Review Chapter 2: Review of the Accounting Process

Accrual accounting

An accounting system that measures an entity's accomplishments and resource sacrifices during the period

Cash-basis accounting

Accounting that measures income based on cash receipts and cash disbursements

Special journal

A journal used to record repetitive, similar transactions

Sales journal

Special journal used to record credit sales

Purchases journal

Special journal used to record credit purchases

Cash receipts journal

Special journal used to record cash received

Cash disbursements journal

Special journal used to record cash payments

Depreciation journal

Not a type of special journal

General journal

A chronological record of journal entries

Subsidiary ledger

A group of subsidiary accounts associated with a general ledger control account

Purpose of subsidiary ledger

To provide detailed information for individual accounts under a control account

Control account

A general ledger account that summarizes information from subsidiary accounts

Worksheet

An informal tool used to organize accounting information for adjusting and closing entries and financial statements

Statement of shareholders' equity

Financial statement that reports changes in shareholders' equity during the period

Changes reported on statement of shareholders' equity

Investments by owners, net income, other comprehensive income, and distributions to owners

Reversing entry

An optional entry made at the beginning of a new reporting period

When are reversing entries made?

At the beginning of a reporting period

Reversing entries are most often used with

Accruals

Purpose of reversing entries

To simplify journal entries recorded during the new period

Adjusting entries

Entries made to update account balances at the end of an accounting period

Common adjusting entries

Accruals, prepayments, depreciation, and estimates

Unadjusted trial balance

Trial balance prepared before adjusting entries

Adjusted trial balance

Trial balance prepared after all adjusting entries have been recorded and posted

Purpose of adjusted trial balance

To verify total debits equal total credits after adjustments

Closing process

Process of reducing temporary accounts to zero and transferring their effects to retained earnings

Temporary accounts

Revenues, expenses, gains, losses, and dividends

Permanent accounts

Assets, liabilities, common stock, and retained earnings

Where are temporary account balances transferred?

Retained Earnings

Accounting equation

Assets = Liabilities + Shareholders' Equity

Trial balance rule

Total debits must equal total credits

Accrued revenue

Revenue earned before cash is received

Accrued expense

Expense incurred before cash is paid

Deferred revenue

Cash received before revenue is earned

Prepaid expense

Cost paid in advance for a future benefit

Revenue recognition under accrual accounting

Revenue is recognized when earned

Expense recognition under accrual accounting

Expenses are recognized when incurred

Cash basis vs. accrual basis

Cash basis focuses on cash movement; accrual basis focuses on economic activity