Expense Recognition/Matching Principle |
Aims to record expenses in the same accounting period as the revenues that are earned as a result of those expenses. |
Prepaid Expenses |
Refer to items paid for in advance of receiving their benefits. Prepaid expenses are assets. When these assets are used, their costs become expenses. E.g. insurance, rent, supplies, etc. |
Depreciation |
It is the process of allocating the costs of these assets over their expected useful lives. |
Unearned Revenues |
Refers to cash received in advance of providing products and services. Unearned revenues are liabilities. As products or services are provided, the unearned revenues become earned revenues. Adjusting entries for unearned revenues involve increasing revenues and decreasing unearned revenues. |
Accrued Expenses |
Refer to costs that are incurred in a period but are both unpaid and unrecorded. Accrued expenses must be reported on the income statement for the period when incurred. Adjusting entries for recording accrued expenses involve increasing expenses and increasing liabilities. |
Accrued Revenues |
Refers to revenues earned in a period that are both unrecorded and not yet received in cash (or other assets). The adjusting entries for accrued revenues increase assets and increase revenues. |
Closing Process |
It is an important step at the end of an accounting period after financial statements have been completed. It prepares accounts for recording the transactions and the events of the next period. In the closing process, we must 1) identify accounts for closing 2) record and post the closing entries, and 3) prepare a post-closing trial balance. |
Temporary (or Nominal) Accounts |
They accumulate data related to one accounting period. They include all income statement accounts, the dividends accounts, and the Income Summary account. They are temporary because the accounts are opened at the beginning of a period, used to record transactions and events for that period, and then closed at the end of the period. The closing process only applies to temporary accounts. |
Permanent (or Real) Accounts |
They report on activities related to one or more future accounting periods. They carry their ending balances into the next period and generally consist of all balance sheet accounts. These asset, liability, and equity accounts are not closed. |
Classified Balance Sheet |
It organizes assets and liabilities into important subgroups that provide more information to decision makers. Current Assets: Cash and other resources that are expected to be sold, collected or used within one year or the company’s operating cycle, whichever is longer. Long-term Investments: A second major balance sheet classification is long-term investments. When they are expected to be held for more than the length of one year or the operating cycle. Plant Assets: They are tangible assets that are both long-lived and used to produce or sell products and services. Order of most liquid to least liquid. Intangible Assets: They are long-term resources that benefit business operations , usually lack physical form, and have uncertain benefits. Current Liabilities: They are obligations due to be paid or settled within one year or the operating cycle, whichever is longer. They are usually settled by paying out current assets such as cash. Long-term Liabilities: They are obligations NOT due within one year or the operating cycle, whichever is longer. Equity: Equity is the owner’s claim on assets. |
Chapter 3 – Terms
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