Cheat_Sheet2 - Time period assumption accounting divides...

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Time period assumption: accounting divides the economic life of a business into artificial time periods. Revenue Recognition principle : requires that companies recognize revenue in the accounting period in which its earned. Matching principle: dictates expenses be matched with revenues. Accrual basis accounting : transactions that change a company's financial statements are recorded in the periods in which the events occurred. Cash basis accounting : companies record revenue only when cash is received or paid. It's prohobited under GAAP because it does not record revenue when earned, thus violating rev. recog. Principle. Adjusting entries : ensure that the revenue recognition and matching principles are followed. It's necessary because the trial balance may not contain up-to-date and incomplete data. It's required everytime a company prepares financial statements. Depreciation : process of allocating the cost of an asset to expense over it's useful life. It is an allocatioin and not a valuation concept. Contra asset account : means that the account is offset against an asset account. I.E.: Accumulated depreciation – office equipment. Book value : difference between the cost of any depreciable asset and its related accumulated depreciation. Adjusted trial balance : after a company has journalized and posted adjusting entries, it prepares another trial balance from ledger accounts. Temporary accounts :revenues, expenses, divides – they only relate to a given accounting period. Permanent accounts : all balance sheet accounts because their balances are carried forward into future accounting periods. Closing entries : transfer net income/loss and dividends to retained earnings so the balance in retained earnings agrees w/ retained earnings statement. Post-closing trial balance : after a company journalizes and posts all closing entries, it prepares this. Its a list of all permament accounts and balances after closing entries are journalized and posted. The purpose is to prove equality of the permament account balances. Earnings management : the planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income. Quality of earnings: providing full and transparent info that will not mislead users of the financial statements. Reversing entry: an entry made at the beginning of the next accounting period; the exact opposite of the adjusting entry made in the pervious period. Useful life : the length of service of a productive asset. Cost of goods sold : the total cost of merchandise sold during the period. Gross profit: The excess of net sales over the cost of goods sold. Gross profit rate: Gross profit expressed as a percentage by dividing the amount of gross profit by net sales. Net sales
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Cheat_Sheet2 - Time period assumption accounting divides...

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