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Revenue Recognition Principle: Companies recognize revenue in the accounting period in which the performance obligation was satisfied. Expense Recognition Principle: Matches expenses with revenues in the period when the company makes effort to generate those revenues. Cash-Basis Accounting: Revenues and expenses are only recognized when cash is received. Accrual-Basis Accounting: Transactions recorded in the period in which the events occurred (Revenue and Expense Principle). Adjusting Entries: Entries made at the end of an accounting period to ensure that the revenue and expense recognition principles are followed (will always include one income statement account and one balance sheet account; never include cash). Two Types of Adjusting Entries: Accruals and Deferrals. Accruals: Revenues or expenses incurred but not yet received or paid in cash (increases both a balance sheet and income statement account). Deferrals: Expenses paid or cash received before the expense or revenue were incurred (prepaid expenses or unearned revenues). Prepaid Expenses: Asset! Not Expense!!! Useful Life: The length of use of a productive asset. Depreciation: The process of allocating the cost of an asset to an expense over its useful life (does not attempt to report the actual change in value of the asset). Accumulated Depreciation: A contra-asset account to account for depreciation of an asset while still being able to see how much the asset was originally purchased for; keeps track of total depreciation of the asset. Book Value (Carrying Value): The difference between the cost of a depreciable asset and its related accumulated depreciation. Earnings Management: The planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income. Quality of Earnings: Indicates the level of full and transparent information that a company provides to users of its financial statements. Temporary Accounts (Nominal Accounts): Revenue, expense, and dividend accounts whose balances a company transfers to retained earnings at the end of an accounting period. Permanent Accounts (Real Accounts): Balance sheet accounts that are transferred to the next accounting period (all asset accounts, liability accounts, and stockholder equity accounts). Closing Entries: Transfer net income (or net loss) and dividends to Retained Earnings, so the balance in Retained Earnings agrees with the retained earnings statement. Income Summary: A temporary account used for closing revenue and expense accounts. Sales Revenue: Revenue from the sale of merchandise. Cost of Goods Sold: Total cost of the merchandise sold during the period. Cost of Goods Available for Sale: Beginning inventory + cost of goods purchased. Perpetual Inventory System: A detailed inventory system in which a company maintains the cost of each inventory item, and the records continuously show the inventory that should be on hand. Periodic Inventory System: An inventory system in which a company does not keep detailed records of the goods on hand and determines the cost of goods throughout the period that determines the price of goods sold only at the end of the accounting period. Purchase Invoice: A document that provides support of each purchase. FOB Shipping Point: Buyer pays shipping. FOB Destination: Seller pays shipping. Freight Costs Incurred by Buyer: Considered part of the cost of the purchase of inventory (Freight in). Freight Costs Incurred by Seller: Considered an operating expense (Freight out). Two Entries Merchandising Sellers Make for Each Sale: Increases Accounts Receivable or cash and increases revenue. Increases cost of goods sold and decreases inventory. Sales Returns and Allowances: Contra account to Sales Revenue. Two Entries Merchandising Sellers Make for Returns: Increase Sales Returns and Allowances and decrease Accounts Receivable or cash. Increase inventory and decrease Cost of Goods Sold (Allowances are the same but don't include inventory or cost of goods sold). Sales Discounts: Contra Revenue Account. Net Sales: Total Revenue - Total Returns and Allowances and Sales Discounts. Gross Profit (Gross Margin): Net Sales - Cost of Goods Sold. Income from Operations: Gross Profit - Operating Expenses. Net Income: Income from Operations +/- results of activities not related to operating. Gross Profit Rate: Gross Profit / Net Sales. Profit Margin: Net Income / Net Sales. Quality of Earnings Ratio: Net Cash Provided by Operating Activities / Net Income.