Accounting - Chapter 3&4

what is the time period assumption?

a business’s timeline is divided:

one year-fiscal period

>1 year-interim period

what is the revenue recognition principle?

revenue is recognized in the period its earned

what is the matching principle?

expenses are matched with revenues

what is the different between the accrual and cash basis of accounting?

accrual-recorded when expenses are used and revenue is earned
cash-when cash is exchanged

what is another word for depreciation?

ammortization

what is depreciation?

a long-term or capital asset losing value overtime

what are accruals?

an accumulation of expenses/revenues overtime

how do you calculate straight-line depreciation?

depreciation (per year) = cost/lifetime

what type of account is accumulated depreciation?

contra asset

how do you calculate the netbook value or carrying amount?

asset cost - depreciation

what is another name for fair value?

judging things based on the market value - not accurate

when do we use accounts like interest or salaries payable?

for our own company

when do we use accounts like accounts payable?

for other companies

what accounts are closed?

temporary (nomial) - revenues, expenses, income summary, drawings

what accounts are never closed?

assets, liabilities, owner’s equity

why aren’t drawings closed to the income summary?

income summary-accounts that determine profit

capital-accounts that directly impact capital

what is a business’s operating cycle?

the time it takes for a business to make revenue from their expenses

what is the working capital formula?

current assets - current liabilities

what is the current ratio formula?

current assets/current liabilities

what is the acid ratio test?

cash + A/R + short-term investments/current liabilities

what factors should be considered making conclusions about a company’s economic position?

the economy, company trends from past years, compare with other companies