Financial Accounting Review Flashcards

Vocabulary flashcards covering fundamental accounting principles, balance sheet items, inventory costing techniques, bad debt estimation, and closing/adjusting journal entries.

Revenue Recognition Principle

The accounting rule stating that revenue is recognized when it is earned, not when cash is received.

Matching Principle

The accounting principle requiring companies to recognize expenses in the same accounting period as the revenues those expenses help generate.

Retained Earnings

A component of shareholders' equity on the balance sheet that accumulates net income and receives the transferred balances of temporary accounts during closing entries.

Research and Development (R&D)

An expense account reported on the income statement, not classified as an asset on the balance sheet.

Wages Payable

A liability account credited to record wages that employees have earned during the period but will not receive until a later period.

Deferred Revenue

A liability account credited when cash is received from a client before performance obligations are completed, which is then recognized as revenue over time as the service is earned.

FIFO (First-In, First-Out)

An inventory method assigning the oldest inventory costs to cost of goods sold, leaving the most recent purchase costs in ending inventory, which generally provides a better approximation of current replacement cost.

LIFO (Last-In, First-Out)

An inventory method assigning the most recent inventory costs to cost of goods sold, providing a better matching of current costs with current revenues on the income statement.

LIFO Reserve

The dollar difference between inventory measured under FIFO and inventory measured under LIFO, used by financial analysts to improve comparability across companies.

Lower-of-Cost-or-Market (LCM) Rule

An inventory valuation requirement stating that inventory must be written down when its market value falls below recorded cost, which increases cost of goods sold and decreases net income.

Allowance Method

An accounting method that estimates and records bad debt expense in the same accounting period as the related credit sale to properly match expenses with generated revenue.

Specific Customer Account Write-Off

A transaction debiting Allowance for Doubtful Accounts and crediting Accounts Receivable, which leaves net accounts receivable and net income unchanged.

Closing Entries

Journal entries prepared at the end of an accounting period to transfer temporary account balances (revenues and expenses) into Retained Earnings.

Temporary Accounts

Accounts such as revenues and expenses (e.g., Wages Expense) whose balances are closed to zero at the end of each accounting period.

Adjusting Journal Entry

An entry made at the end of an accounting period to record unbilled revenues or unrecorded expenses (such as accrued interest or expired insurance) to ensure accurate period financial statements.

Economic Transaction Requirement

The accounting rule specifying that a journal entry is only recorded when an economic event occurs that directly alters assets, liabilities, or equity (not upon mere plan approval or future purchasing promises).