ACC 201 ch 3
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. What would you like to do?
- Record revenues when earned (the revenue recognition principle) and
- expenses with related revenues (the matching principle). p. 108
When a company has incurred an expense but hasn't yet paid cash or recorded an obligation to pay. p. 119
When a company has earned revenue but hasn't yet received cash or recorded an amount receivable. p. 121
Adjusted trial balance
A list of all accounts and their balances after we have updated account balances for adjusting entries. p. 126
Entries used to record events that occur during the period but that have not yet been recorded by the end of the period. p. 112
Record revenues at the time cash is received and expenses at the time cash is paid. p. 110
Classified balance sheet
Balance sheet that groups a company's assets into current assets and long-term assets and that separates liabilities into current liabilities and long-term liabilities. p. 129
Entries that transfer the balances of all temporary accounts (revenues, expenses, and dividends) to the balance of the Retained Earnings account. p. 131
An account with a balance that is opposite, or “contra,” to that of its related accounts. p. 116
Recognize expenses in the same period as the revenues they help to generate. p. 109
The average time between purchasing or acquiring inventory and receiving cash proceeds from its sale. p. 129
All accounts that appear in the balance sheet; account balances are carried forward from period to period. p. 131
Post-closing trial balance
- A list of all accounts and their balances at a particular date after we
- have updated account balances for closing entries. p. 135
The costs of assets acquired in one period that will be expensed in a future period. p. 113
Revenue recognition principle
Record revenue in the period in which it's earned. p. 108
All revenue, expense, and dividend accounts; account balances are maintained for a single period and then closed (or zeroed out) and transferred to the balance of the Retained Earnings account at the end of the period. p. 131
When a company receives cash in advance from a customer for products or services to be provided in the future. p. 117
Record revenues using the revenue recognition principle and expenses using the matching principle.
Record revenues using the revenue recognition principle and expenses using the matching principle.The revenue recognition principle states that we should recognize revenue in the period in which we earn it, not necessarily in the period in which we receive cash. The matching principle states that we recognize expenses in the same period as the revenues they help to generate. Expenses include those directly and indirectly related to producing revenues.
Distinguish between accrual-basis and cash-basis accounting.
The difference between accrual-basis accounting and cash-basis accounting is timing. Under accrual-basis accounting, we record revenues when we earn them (revenue recognition principle) and record expenses with the revenue they help to generate (matching principle). Under cash-basis accounting,we record revenues when we receive cash and expenses when we pay cash. Cash-basis accounting is not allowed for financial reporting purposes.
Demonstrate the purposes and recording of adjusting entries.
- Adjusting entries are a necessary part of accrual-basis accounting. They help to record revenues in the period earned and expenses in the period they are incurred to generate those revenues. Another benefit is that, by properly recording revenues and expenses, we correctly state assets and liabilities. Adjusting entries are needed when cash flows or obligations occur before the earnings-related activity (prepayment) or when cash flows occur after the earnings-related activity (accrual). Adjusting entries are unnecessary in two cases:
- (1) for transactions that do not involve revenue or expense activities and
- (2) for transactions that result in revenues or expenses being recorded at the same time as the cash flow.
Post adjusting entries and prepare an adjusted trial balance.
We post adjusting entries to the T-accounts in the general ledger to update the account balances. An adjusted trial balance is a list of all accounts and their balances at a particular date after we have updated account balances for adjusting entries.
Prepare financial statements using the adjusted trial balance.
We prepare the income statement, statement of stockholders' equity, and balance sheet from the adjusted trial balance. The income statement provides a measure of net income (profitability), calculated as revenues minus expenses. The balance sheet demonstrates that assets equal liabilities plus stockholders' equity (the basic accounting equation)
Demonstrate the purposes and recording of closing entries.
- Closing entries serve two purposes:
- (1) to transfer the balances of temporary accounts (revenues, expenses, and dividends) to the retained earnings account and
- (2) to reduce the balances of these temporary accounts to zero to prepare them for measuring activity in the next period. Closing entries increase the balance of retained earnings by the amount of revenues for the period and decrease retained earnings by the amount of expenses and dividends for the period.
Post closing entries and prepare a post-closing trial balance.
After we post the closing entries to the T-accounts in the general ledger, the balance of Retained Earnings equals the amount shown in the balance sheet. The balances of all revenue, expense, and dividend accounts are zero at that point.
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