Term
| In cash-basis accounting ... |
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Definition
| cash receipts are treated as revenues, and cash payments are treated as expenses. |
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Term
| In accrual accounting ... |
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Definition
| the accountant enters the transactions when the business performs a service or incurs an expense. |
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Term
| In accrual accounting, the effect of every transaction is recorded when ... |
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Definition
| it occurs, not just when cash is received or paid. |
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Term
| What entity prefers cash basis accounting? |
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Definition
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Term
| Does GAAP accept cash basis accounting as an appropriate means of accoutning? |
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Definition
| No. GAAP recognizes only accrual accounting because it gives a more accurate picture of the value of a company |
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Term
| Define: Accounting Period |
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Definition
| The means by which a business is fed information on a regular basis. Most businesses divide their life into segments of a year. |
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Term
| What is the one way to know for certain how valuable a company is? |
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Definition
| To liquidate, which means going out of business. This is why the accounting period was created, to give a clear picture of the financial state of a company in regular intervals. |
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Term
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Definition
| An accounting period which usually corresponds with a low point in business activities. For many retailers this is late January, early February, after holiday sales have slowed. |
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Term
| Explain an interim financial statement. |
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Definition
| An artificial period of time created by managers to evaluate performance. Usually monthly, quarterly and/or semiannually. |
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Term
| What is the difference between calendar and fiscal year accounting periods? |
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Definition
| The calender year runs from January 1 - December 31st. The fiscal year corresponds with a businesses low point in activity. |
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Term
| Revenue principle: define. |
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Definition
| States that revenues are recorded when earned and the amount of revenue recorded equals the cash value of the goods or services transferred to the customer. |
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Term
| Matching principle: define. |
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Definition
| states that expenses should be deducted from (matched against) the revenues earned in the same period. |
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Term
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Definition
| requires that accounting information be reported at regular intervals and that income be measured accurately each period. |
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Term
| When is revenue recognized? |
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Definition
| When it is earned, which is not necessarily when cash is received. |
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Term
| How much revenue should be recorded or recognized? |
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Definition
| Cash value of item transferred to customer |
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Term
| When are expenses recognized? |
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Definition
| Match expenses against the revenues earned during a period. |
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Term
| What does the time period concept mean to accounting? |
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Definition
| That companies have to update all of their accounts at the end of the accounting period to make sure all expenses incurred and all revenues earned during the period are reported in that period. It also means that accounting information be reported at regular intervals. |
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Term
| What are the two purposes of the adjusting process? |
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Definition
1. Measure net income or net loss on the income statement. - Every adjustment affects a revenue or an expense.
2. Update the balance sheet. - Every adjustment affects an asset or a liability. |
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Term
| Adjusting entries: define. |
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Definition
| assign revenues and expenses not previously recorded to the proper accounting period as well as bringing related asset and liability accounts to correct balances for the balance sheet. |
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Term
| Does cash-basis accounting require adjustments? |
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Definition
| No,never. only accrual accounting requires adjusting and it is ALWAYS required. |
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Term
| What is a prepaid expense? |
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Definition
| resources paid for prior to receiving the actual benefits. |
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Term
| What happens when a prepaid expense is used up? |
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Definition
| It stops being an asset and becomes an expense. |
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Term
| How would you record the payment of a prepaid expense and then adjust it? |
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Definition
| When you pay for the prepaid expense it will increase the asset (debit) and decrease the cash (credit). Then, when you adjust it you increase an expense (debit) and decrease the asset (credit) to reflect the amount used or expired. |
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Term
| What are the five catagories of Adjusting Entries? |
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Definition
| Prepaid expenses, depreciation, accrued revenues, accrued expenses, unearned revenues |
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Term
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Definition
| the allocation of the cost of a plant asset to expense over its useful life. |
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Term
| How do you determine the book value of an asset? |
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Definition
| book value = cost of asset - accumulated depreciation |
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Term
| What is accumulated depreciation? |
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Definition
| It is a contra asset account. It is always linked to the asset account. It always appears following its companion account on the financial statements. The balance of this account is the sum of all depreciation recorded to date for the asset. |
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Term
| what is a contra account? |
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Definition
| an asset account with a credit balance that is linked to the asset account. It always appears following the companion account on the financial statements. |
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Term
| Where is book value reported? |
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Definition
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Term
| When are accrual adjustments needed? |
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Definition
| When the cash transaction occurs after the related expense or revenue is recorded. |
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Term
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Definition
| income recieved first, earned later |
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Term
| accrued expenses: define. |
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Definition
| expensed first, paid later |
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Term
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Definition
| Expenses that are incurred because a good or service has been used, by the end of the period but will not be paid until a later pierod. |
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Term
| How do you record an adjusting entry for an accrued expense? |
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Definition
| record an expense for the amount used and a liability for the amount not yet paid. |
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Term
| What are some examples of accrued expenses? |
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Definition
| Salaries, interest, and taxes |
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Term
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Definition
| revenues earned in a period that are both unrecorded and not yet received |
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Term
| How do you record an adjusting entry for accrued revenue? |
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Definition
| record revenue (because it has been earned) and a receivable (because the cash is not yet collected. |
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Term
| What are examples of accrued revenues? |
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Definition
| Interest and service revenue |
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Term
| What is unearned revenue? |
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Definition
| cash received in advance of providing products or services |
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Term
| How do you record adjusted unearned revenue? |
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Definition
| the adjusting entry record the part of the unearned revenue that has been earned. |
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Term
| What kind of account is unearned revenue? |
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Definition
| A liability because the busness OWES the customer a good or service. So the reciept of cash increased cash and increased a liability. |
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Term
| What are the steps to preparing a trial balance? |
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Definition
1. Make the adjusting entries required.
2. Combine the Trial Balance and Adjustment amounts. Enter the amounts in the Adjusted Trial Balance Columns.
3. Extend asset, liability and Owner's Equity amount to the Balance Sheet Columns. Extend the REvenue and expense amount to the Income statement columns. Total the statement columns.
4. On the Income statement, compute net income as total revenues minus total expenses. Enter net income as a balancing amount ont he Income statement and on the balance sheet. Compute the adjusted totals. |
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Term
| What are the steps to the accounting cycle? |
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Definition
| Journalize transactions - post to accounts - adjust accounts - close accounts - prepare financial statements |
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Term
| What are the two purposes of the adjusting process? |
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Definition
1. Measure net income or net loss on the income statement. (since every adjustment affects a revenue or an expense)
2. Update the balance sheet. (since every adjustment affects an asset or a liability.) |
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Term
| What two kinds of adjustments are called ACCRUEL adjustments? |
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Definition
| accrued revenue and accrued expense. Occurs when the cash transaction occurs after the related expense or revenue is recorded. |
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Term
| What is the beginning of the period process for a new business? |
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Definition
| begin by setting up ledger accounts |
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Term
| What is the beginning of the period process for existing businesses? |
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Definition
| begin with account balances carried over from the previous period |
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Term
| What does an accountant do during the financial period? |
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Definition
| analyze and journalize transactions (based on source documents) for the current period. Post transactions fromt he journal to the ledger. |
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Term
| What does an accountant do at the end of a period? |
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Definition
| Calculate the balance of each account in the ledger. Enter the trial balance on the work sheet and complete the work sheet. Use the adjusted trial balance to prepare financial statements. Adjust and close the accoutns, including journalizing and posting. Prepare the postclosing trial balance. |
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Term
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Definition
| Used to help move data from the trial balance to the financial statements. It is an internal document - not a financial statemnt. It proved debits = credits and supplies a listing of open accounts and their balances. It is the basis for any adjustments. |
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Term
| How does one create a work sheet? |
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Definition
| 1. begin by listing the account titles. 2. Enter the trial balance from the general ledger directly int othte first two columns of the work sheet. 3. Total the columns. |
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Term
| How does the work sheet affect the adjusting process? |
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Definition
| The work sheet helps identify accounts that require adjustments. The actual adjustment of accounts requires journalizing and posting entries. |
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Term
| What are the steps for trial balance preperation on the work sheet? |
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Definition
| 1. Enter adjusting entries in the two columns beside the trial balance columns. 2. Total the columns. 3. Combine the amounts in the trial balance columns with the amounts in the adjustments columsn, write the total of each account in the adjusted trial balance columns. then total toal the columns. |
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Term
| How does the work sheet affect the balance and income statement? |
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Definition
| you would copy the adjusted balances to the income statement or balance sheet columns. The amount required to balance the income statement and balance sheet columns represents the net income or net loss. |
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Term
| What are the two kinds of accounts to consider when closing the accounts? |
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Definition
| Permanent accounts and temporary or nominal accounts. |
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Term
| What does closing the accounts do? |
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Definition
| It prepares the accounts for the next period. Closing entries may be prepared directly from the work sheet. |
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Term
| Closing entries transfer the temporary accounts to the ... |
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Definition
| capital account. These accounts relate to a particular accounting period and must be closed at the end of the period. |
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Term
| what does the closing of accounts do to all of the revenue and expense accounts? |
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Definition
| Zeroes them out in order to measure each periods income seperately. |
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Term
| What are the purposes of closing the accounts? |
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Definition
| 1. Moves income to balance sheet. 2. Prepares accounts for recording transactions during the next period. 3. Updates owner's capital account. |
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Term
| There are four closing entries. What are they? |
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Definition
| 1. Close revenue accounts to Income Summary. 2. Close expense accounts to Income Summary. 3. Close Income Summary to Capital. 4. Close Withdrwals to Capital. |
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Term
| In an Income Summary Account. Debit Balance = |
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Definition
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Term
| In an income summary account Credit balance = |
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Definition
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Term
| What are examples of permanent accounts? |
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Definition
| assets, liabilities and capital accounts. Balances from these accounts carry over to the next period. |
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Term
| What is the post-closing trial blaance? |
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Definition
| A list of permanent accounts and their balances after posting closing entries. Total debits and credits must equal. |
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Term
| What is the purpose of a post closing trial balance? |
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Definition
| proves the accuracy of the journalizing and posting of closing entries. It lists the account balances after closing entries. Revenues, expenses, withdrawals, and income summary should never be among the accounts listed. |
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Term
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Definition
| The measure of how quickly an item can be turned into cash. |
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Term
| On the balance sheet, assets and liabilities are classified as either current or long-term to indicate their ... |
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Definition
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Term
| The operating cycle is the length of time during which: |
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Definition
| 1. cash is used to acquire goods or services. 2. these good sor services are sold to customers, who 3. pay for their goods or services with cash. |
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Term
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Definition
| cash or assets that will be converted to cash or used up, in one year or within a normal business operating cycle. Examples: short-term receivables, inventory and prepaid expenses |
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Term
| What are current liablities? |
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Definition
| Debts or obligations due within one year or within one operating cycle. Examples: accounts and salaries payables, short-term notes payable, unearned revenue |
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Term
| Explain the report format of the balance sheet. |
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Definition
| The report format of the balance sheet lists assets first, then liablities, and finally owner's equity. |
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Term
| Explain the account format of the balance sheet |
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Definition
| reports asset son the left side and liabilties and owner's equity on the right, similar to the accounting equation. |
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Term
| What is the benifit of comparative financial statements? |
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Definition
| Enhance user's ability to analyze company's past performance. |
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Term
| Waht are the two common ratios used to measure liquidity? |
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Definition
| 1. current ratio and 2. debt ratio |
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Term
| What is the current ratio? |
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Definition
| measures ability of a business to pay its current liabilities with its current assets. Current assets/current liabilities |
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Term
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Definition
| Indicated the proportion of a business's assets that are financed with debt. Measures business's ability to pay both current and long-term debt. Total liablities/total assets |
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Term
| What are the preferable ratios for current and debt ratios? |
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Definition
| a high current ratio and a low debt ratio are preferred |
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Term
| What is reversing entries? |
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Definition
| reversing entries are special journal entries that ease the burden of accounting in later periods; they are the exact opposite of certain adjusting entries. They are not required by GAAP, but are merely for convenience. |
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Term
| HOw do you make a reversing entry? |
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Definition
| by switching the debit and credit of a previous adjusting entry and dating it the 1st day of the new period. |
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