Cash basis of accounting recognizes revenues when

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Cash basis of accounting Recognizes revenues when cash is received and recognizes expenses when cash is paid out. Contra asset account An account shown as a deduction from the asset to which it relates in the balance sheet; used to reduce the original cost of the asset down to its remaining undepreciated cost or book value. Deferred items Adjusting entries involving data previously recorded in the accounts. Data are transferred from asset and liability accounts to expense and revenue accounts. Examples are prepaid expenses, depreciation, and unearned revenues. Depreciable amount The difference between an asset’s cost and its estimated residual value. Depreciable asset A manufactured asset such as a building, machine, vehicle, or equipment on which depreciation expense is recorded. Depreciation accounting The process of recording depreciation expense. Depreciation expense The amount of asset cost assigned as an expense to a particular time period. Depreciation formula (straight-line): Estimated residual value (scrap value) The amount that the company can probably sell the asset for at the end of its estimated useful life. Estimated useful life The estimated time periods that a company can make use of the asset. Fiscal year An accounting year of any 12 consecutive months that may or may not coincide with the calendar year. For example, a company may have an accounting, or fiscal, year that runs from April 1 of one year to March 31 of the next. Matching principle An accounting principle requiring that expenses incurred in producing revenues be deducted from the revenues they generated during the accounting period. Prepaid expense An asset awaiting assignment to expense. An example is prepaid insurance. Assets such as cash and accounts receivable are not prepaid expenses. Service potential The benefits that can be obtained from assets. The future services that assets can render make assets “things of value” to a business. Trend percentages Calculated by dividing the amount of an item for each year by the amount of that item for the base year. Unearned revenue Assets received from customers before services are performed for them. Since the revenue has not been earned, it is a liability, often called revenue received in advance or advances by customers. Self-test True-false Indicate whether each of the following statements is true or false: Every adjusting entry affects at least one income statement account and one balance sheet account. All calendar years are also fiscal years, but not all fiscal years are calendar years. The accumulated depreciation account is an asset account that shows the amount of depreciation for the current year only. The Unearned Delivery Fees account is a revenue account.

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