Accounting Chapter 3 Flashcards

Questions and Answers

What would a depreciation adjustment include?

A debit to depreciation expense and a credit to accumulated depreciation.

Which of the following describes accrual basis accounting? (Select all that apply)

An accounting system using the matching principle to determine when to recognize revenues and expenses. (correct)

An accounting system that only recognizes cash transactions.

An accounting system consistent with generally accepted accounting principles. (correct)

An accounting system that uses the adjusting process to recognize revenues when earned and expenses when incurred. (correct)

An adjusting journal entry is always made at the end of an accounting period to reflect a recorded transaction.

False

What is the amount for which the insurance expense would be debited?

$300 Signup and view all the answers

Accrual basis accounting recognizes revenues when earned and expenses when incurred.

True Signup and view all the answers

How does cash basis accounting record revenues and expenses?

Revenues are recorded when cash is received and expenses are recorded when cash is paid. Signup and view all the answers

Which of the following statements describes why accrual accounting better reflects a business's performance? (Select all that apply)

Expenses are always recognized in the period they are incurred. Signup and view all the answers

Which of the following would be included in the adjusting journal entry for a 12-month insurance policy purchased for $4,800? (Select all that apply)

Debit to Insurance Expense for $400. Signup and view all the answers

What would be the required adjusting journal entry if $1,000 of supplies were purchased and $300 were used? (Select all that apply)

Supplies would be credited for $300. Signup and view all the answers

What is a plant asset?

A long-term tangible asset used to produce and sell products and services. Signup and view all the answers

Which statements define a plant asset? (Select all that apply)

It is a tangible long-term asset. Signup and view all the answers

Accumulated depreciation is a contra account that has the same normal balance as its linked account.

False Signup and view all the answers

What is the nature of accumulated depreciation?

A contra account that accumulates depreciation against its associated plant asset. Signup and view all the answers

Study Notes

Depreciation and Adjustments

Depreciation adjustment involves a debit to depreciation expense and a credit to accumulated depreciation.
Each depreciation recognition reflects the expense incurred over the asset's life.

Accrual Basis Accounting

Accrual basis accounting aligns with generally accepted accounting principles (GAAP).
Revenues are recognized when earned, and expenses when incurred.
Employs the matching principle to synchronize revenue with expenses.

Adjusting Journal Entries

Adjusting journal entries are made at the end of accounting periods for unrecorded transactions.
Always affect an income statement account and a balance sheet account.
Cash movements are not impacted by these entries.

Insurance Expense Adjustments

A $3,600 insurance policy paid on December 1 necessitates an adjustment for one month, debiting insurance expense for $300 on December 31.

Matching Principle

Accrual basis accounting adheres to the matching principle by recognizing revenues when earned and recording expenses when incurred.

Cash Basis Accounting

Cash basis accounting records revenues upon cash receipt and expenses upon cash payment.
Income is calculated as cash receipts minus cash payments.

Benefits of Accrual Accounting

Accrual accounting reports expenses in the period incurred, enhancing performance reflection.
Improves comparability across financial statements by standardizing recognition timing.
Revenues are recorded in the period earned.

Insurance Policy Adjustments

For a $4,800 insurance policy acquired on December 1, adjusting entries by December 31 include debiting insurance expense and crediting prepaid insurance for $400.

Supplies Expense Adjustment

If $1,000 in supplies were purchased, with $300 used, the adjusting entry requires debiting supplies expense and crediting supplies for $300.

Plant Assets

Plant assets (PP&E) are long-term tangible assets used for providing goods/services, with examples including buildings, machinery, and vehicles.
Provide benefits beyond one accounting period and typically depreciate over time, excluding land.

Depreciation Calculation Example

Equipment purchased for $26,000 will depreciate over five years, with a salvage value of $8,000.
Net cost = $18,000, leading to a monthly depreciation expense of $300.

Additional Supplies Entry

For $800 worth of supplies purchased, with $200 remaining at period end, the adjusting entry would debit supplies expense for $600.

Definitions of Plant Assets

Plant assets are tangible, long-term assets, reported on the balance sheet, and expensed over their useful lives minus any salvage value.

Contra Accounts

Accumulated depreciation is a contra account, carrying an opposite balance to its linked asset account.
Contra accounts reduce the amount of their associated accounts on financial statements.

Accumulated Depreciation

This account reflects total depreciation charged against a specific plant asset over its life.
Is represented as a separate line item on the balance sheet.

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Description

Test your knowledge of key accounting concepts with these flashcards based on Chapter 3. This quiz covers important topics such as depreciation adjustments and accrual basis accounting principles. Perfect for students looking to reinforce their understanding of essential accounting terms.