"

14

deferred expenses

"prepaid expenses"

15

accruals

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

16

accrued revenues

"receivables"

17

accrued expenses

"payables" or "accrued expenses"

18

depreciation, bad debts, and income taxes

deferred

19

what are the two rules of recording adjusting journal entries?

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

20

adjusted trial balance

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

21

closing entries

zeroing out temporary accounts

22

temporary accounts

revenue
expenses
dividends

23

what is the purpose of closing entries?

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

24

permanent accounts

all balance sheet accounts

25

income summary

temporary account used to close revenue and expenses

26

order of closing entries:

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

27

revenue recognition principle

record revenues when earned

28

matching principle

record expenses when incurred

29

what are the seven steps of the accrual accounting cycle?

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