Chapter 3 The Adjusting Process

Vocabulary flashcards covering key terms and definitions from Chapter 3: The Adjusting Process, including accrual vs. cash basis, adjusting entries, deferrals, accruals, depreciation, and related concepts.

Accrual-Basis Accounting

Transactions that change financial statements are recorded in the periods in which the events occur, even if cash is not exchanged; requires revenue and expense recognition principles.

Cash Basis Accounting

Revenue and expenses are recorded only when cash is received or paid; not GAAP and can misstate financial statements.

Periodicity Assumption

The economic life of a business is divided into artificial time periods (e.g., month, quarter, year).

Revenue Recognition Principle

Revenue is recognized in the period when the performance obligation is satisfied by delivering a good or performing a service.

Performance Obligation

A promise in a contract to transfer a good or service to the customer.

Adjusting Entries

End-of-period journal entries to update accounts to reflect revenues and expenses in the proper period; typically involve one income statement account and one balance sheet account and are classified as deferrals or accruals.

Deferrals

Costs or revenues recognized at a date later than when cash was exchanged; includes prepaid expenses and unearned revenues.

Prepaid Expenses

Expenses paid in cash and recorded as assets before they are used; relate to multiple periods and are expensed as they are consumed.

Unearned Revenues

Cash received before services are performed; a liability until the revenue is earned.

Accrued Revenues

Revenues for services performed but not yet recorded or billed; require adjusting entry to recognize receivable and revenue.

Accrued Expenses

Expenses incurred but not yet paid or recorded; require adjusting entry to recognize expense and liability.

Depreciation

Allocation of the cost of a long-lived asset to expense over its useful life; not a valuation of the asset.

Accumulated Depreciation

Contra asset account representing total depreciation to date; reduces the related asset to its book value.

Book Value (Carrying Value)

Cost of an asset minus accumulated depreciation; the net value reported on the balance sheet.

Interest Payable

Liability for interest that is owed but not yet paid.

Interest Expense

Expense representing the cost of borrowed funds for the period.

Salaries and Wages Payable

Liability for salaries and wages earned by employees but not yet paid.

Supplies (Asset)

Asset representing on-hand supplies; the amount used is recorded as an expense through adjusting entries.

Prepaid Insurance

Asset representing insurance paid in advance for future coverage.

Insurance Expense

Expense recognized as the insurance coverage is consumed over time.

Service Revenue

Revenue recognized when services are performed and the performance obligation is satisfied.

Adjusted Trial Balance

Trial balance prepared after adjusting entries to verify that total debits equal total credits and to provide data for financial statements.

GAAP (Generally Accepted Accounting Principles)

Financial reporting rules and conventions that guide accrual-based accounting and the preparation of financial statements.

Matching Principle (Expense Recognition)

Expenses should be recognized in the same period as the revenues they help generate; often referred to as the matching of revenues and expenses.

Carrying Value

Another term for book value; the net amount at which an asset is carried on the balance sheet (cost minus accumulated depreciation).