Accounting ch 4
Card Set Information
Accounting ch 4
accounting ch 4
Revenue recognition principle
The principle that companies recognize revenue in the accounting period
in which it is earned.
The principle that dictates that companies match efforts (expenses) with
“Let the expenses follow the revenues.” Thus, expense recognition
is tied to revenue recognition. Applied to the preceding example, this
means that the salary expense Conrad incurred in performing the cleaning
service on June 30 should be reported in the same period in which it
recognizes the service revenue. The critical issue in expense
recognition is determining when the expense makes its contribution to
revenue. This may or may not be the same period in which the expense is
paid. If Conrad does not pay the salary incurred on June 30 until July,
it would report salaries payable on its June 30 balance sheet.
Accounting basis in which companies record, in the periods in which the
events occur, transactions that change a company's financial statements,
even if cash was not exchanged.
Accounting basis in which a company records revenue only when it
receives cash, and an expense only when it pays out cash.
Entries made at the end of an accounting period to ensure that the
revenue recognition and matching principles are followed.
Adjusting entries are necessary because the trial balance—the first pulling
together of the transaction data—may not contain up-to-date and complete
data. This is true for several reasons:
1. Some events
are not recorded daily because it is not efficient to do so. Examples
are the use of supplies and the earning of wages by employees.
2. Some costs are
not recorded during the accounting period because these costs expire
with the passage of time rather than as a result of recurring daily
transactions. Examples are charges related to the use of buildings and
equipment, rent, and insurance.
3. Some items may
be unrecorded. An example is a utility service bill that will not be
received until the next accounting period.
Adjusting entries are required
every time a company prepares financial statements. The company
analyzes each account in the trial balance to determine whether it is
complete and up to date for financial statement purposes. Every adjusting entry will include one income
statement account and one balance sheet account.
Prepaid expenses (prepayments)
Assets that result from the payment of expenses that benefit more than
one accounting period. (ex. prepaid insurance)
Prepaid expenses are costs that expire
either with the passage of time (e.g., rent and insurance) or through use (e.g., supplies).
The length of service of a productive asset.
he process of allocating the cost of an asset to expense over its useful
One very important point to understand
is an allocation concept, not a valuation concept. That is,
depreciation allocates an asset's cost
to the periods in which it is used. Depreciation does not attempt to
report the actual change in the value of the asset.
The difference between the cost of a depreciable asset and its related
ex: (Equipment) $5,000 - $40 (accumulated depreciation)= book value
Cash received before a company earns revenues and recorded as a
liability until earned.
Companies record cash received before revenue is earned by increasing
(crediting) a liability account called unearned
Unearned revenues are the opposite of prepaid expenses. Indeed, unearned
revenue on the books of one company is likely to be a prepayment on the
books of the company that has made the advance payment. For example, if
identical accounting periods are assumed, a landlord will have unearned
rent revenue when a tenant has prepaid rent.
Revenues earned but not yet received in cash or recorded.
Adjusted Trial Balance
A list of accounts and their balances after all adjustments have been
Revenue, expense, and dividend accounts whose balances a company
transfers to Retained Earnings at the end of an accounting period.
Balance sheet accounts whose balances are carried forward to the next
Entries at the end of an accounting period to transfer the balances of
temporary accounts to a permanent stockholders' equity account, Retained
A temporary account used in closing revenue and expense accounts.
Revenue and expense accounts---> Income summary----> Retained Earnings account
Post-closing trial balance
A list of permanent accounts and their balances after a company has
journalized and posted closing entries.