Accounting Allison McCulloch Chapters 3+4 Extra crediT #3 Accrual Basis Accounting records revenues when earned and expenses when incurred, regardless of the timing of cash receipts or payment. Cash Basis Accounting records revenues when cash is received and expenses when cash is paid. Expenses are decreases in assets or increases in liabilities to generate revenues during the period. Gains are increases in assets or decreases in liabilities from peripheral transactions. Losses are decreases in assets or increases in liabilities from peripheral transactions. Matching Principle requires that expenses be recorded when incurred in earning revenue. Operating cycle (cash to cash cycle) is the time it takes for a company to purchase goods or services from suppliers, sell those goods and services to customers, and collect cash from customers. Revenues are increases in assets or settlements in liabilities from ongoing operations. Revenue Principle states that revenues are recognized when the earnings process is complete or nearly complete, an exchange has taken place, and collection is probable. Time Period Assumption indicates that the long life of a company can be reported in shorter time periods. #4 Accounting cycle - record keeping process used during and at the end of the accounting period that results in financial statements Accrued Revenues and Accrued Expenses are revenues that have been earned and expenses that have been incurred by the end of the current accounting period but that will not be collected or paid until a future accounting period. Adjusting Entries are entries necessary at the end of the accounting period to measure income properly, correct errors, and provide for adequate valuation of balance sheet accounts. Book Value (Net book value, Carrying value) of an asset is the difference between its acquisition cost and accumulated depreciation, its related contra-account. Closing Entries are made at the end of the accounting period to transfer balances in temporary accounts to Retained Earnings and to establish a zero balance in each of the temporary accounts. Contra-Account is an accounts that is an offset to, or reduction of, the primary account. Deferred Revenues and Deferred Expenses are previously recorded assets, liabilities, revenues, or expenses that need to be adjusted at the end of the period to reflect earned revenues or incurred expenses. Income Summary is a temporary account used only during the closing process to facilitate closing revenues and expenses. Permanent (Real) Accounts are the balance sheet accounts that carry their ending balances into the next accounting period. Post-Closing Trial Balance should be prepared as the last step of the accounting cycle to check that debits equal credits and all temporary accounts have been closed. Temporary (Nominal) Accounts are income statement ( and sometimes dividends declared) accounts that are closed to Retained Earnings at the end of the accounting period. Trial Balance is a list of all accounts with their balances to provide a check on the equality of the debits and credits.