ch4 keywords

4. Accrual Accounting Concepts: Accrual Accounting Concepts

Accrued expenses

Expenses incurred but not yet paid in cash that are recorded at the end of the period by an adjusting entry.

Accrued revenues

Revenues earned but not yet received in cash that are recorded at the end of an accounting period by an adjusting entry.

Adjusted trial balance

A list of accounts and their balances after all adjusting journal entries have been recorded and posted.

Adjusting entries

Journal entries made at the end of an accounting period to update the accounts to ensure the proper recognition of revenues and expenses.

Carrying amount

(also known as book value) Amount at which an asset is recognized in the statement of financial position. Can be used to describe the assets of a company as a whole or individual assets such as accounts receivable (cost less allowance for doubtful accounts), depreciable assets (cost less accumulated depreciation), amortizable assets (cost less accumulated amortization), investments, and bonds.

Cash basis accounting

An accounting basis in which revenue is recorded only when cash is received, and an expense is recorded only when cash is paid.

Closing entries

Journal entries at the end of an accounting period to transfer the balances of temporary accounts (revenues, expenses, and dividends declared) to the permanent shareholders' equity account Retained Earnings.

Contract-based approach

An approach to revenue recognition that recognizes revenue when an entity satisfies a performance obligation in a contract by transferring a promised good or service to a customer.

Depreciation

(also known as amortization) The process of allocating the cost of a depreciable asset (for example, buildings and equipment) over its useful life.

Earnings-based approach

An approach to revenue recognition that recognizes revenue when performance is substantially complete and collection is reasonably assured.

Expense recognition

The process of recording an expense when there is a decrease in future economic benefits related to a decrease in an asset or an increase in a liability in the course of ordinary activities. Expense recognition is linked to revenue recognition in that expenses are recognized in the period in which a company makes efforts to generate revenues.

Income Summary

A temporary account used in closing revenue and expense accounts. The balance in each individual revenue and expense account is credited or debited and summarized in the Income Summary account before being closed to Retained Earnings (via the Income Summary account).

Performance obligation

A company's requirement to provide goods or services to a customer, as outlined under a contract.

Permanent accounts

Statement of financial position accounts whose balances are carried forward to the next accounting period.

Post-closing trial balance

A list of permanent accounts and their balances after closing entries have been journalized and posted.

Revenue recognition

The process of recording revenue when there is an inflow of future economic benefits that result from an increase in an asset or a decrease in a liability in the course of ordinary activities. In addition, five conditions must be met: a contract must exist, performance obligations identified, the transaction price determined, the transaction price allocated to the performance obligations, and revenue recognized when the performance obligation is satisfied.

Temporary accounts

Revenue, expense, and dividends declared accounts whose balances are transferred to Retained Earnings at the end of an accounting period.

Unadjusted trial balance

A list of accounts and their balances before adjusting journal entries have been made.

Useful life

The length of service of a depreciable asset.

Variable consideration

The amount reflected in the transaction price of a contract resulting from discounts, refunds, rebates, price concessions, incentives, performance bonuses, penalties, or the like, which affect the consideration that a customer is expected to pay under the contract.