Financial Accounting Exam 2

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Revenue Recognition Principle
Revenue is earned and recognized upon product delivery or service completion, no matter when cash is received.
Expense recognition Principle
The recognition of expenses is related to net changes in assets and earning revenues.
Accrued Expenses
Expenses that have been incurred but not recorded in the accounts.
Accrued Revenues
Revenues earned but not yet received in cash or recorded
Adjusting Entries
Entries made at the end of an accoutning period to ensure that the revenue recognition and matching principles are followed
A decrease in value due to physical deterioration, functional or economic obsolescence.
income summary
A temporary account used in closing revenue and expense accounts
book value
The cost of a fixed asset less accumulated depreciation.
cost of goods sold
COGS: All money spent to purchase or make the products or services the company plans to sell to its customers.
contra revenue account
An account that is offset against a revenue account on the income statement
gross profit
(finance) the net sales minus the cost of goods and services sold
profit margin
NI / Sales
Average-cost Method
Inventory costing method that uses the weighted-average unit cost to allocate to ending inventory and cost of goods sold the cost of goods available for sale.
specific identification
Each item sold & purchased is individually identified; Required for goods that are not ordinarily interchangeable; & that are produced & segregated for specific projects.
consigned goods
Goods held for sale by one party although ownership of the goods is retained by another party.
FOB destination
Situation in which the buyer takes ownership (title) at the delivery destination point and the seller pays the freight
FOB shipping point
Situation in which the buyer takes ownership (title) to the goods at the shipping point and the buyer pays the freight
adjusting journal entry
closing journal entries
Journal entries automatically generated by the computer that close all temporary income statement accounts to the income summary account, close the income summary account to the capital account, and close the drawing account to the capital account.
Step 1 of Accounting Cycle
Analyze Business transactions
Step 2 of Accounting Cycle
Journalize the transactions
Step 3 of Accounting Cycle
Post to ledger accounts
Step 4 of Accounting Cycle
Prepare a Trial Balance
Step 5 of Accounting Cycle
Journalize and post adjusting entries: Deferrals/Accruals
Step 6 of Accounting Cycle
Prepare an adjusted trial balance
Step 7 of Accounting Cycle
Prepare financial Statements
Step 8 of Accounting Cycle
Journalize and post closing entires
Step 9 of the Accounting Cycle
Prepare a post-closing trial balance
Cash-basis accounting
Accounting basis in which a company records revenue only when it receives cash, and an expense only when it pays cash. Prohibited under GAAP
Accrual Accounting
Accounting that records the impact of a business event as it occurs, regardless of whether the transaction affected cash.
adjusting entries for either prepaid expenses (Expenses paid in cash and recorded as assets before they are used or consumed)
or unearned revenues (Cash received and reported as liabilities before revenue is earned)
adjusting entires for accrued revenues (Revenues earned but not yet received in cash or recorded)
or accrued expenses (Expenses incurred but not yet paid in cash or recorded)
Prepaid Expenses
Assets Overstated
Expenses Understated

Dr. Expenses
Cr. Assets

Unearned revenues
Liabilities overstated
Revenues understated
Dr. Liabilities
Cr. Revenues
Accrued Revenues
Assets understated
Revenues understated
Dr. Assets
Accrued Expenses
Expenses understated
Liabilities understated
Dr. Expenses
Cr. Liabilities
Categories: Financial Accounting