Chapter 3 - Acct

Asset... really? tricky Asset...

Accumulated depreciation is an asset!!! **The accumulated depreciation account is an asset account with a credit balance (also known as a contra asset account); this means that it appears on the balance sheet as a reduction from the gross amount of fixed assets reported. *we label it an "asset" b/c accumulated depreciation is the cost of the asset...

Interest expense formula (s)

Simple Interest expense = Principal x Rate x Time. Compound Interest rate formula = Principal * (1 + (R/N)) * (N*T). .note: N = # of times interest is compounded in a year, T = time in years

Fiscal year

a consecutive 12 month (or 52 week) period chosen as the organization's annual accounting period

contra account

account linked with another account and having an opposite normal balance; reported as a subtraction from the other account's balance. *linked to another account, has an opposite balance, and is SUBTRACTED from the other account's balance

cash basis accounting

accounting system that recognizes revenues when cash is received and records expenses when cash is paid. *i.e. only record when money paid off in cash value (not when things on credit)

accrual basis accounting

accounting system that recognizes revenues when earned AND expenses when incurred; the basis for GAAP. 1) revenues should be recorded in period in which they are earned in order to follow the matching principle. 2) expenses are recorded when the business incurs the obligation... not when the obligation is paid. 3) the liability is recorded when the obligation occurs, not when the debt is paid.

book value

asset's acquisition costs less its accumulated depreciation (or depletion or amortization); also sometimes used synonymously as the 'carrying value' of an account. *it is the un-expensed portion of the original cost of an asset

time period assumption

assumption that an organization's activities can be divided into specific time periods such as months, quarters, or years

current vs. non-current items in Balance sheets

both US GAAP and IFRS balance sheets require current items to be separated from non-current items

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 *yes, increasing liability... accrued expense is a liability, but accrued revenues are assets

depreciation

expense created by allocating the cost of plant and equipment to periods in which they are used; represents the expense of using the asset

annual financial statements

financial statements covering one year period; often based on a calendar year, but any consecutive 12-month (or 52 week) period is acceptable

Interim financial statements (interim statements)

financial statements covering periods of less than one year; usually based on one-, three-, or six-month periods

prepaid expenses

items paid for in advance of receiving their benefits. *note: that supplies are considered both an asset and prepaid expense

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 *adjusting journal entry is made at the end of an accounting period to reflect a transaction or event that is not yet recorded

Accounting periods

length of time covered by financial statements; also called "reporting period"

unearned revenues

liability created when customers pay in advance for products or services; earned when the products or services are later delivered. *adjustment entry involved transferring from unearned revenue account to a revenue account. (after all, services are worth a value so their net worth will increase net income and add to your revenues when finally performed)

adjusted trial balance

list of accounts and balances prepared after period-end adjustments are recorded and posted *adjustments are BOTH recorded and posted. *an adjusted trial balance is a list of accounts and balances prepared after adjustments are posted, so new accounts may need to be added

unadjusted trial balance

list of accounts and balances prepared before accounting adjustments are recorded and posted

straight-line depreciation method

method that allocates an equal portion of the depreciable cost of plant asset (cost minus salvage) to each accounting period in its useful life

profit margin

net income/net sales ratio... 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"

Expense Recognition (aka matching) Principle

prescribes expenses to be reported in the same period as the revenues that were earned as a result of the expenses

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

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". expected to provide benefits for more than one period *plant assets = a special category of prepaid expenses (they are long-term tangible assets) * examples of plant assets: building, land, machines, vehicles, and fixtures. *all plant assets (w/ exception for land), eventually wear out or decline in usefulness.. just not within 1 year

accumulated depreciation account (whats the purpose of it?)

the account allows both the original cost of the plant assets and the total depreciation taken so far to be shown simultaneously *accumulated depreciation is subtracted from its plant asset on balance sheet *accumulated depreciation is a contra account *accumulated depreciation account allows the original cost of the asset to remain in the plant asset account

principle (principle of a note)

the amount the signer of a note agrees to pay back when it matures, not including interest

revenue recognition principle

the principle prescribing that revenue is recognized when earned... EARNED not received...

Natural business year

twelve-month period that ends when a company's sales activities are at their lowest point.