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31 Cards in this Set
- Front
- Back
What is accrual accounting?
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Revenues are recognized when they are earned and expenses are recognized when they are incurred to generate that revenue. This is called accrual accounting.
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What makes financial transactions complex?
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Financial transactions are often complex because of timing differences.
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What is an accrual?
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Accrual – a transaction in which revenue has been earned or the expense has been incurred but no cash has been exchanged.
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What are accrued revenues?
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Accrued revenues – revenue earned but not yet received in cash or previously recorded.
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What are accrued expenses?
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Accrued expenses – expense incurred but not yet paid in cash or previously recorded.
Examples – interest expense and interest revenue |
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What is an accrued liability?
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Accrued liability – the liability for an expense incurred but not yet paid.
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What is a deferral?
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Deferral – a transaction in which cash is exchanged before revenue is earned or the expense is incurred
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What is deferred revenue?
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Deferred revenue – a liability resulting from the receipt of cash before the recognition of revenue.
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What is unearned revenue?
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Unearned revenue is a common account name for deferred revenue. It is a liability that represents the amount of goods or services that a company owes its customers. The cash has been collected, but the action of earning the revenue has not taken place
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Give some examples of unearned revenue.
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Examples of unearned revenue – magazine subscriptions, prepaid calling cards/gift cards.
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What is a deferred expense?
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Deferred expense – an asset resulting from the payment of cash before the actual incurrence of the expense.
Examples of deferred expense – prepaid insurance, supplies. |
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What is depreciation expense?
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Depreciation expense – a single period’s reduction to the cost of the asset, shown on the income statement; also the name of the account in which the expense is recorded.
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What is depreciation?
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Depreciation – the process of allocating the cost of an asset to the accounting periods in which it is used.
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What is accumulated depreciation?
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Accumulated depreciation – the total amount of depreciation that has been recorded during an asset’s use.
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How does accumulated depreciation affect the balance of the asset account?
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Accumulated depreciation is a contra-asset in that it reduces or offsets the balance in the asset account.
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What is residual value?
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Residual value – the estimated value of an asset at the end of its useful life, deducted in the calculation of depreciation expense.
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What is book value?
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Book value – the cost of an asset minus the total accumulated depreciation recorded for the asset
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When do accountants make adjusting journal entries?
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Making adjusting entries is step 4 of the accounting cycle.
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What is the fifth step in the accounting cycle?
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The fifth step is to prepare an adjusted trial balance.
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What is the sixth step in the accounting cycle?
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The sixth step is to prepare the financial statements.
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What is the seventh step in the accounting cycle?
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The seventh step in the cycle is closing the books.
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Which accounts are temporary accounts?
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Revenue and expense accounts are temporary accounts along with dividends.
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What is a temporary account?
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Temporary accounts are accounts with balances that are brought to zero at the end of the accounting period;
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What is a closing entry?
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Closing entries – journal entries that transfer the balances in the revenue, expense, and dividends accounts to Retained Earnings at the end of the accounting period.
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What is a permanent account?
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Permanent accounts are accounts with balances that carry over from the end of one period to the beginning of the next; these accounts are never closed.
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Name the three permanent accounts.
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Permanent accounts are the asset, liability, and equity accounts
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What is the eighth and final step in the accounting cycle?
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The eighth step is to prepare a post-closing trial balance.
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Why do we prepare a post-closing trial balance?
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Purposes of the post-closing trial balance are to:
Be a final check on the equality of debits and credits, and Confirm only real accounts have balances, and Provide beginning balances to start the next period. |
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What is a solvency ratio?
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Solvency ratios are used to measure a firm’s ability to meet its long-term obligations. An example of a solvency ratio is the debt-to-assets ratio.
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What is the debt-to-total assets ratio?
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Debt-to-total assets ratio = Total liabilities/total assets. It measures the percentage of assets financed by creditors
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What controls do accountants use to reduce the risk of failing to record a transaction?
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Controls that help a firm reduce the risk of failing to record a transaction.
Pre-numbered documents Segregation of duties |