exam 2 terms

• Cash basis accounting


  a method of accounting in which revenue is recorded when cash is received, regardless of when it is actually earned. Similarly, an expense is recorded when cash is paid, regardless of when it is actually incurred. Cash-basis accounting does not tie recognition of revenues and expenses to the actual business activity but rather to the exchange of cash.
• Accrual-basis accounting


  a method of accounting in which revenues are generally recorded when earned (rather than when cash is received) and expenses are matched to the periods in which they help produce revenues (rather than when cash is paid).
• Revenue Recognition Principle


  determines when revenue is recorded and reported. Under this principle, revenue is recognized, or recorded, in the period in which a company satisfies its performance obligation, or promise within a contract.
• expense recognition principle


  requires that expenses be recorded and reported in the same period as the revenue that it helped to generate
• Adjusting entries


  journal entries that are made at the end of an accounting period to record the completed portion of partially completed transactions
• Accrued revenues


  previously unrecorded revenues that have been earned but for which no cash has yet been received.
• Accrued expenses


  previously unrecorded expenses that have been incurred, but not yet paid in cash
• Deferred (or unearned) revenues


  liability arising from the receipt of cash for which revenue has not yet been earned.
• Permanent accounts


  accounts of asset, liability, and stockholders’ equity items whose balances are carried forward from the current accounting period to future accounting periods
• Temporary accounts


  the accounts of revenue, expense, and dividend items that are used to collect the activities of only one period.
•  time-period assumption 


  allows companies to artificially divide their operations into time periods so they can satisfy users’ demands for information
• Deferred (or prepaid) expenses


  asset arising from the payment of cash which has not been used or consumed by the end of the period.
• Depreciation


  the process whereby companies systematically allocate the cost of their tangible operating assets (other than land) as an expense in each period in which the asset is used.
• Contra accounts


  accounts that have a balance that is opposite of the balance in the related account.
• Adjusted trial balance


  an updated trial balance that reflects the changes to account balances as the result of adjusting entries
• Internal control system


  the policies and procedures established by top management and the board of directors to provide reasonable assurance that the company’s objectives are being met in three areas: (1) effectiveness and efficiency of operations, (2) reliability of financial reporting, and (3) compliance with applicable laws and regulations.
• Segregation of duties


  the idea that accounting and administrative duties should be performed by different individuals, so that no one person has access to the asset and prepares all the documents and records for an activity.
• Accounting system


  the methods and records used to identify, measure, record, and communicate financial information about a business.
• Cash equivalents


  short-term, highly liquid investments that are readily convertible to cash and have original maturities of three months or less
• Bank reconciliation


  the process of reconciling any differences between a company’s accounting records and the bank’s accounting records
• Outstanding check


  a check that has been issued and recorded by the business but that has not been “cashed” by the recipient of the check.
• Deposit in transit


  an amount received and recorded by a company, but which has not been recorded by the bank in time to appear on the current bank statement.
• Service charges


  fees charged by the bank for services provided. Examples include annual maintenance, minimum balance, and foreign transaction fees.
• Non-sufficient funds (NSF) check


  a check that has been returned to the depositor because funds in the issuer’s account are not sufficient to pay the check (also called a “bounced” check).
• Petty cash


  a fund used to pay for small dollar amounts.
• Control environment


  the collection of environmental factors that influence the effectiveness of control procedures such as the philosophy and operating style of management, the personnel policies and practices of the business, and the overall integrity, attitude, awareness, and actions of everyone in the business concerning the importance of control
• Strategic risks


  possible threats to the organization’s success in accomplishing its objectives that are external to the organization
• Business process risks


  threats to the internal processes of a company
• Control activities


  the policies and procedures that top management establishes to help insure that its objectives are met
• Safeguarding


  the physical protection of assets through, for example, fireproof vaults, locked storage facilities, keycard access, and anti-theft tags on merchandise.