Fundamental Accounting Principles Chapter 3

Accounting Period

Length of time covered by financial statements; also

called reporting period

Accrual basis accounting

Accounting system that recognizes revenues

when earned and expenses when incurred; the basis for GAAP

accrued expenses

Costs incurred in a period that are both unpaid and

unrecorded; adjusting entries for recording accrued expenses involve increasing expenses and increasing liabilities

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 assets and increasing revenues.

adjusted trial balance

List of accounts and balances prepared after

period-end adjustments are recorded and posted

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 expense or revenue account.

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.

book value

Asset's acquisition costs less its accumulated depreciation

(or depletion, or amortization); also sometimes used synonymously as

the carrying value of an account.

cash basis accounting

Accounting system that recognizes revenues

when cash is received and records expenses when cash is paid

contra account

Account linked with another account and having an opposite normal balance; reported as a subtraction from the other account's

balance.

depreciation

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

the asset.

expense recognition principle

(See matching principle.)

fiscal year

Consecutive 12-month (or 52-week) period chosen as the

organization's annual accounting period

interim financial statements

Financial statements covering periods of

less than one year; usually based on one-, three-, or six-month periods.

Matching principle

Prescribes expenses to

be reported in the same period as the revenues that were earned as a result of the expenses.

natural business year

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

plant assets

Tangible long-lived assets used to produce or sell products

and services; also called property, plant and equipment (PP&E) or fixed

assets.

prepaid expenses

Items paid for in advance of receiving their benefits;

classified as assets

profit margin

Ratio of a company's net income to its net sales; the percent of income in each dollar of revenue; also called net profit margin

straight-line depreciation method

Method that allocates an equal portion of

the depreciable cost of plant asset (cost minus salvage) to each accounting period in its useful life.

time period assumption

Assumption that an organization's activities

can be divided into specific time periods such as months, quarters, or

years

unadjusted trial balance

List of accounts and balances prepared before accounting adjustments are recorded and posted

unearned revenue

Liability created when customers pay in advance

for products or services; earned when the products or services are later

delivered