fame7

STUDY UNIT SEVEN

1. Accrual – the recognition of revenue or expense before the payment is received or the expense is paid; required in accrual-basis accounting when the revenue or expense transaction occurs in the period before the cash transaction.

2. Accrual adjusting entry – debit the expense account to increase the expenses recognized in the current period, or credit the revenue account to increase the revenues recognized in the current period.

3. Accrual-basis accounting – revenue is recognized when it is earned; expenses are recognized when incurred; requires deferral and accrual transactions; must be used by all public companies.

4. Accumulated depreciation – contra-asset account that offsets its corresponding asset account to reflect a reduction in usefulness and value of a long-term asset; credit balance listed below the corresponding asset account.

5. Adjusted trial balance – summation of all of the debits and credits in all of an entity’s accounts after adjusting entries have been made; verifies that account balance debits still equal credits.

6. Adjusting journal entry – used in accrual-basis accounting to adjust balance sheet accounts for deferrals and accruals; affects one balance sheet, or permanent, account; and at least one income statement, or temporary, account.

7. Cash-basis accounting – revenue is recognized when cash is received; expenses are recognized when cash is paid; only used by some private companies.

· Income = Cash received – Cash paid

8. Cost of goods available for sale (GAS) = Beginning inventory + Purchases.

9. Cost of goods sold/Cost of sales (COGS) = Beginning inventory + Purchases – Ending inventory.

10. Deferral – the postponement of the recognition of revenue or expense to a subsequent accounting period; required in accrual-basis accounting when a revenue or expense transaction occurs in the period after the cash transaction.

11. Deferral adjusting entry – debit the revenue account to decrease the revenue recognized in the current period, or credit the expense account to decrease the expenses recognized in the current period.

12. Earned – revenue is earned when title of a good transfers to a customer or when a service is performed.

13. Expense – recognized when it is incurred; expenses are incurred when assets are used or liabilities incurred in the production of revenue.

14. Incurred – expenses are incurred when the company uses either assets or services to produce revenue.

15. Matching principle – expenses should be recognized at the time related revenues are earned; principle used in accrual-basis accounting.

16. Periodic (physical) inventory system – uses a temporary expense account called purchases to record inventory (merchandise for resale) purchases during a period. At the end of the period, purchases is closed to cost of goods sold and the actual end of period inventory amount is established in the inventory account. This is the inventory system that is used throughout this FAME program.

17. Perpetual inventory system – records increases and decreases of inventory directly to the permanent inventory asset account and not to the temporary purchases expense account. This system is for those requiring continuously accurate inventory balances (not just at the end of the period).

18. Recognition – the process of formally recording expenses when incurred and revenues when earned.

19. Revenue – recognized when it is earned; revenue is considered earned when title of a good transfers to a customer or when a service is performed.