Chapter 4 Vocab

Accrual-basis accounting

Accounting basis in which companies record, in the periods in which the events occur, transactions that change a company's financial statements, even if cash was not exchanged.

Accrued expenses

Expenses incurred but not yet paid in cash or recorded.

Accrued revenues

Revenues for services performed but not yet received in cash or recorded.

Adjusted trial balance

A list of accounts and their balances after all adjustments have been made.

Adjusting entries

Entries made at the end of an accounting period to ensure that the revenue recognition and expense recognition principles are followed.

Book value

The difference between the cost of a depreciable asset and its related accumulated depreciation.

Cash-basis accounting

Accounting basis in which a company records revenue only when it receives cash and an expense only when it pays cash.

Closing entries

Entries at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders' equity account, Retained Earnings.

Contra asset account

An account that is offset against an asset account on the balance sheet.

Depreciation

The process of allocating the cost of an asset to expense over its useful life.

Earnings management

The planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income.

Expense recognition principle

The principle that dictates that efforts (expenses) be recognized with results (revenues) in the period when the company makes efforts to generate those revenues.

Fiscal year

An accounting period that is one year long.

Income Summary

A temporary account used in closing revenue and expense accounts.

Periodicity assumption

An assumption that the economic life of a business can be divided into artificial time periods.

Permanent accounts

Balance sheet accounts whose balances are carried forward to the next accounting period.

Post-closing trial balance

A list of permanent accounts and their balances after a company has journalized and posted closing entries.

Prepaid expenses (prepayments)

Expenses paid in cash before they are used or consumed.

Quality of earnings

Indicates the level of full and transparent information that a company provides to users of its financial statements.

Revenue recognition principle

The principle that companies recognize revenue in the accounting period in which the performance obligation is satisfied.

Reversing entry

An entry made at the beginning of the next accounting period; the exact opposite of the adjusting entry made in the previous period.

Temporary accounts

Revenue, expense, and dividend accounts whose balances a company transfers to Retained Earnings at the end of an accounting period.

Unearned revenues

Cash received and a liability recorded before services are performed.

Useful life

The length of service of a productive asset.

Worksheet

A multiple-column form that companies may use in the adjustment process and in preparing financial statements.