Concept explainers
Read each definition below and write the number of the definition in the blank beside the appropriate term. The quiz solutions appear at the end of the chapter.
Recognition
Historical cost
Current value
Cash basis
Accrual basis
Revenues
Revenue recognition principle
Matching principle
Expenses
Straight-line method
Contra account
Deferral
Deferred expense
Deferred revenue
Accrual
Accrued liability
Accrued asset
Accounting cycle
Work sheet
Real accounts
Nominal accounts
Closing entries
Interim statements
- A device used at the end of the period to gather the information needed to prepare financial statements without actually recording and posting adjusting entries.
- Inflows of assets or settlements of liabilities from delivering or producing goods, rendering services, or conducting other activities.
Journal entries made at the end of a period by a company using the accrual basis of accounting.- Journal entries made at the end of the period to return the balance in all nominal accounts to zero and transfer the net income or loss and the dividends to
Retained Earnings . - A liability resulting from the receipt of cash before the recognition of revenue.
- The name given to balance sheet accounts because they are permanent and are not closed at the end of the period.
- An asset resulting from the recognition of a revenue before the receipt of cash.
- The amount of cash or its equivalent that could be received by selling an asset currently.
- The assignment of an equal amount of
depreciation to each period. - Cash has been paid or received but expense or revenue has not yet been recognized.
- A system of accounting in which revenues are recognized when a performance obligation is satisfied and expenses are recognized when incurred.
- Cash has not yet been paid or received but expense has been incurred or revenue recognized.
- Financial statements prepared monthly, quarterly, or at other intervals less than a year in duration.
- Revenues are recognized in the income statement when a performance obligation is satisfied.
- The process of recording an item in the financial statements as an asset, a liability, a revenue, an expense, or the like.
- An asset resulting from the payment of cash before the incurrence of expense.
- The name given to revenue, expense, and dividend accounts because they are temporary and are closed at the end of the period.
- A system of accounting in which revenues are recognized when cash is received and expenses are recognized when cash is paid.
- A liability resulting from the recognition of an expense before the payment of cash.
- The association of revenue of a period with all of the costs necessary to generate that revenue.
- An account with a balance that is opposite that of a related account.
- The amount paid for an asset and used as a basis for recognizing it on the balance sheet and carrying it on later balance sheets.
- Outflows of assets or incurrences of liabilities resulting from delivering goods, rendering services, or carrying out other activities.
- A series of steps performed each period and culminating with the preparation of a set of financial statements.
Accounting concepts and conventions: Accounting is consisting of various concepts and conventions such as materiality, reliability, comparability, conservatism, consistency and relevance. These are important part of accounting or it can be said that it is the base of the accounting.
The correct number of explanation given and write beside the appropriate term given.
Answer to Problem 4.1KTQ
- ___15__Recognition
- ___22__ Historical cost
- ___08__ Current value
- ___18__ Cash basis
- ___11__ Accrual basis
- ___02__ Revenues
- ___14__ Revenue recognition principle
- ___20__ Matching principle
- ___23__ Expenses
- ___03__ Adjusting entries
- ___09__ Straight line method
- ___21__ Contra account
- ___10__ Deferral
- ___16__ Deferred expense
- ___05__ Deferred revenue
- ___12__ Accrual
- ___19__ Accrued liability
- ___07__ Accrued asset
- ___24__ Accounting cycle
- ___01__ Worksheet
- ___06__ Real accounts
- ___17__ Nominal accounts
- ___04__ Closing entries
- ___13__ Interim statements
Explanation of Solution
- Recognition: Accounting all the expenses, revenues, an asset or liability in the books of accounts is called recognition.
- Historical cost: It is the original or nominal value of the item or any asset to be recognized in the balance sheet and also to be carried to the later years of the balance sheet.
- Current value: It is the value of the asset which is realized on its sale immediately.
- Cash basis: It is the accounting system of recording the transactions only when the cash is received or paid.
- Accrual basis: It is the system of accounting in which revenues are recognized when it is earned and expenses are recognized when it is incurred instead of cash receipt or payment.
- Revenues: It is the income generated from the business through selling, distributing of manufacturing goods and services or rendering any other activities.
- Revenue recognition principle:It is the accounting principle in which all the revenues are recognized on its accrual. Whether cash is received or not, revenue is recognized immediately.
- Matching principle: It is the accounting principle in which expenses on its related incomes are to be recognized in that period only in which revenue is earned.
- Expenses: It is the cost incurred by the companies to generated required revenues for the business purpose.
- Adjusting entries: The entries made to convert or make financial statements on accrual basis is called adjusting entries.
- Straight line method: It is the method of distributing the value of the asset over the period equally.
- Contra account: It is the general account which carries the balance that is opposite to the normal account classification.
- Deferral: It means delay in accounting the revenues and expenses until the appropriate time.
- Deferred expense: It is the expense which is already paid but not yet consumed fully.
- Deferred revenue: It is revenue which is received but not yet earned. In other words, payment is received but goods and services are not yet rendered.
- Accrual:It is accounting when events occurred instead of cash received or paid.
- Accrued liability: It is an expense which is incurred but not yet paid.
- Accrued asset: It is the revenue incurred but the cash is not yet received for it.
- Accounting cycle: It is the cycle which contains the accounting work such as determining, analyzing and recording of various transactions related to business.
- Worksheet: It is the assembling of all the transactions of the business all over the period and recording in one place at the end of the year.
- Real accounts: Accounts which are not closed at the end of the year and are carried forward to next year are called real accounts. These are also known as permanent accounts.
- Nominal accounts: Accounts which are to be closed at the end of the year and their balances are to be carried to next year are called nominal accounts. These are also known as nominal accounts.
- Closing entries: It is the journal entry made to close all the temporary accounts and transfer their balances to permanent account.
- Interim Statements: Statements which cover the records of financial statements for less than a year. It is mostly prepared monthly, quarterly or half yearly.
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Chapter 4 Solutions
Financial Accounting: The Impact on Decision Makers
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- Identify which type of adjustment is indicated by these transactions. Choose accrued revenue, accrued expense, deferred revenue, deferred expense, or estimate. A. utilities owed but not paid B. cash received in advance for future services C. supplies inventory purchased D. fees earned but not yet collected E. depreciation expense recorded F. insurance paid for future periodsarrow_forwardIdentify which of the following accounts would be listed on the companys Post-Closing Trial Balance. A. Accounts Receivable B. Accumulated Depreciation C. Cash D. Office Expense E. Note Payable F. Rent Revenue G. Retained Earnings H. Unearned Rent Revenuearrow_forwardIdentify which type of adjustment is indicated by these transactions. Choose accrued revenue, accrued expense, deferred revenue, or deferred expense. A. rent paid in advance for use of property B. cash received in advance for future services C. supplies inventory purchased D. fees earned but not yet collectedarrow_forward
- Read each definition below and write the number of the definition in the blank beside the appropriate term. The quiz solutions appear at the end of the chapter. Understandability Relevance Faithful representation Comparability Depreciation Consistency Materiality Conservatism Operating cycle Current asset Current liability Liquidity Working capital Current ratio Single-step income statement Multiple-step income statement Gross profit Profit margin Auditors report An income statement in which all expenses are added together and subtracted from all revenues. The magnitude of an accounting information omission or misstatement that will affect the judgment of someone relying on the information. The capacity of information to make a difference in a decision. An income statement that shows classifications of revenues and expenses as well as important subtotals. The practice of using the least optimistic estimate when two estimates of amounts are about equally likely. The quality of accounting information that makes it comprehensible to those willing to spend the necessary time. Current assets divided by current liabilities. The quality of information that makes it complete, neutral, and free from error. An obligation that will be satisfied within the next operating cycle or within one year if the cycle is shorter than one year. Current assets minus current liabilities. Net income divided by sales. For accounting information, the quality that allows a user to analyze two or more companies and look for similarities and differences. An asset that is expected to be realized in cash or sold or consumed during the operating cycle or within one year if the cycle is shorter than one year. The ability of a company to pay its debts as they come due. For accounting information, the quality that allows a user to compare two or more accounting periods for a single company. The process of allocating the cost of a long-term tangible asset over its useful life. The period of time between the purchase of inventory and the collection of any receivable from the sale of the inventory. Sales less cost of goods sold. The opinion rendered by a public accounting firm concerning the fairness of the presentation of the financial statements.arrow_forwardWhich of these is the first step in the closing process? (a) Close revenue account(s). (b) Close expense accounts. (c) Close the Income Summary account. (d) Close the drawing account.arrow_forwardIdentify which type of adjustment is associated with this account, and what the other account is in the adjustment. Choose accrued revenue, accrued expense, deferred revenue, or deferred expense. A. Salaries Payable B. Interest Receivable C. Unearned Fee Revenue D. Prepaid Rentarrow_forward
- For each of the following accounts, identify whether it is nominal/temporary or real/permanent, and whether it is reported on the Balance Sheet or the Income Statement. A. Salaries Payable B. Sales Revenue C. Salaries Expense D. Prepaid Insurancearrow_forwardIf adjusting entries include these listed accounts, what other account must be in that entry as well? (A) Depreciation expense; (B) Unearned Service Revenue; (C) Prepaid Insurance; (D) Interest Payable.arrow_forwardThe ledger accounts after adjusting entries for Cruz Services are presented below. a. Journalize the following closing entries and number as steps 1 through 4. b. What is the new balance of A. Cruz, Capital after closing? Show your calculations.arrow_forward
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