Accounting Chapter 3 - Adjusting Accounts

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Questions and Answers

Which of the following accounts would be debited in an adjusting entry to record accrued revenue?

Accounts Receivable (correct)

Sales Revenue

Cash

Unearned Revenue

Which of the following situations would require adjusting entry?

A company pays for a new piece of equipment.

A company purchases supplies on credit.

A company receives an invoice for services rendered last month.

A customer makes a payment on their outstanding account balance.

A company accrues interest revenue on its outstanding investments. (correct)

What is the effect of failing to record an accrued expense?

Revenues will be understated.

Expenses will be overstated.

Assets will be understated.

Liabilities will be understated. (correct)

A company has incurred $1,000 in advertising expenses for the month but has not yet paid for them. What adjusting entry should be made?

Debit Advertising Expense $1,000; Credit Accounts Payable $1,000 (A) Signup and view all the answers

What is the main purpose of adjusting entries?

To update the balance of accounts to reflect the actual financial position of the company. (A) Signup and view all the answers

Which of the following is NOT an example of an accrued expense?

Prepaid insurance (D) Signup and view all the answers

Which of the following is an example of an accrued revenue?

Interest receivable on a loan (A) Signup and view all the answers

What is the primary difference between an accrued revenue and accrued expense?

Accrued revenues represent revenue that has been earned but not yet received, while accrued expenses represent expenses that have been incurred but not yet paid. (B) Signup and view all the answers

What is the adjusting entry for depreciation?

Dr. Depreciation Expense; Cr. Accumulated Depreciation (B) Signup and view all the answers

What does the carrying amount of an asset represent?

The remaining value of the asset after accumulated depreciation has been deducted (B) Signup and view all the answers

What is the adjusting entry for unearned revenue?

Dr. Liability; Cr. Revenue (D) Signup and view all the answers

Which of the following is NOT an example of unearned revenue?

Inventory (C) Signup and view all the answers

What is the formula for calculating straight-line depreciation?

Cost ÷ Estimated Useful Life (B) Signup and view all the answers

What is the accounting principle that requires revenues and expenses to be recognized in the period in which they are earned or incurred, respectively?

Accrual Basis Accounting (B) Signup and view all the answers

What is the primary difference between accrual basis accounting and cash basis accounting?

Accrual basis accounting recognizes revenues and expenses when cash is received or paid, respectively, while cash basis accounting recognizes revenues and expenses when they are earned or incurred, respectively. (C) Signup and view all the answers

What are expenses in accounting primarily characterized by?

Decreases in owner’s equity (A) Signup and view all the answers

When are expenses typically recognized for long-lived assets?

Over the life of the asset (A) Signup and view all the answers

What is the purpose of adjusting entries in accounting?

To accurately reflect assets and liabilities (D) Signup and view all the answers

Which of the following best describes prepaid expenses?

Expenses recorded as assets before consumption (A) Signup and view all the answers

Which type of adjusting entry is recorded when cash is received before revenue is earned?

Unearned revenue (A) Signup and view all the answers

What happens to assets prior to the adjustment of prepaid expenses?

Overstated and expenses understated (C) Signup and view all the answers

What is included in the expense recognition criteria when associated with revenue?

Expenses must be recognized in the same period as the revenue they helped generate (C) Signup and view all the answers

In the accounting cycle, how are adjusting entries classified?

As prepayments or accruals (B) Signup and view all the answers

What distinguishes accrual basis accounting from cash basis accounting?

Accrual basis records events when they occur, regardless of cash flow. (D) Signup and view all the answers

When is revenue typically recognized under the revenue recognition criteria?

When goods are sold and delivered or services are performed. (B) Signup and view all the answers

Which of the following describes the fiscal year?

A period of exactly 12 months. (A) Signup and view all the answers

What are interim periods?

Periods of less than one year. (D) Signup and view all the answers

What is the primary focus of adjusting entries in accounting?

To match revenues with the expenses incurred in the same period. (D) Signup and view all the answers

What is meant by the term 'prepayments' in accounting?

Payments made for services or goods not yet received. (B) Signup and view all the answers

Which statement accurately describes cash basis accounting?

Revenues are recorded only when cash is received from customers. (C) Signup and view all the answers

Which of the following best describes the relationship between Generally Accepted Accounting Principles (GAAP) and accounting practices?

Accounting practices must align with GAAP standards. (A) Signup and view all the answers

Study Notes

Chapter 3, pg 94 - Adjusting the Accounts

The chapter focuses on adjusting the accounts
Learning goals include demonstrating the relationship between Generally Accepted Accounting principles (GAAP) and accounting practices, and recording adjusting and closing entries.
A Kahoot! activity is planned for engagement.
Students are instructed to have open "Questions - Chapter 3" on Google Classroom and answer them as the presentation proceeds.
Success criteria for the chapter include explaining accrual basis accounting, recognizing revenues and expenses (pg 96-101), preparing adjusting entries for prepayments, and preparing adjusting entries for accruals.
The economic life of a business is divided into time periods, generally a month, quarter, or year.
Periods of less than a year are called interim periods, while a period of one year is a fiscal year.
Accrual basis accounting records events when they occur, not when cash is paid or received.
Cash basis accounting records revenue when cash is received and expenses when cash is paid.
Revenue is recognized when there's an increase in assets or decrease in liabilities due to customer activity. Revenue recognition criteria generally involve service completion or goods delivery.
Expenses are decreases in assets or increases in liabilities from business activities, representing a decrease in owner's equity.
Expense recognition criteria depend on a direct connection between costs and revenue, or whether an asset is long-lived.
The accounting cycle involves several steps, including analyzing business transactions, journalizing, posting to ledger accounts, preparing a trial balance, journalizing and posting adjusting entries (prepayments/accruals), preparing an adjusted trial balance, and preparing financial statements.
Adjusting entries are needed for preparing financial statements, ensuring adherence to revenue and expense recognition criteria, and accurately reporting assets, liabilities and owner's equity. Adjusting entries are classified as prepayments or accruals.
Textbook pages 101-109 are assigned for practice on E3-2 (journal entry only).
Textbook questions on BE3-1, BE3-2, p130 are assigned
Success criteria include explaining accrual accounting, preparing adjusting entries for prepayments (pg 101-106) and accruals.
Prepaid expenses are expenses paid in cash and recorded as assets before use or consumption.
Unearned revenues are cash received and recorded as liabilities before revenue is earned.
Prepaid expenses expire over time or by asset use and are recorded as expenses in the period used. The adjusting entry involves debiting an expense account and crediting an asset account.
Examples of prepaid expenses are supplies, rent and insurance.
Textbook question on BE3-4, p128 is assigned.
Depreciation is the allocation of the cost of long-lived assets to expense over their expected useful life.
Straight-line depreciation calculates annual depreciation expense as cost divided by estimated useful life.
Adjusting entry for depreciation involves debiting depreciation expense and crediting accumulated depreciation, a contra asset account deducted from the related asset on the balance sheet.
Accumulated depreciation reduces the asset's balance to the carrying amount on the balance sheet.
Textbook questions on BE3-5, p129 are assigned.
Unearned revenues are cash received before revenue is earned and recorded as liabilities.
Subsequently earned through services or goods, they are overstated prior to adjustment, and revenues are understated.
The adjusting entry involves debiting the liability account to decrease and crediting a revenue account to increase.
Examples include subscriptions, tickets for entertainment/sporting events, and customer deposits.
Textbook questions on BE3-6, pg128 are assigned.
Adjusting entries for prepayments include prepaid expenses and unearned revenue and these entries are shown in the table of Asset and Expense, and Liability and Revenue.
Textbook Exercise E3-3a, 4 (pg 130-131) is assigned.
Accrued revenues are revenues earned but not yet received in cash or recorded.
Accrued expenses are expenses incurred but not yet paid in cash or recorded.
Accrued revenues accrue with the passage of time or services performed, but not billed or collected. Prior to adjustment, assets and revenues were understated. The adjusting entry involves debiting an asset account (to increase) and crediting a revenue account (to increase). Examples include accounts receivable, rent receivable, and interest receivable.
Accrued expenses involve expenses incurred but not yet paid or recorded, causing liabilities and expenses to be understated prior to adjustment. The adjusting entry involves debiting an expense account (to increase), and crediting a liability account (to increase). Examples include accounts payable, rent payable, salaries payable, and interest payable.
Adjusting entries for accruals involve accrued revenues and accrued expenses, demonstrating debit adjustments for expenses and credit adjustments for revenue, shown in a table demonstrating relationships between asset and expense, and liability and revenue.
Textbook questions on P3-2a, pg 134 are assigned.

Group Work Questions

Groups will work through specific sections of the textbook.
Examples of questions are: BE3-7, BE3-8, BE3-9, BE3-10, and BE3-11 (p numbers not given).

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Description

This quiz delves into Chapter 3 of accounting, focusing on adjusting the accounts according to GAAP standards. Students will learn about the principles of accrual basis accounting, preparing adjusting entries for prepayments and accruals, and the importance of time periods in accounting. Engage with the material using the Kahoot! activity and collaborate with peers in Google Classroom.