First Exam Review Accrual Accounting Revenue Recognition record revenue in the period in which it is earned Ex If you perform a service and bill a customer the revenue is recorded Matching Principle Record expenses in the period in which they generate revenue Ex If you rent office space you record the current month s amount as expense Historical Cost Record assets at their cost Depreciation Only used for long term assets Estimated use over number of years Equipment or Machinery Accounting Depreciation Allocation of the cost to the period s revenue Permanent Accounts Carry their balance from one period to the next Assets Liabilities Common Stock Retained Earnings Revenue Expenses Dividends Borrowed Money Temporary Accounts Only gather information for the current period Recorded in Notes Payable Under liabilities If borrowed from bank includes an Annual Percentage Rate of interest If expenses increase then retained earnings decrease Retained Earnings Revenue Accounts Expense Accounts Dividends Accrued Revenue Revenue is earned but not yet collected Accrued Expense Expense is incurred but not yet paid Revenue increases Accounts Receivable increases Time Passes Cash increases Accounts Receivable decreases Expense increases Accounts Payable increases Time Passes Cash decreases Accounts Payable decreases Cash increases Unearned Revenue increases Time Passes Revenue Increases Liability decreases Cash decreases Prepaid Asset increases Time Passes Expense increases Prepaid Asset decreases Deferred Revenue Cash is collected before services are provided Deferred Expense Paying in advance of receiving a service or asset