Accrual Accounting and Adjusting Entries: every key term you need (+ practice quiz)
25 flashcard terms for Financial Accounting Topic 3, written to match the course framework. Study them here, then drill them as interactive flashcards, or test yourself with the 15-question quiz — free, no account needed.
Revenues are recorded when earned and expenses when incurred, regardless of when cash moves. It is required for external reporting because it matches effort with accomplishment in the correct period.
Cash basis accounting
Revenues and expenses are recorded only when cash is received or paid. Simple to keep, but it can shift income between periods purely by timing a payment, so it is not acceptable for general purpose reports.
Revenue recognition principle
Revenue is recorded when control of the promised good or service transfers to the customer, in the amount the seller expects to be entitled to receive for satisfying that promise.
Performance obligation
A distinct promise in a contract to transfer a good or service. Revenue attaches to each obligation as it is satisfied, which may be at a point in time or steadily over time.
Expense recognition principle
Costs are recorded in the same period as the revenues they help generate, or immediately when no future benefit can be identified. This is why unsold inventory cost waits on the balance sheet.
Adjusting entry
A period-end entry that updates accounts for events that occurred without a new external transaction. Every adjusting entry touches at least one income statement account and one balance sheet account, and never cash.
Deferral
Cash changed hands before the revenue was earned or the expense was incurred, so an asset or liability was created first and is later reduced by an adjustment as the benefit is used.
Accrual
The revenue was earned or the expense incurred before any cash moved, so an adjustment must record the receivable or payable along with the related income statement amount.
Prepaid expense
An asset created by paying for a benefit in advance, such as rent or insurance. As the coverage period elapses the asset is written down and expense is recognized in step.
Supplies adjustment
Supplies are recorded as an asset when bought, then a count at period end determines how many remain. The difference between the recorded amount and the count becomes supplies expense.
Deferred revenue
Cash collected before the seller performs. It sits as a liability and is moved into revenue only as each portion of the promised service or product is actually delivered.
Accrued revenue
Revenue earned but neither billed nor collected by period end. The adjustment debits a receivable and credits revenue so the performance appears in the period it occurred.
Accrued expense
A cost incurred but unpaid and often unbilled at period end, such as wages for the final days of the month. The adjustment debits expense and credits a payable.
Interest accrual
Interest grows with the passage of time, so at period end the borrower records interest expense and interest payable for the days elapsed since the last payment date.
Unbilled services
Work completed for a client whose invoice will not go out until the following period. Under accrual rules the revenue and a receivable are recorded now rather than when the bill is sent.
Cut-off
The discipline of assigning transactions near period end to the correct period. Weak cut-off is a classic source of overstated revenue, since a shipment made in January is credited to December.
Adjusted trial balance
The listing of account balances after all adjusting entries are posted. It is the direct source for preparing the income statement, the equity statement and the balance sheet.
Contra-asset account
An account paired with an asset and carrying the opposite normal balance, so it is subtracted in presentation. It preserves the original cost figure while showing the reduction separately.
Materiality
Information matters if omitting or misstating it could change a user's decision. Small amounts may be expensed immediately rather than allocated, because precision beyond usefulness has no value.
Conservatism
When genuine uncertainty exists, choose the treatment less likely to overstate assets or income. It is a caution against optimism, not a licence to deliberately understate results.
Full disclosure principle
Anything that would influence a reasonable user's judgement must appear in the statements or notes, including accounting policies, unusual commitments and events after the reporting date.
Reversing entry
An optional first-day-of-period entry that undoes a prior accrual so the eventual cash payment can be recorded in the routine way without double counting the expense.
Accounting worksheet
An internal columnar tool running from unadjusted balances through adjustments to the statement columns. It is a drafting aid for the accountant and is never issued to outside users.
Cash-to-accrual conversion
Restating cash receipts and payments into accrual figures by adding the change in related receivables, payables and deferrals. It is the analytical reverse of the cash flow statement adjustments.
Expiration of prepaid insurance
A twelve month policy paid in advance is consumed evenly, so each month one twelfth moves out of the asset and into expense until the balance reaches zero at the end of coverage.