4. Accrual vs. Cash Basis and the Accounting Cycle Flashcards

Accrual Basis

An accounting method where revenues and expenses are recorded when they are earned and incurred, regardless of when cash transactions occur.

Cash Basis

An accounting method where revenues and expenses are recorded only when cash is received or paid out.

Revenue Recognition

The principle determining when revenues are recognized in the financial statements.

GAAP

Generally Accepted Accounting Principles; a set of accounting standards for financial reporting.

Matching Principle

The accounting principle stating that revenues should be matched with their corresponding expenses in the period they occur.

Collection Probability

The likelihood that a company will be able to collect payment from a sale; impacts revenue recognition.

Delivery Completed

A condition indicating that ownership of goods has transferred to the buyer, which is necessary for recognizing revenue.

Conservatism Principle

The accounting principle that advises recognizing anticipated losses but delaying the recognition of anticipated gains.

Unadjusted Trial Balance

A preliminary trial balance that lists account balances to verify that total debits equal total credits before adjustments.

Adjusted Trial Balance

A trial balance prepared after adjusting entries have been made, ensuring that debits still equal credits.

Deferred Revenue

Payments received before goods or services have been delivered, requiring future recognition.

Accrued Expense

Expenses that have been incurred but not yet paid, requiring recognition in the current period.

Example: Realized, but not earned

A scenario where payment is received but the service or product has not yet been provided, requiring no revenue recognition.

Example: Earned, but not realized

A scenario where revenue is recognized because services have been performed, but cash is yet to be received, often with collection uncertainty.

Closing Entries

Journal entries made at the end of an accounting period to transfer temporary account balances to permanent accounts.

_____ Basis: An accounting method where revenues and expenses are recorded only when cash is received or paid out.

Cash

The principle that determines when revenues are recognized in the financial statements is called _____ Recognition.

Revenue

_____ Principle: An accounting principle stating that revenues should be matched with their corresponding expenses in the period they occur.

Matching

_____ Probability: The likelihood that a company will be able to collect payment from a sale.

Collection

A condition indicating that ownership of goods has transferred to the buyer is known as _____ Completed.

Delivery

The accounting principle that advises recognizing anticipated losses but delaying the recognition of anticipated gains is called _____ Principle.

Conservatism

_____ Trial Balance: A preliminary trial balance that lists account balances to verify that total debits equal total credits before adjustments.

Unadjusted

A trial balance prepared after adjusting entries have been made is known as _____ Trial Balance.

Adjusted

Payments received before goods or services have been delivered are known as _____ Revenue.

Deferred

Expenses that have been incurred but not yet paid are referred to as _____ Expense.

Accrued

What is Accrual Basis Accounting?

An accounting method where revenues and expenses are recorded when they are earned and incurred, regardless of when cash transactions occur.

What is Cash Basis Accounting?

An accounting method where revenues and expenses are recorded only when cash is received or paid out.

What is Revenue Recognition?

The principle determining when revenues are recognized in the financial statements.

What does GAAP stand for?

Generally Accepted Accounting Principles; a set of accounting standards for financial reporting.

What is the Matching Principle?

The accounting principle stating that revenues should be matched with their corresponding expenses in the period they occur.

What does Collection Probability indicate?

It indicates the likelihood that a company will be able to collect payment from a sale; impacts revenue recognition.

What does Delivery Completed mean?

It indicates that ownership of goods has transferred to the buyer, which is necessary for recognizing revenue.

What is the Conservatism Principle?

The accounting principle that advises recognizing anticipated losses but delaying the recognition of anticipated gains.

What is an Unadjusted Trial Balance?

A preliminary trial balance that lists account balances to verify that total debits equal total credits before adjustments.

What is the difference between Adjusted Trial Balance and Unadjusted Trial Balance?

An Adjusted Trial Balance is prepared after adjusting entries have been made, ensuring that debits still equal credits.