Accounting Principles: Accruals, Deferrals, Revenue Recognition, and Closing (Chapters 1-8)

A set of vocabulary flashcards covering accruals, deferrals, recognition vs realization, AR/AP, adjusting entries, revenue recognition, the closing process, and related concepts discussed in the notes.

Accrual

Revenue or expenses recognized when the event occurs, not when cash moves; often involves creating accounts receivable or accounts payable.

Deferral

Cash is exchanged before the related revenue or expense is recognized; includes prepaid expenses and unearned (deferred) revenue.

Recognition

Recording an economic event (revenue or expense) on the books when it occurs or is incurred.

Realization

The actual movement of cash related to a recognized revenue or expense; cash collection or payment.

Accounts Receivable (AR)

Asset representing cash to be collected from customers for services or goods already recognized as revenue.

Accounts Payable (AP)

Liability representing amounts owed to suppliers for expenses already recognized.

Unearned Revenue

Cash received before revenue is earned; a liability until the related service is performed.

Deferred Revenue

Alternative term for unearned revenue; cash received now, revenue recognized later.

Prepaid Expense

Asset representing cash paid before a service or benefit is received; expense recognized over time.

Accrued Revenue

Revenue that has been earned but not yet billed or collected; typically recorded via Accounts Receivable.

Accrued Expense

Expense that has been incurred but not yet paid; typically recorded via Accounts Payable.

Adjusting Entries

End-of-period journal entries to update prepaids, unearned revenue, and accrued items; do not involve cash.

Matching Concept

Revenue and expenses are recognized in the period in which they occur, not when cash is paid."

Temporary Accounts

Accounts that are closed at period end (revenues, expenses, dividends) and reset to zero; balances move to Retained Earnings.

Permanent Accounts

Accounts that carry over to the next period (assets, liabilities, equity).

Closing Entries

Process of transferring balances of temporary accounts to Retained Earnings; resets temporary accounts to zero.

Red to Read

Mnemonic for closing temporary accounts to Retained Earnings.

Asset Source

Transaction pattern where assets increase and claims (liabilities/equity) also increase; financing source.

Asset Use

Transaction pattern where both sides decrease; consumption of assets (e.g., paying cash for an expense).

Asset Exchange

Transaction pattern where one asset increases and another asset or account decreases; net effect on total assets is zero.

Claims Exchange

Transaction pattern where changes occur on the rights side (liabilities/equity) with opposite changes on the asset side.

Financing Activity

Cash flow activity related to obtaining or repaying capital from owners or creditors (e.g., issuing stock, paying dividends).

Operating Activity

Cash flow activity related to day-to-day business operations—revenues and expenses.

On Account

Transaction done on credit; cash will move in the future; implies Accounts Receivable or Accounts Payable.

Basic Accounting Equation

Assets = Liabilities + Stockholders’ Equity.

Unrecognized Revenue (Unearned Revenue)

Cash received before the related service is performed; not revenue on the income statement until earned.