Chapter 4 Key Terms + Four Adjusting-Entry Patterns

Accounting Test 2

Accrual-basis accounting

Records transactions in the periods in which the economic events occur, regardless of cash timing.

Adjusting entry

An entry made to recognize revenues and expenses in the proper accounting period.

Deferral

A timing difference in which cash occurs before revenue or expense recognition.

Accrual

A timing difference in which revenue or expense recognition occurs before cash.

Prepaid expense

Cash paid before the related expense is incurred.

Unearned revenue

Cash received before the related revenue is earned.

Accrued revenue

Revenue earned but not yet received in cash or recorded.

Accrued expense

Expense incurred but not yet paid or recorded.

Depreciation

Allocation of a long-lived asset's cost to expense over its useful life.

Accumulated depreciation

A contra-asset account that accumulates depreciation recognized to date.

Book value

Asset cost less accumulated depreciation.

Temporary accounts

Revenue, expense, and dividend accounts closed at period-end.

Permanent accounts

Balance sheet accounts carried into the next accounting period.

Post-closing trial balance

A trial balance containing only permanent accounts after closing entries.

Prepaid expense

Before Adjusting

• Asset overstated; Expense understated

After Adjusting

• Debit Expense; Credit Asset

Unearned revenue

Before Adjusting

• Liability overstated; Revenue understated

Adjusting

• Debit Liability; Credit Revenue

Accrued revenue

Before Adjusting

• Asset understated; Revenue understated

After Adjusting

• Debit Asset; Credit Revenue

Accrued expense

Before Adjusting

• Expense understated; Liability understated

After Adjusting

• Debit Expense; Credit Liability