Accounting Exam 2

Here’s a breakdown of each of the terms for your study:

Chapter 3 - Accrual Accounting & Related Topics

1. Cash accounting

   •  is an accounting method where revenue and expenses are recorded when cash is actually received or paid.

2. Accrual Accounting
   
   

   • A method of accounting where revenues and expenses are recorded when they are earned or incurred, not when cash is received or paid.

3. AJEs (Adjusting Journal Entries)
   
   

   • Entries made at the end of an accounting period to update the accounts for revenues that have been earned but not yet recorded and expenses that have been incurred but not yet recorded.

4. Deferred Revenues
   
   

   • Money received by a business for goods or services that have not yet been provided or performed (i.e., unearned revenue).

5. Payables (Accrued Expenses)
   
   

   • Expenses that have been incurred but not yet paid or recorded in the accounting system (e.g., wages, taxes, interest).

6. Receivables (Accrued Revenues)
   
   

   • Revenues that have been earned but not yet collected or recorded, typically through services provided or goods delivered (e.g., accounts receivable).

7. Prepaid Expenses
   
   

   • Payments made for expenses that will be incurred in the future (e.g., insurance, rent), which are recorded as assets initially and expensed over time.

8. Depreciation
   
   

   • The process of allocating the cost of a long-term tangible asset over its useful life.

9. Contra Accounts
   
   

   • Accounts that reduce the value of related accounts (e.g., Accumulated Depreciation reduces the value of fixed assets).

10. Closing
    
    

    • The process of transferring balances from temporary accounts (revenues, expenses, and dividends) to permanent accounts (retained earnings) at the end of an accounting period.

11. Classified Balance Sheet
    
    

    • A balance sheet that organizes assets, liabilities, and equity into categories (e.g., current and non-current).

Chapter 7 - Long-Term Assets

1. Various Long-Term Assets
   
   

   • Assets that are expected to provide economic benefits for more than one year, including property, plant, equipment, and intangible assets.

2. Property, Plant, and Equipment (PP&E)
   
   

   • Tangible, long-term assets used in the production of goods and services (e.g., buildings, machinery, land).

3. Natural Resources
   
   

   • Long-term assets that are physically consumed over time, such as minerals, oil, and timber.

4. Intangibles
   
   

   • Non-physical assets that provide long-term value, such as patents, copyrights, trademarks, and goodwill.

5. Land vs. Land Improvements
   
   

   • Land: The cost of acquiring land, which is not depreciated.

   • Land Improvements: Enhancements made to the land (e.g., landscaping, parking lots) that are depreciated over time.

6. Leasehold Improvements
   
   

   • Improvements made to a leased property that are amortized over the shorter of the asset’s useful life or the lease term.

7. Acquisition Costs
   
   

   • Costs incurred to acquire long-term assets, including purchase price, taxes, and legal fees.

8. Capitalize vs. Expense
   
   

   • Capitalize: Recording an expenditure as an asset to be depreciated or amortized over time.

   • Expense: Recording an expenditure as an immediate cost in the current period.

9. Basket Purchase
   
   

   • The acquisition of multiple assets in a single purchase, where the total cost is allocated among the assets based on their relative fair market values.

10. Non-Cash Acquisition
    
    

    • Acquiring assets through means other than cash, such as issuing stock or assuming liabilities.

Depreciation, Depletion, and Amortization

1. Depreciation (Various Methods)
   
   

   • The process of allocating the cost of a tangible fixed asset over its useful life. Common methods include:

     • Straight-Line: Allocates the same amount of depreciation each year.

     • Declining Balance: Allocates more depreciation in the earlier years of the asset's life.

     • Units of Production: Based on asset usage or output.

2. Depletion
   
   

   • The allocation of the cost of natural resources over their useful life or extraction period (similar to depreciation, but for natural resources like minerals or timber).

3. Amortization
   
   

   • The gradual write-off of the cost of intangible assets over their useful life (similar to depreciation but for intangible assets like patents or trademarks).

Other Key Terms

1. Change in Estimate
   
   

   • A revision to the expected useful life or salvage value of an asset, which impacts depreciation, amortization, or depletion going forward.

2. Part-Year Depreciation
   
   

   • Depreciation calculated for an asset that was purchased or disposed of during the accounting period, prorated for the part of the year the asset was in use.

3. Impairment
   
   

   • A reduction in the carrying value of an asset when its market value falls below its book value, requiring a write-down.

4. Disposal of Long-Term Assets
   
   

   • The process of selling, scrapping, or otherwise disposing of long-term assets, which may result in gains or losses.