Book 3: Accrual Accounting

accrual accounting principles, trial balances, adjusting entries, depreciation

fiscal year

any consecutive 12-month period that a business adopts as its accounting year

usually, the fiscal year end date is the low point in business activity (slack time)

accrual accounting

records revenues when earned and expenses when incurred without regard to when cash is exchanged

accounting principles for accrual accounting

revenue recognition principle

matching principle

cost principle

time-period principle

monetary unit principle

full disclosure principle

revenue recognition principle

revenues should be recognized and recorded when they are earned (regardless of when cash is received)

matching principle

expenses should be matched with the revenues they helped to generate

cost principle

assets, liabilities, and equity be recorded at their original historical cost at the time of purchase

time-period principle

a business's financial activities can be divided into distinct, consecutive periods

ex. monthly, quarterly, annually

monetary unit principle

only transactions that can be expressed in a stable currency should be recorded in a company's financial records

full disclosure principle

public companies must disclose all pertinent information

source documents

invoice

check

bank statement

purchase order

sales order

memorandum

cash receipt

invoice

a bill for goods or services sent by a seller to a buyer

check

provides information regarding payment from a customer or to a supplier

bank statement

outlines monthly bank activity

purchase order

sent to the seller to indicate a desire to purchase items

sales order

an internal document that a seller creates to confirm a customer's purchase order and initiate the fulfillment process

prepared by the seller upon receipt of a purchase order

memorandum

used as a note explaining a transaction if no other documents exist

for correcting entries if required by an error

cash receipt

records cash recieved by the business and petty cash payments

trial balance

a list of all the accounts of a business and their balances

verifies that total debits equals total credits

three trial balanecs completed each period

unadjusted trial balance

adjusted trial balance

post-closing trial balance

unadjusted trial balance

a list of all a company's general ledger accounts and their balances, created before any adjusting entries are made

adjusted trial balance

a financial report that lists all of a company's accounts and their balances after all adjusting entries have been made for the accounting period

post-closing trial balance

the trial balance prepared from the general ledger after the closing journal entries have been journalized and posted

chart of accounts

a list of all the accounts of a business and the numbers assigned to those accounts

types of accounts

assets

liabilities

capital

revenue

expenses

other

adjusting entries

journal entries made at the end of an accounting period, after completion of the unadjusted trial balance, to record revenue and expenses that have been earned or incurred but not yet recorded

used to correct accounts before financial statements are prepared so that revenues and expenses are recognized at the time they occurred

types of adjusting entries

prepaid expense (deferred expense)

unearned revenue (deferred revenue)

accrued expense

accrued revenue

depreciation

prepaid expense (deferred expense)

an asset created when a company pays for a good or service in advance

unearned revenue (deferred revenue)

a liability created when a business collects cash from customers in advance for providing goods or services

accruals

revenue earned or expenses incurred before cash has been exchanged

deferrals

cash received or paid before revenues have been earned or expenses have been incurred

all adjusted entries will include

a balance sheet account (asset, liability) and an income statement account (revenue, expense)

if expenses are debited

assets/liabilities are credited

if assets/liabilities are debited

revenue is credited

types of long-term assets

fixed (plant) assets

intangible assets

natural resources

fixed (plant) assets

physical assets that can be seen or touched

ex. land, buildings

intangible assets

assets that cannot be seen or touched

ex. patents, copyrights

natural resources

assets that come from the earth and can be used up

ex. oil, minerals

amortization

spreading the cost of an intangible asset over its useful life

depreciation

the estimated loss in value that an asset experiences over time

straight-line depreciation

(cost of asset - salvage value) / useful life

double declinine value

[(cost - salvage value) / useful life] x book value

sum of year digits

[(cost - salvge value) / sum of years of useful life] x remaining life

units of production

(cost - residual value) / estimated useful life in units

book (carrying) value

the cost of an asset minus its accumulated depreciation

useful life

the expected life of an asset during which it is anticipated to generate revenue

residual (salvage) value

the expected cash value of an asset at the end of its useful life

contra-account

an account that is linked to another account

the normal balance of the contra-account will be the opposite of the account linked

accumulated depreciation

a contra-asset account that reflects all of the depreciation recorded for an asset to date

the cost of land includes

purchase price, survey and legal fees, realtor commissions, unpaid property taxes, cost of cleraing the land, etc.

the cost of land does not include

fencing, paving, lighting, etc.

is the cost of land itself ever depreciated

no, land is considered to have an infinite life

land improvements

physical enhancements made to a piece of land to increase its value, utility, or appearance

land improvements have a limited useful life and are therefore depreciated over time for tax purposes

ex. fencing, paving, lighting