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Accounting Ch. 3 and 4

Accounting Period Concept
the accounting concept that divides the economic life of the business into time periods and requires that revenue and expense be reported in the proper period
Accrual basis of accounting
under this basis of accounting, revenues and expenses are reported in the income statement in the period in which they are earned or incurred
Accrued expenses
unrecorded expenses that have been incurred and for which cash has yet to be paid
Accrued revenues
unrecorded revenues that have been earned and for which cash has yet to be received
Accumulated Depreciation
the contra asset account that is credited when recording the depreciation of a fixed asset
Adjusted trial balance
the trial balance prepared ofter all the adjusting entries have been posted
Adjusting entries
the journal entries that bring the accounts up to date at the end of the accounting period. Also, will always involve a revenue or expense and an asset or liability account
Adjusting Process
the analysis and updating of accounts at the end of the period before the financial statements are prepared
Book value of the asset
the difference between the cost of a fixed asset and its accumulated depreciation
Cash basis of accounting
under this basis of accounting, revenues and expenses are reported on the income statement in the period in which cash is received or paid
Contra accounts
an account offset against another account
Depreciate
to lose usefulness as all fixed assets except land do
Depreciation
the systematic periodic transfer of the cost of a fixed asset to an expense account during its expected useful life
Depreciation expense
the portion of the cost of a fixed asset that is recorded as an expense in each year of its useful life
Fixed assets
long-term or relatively permanent tangible assets such as equipment, machinery, buildings, and land that are used in the normal business operations and that depreciate over time
Prepaid Expenses
advance payment of future expenses and are recorded as assets when cash is paid. Becoming expenses overtime
Revenue Recognition Concept
the accounting concept that supports reporting revenues when the services are provided to customers
Unearned revenues
the liability created by receiving revenue in advance. Advance receipt of future revenues and are recorded as liabilities when cash is received. Becoming revenue ovetime
Vertical analysis
an analysis that compares each item in a financial statement with a total number within the same statement
Accounting cycle
the process that begins with analyzing and journalizing transactions and ends with the post-closing trial balance
Clearing account
another name for the income summary account because it has the effect of clearing the revenue and expense accounts of their balances
Closing entires
the entires that transfer the temporary account balances of the revenue, expense, and drawing accounts to permanent accounts at the end of the accounting period
Closing process
the transfer process of converting temporary account balances to zero
Closing the books
the process of transferring temporary accounts balances to permanent accounts at the end of the accounting period
Current Assets
cash and other assets that are expected to be converted to cash
Current liabilities
liabilities that will be due within a short time and that are to be paid out of current assets
Current ratio
a financial ratio that is computed by dividing current assets by current liabilities
Fiscal year
the annual accounting period adopted by a business
Income Summary
a temporary account (only used during the closing process) to which the revenue and expense account balances are transferred at the end of a period
Liquidity
the ability to convert assets into cash
Long-term liabilities
liabilities that usually will not be due for more than one year
Natural business year
a fiscal year that ends when business activities have reached the lowest point in an annual operating cycle
Notes receivable
a customer’s written promise to pay an amount and possibly interest at an agreed-upon rate
real accounts
accounts found on the balance sheet
Solvency
the ability of a firm to pay its debts as they come due
Nominal accounts
accounts not found on the balance sheet
Working Capital
the excess of the current assets of a business over its current liabilities

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