Chapter 4 - Accounting

Periodic Assumption

The financial activities of a business can be divided into distinct time periods such as monthly, quarterly, or annually.

Revenue Recognition Principle

Requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied.

Expense Recognition Principle

Requires that companies recognize expenses in the period when they make efforts to generate revenue.

Adjusting Entry

A journal entry made at the end of an accounting period to update accounts and ensure they reflect correct balances.

Accrued Revenue

An accounting entry recognizing revenue that has been earned but not yet received.

Book Value

Calculated as total assets minus total liabilities.

Temporary Accounts

Accounts used to track financial transactions for a specific period.

Permanent Accounts

Accounts that track the ongoing financial position of a company over multiple periods.

Accrual Basis of Accounting

Requires companies to recognize revenues and expenses when they are incurred, regardless of cash transactions.

Cash Basis Accounting

Occurs when companies record revenue and expenses only when cash is exchanged.

Accumulated Depreciation

The process of allocating the cost of a long-lived asset to expense over its useful life.

Performance Obligation

A commitment in a contract where a company promises to deliver goods or services to a customer.

Trial Balance

A report that lists the balances of all accounts in the general ledger to ensure debits equal credits.

Post-Closing Trial Balance

Prepared after closing entries, containing only permanent accounts.

Fiscal Year

A 12-month accounting period that can start on any date.