Chapter 3 Key Terms

Accrual Basis Accounting

Accrual Basis Accounting

Accounting method that records revenues when earned and expenses when incurred.

Accrued Expense

An expense that the business has incurred but has not yet paid.

Accrued Revenue

A revenue that has been earned but for which the cash has not yet been collected.

Accumulated Depreciation

The sum of all the depreciation expense recorded to date for a depreciable asset.

Adjusted Trial Balance

A list of all the accounts with their adjusted balances.

Adjusting Entry

An entry made at the end of the accounting period that is used to record revenues to the period in which they are earned and expenses to the period in which they occur.

Book Value

A depreciable asset’s cost minus accumulated depreciation.

Cash Basis Accounting

Accounting method that records revenues only when cash is received and expenses only when cash is paid.

Contra Account

An account that is paired with, and is listed immediately after, its related account in the chart of accounts and associated financial statement and whose normal balance is the opposite of the normal balance of the related account.

Deferred Expense

An asset created when a business makes advance payments of future expenses.

Deferred Revenue

A liability created when a business collects cash from customers in advance of completing a service or delivering a product.

Depreciation

The process by which businesses spread the allocation of a plant asset’s cost over its useful life.

Fiscal Year

An accounting year of any 12 consecutive months that may or may not coincide with the calendar year.

Matching Principle

Guides accounting for expenses, ensuring that all expenses are recorded when incurred during the period, and matches those expenses against the revenues of the period.

Property, Plant, and Equipment

Long-lived, tangible assets, such as land, buildings, and equipment, used in the operation of a business.

Residual Value

The expected value of a depreciable asset at the end of its useful life.

Revenue Recognition Principle

Requires companies to record revenue when (or as) the entity satisfies each performance obligation.

Straight-Line Method

A depreciation method that allocates an equal amount of depreciation each year. (Cost − Residual value) / Useful life.

Time Period Concept

Assumes that a business’s activities can be sliced into small time segments and that financial statements can be prepared for specific periods, such as a month, quarter, or year.

Worksheet

An internal document that helps summarize data for the preparation of financial statements.