Accounting cycle
A series of six steps whose ultimate purpose is to provide useful information to decision makers
Accrual accounting
Recording transactions in the periods in which they occur, rather in the periods in which cash is received or paid; all the techniques that accountants use to apply the matching rule.
Accrual
The recognition of an expense or revenue that has arisen but has not yet been recorded.
Accrued expenses
Expenses incurred but not recognized in the accounts; unrecorded expenses.
Accrued revenues
Revenues for which a service has been performed or goods delivered but for which no entry has been made; unrecorded revenues.
Accumulated depreciation account
A contra-asset account used to accumulate depreciation on specific long-term assets.
Adjusted trial balance
A trial balance prepared after all adjusting entries have been recorded and posted to the accounts.
Adjusting entries
Entries made to apply accrual accounting to transactions that span accounting periods.
Carrying value
The unexpired part of an asset’s cost. Also called book value.
Cash basis of accounting
Accounting for revenues and expenses on a cash-received and cash-paid basis.
Closing entries
Journal entries made at the end of an accounting period that set the stage for the next period by clearing the temporary accounts of their balances and transferring them to Retained Earnings; they summarize a period’s revenues and expenses.
Continuity
The difficulty associated with not knowing how long a business will survive.
Contra account
An account whose balance is subtracted from an associated account in the financial statements.
Deferral
The postponement of the recognition of an expense already paid or of a revenue received in advance.
Depreciation
The portion of the cost of a long-term asset allocated to any one accounting period. Also called depreciation expense.
Earnings management
The manipulation of revenues and expenses to achieve a specific outcome.
Fiscal year
Any 12-month accounting period.
Going concern
The assumption that unless there is evidence to the contrary, a business will continue to operate indefinitely.
Income Summary account
A temporary account used during the closing process that holds a summary of all revenues and expenses before the net income or loss is transferred to the Retained Earnings account.
Matching rule
The principle that revenues must be assigned to the accounting period in which the goods are sold or the services performed, and expenses must be assigned to the accounting period in which they are used to produce revenue.
Net income
The net increase in stockholders’ equity that results from business operations and is accumulated in the Retained Earnings account; revenues less expenses when revenues exceed expenses.
Periodicity
The assumption that although the lifetime of a business is uncertain, it is still useful to estimate its net income in terms of accounting periods.
Post-closing trial balance
A trial balance prepared at the end of an accounting period after all adjusting and closing entries have been posted; a final check on the balance of the ledger to ensure that all temporary accounts have zero balances and that total debits equal total cre
Prepaid expenses
Expenses paid in advance that have not yet expired; an asset account.
Profit margin:
A ratio that shows the percentage of each sales dollar that results in net income; Net Income ÷ Net Revenues.
Profit
The increase in stockholders’ equity that results from business operations.
Unearned revenues
Revenues received in advance for which the goods have not yet been delivered or the services performed; a liability account.
