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Chapter 4
Accrual accounting concepts
37
Accounting
Undergraduate 2
02/26/2011

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Term
accrual-basis accounting
Definition
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.
Term
accrued expenses
Definition
expenses incurred but not et paid in cash or recorded
Term
accrued revenues
Definition
revenues earned but not yet reveied in cash or recorded
Term
adjusted trial balance
Definition
a list of accounts and their balances after all adjustments have been made
Term
adjusting entries
Definition
entries made at the end of an accounting peiod to ensure that the revenue recognition and matching principles are followed
Term
book value
Definition
the difference between the cost of a depreciable asset and its related accumulated depreciation
Term
cash-basis accounting
Definition
accounting basis in which a compan records revenue only when t receives cash, and an expense only when it pays cash
Term
closing entries
Definition
entries at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders' equity account, retained earning
Term
contra asset account
Definition
an account that is offset against an sset account on the balance sheet
Term
depreciation
Definition
the process of allocating the cost of an asset to expense over its useful life
Term
earnings management
Definition
the planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income
Term
fiscal year
Definition
an accounting eriod that is one year long
Term
income summary
Definition
a temporary account used in closing revenue and expense accounts.
Term
matching principle
Definition
the principle that dictates that companies match effects (expenses) with accomplishments (revenues)
Term
permanent accounts
Definition
balance sheet accounts whose balances are carried forward to the next accounting period
Term
post-closing trial balance
Definition
a list of permanent accounts and their balances after a company has journalized and posted closing entries
Term
prepaid expenses (prepayments)
Definition
assets that result from the payment of expenses that benefit more than one accounting period
Term
quality of earnings
Definition
indicates the level of full and transparent information that a company provides to users of its financial statement
Term
revenue recognition principle
Definition
the principle that companies recognize revenue in the accounting period in which it is earned
Term
reversing entry
Definition
an entry made at the beginning of the next accouting period; the exact opposite of the adjusting entry made in the previous period.
Term
temporary accounts
Definition
revenue, expense, and dividend accounts whose balances a company transfers to retained earnings at the end of an accounting period
Term
time period assumption
Definition
an assumption that the economic life of a business can be divided into artificial time periods
Term
unearned revenues
Definition
cash received before a company earns revenues and recorded as a liability until earned
Term
useful life
Definition
the length of service of a productive asset
Term
worksheet
Definition
a multiple-column from that companies may use in the adjustment process and in preparing financial statements.
Term
an adjusting entry for prepaid expenses results in a _______ (_______) to an expense account and a _______ (________) to an asset account

decrease
increase
debit
credit
Definition
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
Term
the adjusting entry for unearned revenues results in a _______ (_________) to liability account and a _________ (___________) to a revenue account

decrease
increase
debit
credit
Definition
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
Term
an adjusting entry for accrued revenues results in a ________ (_______) to an asset account and a ________ (___________) to a revenue account

increase
increase
credit
debit
Definition
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
Term
an adjusting entry for accrued expenses results in a _______ (________) to an expense account and a _________ (___________) to a liabiltiy account

increase
increase
debit
credit
Definition
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
Term
explain the revenue recognition principle and the matching principle
Definition
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.
Term
explain why adjusting entries are needed, and identify the major types of adjusting entries.
Definition
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.
Term
prepare adjusting entries for deferrals
Definition
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.
Term
prepare adjusting entries for accruals
Definition
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.
Term
describe the nature and purpose of the adjusted trial balance.
Definition
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.
Term
explain the purpose of closing entries
Definition
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.
Term
descrive the required steps in the accounting cycle
Definition
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
Term
understand the causes of differences between net income and net cash provided by operating activities
Definition
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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