GLOSSARY
124 Chapter 3 Accrual Accounting Concepts
A classified balance sheet includes sections for current as-
sets; property, plant and equipment (fixed assets); and intan-
gible assets. Liabilities areclassified as current liabilities or
long-term liabilities. The income statement normally reports
sections for revenues, operating expenses, other income and
expense, and net income.Describe how the accrual basis of accounting
enhances the interpretation of financial statements.
The net cash flows from operating activities and net
income will differ under the accrual basis of accounting.
Under the accrual basis, net income is a better indicator
of the long-termprofitability of a business. For this reason,
the accrual basis of accounting is required by generally
accepted accounting principles, except for very small
businesses. The accrual basisreports the effects of
operations on cash flows through the reporting of net cash
flows from operating activities on the statement of cash
flows.Describe the accounting cycle for the accrual basis
of accounting.The accounting cycle is the process
that begins with the analysis of transactions and ends with
preparing the accounting records for the next accounting
period. The basic steps in the accounting cycle are
(1) identifying, analyzing, and recording the effects of
transactions on the accounting equation; (2) identifying,
analyzing, and recording adjustment data; (3) preparing
financial statements; and (4) preparing the accounting records
for the next accounting period.Describe and illustrate how common-sized financial
statements can be used to analyze and evaluate a
company’s performance.Common-sized financial
statements are often useful in comparing one company to
another. In common-sized financial statements, all items are
expressed in percentages. Such statements are useful in
comparing the current period with prior periods, individual
businesses, or one business with industry percentages.5
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AccountA record for summarizing increases and decreases
in a financial statement element.Accounting cycle The process that begins with the analy-
sis of transactions and ends with preparing the accounting
records for the next accounting period.Accounts payableA liability for an amount incurred from
purchases of products or services in the normal operations of
a business.Accounts receivableAn asset for amounts due from cus-
tomers in the normal operations of a business.Accrual basis of accounting A system of accounting in
which revenue is recorded as it is earned and expenses are
recorded when they generate revenue.AccrualsA revenue or an expense that has not been recorded.Accrued expenseAn expense that has been incurred at the
end of an accounting period but has not been recorded in the
accounts; sometimes called an accrued liability.Accrued revenue A revenue that has been earned at the
end of an accounting period but has not been recorded in the
accounts; sometimes called an accrued asset.Accumulated depreciation An offsetting or contra asset
account used to record depreciation on a fixed asset.Adjustment process A process required by the accrual
basis of accounting in which the accounts are updated prior
to preparing financial statements.Cash basis of accounting A system of accounting in
which only transactions involving increases or decreases of
the entity’s cash are recorded.Classified balance sheet A balance sheet prepared with
various sections, subsections, and captions that aid in its in-
terpretation and analysis.Common-sized financial statement A financial state-
ment in which all items are expressed in percentages.Current assets Cash and other assets that are expected to
be converted to cash or sold or used up within one year or
less, through the normal operations of the business.Current liabilities Liabilities that will be due within a
short time (usually one year or less) and that are to be paid
out of current assets.Deferrals The delayed recording of an expense or revenue.Deferred expenses Items that are initially recorded as as-
sets but are expected to become expenses over time or through
the normal operations of the business; sometimes called pre-
paid expenses.Deferred revenues Items that are initially recorded as lia-
bilities but are expected to become revenues over time or
through the normal operations of the business; sometimes
called unearned revenues.DepreciationThe reduction in the ability of a fixed asset to
provide service.Fixed assets Physical assets of a long-term nature; some-
times called plant assets.Intangible assets Assets that are rights of a long-term
nature.