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19 Cards in this Set
- Front
- Back
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What is time period assumption?
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An assumption that the economic life of a business can be divided into artificial time periods.
Note: Accounting time periods are generally a month, a quarter, or a year. |
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What is the revenue recognition principle?
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the principle that companies recognize revenue in the accounting period in which its earned.
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Example of revenue recognition principle: Conrad Dry Cleaners cleans clothing on June 30, but customers do not claim and pay for their clothes until the firs week of July.
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Under the revenue recognition principle, Conrad earns revenue in June when performs the service, not in July when it receives the cash. Journal entries for June and July:
June Account receivable XXX Service Revenue XXX July Cash XXX Account receivable XXX |
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The matching principle
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the principle that dictates that companies match efforts (expenses) with accomplishments (revenues).
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What is accrual-basis accounting?
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Accounting basis in which companies record, in the periods in which the events occur, transactions that change company's financial statements, even if cash was not exchange.
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Accrual versus cash basis of accounting
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Accrual basis means that companies recognize revenue when it's earned and cash-basis means that companies only recognize revenues only when cash is received.
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What is cash basis accounting?
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Accounting basis in which company records revenue only when it receives cash, and expense only when it pays cash.
NOTE: cash basis of accounting is prohibited under GAAP. |
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What is adjusting entries?
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ensure that the revenue recognition and matching principles are followed.
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What are types of adjusting entries?
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Adjusting entries are classified as either deferrals or accruals.
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Examples of deferrals and accruals
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Deferrals:
1. Prepaid expenses: Expenses paid in cash and recorded as assets before they are used or consumed. 2. Unearned revenues: cash received and recorded as liabilities before revenues is earned. Accruals: 1. Accrued revenues: revenues earned but not yet received in cash or recorded. 2. Accrued expenses: Expenses incurred but not yet paid in cash or recorded. |
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What are Deferrals?
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are required to record the portion of the deferral that represents
1. the expense incurred or 2. the revenue earned in the current accounting period. |
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Adjusting entries are for prepaid expenses result in an increase (a debit) to an expense account and a decrease (a credit) to an asset account.
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(debit) ASSET (credit)
--------------------------------------------- CR adjusting entry(-) EXPENSE -------------------------------------------- DR adjusting entry (+) |
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What are prepaid expenses?
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are expenses paid in cash and recorded as assets before they are consumed; they expired the passage of time or through use and consumption.
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What is depreciation?
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is the process of allocating the cost of an asset to expense over its useful life.
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What is contra asset account?
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an account that is off-set against an asset account on the balance sheet.
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In recording depreciation, depreciation expense is debited and contra asset account, Accumulated Depreciation, is credited.
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DEPRECIATION EXPENSE
---------------------------------------------- (DR) XXX ACCUMULATED DEPRECIATION -------------------------------------------------- (CR) XXX |
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What is the book value of the asset?
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the difference between the cost of any depreciable asset and its related accumulated depreciation is referred to...
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What are unearned revenues?
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companies record cash received before revenues is earned by increasing (crediting) a liability called...
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The adjusting entry for unearned revenues results in a decrease (a debit) to a liability account and an increase (a credit) to a revenue account.
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LIABILITY
------------------------------------------- (DR) ADJUSTING ENTRY (-) REVENUE ---------------------------------------- (CR) ADJUSTING EN. |
