Financial Accounting Terms Dictionary

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Financial Accounting Terms
Accrual Basis Accounting


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Accrual Basis Accounting
  
Accrual Basis Accounting
  
Cash basis accounting Cash basis accounting recognizes revenue and expenses when cash is received or paid
  
Under cash basis accounting
Revenue recognition: when cash is received
Expense recognition: when cash is paid
  
Accrual basis accounting Accrual basis accounting recognizes revenue and expenses when services are delivered or received
 
Under accrual basis accounting
Revenue recognition: when revenue is earned
Expense recognition: when related revenue is recognized 
  
Matching principle Under accrual basis accounting
Expense is recognized in the period when related revenue is recognized
This is called the "matching principle"
Matching the expense with the related revenue
  
Accruals and deferrals Accrual is the recognition of revenue and expenses before cash is received or paid
 
Deferral is the recognition of revenue and expenses after cash is received or paid

  
Accrued revenue Accrued revenue is the revenue recognized before cash is received
 
An example of accrued revenue
On December 1, 20X1, Entity A loaned $300,000 to another entity
Entity A is scheduled to receive $3,000 interest on February 28, 20X2
What is the amount of interest revenue for the period ended December 31, 20X1?
  
Answers
Since $3,000 interest covers 3 month period (December - February)
Interest earned during the month of December is $1,000
  
Journal entry on December 31, 20X1
(Debit)   Interest receivable         1,000
     (Credit)   Interest revenue                  1,000
 
Interest receivable is an asset account

  
Accrued expense Accrued expense is the expense recognized before cash is paid
 
An example of accrued expense
On December 1, 20X1, Entity A rented office space
Monthly rent is $5,000 due on the first day of the following month
What is the amount of rent expense for the period ended December 31, 20X1?
  
Answers
Since $5,000 rent is due on January 1, 20X2, cash will be paid in January 20X2, while rent expense is recognized in December 20X1
  
Journal entry on December 31, 20X1

(Debit)   Rent expense           5,000
     (Credit)   Rent payable                  5,000
    
Rent payable is a liability account 
 
        


 
Accrual Basis Accounting
  
Deferred revenue Deferred revenue is the revenue recognized after cash is received
 
An example of deferred revenue
On December 1, 20X1, Entity A loaned $300,000 to another entity
Entity A received $3,000 interest for three months ending February 28, 20X2

What is the amount of interest revenue for the period ended December 31, 20X1?

What is the balance of unearned interest revenue at December 31, 20X1?
     
Answers
Since $3,000 interest covers 3 month period (December - February)
Interest earned during the month of December is $1,000
  
Journal entry on December 1, 20X1

(Debit)   Cash                                     3,000
     (Credit)   Unearned interest revenue                 3,000
  
Journal entry on December 31, 20X1
(Debit)   Unearned interest revenue           1,000
     (Credit)   Interest revenue                                1,000

  
Unearned rent revenue balances
At December 1, 20X1      $3,000
At December 31, 20X1    $2,000 = $3,000 - $1,000
    
Unearned rent revenue is a liability account  
  
Unearned revenue Unearned revenue is the amount of cash received for the services not provided yet
  
Unearned revenue is a liability account representing the obligation to provide services in the future
  
Unearned revenue balance decreases as services are provided and related revenue is recognized
 
  
Deferred expense Deferred expense is the expense recognized after cash is paid
  
An example of deferred expense
On December 1, 20X1, Entity A rented office space and paid $24,000
Monthly rent is $4,000 and $24,000 covers the 6 month period from December 1, 20X1 to May 31, 20X2

Journal entry on December 1, 20X1
(Debit)   Prepaid rent          24,000
     (Credit)   Cash                           24,000
  
Journal entry on December 31, 20X1
(Debit)   Rent expense          4,000
     (Credit)   Prepaid rent                   4,000

  
Prepaid rent expense balances
At December 1, 20X1      $24,000
At December 31, 20X1    $20,000 = $24,000 - $4,000
 
Prepaid rent expense is an asset account
 
Accrued revenue
Accrued expense
Deferred revenue Deferred expense
Accrued revenue is an asset account
   Revenue is recognized before cash is received
   Cash to be received in the future is an asset account
  
Accrued expense is a liability account

   Expense is recognized before cash is paid
   Cash to be paid in the future is a liability account
  

Deferred revenue is a liability account

   Revenue is recognized after cash is received
   Cash received in advance is a liability account
  

Deferred expense is an asset account

   Expense is recognized after cash is paid
   Cash paid in advance is an asset account
     
        



U.S. GAAP by Codification Topic 
 
 105  GAAP Hierarchy 
 105  GAAP History 

 205  Presentation of Financial Statements 
 205-20 Discontinued Operations 
 210  Balance Sheet 
 210-20 Offsetting 
 220  Comprehensive Income 
 225  Income Statement 
 225-20 Extraordinary and Unusual Items 
 230  Statement of Cash Flows 
 250  Accounting Changes and Error Corrections 
 260  Earnings per Share 
 270  Interim Reporting
 
 310  Impairment of a Loan
 320  Investment Securities 
 320  Other-Than-Temporary Impairments, FSP FAS 115-2 
 320-10-05 Overview of Investments in Other Entities 
 320-10-35 Reclassification of Investments in Securities
 323-10 Equity Method Investments
 323-30 Investments in Partnerships and Joint Ventures 
 325-20 Cost Method Investments 
 330  Inventory

 340-20 Capitalized Advertising Costs 
 350-20 Goodwill 
 350-30 Intangibles Other than Goodwill 
 350-40 Internal-Use Software 
 350-50 Website Development Costs 
 360  Property, Plant and Equipment
 360-20 Real Estate Sales 
 
 410  Asset Retirement and Environmental Obligations 
 420  Exit or Disposal Cost Obligations 
 450  Contingencies 
 450-20 Loss Contingencies 
 450-30 Gain Contingencies
 480  Redeemable Financial Instruments 

 505-20 Stock Dividends, Stock Splits 
 505-30 Treasury Stock 

 605  SEC Staff Accounting Bulletin, Topic 13 
 605-25 Revenue Recognition - Multiple Element Arrangements 
 
 715-30 Defined Benefit Plans - Pension
 718  Share-Based Payment 
 730  Research and Development 
 730-20 Research and Development Arrangements 

 805  Business Combinations  
 810  Consolidation 
 810  Noncontrolling Interests 
 810  Consolidation of Variable Interest Entities, SFAS 167 
 
 815  Derivatives and Hedging Overview 

 820  Fair Value Measurements  
 820  Fair value when the markets are not active, FSP FAS 157-4
 825  Fair Value Option 

 830  Foreign Currency Matters 
 830-20 Foreign Currency Transactions 
 830-30 Translation of Financial Statements 
 835  Interest 
 835-20 Capitalization of Interest 
 835-30 Imputation of Interest 

 840  Leases 
 840-20 Operating Leases 
 840-30 Capital Leases 
 840-40 Sale-Leaseback Transactions
 845  Nonmonetary Transactions 

 855  Subsequent Events 
 860-20 Sale of Financial Assets, SFAS 166 
 860-50 Servicing Assets and Liabilities, SFAS 156 

 985-20 Costs of software to be sold  

 



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