ACC101-Chapter 3+4 Flashcards

Vocabulary flashcards covering key accounting concepts from Chapters 3 and 4, including principles, adjusting entries, financial statement structures, and the closing process.

Time period principle

A broad principle that assumes an organization's activities can be divided into specific time periods such as months, quarters, fiscal years, or calendar years.

Interim financial statements

Financial reports that cover less than one year, usually spanning one, three, or six-month periods.

Natural business year

The 12-month period that ends when a company's activities are at their lowest point.

Accounting period

The length of time covered by a set of periodic financial statements.

Revenue recognition principle

The accounting principle that requires revenue to be reported when earned.

Adjusting entries

Journal entries made at the end of an accounting period to record internal transactions, update liability and asset accounts to their proper balances, and ensure financial statements reflect earned revenues and incurred expenses.

Matching principle

A broad principle that requires expenses to be reported in the same period as the revenues that were earned as a result of those expenses.

Cash basis accounting

A system of preparing financial statements based on recognizing revenues when the cash is received and reporting expenses when the cash is paid.

Accrual basis accounting

An approach to preparing financial statements based on recognizing revenues when they are earned and matching expenses to those revenues; it is generally accepted for external reporting.

Profit margin

A ratio, also called return on sales, calculated as $\text{Net Income} / \text{Net Sales}$. It reflects the percent of profit in each dollar of revenue.

Contra account

An account linked with another account that has an opposite normal balance and is subtracted from the balance of the related account.

Accumulated depreciation

The total amount of depreciation recorded against an asset or group of assets during the entire time the asset or assets have been owned.

Depreciation expense

The periodic expense created by allocating the cost of plant and equipment to the periods in which they are used.

Unearned revenue

A liability reported on the balance sheet representing cash received in advance of providing products or services.

Accrued expenses

Incurred but unpaid expenses that are recorded during the adjusting process with a debit to an expense and a credit to a liability.

Book value

The difference between the cost of an asset and the accumulated depreciation for that asset.

Adjusted trial balance

A trial balance prepared after adjustments have been recorded, reflecting revised account balances.

Report form balance sheet

A balance sheet format that places the assets above the liabilities and equity.

Account form balance sheet

A balance sheet format that places the liabilities and equity to the right of the assets.

Temporary accounts

Also called nominal accounts, these include revenues, expenses, and withdrawals accounts which are closed at the end of each accounting period to start with a zero balance.

Permanent accounts

Also called real accounts, these consist of assets, liabilities, and equity accounts that remain open as long as they exist and are not closed at the end of a period.

Closing entries

Journal entries recorded at the end of each period to prepare temporary accounts for the next period and update the owner's capital account.

Accounting cycle

The recurring steps performed each reporting period, starting with analyzing and recording transactions and ending with the post-closing trial balance.

Classified balance sheet

A balance sheet that organizes assets and liabilities into important subgroups like current assets, long-term investments, plant assets, and intangible assets.

Current ratio

A measure of a company's ability to pay its debts in the near future, calculated by dividing current assets by current liabilities.

Work sheet

A 10-column spreadsheet used as an optional tool to draft a company's trial balances, adjusting entries, and financial statements.

Pro forma statements

Financial statements that show the effects of proposed transactions as if the transactions had already occurred.

Income Summary account

A special temporary account used only in the closing process to hold the amounts of revenues and expenses before the net difference is transferred to the owner's capital account.

Post-closing trial balance

A trial balance prepared after closing entries have been journalized and posted, reporting only ledger accounts with permanent balances.

Reversing entries

Optional entries prepared at the beginning of a new accounting period.