bmgt220 umd accounting quiz #3

Accounting Period Concept

Revenues and expenses should be reported in the proper

period.

Revenue Recognition Concept

Revenue is only reported on financial statements when

earned.

Matching Concept/Matching Principle

Revenues and related expenses should be

reported in the same period. This allows for the correct net income/loss to be properly

reported on the income statement

Accrual Basis of Accounting

Revenues are reported when they are earned and expenses

are reported when they incur, on financial statements. NOT when cash is received or

paid.

Cash Basis of Accounting

Revenues and expenses are reported on the income statement

in the period in which cash is received or paid.

Adjusting Process

Analyzing and updating accounts at the end of the period before

financial statements are prepared.

Adjusting Entries

Journal entries that bring accounts up to date at the end of the

accounting period

Deferrals

- Cash is received before revenues/expenses are recognized, i.e the recording of

expense/revenue is deferred to later periods.

Accruals

Cash is received after revenues/expenses are recognized

Fixed Assets/Plant Assets

Physical resources that are owned and used by a business and

are permanent/have a long life

Depreciation

- Decrease in usefulness of a fixed asset over time.

Depreciation Expense

Allocated periodic cost that indicates a decrease in the usefulness

of a fixed asset

Accumulated Depreciation

Account credited when depreciation expense is debited.

Contra Asset Accounts/ Contra Accounts -

Accounts that act opposite to asset accounts.

Normal balance is a credit. Eg - accumulated depreciation

Book Value of Asset/ Net Book Value

- Original cost of an asset less accumulated

depreciation

Adjusted Trial Balance

Verifies that total debit balance and total credit balance is equal

before financial statements are prepared

Vertical Analysis

- Comparing each item in a financial statement with total amount from

the same statement.

Types of Accounts Requiring Adjustment

- Deferrals and Accruals

Types of Deferrals

1. Prepaid Expenses

2. Unearned Revenues

Types of Accruals

1. Accrued Expenses

2. Accrued Revenues

Prepaid Expense

Debit Expense, Credit Asset

Unearned Revenues

Debit Liability, Credit Revenue

Accrued Expense

Debit Expense, Credit Liability

Accrued Revenue

Debit Asset, Credit Revenue

Depreciation Expense

Debit Depreciation Expense, Credit Accumulated

Depreciation

GAAP

requires the accrual basis of accounting

Reasons the adjusting process is necessary

o Some expenses are not recorded on a daily basis. These expenses must be

reported as a whole at the end of the period. Eg - supplies expense

o Some revenues and expenses are earned/incurred with the passage of time.

o Some revenues and expenses may be unrecorded.

Remember BICE when doing an adjusting entry

o B - Balance Sheet (always involves one account from balance sheet)

o I - Income Statement (always involves one account from income statement)

o C - Cash (NEVER involves cash account)

o E - End of Period (adjusting entry generally made at end of period)