accounting ch. 3 & 4 - vocab and objectives

closing entries (4 steps)

1. revenue accounts into income summary 2. expenses into income summary 3. income summary into retained earnings account 4. dividends into retained earnings account

accounting cycle (10 steps)

1. transactions are analyzed and recorded in journal 2. transactions are posted to the ledger 3. unadjusted trial balance is prepared 4. adjustment data are assembled and analyzed 5. optional end of period spreadsheet is prepared 6. adjusting entries are journalized and posted to ledger 7. an adjusted trial balance is prepared 8. financial statements are prepared 9. closing entries are journalized and posted to the ledger 10. a post closing trial balance is prepared

describe the nature of the adjusting process

each adjusting entry affects an income statement and balance sheet account. the four types of accounts requiring adjusting entries are prepaid expenses, unearned revenues, accrued revenues, and accrued expenses.

matching concept / matching principle

expenses are reported in the same period as the revenues to which they relate. the accounting concept supporting reporting revenues and related expenses in the same period

permanent accounts / real accounts

cash, accounts receivable, equipment, accumulated depreciation, accounts payable, capital stock, and retained earnings

depreciation

decrease in usefulness

adjusting entries

journal entries that bring the accounts up to date at the end of the accounting period

long term liabilities

liabilities that are due after a year or more

current liabilities

liabilities that are due within a year

fixed/plant assets

physical resources that are owned and used by a business and are permanent or have a long life

cash basis of accounting

revenues and expenses are reported on the income statement in the period in which cash is received or paid

accrual basis of accounting

revenues are reported on the income statement in the period in which they are earned

income summary / clearing account

temporary account that is only used during the closing process

temporary accounts / nominal accounts

temporary accounts that are not carried past one period

revenue recognition concept

the accounting concept supporting this method reporting of revenues. i.e. cash may or may not be received from customers during this period.

adjusting process

the analysis and updating of accounts at the end of the period before the financial statements are prepared

closing entries

transferring balances into real accounts (also known as closing process and closing the books)

accrued expenses

unrecorded expenses that have been incurred and for which cash has yet to be paid

adjusted trial balance

verifies the equality of the total debit and credit balances before the financial statements are prepared

accounting period concept

a concept that requires revenues and expenses be reported in the proper period

depreciation expense

a portion of the items cost should be recorded as an expense

summarize the adjustment process

a summary of adjustments, including the type, reason, and adjusting entry, and the effect of omitting an adjustment on the financial statements

prepaid expenses

advance payment of future expenses and are recorded as assets when cash is paid

prepare an adjusted trial balance

after all the adjusting entries have been posted, the equality of the total debit balances and total credit balances is verified by an adjusted trial balance

notes receivable

amounts that customers owe

journalize entries for accounts requiring adjustment

at the end of the period, adjusting entries are needed for prepaid expenses, unearned revenues, accrued revenues, and accrued expenses. in addition, an adjusting entry is necessary to record depreciation on fixed assets.

current assets

cash and other assets that are expected to be converted to cash or sold/used up within 1 year or less

vertical analysis

comparing each item in a financial statement with a total amount from the same statement is useful in analyzing relationships within the financial statement

describe the use of vertical analysis in evaluating a company's performance and financial condition

comparing each item on a financial statement with a total amount from the same statement is called vertical analysis. on the balance sheet, each asset is expressed as a percent of total assets, and each liability and stockholder's equity is expressed as a percent of total liabilities and stockholders' equity. on the income statement, each revenue and expense is expressed as a percent of total revenues or fees earned.

accumulated depreciation

contra (assets) accounts

book value of asset

cost of asset minus accumulated depreciation of asset