Accounting Exam 2

Cash Accounting

An accounting method where revenue and expenses are recorded when cash is actually received or paid.

Accrual Accounting

A method of accounting where revenues and expenses are recorded when they are earned or incurred, not when cash is received or paid.

AJEs (Adjusting Journal Entries)

Entries made at the end of an accounting period to update the accounts for revenues that have been earned but not yet recorded and expenses that have been incurred but not yet recorded.

Deferred Revenues

Money received by a business for goods or services that have not yet been provided or performed (i.e., unearned revenue).

Payables (Accrued Expenses)

Expenses that have been incurred but not yet paid or recorded in the accounting system (e.g., wages, taxes, interest).

Receivables (Accrued Revenues)

Revenues that have been earned but not yet collected or recorded, typically through services provided or goods delivered (e.g., accounts receivable).

Prepaid Expenses

Payments made for expenses that will be incurred in the future (e.g., insurance, rent), which are recorded as assets initially and expensed over time.

Depreciation

The process of allocating the cost of a long-term tangible asset over its useful life.

Contra Accounts

Accounts that reduce the value of related accounts (e.g., Accumulated Depreciation reduces the value of fixed assets).

Closing

The process of transferring balances from temporary accounts (revenues, expenses, and dividends) to permanent accounts (retained earnings) at the end of an accounting period.

Classified Balance Sheet

A balance sheet that organizes assets, liabilities, and equity into categories (e.g., current and non-current).

Property, Plant, and Equipment (PP&E)

Tangible, long-term assets used in the production of goods and services (e.g., buildings, machinery, land).

Natural Resources

Long-term assets that are physically consumed over time, such as minerals, oil, and timber.

Intangibles

Non-physical assets that provide long-term value, such as patents, copyrights, trademarks, and goodwill.

Land vs. Land Improvements

The cost of acquiring land, which is not depreciated vs Enhancements made to the land (e.g., landscaping, parking lots) that are depreciated over time.

Leasehold Improvements

Improvements made to a leased property that are amortized over the shorter of the asset’s useful life or the lease term.

Acquisition Costs

Costs incurred to acquire long-term assets, including purchase price, taxes, and legal fees.

Capitalize vs. Expense

Capitalize: Recording an expenditure as an asset to be depreciated or amortized over time. Expense: Recording an expenditure as an immediate cost in the current period.

Basket Purchase

The acquisition of multiple assets in a single purchase, where the total cost is allocated among the assets based on their relative fair market values.

Non-Cash Acquisition

Acquiring assets through means other than cash, such as issuing stock or assuming liabilities.

Depletion

The allocation of the cost of natural resources over their useful life or extraction period.

Amortization

The gradual write-off of the cost of intangible assets over their useful life (similar to depreciation but for intangible assets like patents or trademarks).

Change in Estimate

A revision to the expected useful life or salvage value of an asset, which impacts depreciation, amortization, or depletion going forward.

Part-Year Depreciation

Depreciation calculated for an asset that was purchased or disposed of during the accounting period, prorated for the part of the year the asset was in use.

Impairment

A reduction in the carrying value of an asset when its market value falls below its book value, requiring a write-down.

Disposal of Long-Term Assets

The process of selling, scrapping, or otherwise disposing of long-term assets, which may result in gains or losses.