Accounting Coach: Accounting Basics
Terms in this set (58)
Revenue Recognition Principle
The accounting guideline requiring that revenues be shown on the income statement in the period in which they are earned, not in the period when the cash is collected. This is part of the accrual basis of accounting (as opposed to the cash basis of accounting).
Balance Sheet Effect : When Revenue is recognized (in general)
An increase in Cash (if the service or sale was for cash),
An increase in Accounts Receivable (if the service was performed on credit)
Decrease in Unearned Revenues (if the service was performed after the customer had paid in advance for the service).
Balance Sheet Effect: service or sale for cash
An increase in cash (asset) on balance sheet
Balance sheet Effect: service or sale was on credit
An increase in Accounts Receivable (asset) on balance sheet
Balance Sheet Effect: service was performed after the customer had paid in advance for the service
Decrease in Unearned Revenues (liability) on balance sheet
Accrual method: Revenues
Are recognized on the income statement when they are earned (rather than when the cash is received).
Accrual method: Expenses
are matched with revenues on the income statement when they expire or title has transferred to the buyer, rather than at the time they are paid.
Balance Sheet Effect: expense was paid at the time the expense was incurred
Decrease in Cash (asset) on balance sheet
Balance Sheet Effect: expense will be paid in the future
An increase in Accounts Payable (liability) on balance sheet.
Balance Sheet Effect: expense was paid in advance
Increase in Prepaid Expenses (asset) on balance sheet
Cash Basis Of Accounting
An accounting method wherein revenues are recognized when cash is received and expenses are recognized when paid.
Accounts Receivable (account)
A current asset resulting from selling goods or services on credit (on account). Invoice terms such as (a) net 30 days or (b) 2/10, n/30 signify that a sale was made on account and was not a cash sale.
A revenue account that reports the sales of merchandise. Reported in the accounting period in which title to the merchandise was transferred from the seller to the buyer
Principle that requires a company to match expenses with related revenues in order to report a company's profitability during a specified time interval.
Ideally, the matching is based on a cause and effect relationship: sales causes the cost of goods sold expense and the sales commissions expense.
Matching Principle: no cause and effect relationship
accountants will show an expense in the accounting period when a cost is used up or has expired
Matching Principle:cost cannot be linked to revenues or to an accounting period
the expense will be recorded immediately. An example of this is Advertising Expense and Research and Development Expense.
Interest expense (account)
This account is a non-operating or "other" expense for the cost of borrowed money or other credit.
Interest expense amount (income statement)
The amount appearing on the income statement is the cost of the money that was used during the time interval shown in the heading of the income statement, not the amount of interest paid during that period of time.
This is the bottom line of the income statement. It is the mathematical result of revenues and gains minus the cost of goods sold and all expenses and losses (including income tax expense if the company is a regular corporation) provided the result is a positive amount.
The bottom line of the income statement when revenues and gains are less than the aggregate amount of cost of goods sold, operating expenses, losses, and income taxes (if the company is a regular corporation).
A long-term asset account that reports a company's cost of automobiles, trucks, etc. The account is reported under the balance sheet classification property, plant, and equipment. Depreciated over their useful lives.
A current asset account which includes currency, coins, checking accounts, and undeposited checks received from customers. The amounts must be unrestricted. (Restricted amounts should be recorded in a different account.)
A current asset representing the cost of supplies on hand at a point in time. The account is usually listed on the balance sheet after the Inventory account.
A related account is Supplies Expense, which appears on the income statement. The amount in the Supplies Expense account reports the amounts of supplies that were used during the time interval indicated in the heading of the income statement.
a noncurrent or long-term asset account which reports the cost of the equipment.
.... will be depreciated over its useful life by debiting the income statement account Depreciation Expense and crediting the balance sheet account Accumulated Depreciation (a contra asset account).
prepaid expense (expense)
A current asset representing amounts paid in advance for future expenses. As the expenses are used or expire, expense is increased and this account is decreased.
Insurance Expense (account)
The amount of insurance that was incurred/used up/expired during the period of time appearing in the heading of the income statement. The amount of insurance premiums that have not yet expired should be reported in the current asset account Prepaid Insurance.
Prepaid Insurance (account)
A current asset which indicates the cost of the insurance contract (premiums) that have been paid in advance. It represents the amount that has been paid but has not yet expired as of the balance sheet date.
A related account is Insurance Expense, which appears on the income statement. The amount in the Insurance Expense account should report the amount of insurance expense expiring during the period indicated in the heading of the income statement.
The accounting guideline requiring amounts in the accounts and on the financial statements to be the actual cost rather than the current value.
Accountants can show an amount less than cost due to conservatism, but accountants are generally prohibited from showing amounts greater than cost. (Certain investments will be shown at fair value instead of cost.)
This accounting guideline states that if doubt exists between two acceptable alternatives (in other words the accountant needs to break a tie), the accountant should choose the alternative that will result in a lesser asset amount and/or a lesser profit. A classic example is inventory where the replacement cost is less than the actual cost.
In short, the cost principle generally prevents assets from being reported at _____ than cost, while conservatism might require assets to be reported at _____ than their cost.
Depreciation Expense (account)
The income statement account which contains a portion of the cost of plant and equipment that is being matched to the time interval shown in the heading of the income statement. (does not apply to land)
worth, cost minus depreciation expense
assets are not reported on the balance sheet at their ______ (fair market value). Long-term assets (such as buildings, equipment, and furnishings) are reported at their __________.
Accountants view depreciation as an ________ process—allocating the cost to expense in order to match the costs with the revenues generated by the asset. Accountants do not consider depreciation to be a ______ process
A long-term asset account that reports the cost of real property exclusive of the cost of any constructed assets on the property.
....usually appears as the first item under the balance sheet heading of Property, Plant and Equipment. Does not depreciate, always appears at original cost despite any rise in value.
Office Equipment (account)
A long-term asset account reported on the balance sheet under the heading of property, plant, and equipment. Included in this account would be copiers, computers, printers, fax machines, etc.
Common Stock (account)
The type of stock that is present at every corporation. Shares .............provide evidence of ownership in a corporation. Holders of ..........elect the corporation's directors and share in the distribution of profits of the company via dividends.
If the corporation were to liquidate, the secured lenders would be paid first, followed by unsecured lenders, preferred stockholders (if any), and lastly the common stockholders.
Obligations of a company or organization. Amounts owed to lenders and suppliers...often have the word "payable" in the account title.... also include amounts received in advance for a future sale or for a future service to be performed.
Notes Payable (account)
The amount of principal due on a formal written promise to pay. Loans from banks are included in this account
Interest Payable (account)
This current liability account reports the amount of interest the company owes as of the date of the balance sheet. (Future interest is not recorded as a liability.)
Accounts Payable (account)
This current liability account will show the amount a company owes for items or services purchased on credit and for which there was not a promissory note. This account is often referred to as trade payables
Wages Payable (account)
A current liability account that reports the amounts owed to employees for hours worked but not yet paid as of the date of the balance sheet.
A liability account that reports amounts received in advance of providing goods or services. When the goods or services are provided, this account balance is decreased and a revenue account is increased
Service Revenues (account)
Under the accrual basis of accounting, this account reports the fees earned by a company during the time period indicated in the heading of the income statement.
Includes work completed whether or not it was billed.... an operating revenue account and will appear at the beginning of the company's income statement.
market value of the corporation
Stockholders equity (S.E.) is not the same as the _____________ , because is S.E is valued at cost or lower.
Paid-in Capital In Excess Of Par Value - Common Stock
The stockholders' equity account that represents the amount paid to a corporation for its common stock that was in excess of the common stock's par value. This account is sometimes referred to as the premium on common stock
Preferred Stock (account)
A class of corporation stock that provides for preferential treatment of dividends: preferred stockholders will be paid dividends before the common stockholders receive dividends.
In exchange for the preferential treatment of dividends, holders of these shares usually do not share in the corporation's earnings and instead receive only their fixed dividend.
Retained Earnings (account)
A stockholders' equity account that generally reports the net income of a corporation from its inception until the balance sheet date less the dividends declared from its inception to the date of the balance sheet
statement of cash flows
One of the main financial statements (along with the income statement and balance sheet).... reports the sources and uses of cash by operating activities, investing activities, financing activities, and certain supplemental information for the period specified in the heading of the statement.
chart of accounts
A listing of the accounts available in the accounting system in which to record entries....consists of balance sheet accounts (assets, liabilities, stockholders' equity) and income statement accounts (revenues, expenses, gains, losses).
double entry accounting
The 500 year-old accounting system where every transaction is recorded into at least two accounts.
investment revenues (account)
The amounts earned on money invested. Often this is interest and dividends earned on a company's investment in stocks and bonds of other companies.
rent expense (account)
pplUnder the accrual basis of accounting, this will report the cost of occupying space during the time interval indicated in the heading of the income statement, whether or not the expense was paid within that period. (amount that has been paid in advance is shown on the balance sheet in the current asset account Prepaid Rent.) Depending upon the use of the space......could appear on the income statement as part of administrative expenses or selling expenses. If the rented space was used to manufacture goods, the rent would be part of the cost of the products produced.
delivery equipment (account)
A long term asset account containing the cost of delivery equipment acquired by a company and used in its business. The account will appear on the balance sheet under the heading of Property, Plant and Equipment. There will be a related contra asset account Accumulated Depreciation: Delivery Equipment where the depreciation expense is accumulated.
is the income statement account which reports the dollar amount of ads run during the period shown in the income statement. Will be reported under selling expenses on the income statement.
The compensation earned by hourly-paid employees during the interval of time indicated in the heading of the income statement. Under the accrual basis of accounting, the date that wages are paid does not determine when the wages are reported as an expense
A current asset account that reports the amount of future rent expense that was paid in advance of the rental period. The amount reported on the balance sheet is the amount that has not yet been used or expired as of the balance sheet date.
a noncurrent or long-term asset account which shows the cost of a building (excluding the cost of the land). ....will be depreciated over their useful lives by debiting the income statement account Depreciation Expense and crediting the balance sheet account Accumulated Depreciation.
This reports the amounts that a customer has prepaid and will be earned by the company within one year of the balance sheet date. An example is a retailer's unredeemed gift cards.
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