accounting chapter 3

account format

a balance-sheet format that lists assets on the left and liabilities and stockholders' equity on the right

accrual

an expense or a revenue that occurs before the business pays or receives cash. an accrual is the opposite of a deferral

accrual accounting

accounting that records the impact of a business event as it occurs, regardless of whether the transaction affected cash

accrued expense

an expense incurred but not yet paid in cash

accrued revenue

a revenue that has been earned but not yet received in cash

accumulated depreciation

the cumulative sum of all depreciation expense form the date of acquiring a plant asset

adjusted trial balance

a list of all the ledger accounts with their adjusted balances

book value (of a plant asset)

the asset's cost minus accumulated depreciation

cash-basis accounting

accounting that records only transactions in which cash is received or paid

classified balance sheet

a balance sheet that shows current assets separate from long-term assets, and current liabilities separate from long-term liabilities

closing the books

the process of preparing the accounts to begin recording the next period's transactions. closing the accounts consists of journalizing and posting the closing entries to set the balances of the revenue, expense, and dividends accounts to zero. also called

closing entries

entries that transfer the revenue, expense, and dividends balances from these respective accounts to the retained earnings account

contra account

an account that always has a companion account and whose normal balance is opposite that of the companion account

current asset

an asset that is expected to be converted to cash, sold, or consumed during the next 12 months, or within the business's normal operating cycle if longer than a year

current liability

a debt due to be paid within one year or within the entity's operating cycle if the cycle is longer than a year

current ratio

current assets divided by current liabilities. measures a company's ability to pay current liabilities with current assets

debt ratio

ratio of total liabilities to total assets. states the proportion of a company's assets that is financed with debt

deferral

an adjustment for which the business paid or received cash in advance. examples include prepaid rent, prepaid insurance, and supplies

depreciation

allocation of the cost of a plant asset to expense over its useful life

liquidity

measure of how quickly an item can be converted to cash

long-term asset

an asset that is not a current asset

long-term liability

a liability that is not a current liability

matching principle

the basis for recording expenses. directs accountants to identify all expenses incurred during the period, to measure the expenses, and to match them against the revenues earned during that period

multi-step income statement

an income statement that contains subtotals to highlight important relationships between revenues and expenses

operating cycle

time span during which cash is paid for goods and services that are sold to customers who pay the business in cash

permanent accounts

asset, liability, and stockholders' equity accounts that are not closed at the end of the period

plant assets

long-lived assets, such as land, buildings, and equipment, used in the operation of the business. also called fixed assets

prepaid expense

a category of miscellaneous assets that typically expire or get used up in the near future. examples include prepaid rent, prepaid insurance, and supplies

report format

a balance-sheet format that lists assets at the top, followed by liabilities and stockholders' equity below

revenue principle

the basis for recording revenues; tells accounts when to record revenue and the amount of revenue to record

single-step income statement

an income statement that lists all the revenues together under a heading such as revenues or revenues and gains. expenses appear in a separate category called expenses or perhaps expenses and loses

temporary accounts

the revenue and expense accounts that relate to a limited period and are closed at the end of the period are temporary accounts. for a corporation, the dividends account is also temporary

time-period concept

ensures that accounting information is reported at regular intervals

unearned revenue

a liability created when a business collects cash from customers in advance of earning the revenue. the obligation is to provide a product or a service in the future