Accounting Principles and Adjusting Entries

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Questions and Answers

Which of the following is (are) true regarding timeliness and the importance of periodic reporting? (Check all that apply)

Businesses report financial information at regular intervals to ensure timeliness of data (correct)

Decision makers require financial statements that are audited to ensure reliability

Usefulness of information must reach decision makers frequently and promptly (correct)

The value of information is often linked to its timeliness (correct)

Accrual basis accounting is defined as: (Check all that apply)

An accounting system which is 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 accounting system that uses the matching principle to determine when to recognize revenues and expenses (correct)

An accounting system that recognizes revenues when cash is received and records expenses when cash is paid

The expense recognition (matching) principle aims to record in the same accounting period as the that are earned as a result of those costs. This principle is a major part of the __ process.

expenses; revenues; adjusting

Place the steps in the adjusting process in the correct order in which they would be performed.

Determine what the current account balance is = 1 Determine what the correct account balance should be = 2 Record an adjusting entry = 3 Signup and view all the answers

A 12-month insurance policy was purchased on Dec. 1 for $4,800 and the Prepaid insurance account was initially increased for the payment. The required adjusting journal entry on December 31 includes a: (Check all that apply)

Debit to Insurance expense for $400 (A), Credit to Prepaid insurance for $400 (C) Signup and view all the answers

Which of the following could be a logical or realistic accounting period for a business that is creating financial statements? (Check all that apply)

One year (A), Six months (B), One month (C) Signup and view all the answers

Accrual basis accounting recognizes when earned and records when __ in order to adhere to the matching principle.

revenues; expenses; incurred Signup and view all the answers

Which of the following statements describes the expense recognition (matching) principle? (Check all that apply)

Expenses should be matched in the same accounting period as the revenues that are recognized as a result of those expenses (A), Matching of expenses with revenues is a major part of the adjusting process (B) Signup and view all the answers

Describe the final step in the adjusting process.

The final step is to create an adjusting journal entry to get from step 1 to step 2 (D) Signup and view all the answers

A 12-month insurance policy was purchased on Dec. 1 for $3,600 and the Prepaid insurance account was increased for the payment. The required adjusting journal entry on Dec. 31 would include:

Insurance expense would be debited for $3,600 (B) Signup and view all the answers

$800 of supplies were purchased at the beginning of the month and the Supplies account was increased. At the end of the period, $200 of supplies still remain. Which is the correct adjusting entry?

Supplies expense would be debited for $600 (B) Signup and view all the answers

Which of the following accounts is considered a prepaid expense?

Supplies (D) Signup and view all the answers

What is a plant asset?

A plant asset refers to a long-term tangible asset used to produce and sell products or services (C) Signup and view all the answers

Explain what unearned revenues are by choosing the correct statement below.

Unearned revenues refer to cash received in advance of providing a service or product (B) Signup and view all the answers

$1,000 of supplies were purchased at the beginning of the month and $300 were used. The required adjusting journal entry includes:

Supplies expense would be debited for $300 (A), Supplies would be credited for $300 (B) Signup and view all the answers

An advance payment of $1,000 for services was received on December 1. By year-end, $400 had been earned. Demonstrate what the correct adjusting entry should include:

Debit Unearned revenues for $400 (B) Signup and view all the answers

Which of the accounts below are considered accrued expenses?

Wages expense, Interest expense (B) Signup and view all the answers

Explain what unearned revenues are by selecting the statements below which are correct.

They refer to cash received in advance of performing a service or product (A), They are a liability (C), They are also called deferred revenues (E), They are reported on a balance sheet (F) Signup and view all the answers

Define the Salaries payable account by selecting the appropriate statement below.

It reports amounts owed to employees and is a liability (B) Signup and view all the answers

A company borrowed $4,000 from the bank at an interest rate of 9%. By the end of the accounting period, the loan had been outstanding for 30 days. The required adjusting entry includes:

Debit Interest expense for $30 (B) Signup and view all the answers

$1,000 of cash was received in advance of performing services. By the end of the period, $300 had not yet been earned. The required adjusting journal entry includes:

Unearned revenue would be debited for $700 (A), Service revenue would be credited for $700 (E) Signup and view all the answers

Explain your understanding of what an accrued expense is by selecting the statements below which are correct.

They are reported on an income statement (A), Examples of accrued expenses are wages expense and interest expense (B), Adjustments involve increasing both an expense and a liability account (D), They refer to costs that are incurred in a period, but are both unpaid and unrecorded (E) Signup and view all the answers

McDarrel's records $500 of accrued salaries on December 31. Three days later, on January 3, total salaries of $4,000 (including the $500 accrued at year end) are paid. The required journal entry on January 3 includes:

Cash would be credited for $4,000 (B), Salaries payable will be debited for $500 (D), Salaries expense would be debited for $3,500 (E) Signup and view all the answers

Study Notes

Timeliness and Periodic Reporting

Useful information must be delivered to decision makers frequently and promptly.
The value of information often correlates with its timeliness.
Regular financial reporting intervals enhance data timeliness.

Accrual Basis Accounting

Defined by the matching principle, recognizing revenues and expenses when earned or incurred.
Consistent with generally accepted accounting principles (GAAP).
Cash transactions do not dictate recognition of revenues and expenses.

Expense Recognition Principle

Aims to match expenses with related revenues in the same accounting period.
Integral to the adjusting process in accounting.

Adjusting Process Steps

Identify the current account balance, determine the correct balance, then record an adjusting entry in that order.

Insurance Policies and Adjusting Entries

For a 12-month insurance policy, an adjusting journal entry is necessary for monthly expense recognition.
Example: A $4,800 policy incurs a $400 expense for one month.

Accounting Periods

Logical accounting periods include one-month, six-month, and one-year intervals.

Recognizing Revenues and Expenses

Accrual basis accounting recognizes revenues when earned and expenses when incurred for proper matching.

Regarding Expense Recognition

Expenses must be matched with revenues in the same accounting period.
Recognizing revenues when earned is a key aspect of this principle.

Final Step in Adjusting Process

The last step consists of creating an adjusting journal entry to ensure financial statements are accurate.

Prepaid Expenses

Prepaid expenses, like insurance and supplies, require adjusting entries to reflect usage.

Plant Assets

A plant asset is a long-term tangible asset utilized to produce goods or services.

Unearned Revenues

Cash received in advance for services is classified as unearned revenue, representing a liability until earned.

Accrued Expenses

Examples include wages and interest expense, which are incurred but not yet paid.

Adjusting Entries for Supplier and Unearned Revenues

Adjusting entries may involve crediting or debiting unearned revenue and recognizing earned revenue as services are performed.

Salaries Payable Account

This liability account tracks amounts owed to employees until payment is made.

Interest and Loan Adjustments

Interest expense must be recognized for loans outstanding over an accounting period, calculated based on the principal and rate.

Handling Adjustments

Accurate adjustments require proper selection of amounts to be debited or credited, ensuring correct reflection in financial statements.

Overall Adjustments

Adjustments generally affect both expense and liability accounts, ensuring financial accuracy at period ends.

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Description

This quiz explores key concepts in accounting, focusing on timeliness and periodic reporting, accrual basis accounting, and the expense recognition principle. It emphasizes the importance of adjusting entries in financial reporting and the steps involved in this process. Test your knowledge on these essential accounting practices.