ACCT accrual and depreciation

What is the key condition for the recognition of revenue according to the revenue recognition principle - accrual?

Revenue is recognized when it is earned.

What is the matching principle in accounting?

It states that expenses should be recognized in the same period as the revenues they helped generate.

What are advance payments recognized as in accounting?

Current liabilities, known as deferred revenue.

What is the main distinction between cash accounting and accrual accounting?

Cash accounting recognizes revenue when cash is received, while accrual accounting recognizes revenue when it is earned.

What is depreciation in accounting?

The process of measuring the value lost of an asset over time.

What is the purpose of accumulated depreciation?

It represents the total depreciation expense that has been recognized over the life of an asset.

What does COGS stand for in relation to inventory?

Cost of Goods Sold.

How is inventory valued according to the prudence principle?

At the lower of cost and net realizable value.

What is a bad debt expense?

An expense recognized for receivables that cannot be collected.

What happens to profit or loss at the end of the accounting period?

It is transferred to retained profits.

What do firms do to reduce expenses in order to increase profit?

They reduce compensation or cut costs.

What is required to recognize revenue according to the conditions for recognition - accrual?

Ownership and control of the good must pass to the buyer.

What is the relationship between expenses and revenues according to recognition standards - matching convention?

Expenses should be aligned with the revenues they relate to and recognized in the same period.

How is the straight-line method of depreciation calculated?

Cost minus residual value divided by useful life.

What is the role of invoices in revenue recognition?

Invoices provide reasonable assurance for cash collection and revenue recognition.

What is meant by a deferred expense?

An asset that will be recognized as an expense in a future period.

What is the difference between perpetual and periodic inventory systems?

In a perpetual inventory system, inventory records are updated continuously with each transaction, whereas in a periodic inventory system, inventory levels are updated at specific intervals, typically at the end of an accounting period.

Where does accumulated depreciation appear on the financial statements?

Accumulated depreciation appears on the balance sheet as a contra asset account, reducing the total value of fixed assets.

What happens when bad debts are written off in accounting?

Bad debts must be written off, which reduces accounts receivable and increases expenses related to doubtful debts.

What is the formula for calculating Cost of Goods Sold (COGS)?

COGS is calculated using the formula: Opening inventory + Purchases - Closing inventory = COGS.

What is net realizable value in accounting?

Net realizable value is calculated as the estimated selling price of an asset minus the costs necessary to complete the sale.