introduction chapters
chapter
3Following is a "checklist" of selected key concepts that are likely to be included on an exam. Review and check-off each noted item to be certain that important concepts have not been overlooked in your study.
Distinguish between the economic and accounting concepts of income.
Why do accountants use the transactions approach to compute net income?
Distinguish between exchange transactions and nonexchange events.
Define the periodicity assumption, and know its importance in income measurement.
What is a fiscal year versus a calendar year?
Be able to recite the revenue recognition rule.
Understand the importance of the matching principle to expense recognition and income measurement.
What are the three general rules for expense recognition?
Why are adjusting entries needed?
Understand and be able to prepare adjusting entries for multiperiod costs and revenues (prepaid expenses, depreciation, and unearned revenues) and accrued revenues and expenses.
Define the term "accrual."
Distinguish between a trial balance and an adjusted trial balance.
Be able to deal with the alternative treatment of prepaid expenses and unearned revenues.
Why might the alternative treatment of adjustments "simplify" the accounting process?
Define and apply both the accrual basis and cash basis of accounting.
Which method of accounting (cash or accrual) is generally preferred, and why?
What is the nature of the modified cash-basis system?
KEY TERMS AND DEFINITIONS (with links to discussion in text)
| accrual | Expenses and revenues that gradually accumulate throughout an accounting period |
| accrual basis | The accounting process whereby revenues are measured and recorded as earned, while expenses are recorded as incurred |
| accrued expenses | Unpaid expenses that have already been incurred |
| accrued revenues | Revenues that have been earned and recorded, but are not as yet collected |
| adjusted trial balance | A trial balance prepared after adjusting entries have been prepared and posted to the ledger |
| adjusting process | To analyze account balances and update them at the end of an accounting period to reflect the correct measure of revenues and expenses |
| book value | Cost minus accumulated depreciation; the net amount at which an asset is reported on the balance sheet |
| cash basis | An accounting approach where revenue is recorded when cash is received (no matter when "earned"), and expenses are recognized when paid (no matter when "incurred") |
| contra asset | An account that is subtracted from a related account -- contra accounts have opposite debit/credit rules |
| depreciation | The process used to allocate the cost of a long-lived property to the accounting periods benefited |
| fiscal year | A one-year accounting period that does not correspond to a calendar year |
| matching principle | To associate expenses with revenues, and record them in simultaneous accounting periods |
| modified cash basis | Like the cash basis, except that certain large expenditures for durable assets may be recorded as assets initially |
| natural business year | Applicable to certain businesses that have a seasonal business pattern, and an attempt is made to establish an accounting fiscal year to match |
| periodicity assumption | An accounting assumption that purports to divide a continuous business process into measurement intervals, such as months, quarters, and years |
| prepaid expenses | Goods or services purchased in advance of their consumption |
| revenue recognition | The point at which revenue is recognized in the accounting records; ordinarily the point of sale |
| unearned revenue | Revenue that has been collected in advance of providing goods and services to "earn it;" reported as a liability until earned |