Questions and 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)
Accrual basis accounting recognizes __________ when earned and records __________ when __________ in order to adhere to the matching principle.
revenues, expenses, incurred
The expense recognition (matching) principle aims to record _________ in the same accounting period as the _________ that are earned as a result of those costs.
expenses, revenues
What are the steps in the adjusting process?
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At least one income statement account and one balance sheet account are always involved in adjusting journal entries.
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Which of the following is (are) true regarding timeliness and the importance of periodic reporting? (Check all that apply)
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Demonstrate the required adjusting journal entry on Dec. 31 for a 12-month insurance policy purchased for $3,600.
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Accrual basis accounting is defined as: (Check all that apply)
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$1,000 of supplies were purchased at the beginning of the month and $300 were used during the month. Demonstrate the required adjusting journal entry. (Check all that apply)
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Which of the following statements describes the expense recognition (matching) principle? (Check all that apply)
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Which of the following accounts is considered a prepaid expense?
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Describe the final step in the adjusting process.
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A plant asset can be defined by which of the following statements? (Check all that apply)
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Define an adjusting journal entry.
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Which of the following lists of assets would be classified as plant assets?
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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)
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Calculate depreciation expense for the month of December for a $300,000 building purchased on December 1, with an estimated life of 20 years and zero salvage value.
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Study Notes
Accounting Periods
- Common accounting periods include six-month, one-month, and one-year durations.
- Selection of a period is crucial for financial statement preparation.
Accrual Basis Accounting
- Recognizes revenues when earned and expenses when incurred.
- Aligns with the matching principle for accurate financial reporting.
Expense Recognition Principle
- Aims to align expenses with the revenues they generate in the same accounting period.
- Integral to the adjusting process within accounting practices.
Adjusting Process Steps
- Current account balance must be determined first.
- Next, identify the correct account balance.
- Finally, record the necessary adjusting entry.
Adjusting Journal Entries
- Involves at least one income statement account and one balance sheet account.
Importance of Timeliness in Reporting
- Information value often correlates with its timeliness.
- Frequent and prompt reporting of financial information is essential for decision-making.
- Regular intervals for reporting help maintain timely data flow.
Insurance Expense Adjustment
- For a 12-month insurance policy costing $3,600, an adjusting entry on December 31 would debit insurance expense for $300.
Characteristics of Accrual Basis Accounting
- Utilizes an adjusting process for recognizing revenues and expenses.
- Follows the matching principle for financial reporting.
- Consistent with generally accepted accounting principles (GAAP).
Supplies Adjustment Example
- On purchasing $1,000 in supplies with $300 used, adjusting entries would involve crediting supplies for $300 and debiting supplies expense for $300.
Matching Principle
- States that expenses should be matched with revenues within the same accounting period.
- Essential component of the adjusting process in accounting.
Prepaid Expenses
- Accounts classified as prepaid expenses include supplies, prepaid rent, and prepaid insurance.
Final Adjusting Process Step
- The last step involves creating an adjusting journal entry to transition from the current to the correct account balance.
Plant Assets Definition
- Reported on the balance sheet, plant assets include tangible long-term assets such as buildings and equipment.
- Original costs minus any salvage value are gradually expensed over the asset's useful life.
Adjusting Journal Entry Definition
- An adjusting journal entry is recorded at the end of an accounting period to account for unrecorded transactions or events.
Plant Assets Classification
- Buildings and equipment are categorized as plant assets, crucial to the long-term operation of a business.
Further Insurance Adjustment Example
- For a 12-month insurance policy costing $4,800, the adjusting entry on December 31 involves a debit to insurance expense for $400 and a credit to prepaid insurance for $400.
Depreciation Expense Calculation
- For a $300,000 building with a 20-year life and zero salvage value, the straight-line depreciation expense for December is calculated at $1,250.
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Description
Test your knowledge on crucial accounting principles such as accounting periods, accrual basis accounting, and the expense recognition principle. This quiz also covers the steps of the adjusting process and the significance of timely reporting in financial practices.
