ACCTG 101, CHAPTER 4 : ADJUSTING ACCOUNTS

Accrual Basis

revenue is earned & expense is incurred = recorded

Cash Basis

accountant does not record transaction until cash is received or paid; cash paid = expense'; cash receipts and disbursements

Periodicity Concept

business life divided into artificial accounting period

Liquidation

process of going out business

1 year

most basic accounting period

Fiscal Year

period of any 12 consecutive months

Calendar Year

annual period ending on Dec 31

natural business year

12-month period that ends when business activities are at their lowest annual cycle

Recognition

process of capturing for inclusion in statement of financial position or statement of financial performance

Derecognition

removal of all or part of recognized asset or liability from entity’s financial position

asset

recognition of income occurs at the same time as recognition of ____

liability

recognition of expense occurs at the same time as recognition of _______

relevant, faithful representation

recognition is appropriate if it results in ____ and ______

Derecognition

occurs when entity loses control of all or part of recognized asset

Asset-liability approach

recognizes and measures revenue based on changes in assets and liabilities

Contracts

indicate terms of transactions

Revenue from contracts with customers (PFRS 15)

recognize revenue at consideration expected in exchange for goods/services

Contract

agreement between two or more parties

PFRS 15

defines performance obligation as a promise in a contract with customer to transfer goods/services or series of goods/services

Transaction Price

amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods/services

Adjustments

are needed to ensure that recognition and derecognition principles are followed

Adjusting Entries

involve changing account balances at the end of period

balance sheet account, income statement account

each adjusting entry affects ___ and ____

Deferral

postponement of recognition; expense already paid but not yet incurred or revenue already collected but not yet earned

Accrual

expense already incurred but unpaid

Accruing Expenses

expenses incurred but unpaid and unrecorded

Accruing Revenues

revenues earned but uncollected and unrecorded

Depreciation of Property and Equipment

buying or prepaying for usefulness of asset

Depreciation

estimated amount allocated to any one account period of an asset

Cost

amount an entity paid to acquire the depreciable asset

Salvage Value

amount an asset can probably be sold at end of its estimated useful life

Useful Life

estimated number of periods that entity can make use of asset

Straight-line method

simplest procedure of depreciation

Accumulated Depreciation

this is where reduction in a contra account is recorded

Contra Account

used to record reductions in a related account and normal balance is opposite

Book Value

balance of contra account is deducted from cost to obtain ___ of property and equipment

Accrued Expenses

expenses incurred but cash payment later

Accrued Revenues

revenue earned but not yet billed/not paid by clients

Accrual for Uncollectible Accounts

estimate doubtful of collection

Performance Obligation

promised goods/services

asset and expense method

Two alternative recording for deferral, prepaid expense

liability and income method

Two alternative recording for deferral, unearned revenue

Deferred Revenue

cash received but unearned revenue

Deferred Expense

paid but expense not incurred

Cost - Residual Value / Useful Life

Straight-line method formula