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 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?
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Accrual basis accounting recognizes revenues when earned and expenses when incurred.
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How does cash basis accounting record revenues and expenses?
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Which of the following statements describes why accrual accounting better reflects a business's performance? (Select all that apply)
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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)
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What would be the required adjusting journal entry if $1,000 of supplies were purchased and $300 were used? (Select all that apply)
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What is a plant asset?
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Which statements define a plant asset? (Select all that apply)
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Accumulated depreciation is a contra account that has the same normal balance as its linked account.
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What is the nature of accumulated depreciation?
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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.