Glossary of Chapter 2 - Accounting for Accruals

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Accrual Accounting
Accrual Accounting is accounting is which the effects of revenue and expense events in the period in which the occur regardless of when cash is exchanged.

Accrual accounting uses both accruals and deferrals.
Recognition means recording an even in the financial records.
Realization refers to the collection or payment of cash.
Accruals are earnings events that are recognized before cash is exchanged.

Ex. Revenue may be recognized in 201 although the associated cash is collected in 2002.
Deferrals are earnings events that are recognized after cash has been exchanged.

Ex. Assume that supplies are purchased with cash in 2001, but are used in 2002. The supplies expense would be recognized in 2002 even though cash was paid in 2001.
Accounts Receievable
Accounts Receivable are accounts which represent amounts of future cash receipts that are due from customers.

Accounts Receivable are amounts that are expected to be collected in the future.
Salaries Payable
Salaries Payable is an account which represents amounts of future cash payments owed employees.
Closing The Accounts
Closing The Accounts is the process by which the balances in the nominal accounts (revenue, expenses, and dividends) are transferred out of those accounts at the end of each accounting period.
Period Costs
Expenses that are matched with the period in which they were incurred are frequently called period costs.
Matching Concept ****CHECK THIS ONE***
The matching concept is that events are recognized (matched with) in the time period in which they occur regardless of when the event is realized (cash transacted).
Accounting Cycle
(Throughout the Accounting Period)
1 - Recording Transactions.
(At the end of the Accounting Period.)
2 - Adjusting the Accounts.
3 - Preparing Financial Statements.
4 - Closing the Accounts.
Note Payable
A Note Typically is a loan, so called because the bank normally requires the borrower to sign a note that describes the loan terms.
Issuer of a Note
The Issuer of a Note is the Borrower, and the bank is typically called the creditor or lender.
Financial Audit
A Financial Audit is a detailed examination of a company's financial statements and the documents that support the information presented in those statements. The audit includes a verification process that tests the reliability of the underlying accounting system used to produce the financial reports.
Independent Auditor
A financial audit is performed by a CPA who is known as the independent auditor.
Certified Public Accountants are licensed by state governments to provide accounting services to the public.
Material Error
An error, or other reporting problem, is considered material if knowing about the problem would affect the decisions of an *average prudent investor*.
Unqualified Opinion
An unqualified opinion is the best opinion that auditors can give. It means the auditor believes the financial statements are in compliance with GAAP without qualification, reservation, or exception.
Adverse Opinion
An adverse opinion is the most negative opinion that an auditor can give. It means that the fin. statements are not in compliance with GAAP and the auditors think these things would be material to the average prudent investor.
Qualified Opinion
A Qualified Opinion falls between an unqualified and an adverse opinion, meaning that for the most part, the company's fin. statements are in compliance with GAAP, but the auditors have reservations with something in the statements or have some other reason not to give a fully unqualified opinion.
Disclaimer of Audit Opinion
A Disclaimer of Audit Opinion is neither negative or positive, but rather states that the auditor is unable to obtain enough information to confirm compliance or noncompliance with GAAP.
Voluntary Disclosing
The code of ethics of CPAs forbids auditors from Voluntarily Disclosing information that they have acquired as a result of their accountant-client relationship, but they may be required to testify in a court of law.

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