Accounting Chapter 4

contra-asset account

An account with a credit balance that is offset against or deducted from an asset account to produce the proper balance sheet amount for the asset.

matching (principle)

The generally accepted accounting principle that determines when expenses should be recorded in the accounting records. The revenue earned during an accounting period is matched (offset) with the expenses incurred in generating that revenue.

accumulated depreciation

a contra-asset account shown as a deduction from the related asset account in the balance sheet. Depreciation taken throughout the useful life of an asset is accumulated in this account

adjusted trial balance

a schedule indicating the balances in ledger accounts AFTER end of period adjustments have been posted. The amounts shown in the adjusted trial balance are carried into financial statements

unearned revenue

an obligation to deliver goods or render services in the future stemming from the receipt of advance payment

prepaid expenses

assets representing advance payment of the expenses of future accounting periods. As time passes, adjusting entires are made to transfer the related costs from the asset account to an expense account

immaterial

something of little or no consequence. Immaterial items may be accounted for in the most convenient manner, without regard to other theoretical concepts

realization (principle)

the accounting principle that governs the timing of revenue recognition. Basically, the principle indicates that revenue should be recognized in the period in which it is earned

book value

the net amount at which an asset appears in financial statements. For depreciable assets, book value represents cost minus accumulated depreciation. Also called carrying value

useful life

the period of time that a depreciable asset is expected to be useful to the business. This is the period over which the cost of an asset is allocated to depreciation expense

materiality

the relative importance of an item or amount. Items significant enough to influence decisions are said to be material. Items lacking this importance are considered immaterial. The accounting treatment accorded to immaterial items may be guided by convenience rather by theoretical principles.

depreciation

the systematic allocation of the cost of an asset to expense during the periods of its useful life

straight line depreciation

the widely used approach of recognizing an equal amount of depreciation expense in each period of a depreciable asset's useful life

accrue

to grow or accumulate over time ; for example, interest expense