Ch 3: Adjusting Accounts for Financial Statements Key Terms

Comprehensive vocabulary flashcards covering key accounting concepts, financial statements, trial balances, and closing entries from the lecture notes.

Accounting cycle

Recurring steps performed each accounting period, starting with analyzing transactions and continuing through the post-closing trial balance (or optional reversing entries).

Accounting period

Length of time covered by financial statements; also called reporting period.

Accrual basis accounting

Accounting system that recognizes revenues when goods or services are provided and expenses when incurred; the basis for GAAP.

Accrued expenses

Costs incurred in a period that are both unpaid and unrecorded; adjusting entries for recording accrued expenses involve increasing expenses and increasing liabilities.

Accrued revenues

Revenues earned in a period that are both unrecorded and not yet received in cash (or other assets); adjusting entries for recording accrued revenues involve increasing assets and increasing revenues.

Accumulated depreciation

Cumulative sum of all depreciation expense recorded for an asset.

Adjusted trial balance

List of accounts and balances prepared after period-end adjustments are recorded and posted.

Adjusting entry

Journal entry at the end of an accounting period to bring an asset or liability account to its proper amount and update the related expense or revenue account.

Annual financial statements

Financial statements covering a oneyear period; often based on a calendar year, but any consecutive 12-month (or 52-week) period is acceptable.

In what order do we prepare financial statements?

1. Income Statement

2. Statement of Retained Earnings

3. Balance Sheet

Book value

Asset’s acquisition costs less its accumulated depreciation (or depletion, or amortization); also sometimes used synonymously as the carrying value of an account; also called asset book value.

Cash basis accounting

Accounting system that recognizes revenues when cash is received and records expenses when cash is paid.

Classified balance sheet

Balance sheet that presents assets and liabilities in relevant subgroups, including current and noncurrent classifications.

Closing entries

Entries recorded at the end of each accounting period to transfer end-of-period balances in revenue, gain, expense, loss, and withdrawals (dividends for a corporation) accounts to the capital account (or retained earnings for a corporation).

Closing process

Necessary end-of-period steps to prepare the accounts for recording the transactions of the next period.

Contra account

Account linked with another account and having an opposite normal balance; reported as a subtraction from the other account’s balance.

Current assets

Cash and other assets expected to be sold, collected, or used within one year or the company’s operating cycle, whichever is longer.

Current liabilities

Obligations due to be paid or settled within one year or the company’s operating cycle, whichever is longer.

Current ratio

Ratio used to evaluate a company’s ability to pay its short-term obligations, calculated by dividing current assets by current liabilities.

Depreciation

Expense created by allocating the cost of plant and equipment to periods in which they are used; represents the expense of using the asset.

Expense recognition (or matching) principle

Prescribes expenses to be reported in the same period as the revenues that were earned as a result of the expenses.

Fiscal year

Consecutive 12-month (or 52-week) period chosen as the organization’s annual accounting period.

Income summary

Temporary account used only in the closing process to which the balances of revenue and expense accounts (including any gains or losses) are transferred; its balance is transferred to the capital account (or retained earnings for a corporation).

Intangible assets

Long-term assets (resources) used to produce or sell products or services; usually lack physical form and have uncertain benefits.

Interim financial statements

Financial statements covering periods of less than one year; usually based on one-, three-, or six-month periods.

Long-term investments

Long-term assets not used in operating activities such as notes receivable and investments in stocks and bonds.

Long-term liabilities

Obligations not due to be paid within one year or the operating cycle, whichever is longer.

Natural business year

Twelve-month period that ends when a company’s sales activities are at their lowest point.

Operating cycle

Normal time between paying cash for merchandise or employee services and receiving cash from customers.

Permanent accounts

Accounts that reflect activities related to one or more future periods; balance sheet accounts whose balances are not closed.

Plant assets

Tangible long-lived assets used to produce or sell products and services; also called property, plant and equipment(PP&E) or fixed assets.

Post-closing trial balance

List of permanent accounts and their balances from the ledger after all closing entries are journalized and posted.

Prepaid assets

Items paid for in advance of receiving their benefits; classified as assets.

Prepaid expenses

Items paid for in advance of receiving their benefits; classified as assets.

Profit margin

Ratio of a company’s net income to its net sales; the percent of income in each dollar of revenue; also called net profit margin.

Revenue recognition principle

The principle prescribing that revenue is recognized when goods or services are delivered to customers.

Reversing entries

Optional entries recorded at the beginning of a period that prepare the accounts for the usual journal entries as if adjusting entries had not occurred in the prior period.

Robotic process automation (RPA)

The use of software bots to automate repetitive and rule-based tasks, improving efficiency and reducing errors in accounting processes.

Straight-line depreciation

Method that allocates an equal portion of the depreciable cost of plant asset (cost minus salvage) to each accounting period in its useful life.

Temporary accounts

Accounts used to record revenues, expenses, and withdrawals (dividends for a corporation); they are closed at the end of each period.

Time period assumption

Assumption that an organization’s activities can be divided into specific time periods such as months, quarters, or years.

Unadjusted trial balance

List of accounts and balances prepared before accounting adjustments are recorded and posted.

Unclassified balance sheet

Balance sheet that broadly groups assets, liabilities, and equity accounts.

Unearned revenue

Liability created when customers pay in advance for products or services; earned when the products or services are later delivered.

Work sheet

Spreadsheet used to draft an unadjusted trial balance, adjusting entries, adjusted trial balance, and financial statements.