The Accounting Cycle: Adjustments

Vocabulary flashcards covering the key terms, definitions, and formulas related to the accounting adjusting process, including accruals, deferrals, and depreciation.

Accrual-based accounting

An accounting method that records revenues when they are earned and expenses when they are incurred.

Adjusting process

The process to ensure that all accounts are reported accurately at the end of the accounting period.

Accounting period

The period of time covered by the financial statements.

Fiscal year

A consecutive 12-month period that a company chooses for its financial reporting.

Accrued revenue

Revenue earned but not yet received or recorded.

Accrued expenses

Expenses incurred but not yet paid or recorded.

Interest

A cost of borrowing money that accumulates with the passage of time.

Interest format calculation

The calculation using three pieces of information: 1. The principal amount, 2. The interest rate, and 3. The term of the loan.

Unearned revenue

A liability that arises when a customer pays for services or products in advance.

Prepaid expenses

An asset that arises when services or products are paid for in advance, also known as prepayments.

Useful life

The length of time a long-term asset is expected to be used by a business to run operations and generate sales.

Depreciation

The process of allocating the cost of a long-term asset over its useful life.

Net book value

The accounting value of an asset calculated as the original value of an asset less the total depreciation that has been recognized.

Contra account

An account linked to another account that records decreases in the value of that other account so the original value of the related account remains unchanged.

Accumulated depreciation

The contra asset account linked to property, plant and equipment (PPE) that increases as the asset’s cost is allocated to each period.

Straight-line depreciation

A simple method to allocate the cost of the asset evenly over the life of the asset.

Straight-line depreciation formula

$$\text{Yearly Depreciation Expense} = \frac{\text{Cost of asset} - \text{Residual value}}{\text{Useful life}}$$

Cost of the asset

The original purchase price of the asset, shown on the balance sheet.

Residual value (salvage value)

The estimated value of the asset at the end of its useful life.

Unadjusted trial balance

The balance of the general ledger accounts after all regular day-to-day transactions have been recorded and posted, but before adjustments.

Adjusted trial balance

The balance of the ledger accounts after adjusting entries have been recorded in the general journal and posted to the general ledger.

Worksheet

An optional tool used to display the unadjusted trial balance, the adjustments, and the adjusted trial balance to ensure debits and credits balance.