- C1 Time period assumption
- An organization’s activities can be divided into specific time periods such as a month, a quarter, or a year.
- C1 Accounting period
- The length of time covered by financial statements; a year, quarter, or month.
- C1 Fiscal year
- Any twelve consecutive months used as an accounting year. It need not be the calendar year.
- C1 Natural business year
- A fiscal year that ends when sales activity is at its lowest point, so inventory and receivables are easiest to count.
- C1 Interim financial statements
- Statements covering one, three, or six months, prepared inside the annual period.
- C1 Accrual basis accounting
- Revenues are recorded when services and products are delivered, and expenses when incurred, regardless of when cash moves. Required by GAAP.
- C1 Cash basis accounting
- Revenues are recorded when cash is received and expenses when cash is paid. Not consistent with GAAP.
- C1 Revenue recognition principle
- Recognize revenue when goods or services are provided to customers, at the amount expected to be received.
- C1 Expense recognition principle
- Record the expenses that helped generate revenue in the same period as that revenue (also called the matching principle).
- C2 Adjusting entry
- A period-end entry that brings an asset or liability account to its proper amount and updates the related expense or revenue. It never touches Cash.
- C2 Prepaid expenses
- Assets paid for in advance of receiving their benefits. As the benefit is used up, the asset becomes an expense.
- C2 Unearned revenues
- A liability created when cash is received before services or products are delivered. As work is done, the liability becomes revenue.
- C2 Accrued expenses
- Costs that are incurred in a period but are both unpaid and unrecorded. The adjustment records the expense and a payable.
- C2 Accrued revenues
- Revenues earned in a period that are both unrecorded and not yet received in cash. The adjustment records the revenue and a receivable.
- P1 Depreciation
- The process of allocating the cost of a plant asset over its expected useful life.
- P1 Straight-line depreciation
- (Cost − Salvage value) ÷ Useful life. The same amount of expense each period.
- P1 Plant assets
- Long-term tangible assets used to produce and sell products and services, such as equipment and buildings.
- P1 Contra account
- An account linked with another account whose balance is subtracted from it. Accumulated depreciation is a contra asset with a credit balance.
- P1 Accumulated depreciation
- The total depreciation recorded on an asset since it was acquired. A contra asset account.
- P1 Book value
- An asset’s cost less its accumulated depreciation.
- P2 Unadjusted trial balance
- A list of accounts and balances prepared before adjusting entries are recorded.
- P2 Adjusted trial balance
- A list of accounts and balances prepared after adjusting entries are recorded and posted. Statements are prepared from it.
- A2 Profit margin
- Net income ÷ Net sales. The portion of each sales dollar that ends up as profit.