Accounting terms chapter 4

accumulated depreciation

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

statement of retained earnings

a financial statement portraying the reconciliation of beginning and ending balances in the retained earnings account. Typical format: retained earnings at beginning of period+net income-dividends=retained earnings at the end of period.

adjusted trial balance

a schedule indicating the balances in the general ledger accounts after end of period adjusting entries have been posted. Can be used to prepare financial statements.

worksheet

a tool used by accountants that shows in one place the relationships among the unadjusted trial balance, proposed adjusting entries, and the financial statements. The use of a worksheet provides a quick review of the ledger balances before and after adjusting entries. Facilitates preparation of closing entries and the financial statements.

temporary accounts

accounts that accumulate the transactions of only one accounting period. These include revenue accounts, expense accounts, and the dividends accounts. Also called nominal accounts.

permanent accounts

accounts whose balances continue to exist beyond the current accounting period. Includes asset, liability, and stockholders equity accounts. Also called real accounts.

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.

IRS

an agency of the U.S. Treasury Dept. responsible for administering the Internal Revenue Code including collecting federal taxes.

accrued expense

an expense incurred on before a given date and payable at some future date.

prepaid assets

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

closing entries

end of period journal entries whose purpose is to reset the temporary account balances to zero to begin next period and to transfer net income and dividends to the retained earnings account.

adjusting entries

entries made at the end of the accounting period to ensure that revenues are recorded in the period in which they are earned and that expenses are recognized in the period in which they are incurred.

unearned revenue

revenue received in cash from customers but not yet earned. This advance payment of revenue is a liability since it represents an obligation to deliver goods or render services in the future. Also called differed revenue.

revenue recognition concept

the accounting concept concerning the timing of revenue recognition. Indicates that revenue should be recognized in the period in which it is earned.

retained earnings

the accumulated net income for the life of a company's less distributions to stockholders.

useful life

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

book value

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

depreciation

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

post-closing trial balance

the trial balance of the general ledger at the end of a period after closing entries have been made to close out the period's temporary accounts. It gives assurance that the ledger accounts are in balance and ready for recording transactions in the upcoming accounting period.

straight-line method of depreciation

the widely uses approach of recognizing an equal amount of depreciation expense in each period of a depreciable assist's useful life. Formula: cost of asset-salvage value of asset

accrue

to grow or accumulate over time.

matching concept

to properly determine net income for a time period it is necessary to match the revenue generated in that time period with the related costs and expenses incurred in generating that revenue.