Chapter 4 Flashcards

Generally Accepted Accounting Principles
Terms Definitions
accrual-basis accounting
accounting basis in which companies record, in the periods in which he events occur, transactions that change a company's financial statements, even if cash was not exchanged.
accrued expenses
expenses incurred but not et paid in cash or recorded
accrued revenues
revenues earned but not yet reveied in cash or recorded
adjusted trial balance
a list of accounts and their balances after all adjustments have been made
adjusting entries
entries made at the end of an accounting peiod to ensure that the revenue recognition and matching principles are followed
book value
the difference between the cost of a depreciable asset and its related accumulated depreciation
cash-basis accounting
accounting basis in which a compan records revenue only when t receives cash, and an expense only when it pays cash
closing entries
entries at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders' equity account, retained earning
contra asset account
an account that is offset against an sset account on the balance sheet
depreciation
the process of allocating the cost of an asset to expense over its useful life
earnings management
the planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income
fiscal year
an accounting eriod that is one year long
income summary
a temporary account used in closing revenue and expense accounts.
matching principle
the principle that dictates that companies match effects (expenses) with accomplishments (revenues)
permanent accounts
balance sheet accounts whose balances are carried forward to the next accounting period
post-closing trial balance
a list of permanent accounts and their balances after a company has journalized and posted closing entries
prepaid expenses (prepayments)
assets that result from the payment of expenses that benefit more than one accounting period
quality of earnings
indicates the level of full and transparent information that a company provides to users of its financial statement
revenue recognition principle
the principle that companies recognize revenue in the accounting period in which it is earned
reversing entry
an entry made at the beginning of the next accouting period; the exact opposite of the adjusting entry made in the previous period.
temporary accounts
revenue, expense, and dividend accounts whose balances a company transfers to retained earnings at the end of an accounting period
time period assumption
an assumption that the economic life of a business can be divided into artificial time periods
unearned revenues
cash received before a company earns revenues and recorded as a liability until earned
useful life
the length of service of a productive asset
worksheet
a multiple-column from that companies may use in the adjustment process and in preparing financial statements.
an adjusting entry for prepaid expenses results in a _______ (_______) to an expense account and a _______ (________) to an asset accountdecreaseincreasedebitcredit
an adjusting entry for prepaid expenses results in an INCREASE ( A DEBIT) to an expense account and a DECREASE (A CREDIT) to an asset account
the adjusting entry for unearned revenues results in a _______ (_________) to liability account and a _________ (___________) to a revenue accountdecreaseincreasedebitcredit
the adjust entry for unearned revenues results in a DECRASE (A DEBIT) to a liability account and an INCREASE (A CREDIT) to a revenue account
an adjusting entry for accrued revenues results in a ________ (_______) to an asset account and a ________ (___________) to a revenue accountincreaseincreasecreditdebit
an adjusting entry for accrued revenues results in an INCREASE (A DEBIT) to an asset account and an INCREASE (A CREDIT) to a revenue account
an adjusting entry for accrued expenses results in a _______ (________) to an expense account and a _________ (___________) to a liabiltiy accountincrease increasedebitcredit
an adjusting entry for accrued expenses results in an INCREASE (A DEBIT) to an expense account and an INCREASE (A CREDIT) to a liability account
explain the revenue recognition principle and the matching principle
the revenue recognition principle dictates that companies recognize revenue in the accounting period in which it is earned. The matching principle dictates that companies recognize expenses when expenses make their contribution to revenues.
explain why adjusting entries are needed, and identify the major types of adjusting entries.
companies make adjusting entries at the end of an accunting period. These entries ensure that copanies record revenues in the period in which they are earned and that companies recognize expenses in the period in which they are incurred. The major types of adjusting entries are prepaid expenses, unearned revenues accrued revenues, and accrued expenses.
prepare adjusting entries for deferrals
deferrals are either prepaid expenses or unearned revenues. Companies make adjusting entries for deferrals at the statement date to record the portion of the deferred item that represents the expense incurred or the revenue earned in the current accounting period.
prepare adjusting entries for accruals
accruals are either accrued revenues or accrued expenses. Adjusting entries for accruals record revenues earned and expenses incurred in the current accounting period that have not been recognized through daily entries.
describe the nature and purpose of the adjusted trial balance.
An adjusted trial balance is a trial balance that shows the balances of all accounts, including those that have been adjusted, at the end of an accounting period. The purpose of an adjusted trial balance is to show the effects of all financial events that have occurred during the accounting period.
explain the purpose of closing entries
one purpose of closing entries is to transfer net income or net loss for the period to retained earnings. A second purpose is to "zero-out" all temporary accounts (revenue accounts, expense accounts, and dividends) so that they start each new period with a zero balance. To accomplish this, companies "close" all temporary accounts at the end of an accounting period. They make separate entries to close revenues and expenses to income summary; income summary to retained earnings; and dividends to retained earnings. only temporary accounts are closed.
descrive the required steps in the accounting cycle
the require steps in the accounting cycle are:(a) analyze business transactions(b) journalize the transactions(c) post to ledger accounts(d) prepare a trial balance(e) journalize and post adjusting entries(f) prepare an adjusted trial balance(g) prepare financial statements(h) journalize and post closing entries(i) prepare a post-closing trial balance
understand the causes of differences between net income and net cash provided by operating activities
net income is based on accrual accounting, which relies on the adjustment process. Net cash provided by operating activities is determined by adding cash received from operating the business and subtracting cash expended during the operations
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