accounting intermediate

Periodicity assumption

(or time period assumption) implies that a company can divide its economic activities into artificial time periods. These time periods vary, but the most common are monthly, quarterly, and yearly. The shorter the time period, the more difficult it is to determine the proper net income for the period.

Three factors determine the amount of interest accumulation

1) the face value of the note, 2) interest rate 3) the length of the note outstanding

Historical cost

GAAP requires that companies account for and report many assets and liabilities on the basis of acquisition price. This valuation is generally thought to be verifiable. For liabilities, the price, established by the exchange transaction, is the "cost" of the liability.

Measurement principle

Mixed-attribute system that permits the use of various measurement bases. Historical cost and fair value are most often used.

double-entry accounting system

a company records the dual effect of each transaction in appropriate accounts. sum of all debits should equal the sum of all credits

account

a systematic arrangement that shows the effect of transactions and other events on a specific element (asset, liability, etc) companies keep a separate ______ for each asset, liability, revenue and expense and for capital (owner's equity) because the format of an _____ often resembles the letter T and is referred to as a T account

proper recognition of revenues and expenses dictates recording bad debts as an expense of the period in which a company recognizes revenue for services performed instead of in the period in which the company writes off the ______ or _____. the proper valuation of the receivable balance also requires recognition of uncollectable receivables. requires an adjusting entry

accounts, notes

the two types of accruals for adjusting entries are _______ _______ and ______ ______

accrued revenues, accrued expenses

transaction

an external event involving a transfer or exchange between two or more entities

Companies may often prepare adjustments after the balance sheet date on adjusting entries, but they date the entries as of the

balance sheet date

adjustments for accrued expenses record the obligations that exist at the ______ _____ date and recognize expenses that apply to the _____ accounting period. prior to adjustment, both liabilities and expenses are understated and net income and stockholders equity are overstated.

balance sheet, current

unearned revenue

cash received before services are performed

comprehensive income

changes in equity (net assets) of an entity during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investment by owners and distributions to owners

Cost constraint

companies must weigh the costs of providing the information against the benefits that can be derived from using it.(cost-benefit relationship) in order to justify requiring a particular measurement or disclosure, the benefits perceived to be derived from it must exceed the costs perceived to be associated with it.

expense recognition principle

companies recognize expenses not when they pay wages or make a product, but when the work (service) or the product actually contributes to revenue. Tie to revenue recognition, that is by matching efforts (expenses) with accomplishments (revenues), the _____ _______ ______ is implemented in accordance with the definition of expense.

the book value of any depreciable asset is the difference between its ______ and its related _______ ________

cost, accumulated depreciation

to adjust a supplies account, supplies expense is ______ and supplies is _______ . However, you only record the amount of supplies used. Without this entry, expenses are understated and net income is overstated. moreover, both assets and stockholder's equity are overstated.

debited, credited

expenses incurred and withdrawals by owners (dividends) has a _______ impact on owner's equity

decrease

losses

decreases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from expenses or distribution to owners

distributions to owners

decreases in net assets of a particular enterprise resulting from transferring assets, rendering services, or incurring liabilities by the enterprise to owners. distributions to owners decrease ownership interests (or equity) in an enterprise.

Adjusting entries are classified as either _____ or ________

deferrals, accruals

Fair value

defined as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date". It is a market-based measure. GAAP recently called for use of fair value measurements in the financial statements, this is referred to as the fair value principle. the information may be more useful for certain types of assets and liabilities in certain industries.

Four basic assumptions underlie the financial accounting structure

economic entity, going concern, monetary unit, and periodicity

adjusting entries

entries made at the end of an accounting period to bring all accounts up to date on an accrual basis,so that the company can prepare correct financial statements

The adjusting entry for prepaid expenses results in a debit to an ______ account and a _____ to an asset account

expense, credit

the adjusting entry for an accrued expense results in a debit (increase ) to an _______ account and a credit (increase) to a _______ account

expense, liability

accrued expenses

expenses incurred but not yet paid in cash or recorded

deferalls

expenses or revenues that are recognized at a date later than the point when cash was originally exchanged.

prepaid expenses

expenses paid in cash before they are used or consumed

notes to financial statement

generally amplify or explain the items presented in the main body of the statements. If the main body of financial statements gives an incomplete picture of the performance and position of the company, the notes should provide the additional information needed

event

happening of a consequence. It is generally the source or cause of changes in assets, liabilities, and equity. They may be internal or external.

revenues recognized ______ owner's equity

increases

gains

increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from expenses or distributions to owners.

investment by owners

increases in net assets of a particular enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interests (or equity) in it. Assets are most commonly received as investments by owners, but that which is received may also include services or satisfaction or conversion of liabilities of the enterprise.

revenues

inflows or other enhancements of assets of an entity or settlement of its liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations.

articulation

key figures in one financial statement correspond to balances in another. The first class affected by elements of the second class provides at any time the cumulative result of all changes

Adjusting entry for unearned revenues results in a debit(decrease) to a _______ account and a credit(increase) to a _______ account

liability, revenue

product costs

material, labor, overhead that is attached to a product. Companies carry these costs into future periods if they recognize the revenue from the product in subsequent periods.

supplementary information

may include details or amounts that present a different perspective from that adopted in financial statements. It may be quantifiable information that is high in relevance but now in faithful representation.

The economic entity assumption

means that economic activity can be identified with a particular unit of accountability. in other words, a company keeps its activity separate and distinct from its owners and any other business unit. this concept does not necessarily refer to a legal entity. An individual, department, division, or an entire industry could be considered a separate entity if we chose to define it in this manner.

monetary unit assumption

means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis. The monetary unit is revelant, simple, universally available, understandable, and useful. Most effective means of expressing to interested parties changes in capital and exchanges of goods and services. Application of this assumption depends on the even more basic assumption that quantitative date are useful in communicating economic information and in making rational economic decisions

Basic principles of accounting to record and report transactions

measurement, revenue recognition, expense recognition, and full disclosure

income statement

measures the results of operations during the period

to be recognized in the main body of a financial statement, an item should

meet the definition of a basic element, be measurable with significant certainty, and be relevant and reliable.

Under a liquidation approach, a company would better state asset values at ____ _____ ______ (sales price less costs of disposal) than at acqusition cost. If a company adopts a liquidation approach, the current/noncurrent classification of assets and liabilities loses much of its significance.

net realizable value

Period costs

officers salaries and other administrative expenses, attached to the period. Companies charge off such costs in the immediate period even though benefits associated with these costs may occur in the future. Why? because companies can not determine a direct relationship between period costs and revenues

A contra asset account _____ an asset account on the balance sheet. the accumulated depreciation- equipment account _____ the equipment account on the balance sheet

offsets

expenses

outflows or other using up of assets or incurrences of liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or other activities that constitute the entitys ongoing major or central operations

without a depreciation adjusting entry, total assets, total stockholders equity and net income are all ________ and ______ ______ is understated

overstated, depreciation expense

if a company does not make an adjustment for the deferrals, the asset and liability are ________ and the related expense and revenue are ________

overstated, understated

A company often expresses bad debts as a _______ of the revenue on account for the period. Or, a company may compute bad debts by _______ allowance for doubtful accounts to a certain percentage of trade accounts receivable and trade notes receviable at the end of the period

percentage, adjusting

Real accounts

permanent accounts that are asset, liability, and equity accounts; they appear on the balance sheet

the two types of deferals for adjusting entries are ________ ________ and ______ ______

prepaid expenses, unearned revenues

assets

probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events

liabilities

probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events

Full disclosure principle

recognizes that the nature and amount of information included in the financial reports reflects a series of judgmental trade-offs. These trade-offs strive for 1) sufficient detail to disclose matters that make a difference to users, yet 2) sufficient condensation to make the information understandable, keeping in mind costs of preparing and using it.,

statement of retained earnings

reconciles the balance of the retained earnings account from the beginning to the end of the period

Fair value measures or estimates often provide more ________ information about the expected future cash flows related to the asset or liability. It is more revelant to users than the _____ _____ ________. Consider it more relevant because it reflects the current cash equivalent value of financial instruments.

relevant, historical cost principle

statement of cash flows

reports the cash provided and used by operating, investing, and financing activities during the period

revenue recognition principle

requires that companies recognize revenue in the accounting period in which the performance obligation is satisifed.

equity

residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest.

companies make adjusting entries for accruals to record revenues for services preformed and expenses incurred in the current accounting period. Without this adjustment, the ______ account and the related asset account or the expense account and the related liability account are _______. Thus the adjusting entry for accruals will ______ both a balance sheet and an income statement account

revenue, understated, increase

accrued revenues

revenues for services performed but not yet received in cash or recorded

balance sheet

shows the financial condition of the enterprise at the end of the period

Financial statements

statements that reflect the collection, tabulation, and final summarization of the accounting date.

because a company transfers dividends, revenues and expenses to retained earnings at the end of the period, a change in any one of these three items affects

stockholder's equity

nominal accounts

temporary accounts are revenue, expense, and dividend accounts; except for dividends, they appear on the income statement. Companies periodically close ____ accounts; they do not close real accounts.

Going concern assumption

that the company will have a long life. Depreciation and amortization policies are justifiable only if we assume some permanence to the company. Only where liquidation is appears imminent is the assumption inapplicable.

journal

the "book of original entry" where the company initially records transactions and selected other events. Various amounts are transferred from the book of original entry, the journal, to the ledger. entering transactions date in the journal is known as journalizing

Ledger

the book (or computer printouts) containing the accounts. A general _____ is a collection of all the asset, liability, owner's equity, revenue, and expense accounts. A subsidary ______ contains the details related to a given general ____ account

closing entries

the formal process by which the enterprises reduce all nominal accounts to zero and determines and transfers the net income or net loss to an owner's equity account.

trial balance

the list of all open accounts in the ledger and their balances. the trial balance is taken immediately after all adjustments have been posted is called an adjusted _____ ______ . A ____ _____ taken immediately after closing entreies have been posted is called a post-closing ____ _____. companies may prepare ____ _____ at all times.

Posting

the process of transfering the essential facts and figures from the book of original entry to the ledger accounts

for insurance, the adjusting entry would be a debit to interest expense and a credit to prepaid insurance. without an adjusting entry, october expenses are ________ and net income is ________. both assets and stockholder's equity are also overstated

understated, overstated

without a unearned revenue adjustment, revenues and net income would be ________ in the income statement, and liabilities will be overstated and stockholders equity would be ______

understated, understated

when companies receive cash before services are preformed, they record a liability by increasing (crediting) a liability account called _____ _______.

unearned revenues

users find information about financial position, income, cash flows, and investments in one of three places

within the main body of financial statements, in the notes to those statements, or as supplementary information