Chapter 4 Adjustments, Financial Statements, and Financial Results

Flashcards covering key vocabulary related to adjustments, financial statements, and financial results from the lecture notes.

Adjustments

Changes made to the accounting records at the end of the period to state assets, liabilities, revenues, and expenses at appropriate amounts.

Revenues (Income Statement)

Recorded when (or as) the seller fulfills its performance obligation to the customer.

Expenses (Income Statement)

Recorded at the costs incurred when using up assets or incurring liabilities to generate revenues.

Assets (Balance Sheet)

Reported at amounts representing the economic benefits that remain at the end of the current period.

Liabilities (Balance Sheet)

Reported at amounts owed at the end of the current period that obligate the company to transfer resources.

Deferral

An expense or revenue that has been postponed from reporting on the income statement until a later period.

Deferral Adjustments

Used to decrease balance sheet accounts and increase corresponding income statement accounts, involving one asset and one expense account, or one liability and one revenue account.

Accrual

Revenue generated or expense incurred in the current period but not yet recorded because the related cash will not be received or paid until a later period.

Accrual Adjustments

Used to record revenue or expenses when they occur prior to receiving or paying cash, and to adjust corresponding balance sheet accounts, involving one asset and one revenue account, or one liability and one expense account.

Depreciation

The process of allocating the cost of buildings and equipment over their productive lives using a systematic and rational method of allocation.

Contra-account

An account that is an offset to, or reduction of, another account, such as Accumulated Depreciation.

Carrying value (or book value)

Original cost of equipment minus accumulated depreciation.

Amortization

The process of allocating the cost of intangible assets, such as software, over their useful lives, similar to depreciation for tangible assets.

Adjusting Journal Entries (Characteristics)

Never involve cash and always affect one balance sheet account and one income statement account.

Adjusted Trial Balance

A list of all accounts and their balances after all adjusting entries have been made, serving as the basis for preparing financial statements.

Temporary Accounts

Accounts that track financial results for a limited period of time, such as Revenues, Expenses, and Dividends.

Permanent Accounts

Accounts that track financial results from year to year, such as Assets, Liabilities, and Equity.

Closing Journal Entries

Journal entries made at the end of an accounting period to transfer net income (or loss) and dividends to Retained Earnings, ultimately establishing zero balances in all income statement and dividend accounts.

Post-Closing Trial Balance

A trial balance prepared after closing entries, containing balances for only permanent accounts, used as a final check that total debits still equal total credits and all temporary accounts have been closed.