Chapter 3 - Adjusting Entries

Matching principle:

A basic accounting principle that requires comparing revenues of a period with the expenses incurred to earn them

Deferrals:

A classification of adjustments that includes prepaid expenses, depreciation, and unearned revenue adjustments. These are called deferrals because we defer the recognition of a portion of expense or revenue until a future period

Straight-line method of depreciation:

A method that allocates the cost less residual value of a depreciable asset equally over the estimated useful life of the asset

Accruals:

Adjustments that update unrecorded revenues earned and expenses incurred and also the related asset or liability

Accumulated Depreciation:

An account that reveals all past depreciation expense recorded on a depreciable item of property, plant, and equipment

Contra account:

An account used to record the negative portion of a related account

Materiality concept:

An accounting concept that requires an item large enough and significant enough to influence decision makers to be separately identified in accounting statements

Prepaid expense adjustment:

An adjustment that allocates a prepaid item between the current period and a future period

Unearned revenue adjustment:

An adjustment that allocates an advance collection of a revenue between the current period and a future period

Depreciation adjustment:

An adjustment that assigns a portion of the cost of a long-lived asset to the periods benefitted

Accrued expenses:

Expenses that have been incurred in a given period but that have not yet been paid or recorded

Adjusting entries:

Journal entries made to update revenue, expense, asset, and liability accounts as required by the accrual basis of accounting

Unearned revenues:

Revenue payments received before they are earned (that is, before goods or services are exchanged for them).

Accrued revenues:

Revenues that have been earned in a given period but that have not yet been collected or recorded

Depreciation expense:

The amount of property, plant, and equipment cost that is assigned to a given period

Accrual basis:

The basis of accounting that assumes a business realizes revenue at time of the sale of goods or services. A business recognizes expenses at the time it receives benefits or consumes an asset in the production of revenue

Cash basis:

The basis of accounting that recognizes revenue at the time cash is received and expenses in the period of the payment

Book value:

The difference between the original cost of a depreciable item of property, plant, and equipment and its related accumulated depreciation

Accounting period assumptions:

The division of a business's life into shorter periods of time to permit periodic reporting

Residual value:

The estimated salvage value or resale value that an item of property, plant, and equipment should have at the end of its estimated useful life

Accrued liability:

The liability for an expense that has been incurred but not yet paid or recorded

Return on assets (ROA):

The measure of the amount a company earns on each dollar of asset investment. We compute it by dividing net income by average total assets

Profit margin:

The percentage contribution of a sales dollar to net income. We compute it by dividing net income by total revenues