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31 Cards in this Set

  • Front
  • Back
What is accrual accounting?
Revenues are recognized when they are earned and expenses are recognized when they are incurred to generate that revenue. This is called accrual accounting.
What makes financial transactions complex?
Financial transactions are often complex because of timing differences.
What is an accrual?
Accrual – a transaction in which revenue has been earned or the expense has been incurred but no cash has been exchanged.
What are accrued revenues?
Accrued revenues – revenue earned but not yet received in cash or previously recorded.
What are accrued expenses?
Accrued expenses – expense incurred but not yet paid in cash or previously recorded.
Examples – interest expense and interest revenue
What is an accrued liability?
Accrued liability – the liability for an expense incurred but not yet paid.
What is a deferral?
Deferral – a transaction in which cash is exchanged before revenue is earned or the expense is incurred
What is deferred revenue?
Deferred revenue – a liability resulting from the receipt of cash before the recognition of revenue.
What is unearned revenue?
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
Give some examples of unearned revenue.
Examples of unearned revenue – magazine subscriptions, prepaid calling cards/gift cards.
What is a deferred expense?
Deferred expense – an asset resulting from the payment of cash before the actual incurrence of the expense.
Examples of deferred expense – prepaid insurance, supplies.
What is depreciation expense?
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.
What is depreciation?
Depreciation – the process of allocating the cost of an asset to the accounting periods in which it is used.
What is accumulated depreciation?
Accumulated depreciation – the total amount of depreciation that has been recorded during an asset’s use.
How does accumulated depreciation affect the balance of the asset account?
Accumulated depreciation is a contra-asset in that it reduces or offsets the balance in the asset account.
What is residual value?
Residual value – the estimated value of an asset at the end of its useful life, deducted in the calculation of depreciation expense.
What is book value?
Book value – the cost of an asset minus the total accumulated depreciation recorded for the asset
When do accountants make adjusting journal entries?
Making adjusting entries is step 4 of the accounting cycle.
What is the fifth step in the accounting cycle?
The fifth step is to prepare an adjusted trial balance.
What is the sixth step in the accounting cycle?
The sixth step is to prepare the financial statements.
What is the seventh step in the accounting cycle?
The seventh step in the cycle is closing the books.
Which accounts are temporary accounts?
Revenue and expense accounts are temporary accounts along with dividends.
What is a temporary account?
Temporary accounts are accounts with balances that are brought to zero at the end of the accounting period;
What is a closing entry?
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.
What is a permanent account?
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.
Name the three permanent accounts.
Permanent accounts are the asset, liability, and equity accounts
What is the eighth and final step in the accounting cycle?
The eighth step is to prepare a post-closing trial balance.
Why do we prepare a post-closing trial balance?
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.
What is a solvency ratio?
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.
What is the debt-to-total assets ratio?
Debt-to-total assets ratio = Total liabilities/total assets. It measures the percentage of assets financed by creditors
What controls do accountants use to reduce the risk of failing to record a transaction?
Controls that help a firm reduce the risk of failing to record a transaction.
Pre-numbered documents
Segregation of duties