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Questions and Answers
What characterizes expenses in accounting?
What characterizes expenses in accounting?
- They always increase assets.
- They can only be recognized when cash is paid.
- They result in a decrease in owner's equity. (correct)
- They represent income generating activities.
When are expenses recognized under the expense recognition criteria?
When are expenses recognized under the expense recognition criteria?
- When liabilities are increased.
- When cash is received.
- Only at the end of the accounting period.
- Over the life of long-lived assets. (correct)
What is the primary purpose of adjusting entries?
What is the primary purpose of adjusting entries?
- To ensure compliance with tax regulations.
- To increase revenues for the period.
- To reduce overall expenses in the financial statements.
- To accurately report assets, liabilities, and owner's equity. (correct)
What is classified as a prepaid expense?
What is classified as a prepaid expense?
What happens to prepaid expenses over time?
What happens to prepaid expenses over time?
Which of the following statements about unearned revenues is true?
Which of the following statements about unearned revenues is true?
How are expenses typically recorded for the period they are incurred?
How are expenses typically recorded for the period they are incurred?
What entry is made to adjust a prepaid expense?
What entry is made to adjust a prepaid expense?
What is the primary difference between accrual basis accounting and cash basis accounting?
What is the primary difference between accrual basis accounting and cash basis accounting?
When is revenue typically recognized according to the revenue recognition criteria?
When is revenue typically recognized according to the revenue recognition criteria?
Which of the following best describes interim periods in accounting?
Which of the following best describes interim periods in accounting?
What type of entries must be prepared for prepayments?
What type of entries must be prepared for prepayments?
Which of these statements accurately defines a fiscal year?
Which of these statements accurately defines a fiscal year?
Which financial reporting practice involves recording transactions in the period they occur rather than when cash changes hands?
Which financial reporting practice involves recording transactions in the period they occur rather than when cash changes hands?
In accounting, what are adjusting entries used for?
In accounting, what are adjusting entries used for?
What is the main purpose of Generally Accepted Accounting Principles (GAAP)?
What is the main purpose of Generally Accepted Accounting Principles (GAAP)?
What is straight-line depreciation used for?
What is straight-line depreciation used for?
What is the adjusting entry for recording depreciation expense?
What is the adjusting entry for recording depreciation expense?
How is accumulated depreciation presented on the balance sheet?
How is accumulated depreciation presented on the balance sheet?
What happens to the liabilities prior to adjustment of unearned revenues?
What happens to the liabilities prior to adjustment of unearned revenues?
What is included in the adjusting entry for earned unearned revenue?
What is included in the adjusting entry for earned unearned revenue?
What does the carrying amount of an asset refer to?
What does the carrying amount of an asset refer to?
In accrual accounting, when should expenses be recognized?
In accrual accounting, when should expenses be recognized?
Which of the following is NOT an example of unearned revenues?
Which of the following is NOT an example of unearned revenues?
What is accrued revenue?
What is accrued revenue?
What is the necessary adjustment entry for accrued revenues?
What is the necessary adjustment entry for accrued revenues?
Which of the following is an example of accrued expenses?
Which of the following is an example of accrued expenses?
What is the impact on the accounting equation prior to adjustments for accrued revenues?
What is the impact on the accounting equation prior to adjustments for accrued revenues?
In the case of accrued expenses, which accounts are affected by the adjusting entry?
In the case of accrued expenses, which accounts are affected by the adjusting entry?
Which of the following correctly describes the effect of accrued expenses before adjustment?
Which of the following correctly describes the effect of accrued expenses before adjustment?
What type of accounts typically represent accrued revenues?
What type of accounts typically represent accrued revenues?
What does the adjustment process for accrued items typically involve?
What does the adjustment process for accrued items typically involve?
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Study Notes
Time Periods in Accounting
- A business's economic life is divided into time periods (month, quarter, or year).
- Periods shorter than a year are interim periods.
- A one-year period is a fiscal year.
Accrual vs. Cash Basis Accounting
- Accrual Basis: Records events when they occur, regardless of cash flow.
- Cash Basis: Records revenue when cash is received and expenses when cash is paid.
Revenue Recognition
- Recognized when assets increase or liabilities decrease due to customer activities.
- Generally, when services are performed or goods are delivered.
Expense Recognition
- Decreases in assets or increases in liabilities from business activities.
- Decrease in owner's equity.
- Tied to revenue recognition when directly associated.
- For long-lived assets, recognized over the asset's life.
- Otherwise, reported in the period incurred.
Adjusting Entries
- Required for accurate financial statements.
- Ensure revenue and expense recognition criteria are met.
- Accurately report assets, liabilities, and owner's equity.
- Part of the accounting cycle.
- Classified as prepayments or accruals.
Adjusting Entries: Prepayments
- Prepaid Expenses: Expenses paid in cash and recorded as assets before use. Adjusting entry: Debit expense, Credit asset. Examples: supplies, rent, insurance.
- Unearned Revenues: Cash received and recorded as a liability before revenue is earned. Adjusting entry: Debit liability, Credit revenue. Examples: subscriptions, tickets.
Depreciation
- Allocation of a long-lived asset's cost to expense over its useful life.
- Straight-line depreciation: Annual expense = Cost / Useful life.
- Adjusting entry: Debit depreciation expense, Credit accumulated depreciation (a contra-asset account).
- Carrying amount: Cost - Accumulated depreciation.
Adjusting Entries: Accruals
- Accrued Revenues: Revenues earned but not yet received or recorded. Adjusting entry: Debit asset, Credit revenue. Examples: accounts receivable, interest receivable.
- Accrued Expenses: Expenses incurred but not yet paid or recorded. Adjusting entry: Debit expense, Credit liability. Examples: accounts payable, salaries payable.
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