ACCT 2001 Ch. 3 Vocab

Summer 2025

accrual basis accounting

recording revenues when generated and expenses when incurred, regardless of the timing of cash receipts or payments

cash basis accounting

recording revenues when cash is received and expenses when cash is paid

deferred revenue

a liability representing a company’s obligation to provide goods or services to customers in the future

• found on the balance sheet, not the income statement

expense recognition principle (“matching”)

expenses are recorded when incurred in earning revenue (also called “matching)

expenses

decreases in assets or increases in liabilities arising from providing goods or services during the current period

net income

net income = revenues - expenses

net profit margin

profit earned from each dollar of revenue

• net profit margin = net income / total revenues

revenue recognition principle

revenues are recorded when (or as) the seller provides goods or services to customers, in the amount the seller expects to be entitled to receive

revenues

increases in assets or settlements in liabilities arising from providing goods or services

time period assumption

the assumption that allows the long life of a company to be reported in shorter time periods

unadjusted trial balance

an internal report, prepared before end-of-period adjustments, listing the unadjusted balances of each account to check the equality of total debits and credits

operating activities

buying goods/services from suppliers/employees, and selling goods/services to customers to collect cash from them

the five steps of the revenue recognition principle are

1. identify the contract

2. identify the seller’s performance obligations

3. determine the transaction price

4. allocate the transaction price to the performance obligation(s)

5. recognize revenue when (or as) each performance obligation is satisfied

the key factor in determining when to recognize revenue is

when the seller satisfies their performance obligations

the three possible cases for recognition of revenue VS the receipt of cash are

1. cash before sale/service

2. cash with sale/service

3. cash after sale/service

the three possible cases for recognition of expense VS the receipt of cash are

1. cash before expense

2. cash with expense

3. cash after expense