Ch. 3: Accrual Accounting Concepts Flashcards

Generally Accepted Accounting Principles
Terms Definitions
Accrual Basis of Accounting
records revenue as it is earned and matches expenses against the revenue they generate

Since receipts or payment of cash affects cash, all cash receipts and payments are recorded.
Transactions are also recorded even though cash is not received or paid until a later point.
recorded, when the services are provided even though the cash is received later.
or when service is received and will be payed later.
on account
when services are provided and cash is to be received later
account receivable
amount of the services is recorded as an asset
when revenues are earned and recorded, all expenses incurred in generating the revenues are also recorded. Then net income/loss are determined.
11/1: received $1800 from ILS as rent for use of land as temp parking fron nov-mar
BS: inc cash 1800|inc liab (unearned rev) 1800
CF: inc cash oper 1800
IS: after expired one month rev: 360
11/1: paid premium $2400 for 2 year insurance
BS: prepaid insurance 2400 cash -2400
CF: -2400 operation
IS: -100 expense every month
11/1: paid $6000 insurance 6 month
BS: prepaid insurance $6000 cash -6000
CF: -6000 op
IS: -1000 each expired month
invest $5000 for capital stock
BS: cash 5000 | capt stock 5000
CF: 5000 financing
purchased supplies for $240 on account
BS: supp 240 | acct pybl-240
CF: nothing
purchased $8500 office equipment; $1700 cash down payment, w/ $6800 due in five month installments of $1360 beginning 1/1/14
BS: cash -1700 office equipment 8500 | acct payable 6800
CF: -1700 invest then -1360 every month
provided services of $6100 to pts on account
BS: acct rec 6100 | retained earining 6100
CF: nothing
IS: revenue 6100
received $5500 for services provided to pt who paid cash
BS: cash 5500 | retained earn 5500
CF: +5500 op
IS: 5500 Revenue
received $4200 from insurance company, which paid on pts accounts for services that have been provided
BS: cash 4200 acct rec -4200
CF: cash op 4200
IS: nothing
paid $100 on account for supplies that had been purchased
BS: cash 100 | acct payble 100
CF: cash -100 op
IS: none
expenses: wages $2790; rent $800; utilities $580; interest $100; msc $420; total $4690
BS: cash -4690 | wages -2790 rent -800 ut -580 int -100 msc -420
CF: -4690 op
IS: expense 4690
paid dividends $1200
BS: cash -1200 | retained earn -1200
CF: -1200 financing
IS: nothing
transactions that increase or decrease a financial statement element are recorded on accounts
prepaid expenses or deferred expenses
prepaid assets that expire with the passage of time (initially recorded as asset but becomes expense over time)
adjustment process
accounts are updated just before preparing the financial statements.
NOT required for CASH transactions
created by recording a transaction in a way that delays or defers the recognition of an expense or revenue
(prepaid expenses & unearned revenue)
created when a revenue or expense has been earned or incurred but has not been recorded
(accrued expenses & accrued revenues)
Unearned Revenue or deferred revenue
initially recorded as liabilities but become revenues over time
accrued expenses or accrued liabilities
expenses that have been incurred but are not recorded in accts.
(unpaid wages at end of period)
accrued revenues or accrued assets
revenues that have been earned but are not recorded in the accounts
(have been earned but not billed)
Difference btw deferrals and accruals
Deferrals: cash rec/pd BEFORE earned or incurred
Accrual: cash rec/pd AFTER earned or incurred
prepaid insurance expired 1100
BS: prepd insurance -1100 | retained earn -1100
CF: nothing
IS: expense 1100
Supplies used 150
BS: supplies -150 | ret earn -150
CF: nothing
IS: expense -150
Depreciation of Office equipment 160
BS: accumilated dep -160 | retained earnings -160
CF: nothing
IS: 160 expense
reduction in the ability of a fixed asset to provide service
accumulated depreciation
offsetting or contra asset account used to record depreciation on a fixed asset
accumulated dep subtractated from the cost of the fixed asset
3 points on depreciation
1. land does not depreciate
2. cost of equipment is a type of deferred expense that's recognized as an expense over the fixd asset's useful life
3. cost of fixed asset less the balance of its acc dep is call the asset's book value or carrying value
book value/ carrying value
cost of fixed asset less the balance of its acc dep
unearned revenue earned 360
BS: unearned rev -360 ret earn +360
IS: 360 revenue
CF nothing
wages owed but not paid to employees 220
BS: wages owed 220 ret earn -220
IS: 220 expense
CF: nothing
services provided but not biled to insurance companies 750
BS: acct rec 750 ret earn 750
IS: 750 rev
CF nothing
Classified Balance Sheet
prepared with various sections subsections and captions:
-current assets
-fixed assets
-intangible assets
-long term
-capital stock
-retained earnings
current assets
cash and other assets expected to be converted to cash or sold or used up within one year or less
note receivable
written claims against debtors who promise to pay the amount of the note plus interest (from creditors point of view the not receivable is a note payable)
fixed assets
physical assets of long tern nature PP&E
intangible assets
patents copyrights etc
current/ long term liab
current < 1 year
long term > 1 year but eventually become current
Accounting Cycle
1. identifying, analyzing and recording the effects of transaction on the accounting equation
2. Identifying, analyzing, and recording adjustment data
3. preparing financial statements
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