Introductory Financial Accounting - Lecture 3: Accrual Accounting and Adjustments

This set of vocabulary flashcards covers the fundamental concepts of accrual accounting, the differences between cash and accrual bases, and the specific categories of adjusting entries (prepayments and accruals) discussed in Lecture 3.

Accrual-based accounting method

An accounting method where revenue is recognized as it is earned (when goods and services are provided) and expenses are recognized as they are incurred (when assets are consumed or liabilities increased), regardless of when cash changes hands.

Cash-based accounting method

An accounting method where revenue is recognized only when cash is received and expenses are recognized only when cash is paid.

Accounting period assumption

The practice of dividing the economic life of a business into artificial time periods for reporting purposes.

Adjusting entries

Entries required at the end of each accounting period to ensure that recognition criteria are followed for revenue and expenses.

Prepayments

A category of adjusting entries where cash flows occur before the recognition of a revenue or expense. This includes prepaid expenses and unearned revenue.

Prepaid expenses

Amounts paid in cash and recorded as assets until they are used, at which point an adjusting entry transfers the cost to an expense account.

Revenue received in advance (Unearned revenue)

Amounts received from customers and recorded as a liability until the services are performed or goods are delivered.

Accruals

A category of adjusting entries where the revenue or expense is recognized before the cash flow occurs. This includes accrued revenues and accrued expenses.

Accrued revenues

Amounts for which goods or services have been provided but have not yet been received in cash or recorded.

Accrued expenses

Expenses that have been incurred for goods or services already received or used, but have not yet been paid or recorded.

Depreciation

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

Accumulated Depreciation

A contra asset account that tracks the total amount of depreciation recorded for an asset.

Carrying Amount

The value of an asset determined by the formula $\text{Cost} - \text{Accumulated Depreciation}$.

Adjusted Trial Balance

A trial balance prepared after adjusting entries have been journalized and posted to ensure the equality of total debit and credit balances.