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ACCT110 Ch 3 & 4
Adjusting Accts & Prep Fin Stmnts; Completing Accting Cycle
| Question | Answer |
|---|---|
| Accounting Period | Length of Time Covered by financial statements; also called reporting period. |
| Accrued Expenses | Costs incurred in a period that are both unpaid and unrecorded; adjusting entries for recording accrued expenses involve increasing expenses and increasing liabilities. |
| Accrued Revenues | Revenues earned in a period that are both unrecorded and not yet received in cash (or other assets); adjusting entries for recording accrued revenues involve increasing assets and increasing revenues. |
| Adjusted Trial Balance | List of accounts and balances prepared after period-end adjustments are recorded and posted. |
| Adjusting Entry | Journal entry at the end of an accounting period to bring an asset or liability account to its proper amount and update the related expense or revenue account. |
| Annual Financial Statements | Financial statements covering a one-year period; often based on a calendar year, but any consecutive 12-month or 52-week period is acceptable. |
| Book Value | Asset's acquisition costs less its accumulated depreciation (or depletion or amortization); also used synonymously as the "carrying value" of an account. |
| Cash Basis Accounting | Accounting system that recognizes revenues when cash is received and records expenses when cash is paid. |
| Contra Account | Account linked with another account and having an opposite normal balance; reported as a subtraction from the other account's balance. |
| Depreciation | Expense created by allocating the cost of plant and equipment to time periods in which they are used; represents the expense of using an asset. |
| Expense Recognition (Matching) Principle | Prescribes expenses to be reported in the same period as the revenues that were earned as a result of the expenses. |
| Fiscal Year | Consecutive 12-month or 52-week period chosen as the organization's annual accounting period. |
| Interim Financial Statements | Financial statements covering periods of less than one year; usually based on one-, three-, or six-month periods. |
| Natural Business Year | Twelve-month period that ends with a company's sales activities are at their lowest point. |
| Plant Assets | Tangible long-lived assets used to produce or sell products and services; also called "property, plant and equipment" (PP&E) or fixed assets. |
| Prepaid Expenses | Items paid for in advance of receiving their benefits; classified as assets. |
| Profit Margin | Ratio of a company's net income to its net sales; the percent of income in each dollar of revenue; also called "net profit margin". Net income divided by net sales. |
| Straight-Line Depreciation | Method that allocates an equal portion of the depreciable cost of plant asset (cost minus salvage) to each accounting period in its useful life. |
| Time-Period Assumption | Assumption that an organization's activities can be divided into specific time periods such as months, quarters, or years. |
| Unadjusted Trial Balance | List of accounts and balances prepared before account adjustments are recorded and posted. |
| Unearned Revenues | Liability created when customers pay in advance for products or services; earned when the products or services are later delivered. |
| Accounting Cycle | Recurring steps performed each accounting period, starting with analyzing transactions and continuing through the post-closing trial balance (or reversing entries). |
| Classified Balance Sheet | Balance sheet that presents assets and liabilities in relevant subgroups, including current and noncurrent classifications. |
| Closing Entries | Entries recorded at the end of each accounting period to transfer end-of-period balances in revenue, gain, expense, loss, and withdrawal (dividend for a corporation) accounts to the capital account (or to retained earnings for a corporation). |
| Closing Process | Necessary end-of-period steps to prepare the accounts for recording the transactions of the next period. |
| Current Assets | Cash and other assets expected to be sold, collected, or used within one year or the company's operating cycle, whichever is longer. |
| Current Liabilities | Obligations due to be paid or settled within one year or the company's operating cycle, whichever is longer. |
| Current Ratio | Ratio used to evaluate a company's ability to pay its short-term obligations, calculated by dividing current assets by current liabilities. |
| Income Summary | Temporary account used only in the closing process to which the balances of revenue and expense accounts (including any gains or losses) are transferred; its balance is transferred to the capital account (or retained earnings for a corporation). |
| Intangible Assets | Long-term assets (resources) used to produce or sell products or services; usually lack physical form and have uncertain benefits. |
| Long-Term Investments | Long-term assets not used in operating activities such as notes receivable and investments in stocks and bonds. |
| Long-Term Liabilities | Obligations not due to be paid within one year or the operating cycle, whichever is longer. |
| Operating Cycle | Normal time between paying cash for merchandise or employee services and receiving cash from customers. |
| Permanent Accounts | Accounts that reflect activities related to one or more future periods; balance sheet accounts whose balances are not closed; also called real accounts. |
| Post-Closing Trial Balance | List of permanent accounts and their balances from the ledger after all closing entries are journalized and posted. |
| Proforma Financial Statements | Statements that show the effects of proposed transactions and events as if they occurred. |
| Reversing Entries | Optional entries recorded at the beginning of a period that prepare the accounts for the usual journal entries as if adjusting entries had not occurred in the prior period. |
| Temporary Accounts | Accounts used to record revenues, expenses and withdrawals (dividends for a corporation); they are closed at the end of each period; also called nominal accounts. |
| Unclassified Balance Sheet | Balance sheet that broadly groups assets, liabilities and equity accounts. |
| Working Papers | Analyses and other informational reports prepared by accountants and managers when organizing information for formal reports and financial statements. |
| Worksheet | Spreadsheet used to draft an unadjusted trial balance, adjusting entries, adjusted trial balance, and financial statements. |
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