Understanding Accounting Principles and Concepts

Accrual-basis accounting

Accounting basis in which companies record transactions that change a company’s financial statements in the periods in which the events occur.

Accruals

Adjusting entries for either accrued revenues or accrued expenses.

Accrual expenses

Expenses incurred but not yet paid in cash or recorded.

Accrual revenue

Revenues for services performed but not yet received in cash or recorded.

Adjusted trial balance

A list of accounts and their balances after the company has made all adjustments.

Adjusting entries

Entries made at the end of an accounting period to ensure that companies follow the revenue recognition and expense recognition principles.

Book value

The difference between the cost of a depreciable asset and its related accumulated depreciation.

Calendar year

An accounting period that extends from January 1 to December 31.

Cash-basis accounting

Accounting basis in which companies record revenue when they receive cash and an expense when they pay out cash.

Comparability

Ability to compare the accounting information of different companies because they use the same accounting principles.

Consistency

Use of the same accounting principles and methods from year to year within a company.

Contra asset account

An account offset against an asset account on the balance sheet.

Cost constraint

Constraint that weighs the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available.

Deferrals

Adjusting entries for either prepaid expenses or unearned revenues.

Depreciation

The process of allocating the cost of an asset to expense over its useful life.

Economic entity assumption

An assumption that every economic entity can be separately identified and accounted for.

Expense recognition principle

The principle that companies match efforts with accomplishments.

Fair value principle

Assets and liabilities should be reported at fair value.

Faithful representation

Information that accurately depicts what really happened.

Fiscal year

An accounting period that is one year in length.

Full disclosure principle

Accounting principle that dictates that companies disclose circumstances and events that make a difference to financial statement users.

Going concern assumption

The assumption that the company will continue in operation for the foreseeable future.

Historical cost principle

An accounting principle that states that companies should record assets at their cost.

Interim periods

Monthly or quarterly accounting time periods.

Materiality

A company-specific aspect of relevance. An item is material when its size makes it likely to influence the decision of an investor or creditor.

Monetary unit assumption

An assumption that requires that only those things that can be expressed in money are included in the accounting records.

Relevance

The quality of information that indicates the information makes a difference in a decision.

Revenue recognition principle

The principle that companies recognize revenue in the accounting period in which the performance obligation is satisfied.

Timely

Information that is available to decision-makers before it loses its capacity to influence decisions.