Accounting - Chapter 4

• Accrual Basis

  Record when Earned/Occurred
• Cash Basis

  Record when Cash Paid/Received
• Unearned revenue is also known as deferred revenue.
• Accrual Basis

  Records revenues when earned , record expenses when incurred
• Periodicity Concept


  Financial statements are prepared and reported at regular, consistent time periods (e.g., monthly, quarterly, annually)
• Calendar Year:

  January 1 to December 31
• Fiscal Year:

  Any 12 months chosen for financial reporting (e.g., July 1 to June 30)
• Natural Year


  A 12-month period based on a company's operating cycle.
• Interim period :

  A financial reporting period shorter than a full year (e.g., quarterly or semi-annually)
• Recognition:

  Recording an asset, liability, income, or expense in the financial statements.
• Derecognition: 


  Removing an asset or liability from the financial statements when it is no longer valid.
• Contract


  Agreement between two are more parties that created enforcable rights and obligation
• Performance Obligation

  A promise in a contract to deliver a good or service to a customer.
• Transaction Price:

  The amount of consideration (payment) a company expects to receive in exchange for fulfilling a performance obligation in a contract.
• Deferral: 


  Accounting method where revenues or expenses are recognized in a future period when they occur, despite cash transactions happening earlier.
• Accrual:

  Accounting method where revenues or expenses are recognized when they are incurred, regardless of when cash transactions occur.
• Deferral

  decreases the balance sheet account and increases an income statement account
• Accrual

  Increases both a balance sheet and an income statement account
• Prepaid Expenses:

  Payments made in advance for future expenses.
• Depreciation:

  Allocation of asset cost over its useful life.
• Cost:

  The amount spent to acquire or produce an asset.
• Salvage Value:

  Estimated value of an asset at the end of its useful life.
• Useful Life:

  The period over which an asset is expected to be used.
• Straight-Line Method:

  Depreciation method allocating equal expense each period.
• Accrued Expenses:

  Expenses incurred but not yet paid or recorded.
• Accrued Revenues:

  Revenues earned but not yet received or recorded.