Accounting Concepts and Adjusting Entries Quiz

The Business Entity Concept states that a business and its owner are treated as separate entities for financial reporting purposes. This means that the owner's personal transactions should not be mixed with the business's financial transactions.

A credit to HST Recoverable means a business is using its recoverable HST to offset the HST payable to the government. This is done when a business has collected HST on sales but also paid HST on purchases.

The account credited for a payment on account is Accounts Payable. This is because it reflects a reduction in the amount owed to a supplier or vendor.

A debit to Accounts Payable is a possible entry as a result of a transaction involving a check copy, as it represents a decrease in liability. A debit to Supplies also makes sense as it increases an asset. A debit to Bank is likely as it represents cash disbursement. A debit to Car Expense would NOT be appropriate because it has no connection to a check copy. We would expect an entry for a car expense on the account related to the car expense itself.

When an entire journal entry for a $500 purchase invoice for supplies is not recorded, expenses will be understated, leading to an inflated net income. This is because the expense was not recorded. As expenses are subtracted from revenue to arrive at net income, an understated expense will result in an overstated net income.

The Revenue Recognition Principle is an accounting principle that states that revenue should be recognized when it is earned, regardless of when cash is received.

A transposition error occurs when digits in a number are switched. For example, recording $100 as $1,000.

The accounting equation is a fundamental equation in accounting that states that assets are equal to the sum of liabilities and owner's equity.

Owner's equity is the difference between a business's assets and liabilities. It represents the owner's investment in the business.

When an item subject to HST (Harmonized Sales Tax) is sold, the seller collects HST from the buyer and remits it to the government. The seller's accounts will show an increase in HST Payable, while the buyer's accounts will show an increase in HST Recoverable.

A trial balance is a list of all the accounts in a business's ledger, with their debit and credit balances. It is used to ensure that the total debits equal the total credits.

A period of time for which a company prepares and reports its financial statements, often a year.

The process of creating a financial document that summarizes a company's financial performance over a specific period.

Measures the financial value of a company's products or services provided, representing the income generated from normal business operations.

The financial statements should accurately reflect the company's performance and financial position.

The act of intentionally misstating financial information can lead to serious consequences and damage a company's credibility.

A set of international accounting standards that provide guidance on how to prepare financial statements.

A specific IFRS standard focusing on how to recognize revenue from contracts with customers.

A five-step process used to recognize revenue when a company satisfies its performance obligations in a contract with a customer.

The first step in the revenue recognition model involves identifying the contract with the customer and understanding its key terms and conditions.

After identifying the contract, the second step is identifying the performance obligations. This involves determining what goods or services the company is obligated to deliver to the customer.

The third step is determining the transaction price, which represents the amount of money the company expects to receive in exchange for fulfilling its performance obligations.

The fourth step involves allocating the transaction price to the performance obligations. This means determining how much of the revenue should be recognized for each individual obligation based on its relative selling price.

The fifth step is recognizing revenue, which occurs when the company has satisfied a performance obligation. This means that the company has delivered the goods or services and fulfilled its promise to the customer.

Adjusting entries are made at the end of an accounting period to ensure revenues and expenses are recorded in the correct period.

An adjusting entry to reflect the recognition of expenses that were incurred but not yet paid.

A financial statement that shows the financial performance of a business over a specific period, typically a year. It summarizes the revenues earned and expenses incurred during the period.

An account used to temporarily hold the balances of revenue and expense accounts before they are closed at the end of the accounting period. It helps in determining the net income or loss for the period.

The process of transferring the balances of temporary accounts (revenue, expense, and dividends) to the retained earnings account at the end of the accounting period. This resets the temporary accounts to zero for the new period.

Revenue recognized before the related goods or services are delivered or performed. This often occurs when customers pay in advance for future services or products.

Revenue earned but not yet received. This often arises when a company has provided goods or services but has not yet received payment from the customer.

An account that represents the amount of money owed to a company by its customers for goods or services sold on credit.

The process of transferring balances from revenue and expense accounts to the Income Summary account at the end of an accounting period, effectively resetting them to zero.

The total amount of revenue earned during a period.

An account that summarizes the company's profitability for the period. It receives the balances of revenue and expense accounts during the closing process.

The amount of money left over after expenses are deducted from revenues. This is recorded in the owner's capital account.

The process of transferring the net income from the Income Summary account to the owner's capital account.

The account that represents the owner's investment in the business. It increases with net income and decreases with withdrawals.

The account used to record the owner's withdrawals from the business for personal use.

The process of transferring the balance of the Drawings account to the Owner's Capital account to reflect the impact of withdrawals on the owner's equity.