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