Chapter 3

chart of accounts

a listing of accounts used by a specific company.

incurred

acquired

operating expenses

any kind of outflows or uses of assets to prolong the operation of the business.

losses

are decreases in assets or increases in liabilities from peripheral transactions.

operating cash-to-cash cycle

begins when a company receives goods to sell (or, in the case of a service company, has employees work), pays for them, and sells to customers; it ends when the customers pay cash to the company.

non-operating revenues & expenses

investment revenues, interest expense, gains/losses on disposals of assets. Revenues or expenses that have nothing to do with the operation of your business but they still make or cost you money.

unearned revenue

payment of cash before earning of revenue has been completed. (current liability)

prepaid expenses

prepaying for something that we have not received yet. (current asset)

revenue

recognized on the income statement when earned not when cash is received.

cash basis of accounting

reporting revenues only when cash is received and expenses only when cash is paid.

expense matching principle

requires that expenses be recognized in the same period as the related revenues.

cash basis

revenue recognized when cash received-cash paid=net income

revenue realization principle

revenues should be recognized when they are earned, not necessarily when cash is received.

time period assumption

the assumption that the long life of a company can be reported in shorter time periods, such as months, quarters, and years.

measurement issues

what amounts should be recognized?

recognition issues

when should the effects of operating activities be recognized (recorded)?

the expense matching principle

Requires that costs incurred to generate revenue be recognized in the same period. This matches benefits with costs.

accrual basis

revenues recognized when earned-expenses incurred=accrual net income