ACC 203- Chapter 3

Income summary

A temporary account used only in the closing process to which the balances of revenues and expenses are transferred; its balance is transferred into the retained earning account

Contra account

Account linked with another account and having the opposite normal balance; reported as a subtraction 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

Accrual basis accounting

Accounting system that recognizes revenues when earned and expenses when incurred; the basis for GAAP

Temporary accounts

Accounts used to record revenues and expenses; they are closed at the end of the period; also called nominal accounts

Permanent accounts

Accounts used to report activities related to one or more future periods; balance sheet accounts whose balances are not closed; also called real accounts

Straight-line depreciation method

Allocates equal amounts of an asset's cost (less any salvage value) to depreciation expense during its useful life

Working papers

Analyses and other informal reports prepared by accountants and managers when organizing information for formal reports and financial statements

Book value

Asset's acquisition costs less its accumulated depreciation

Long-term investments

Assets such as notes receivable or investments in stocks and bonds that are held for more than the longer of one year or the operating cycle

Time-period principle

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

Unclassified balance sheet

Balance sheet that broadly groups the assets, liabilities and equity accounts

Classified balance sheet

Balance sheet that presents the assets and liabilities in relevant subgroups

Unearned revenues

Cash (or other assets) received in advance of providing products or services; liability

Current assets

Cash or other assets that are expected to sold, collected, or used within one year or the company's operating cycle, whichever is longer

Fiscal year

Consecutive 12-month )or 52 week) period chosen as the organization's annual accounting period

Accrued Expenses

Costs incurred in a period that are both unpaid and unrecorded; adjusting entries for recording accrued expenses involve increasing (debiting) expenses and increasing (crediting) liabilities

Closing entries

Entries recorded at the end of each accounting period to transfer end-of-period balances in revenue and expense accounts to retained earnings

Depreciation

Expense created by allocating the cost of plant and equipment to the periods in which they are used

Annual financial statements

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

Interim financial 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; classified as assets

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 revenue or expense account

Accounting period

Length of time covered by financial statements; also called reporting period

Adjusted trial balance

List of accounts and balances prepared after adjustments are recorded and posted

Unadjusted trial balance

List of accounts and balances prepared before adjustments have been recored and posted

Post-closing trial balance

List of the accounts and their balances from the ledger after the closing entries are journalized and posted

Intangible assets

Long-term assets used to produce or sell products or services; they usually lack physical form and their benefits are uncertain

Closing process

Necessary steps to prepare the accounts for recording the transactions of the next period

Operating cycle

Normal time between paying cash for merchandise or employee services and receiving cash from customers

Current liabilities

Obligations due to be paid or settled within one year or the operating cycle, whichever is longer

Long-term liabilities

Obligations that are not due to be paid within one year or the operating cycle, whichever is longer

Reversing entries

Optional entries recorded at the beginning of a new period that prepare the accounts for the usual journal entries as if adjusting entries had not occurred

Profit Margin

Ratio of a company's net income to net sales; the percent of income in each dollar of revenue

Current ratio

Ratio used to evaluate a company's ability to pay its short-term obligations, calculated by dividing current assets by current liabilities

Accounting cycle

Recurring steps performed each accounting period, starting with analyzing transactions and continuing through post-closing trial balance (or reversing entries)

Matching principle

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

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 (debiting) assets and increasing (crediting) revenues

Work sheet

Spreadsheet used to draft an unadjusted trial balance, adjusting entries, adjusted trial balance, and financial statements

Pro forma financial statement

Statements that show the effects of proposed transactions and events as if they had occurred

Plant assets

Tangible long-lived assets used to produce or sell products or services; also called property, plant and equipment or fixed assets

Natural business year

The 12-month period that ends when a company's sales activities are at their lowest point