Accounting Principles Overview

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Questions and Answers

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 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?

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?

A payment for insurance coverage received in future periods. (B) Signup and view all the answers

What happens to prepaid expenses over time?

They expire through the passage of time or usage. (D) Signup and view all the answers

Which of the following statements about unearned revenues is true?

They represent cash received before revenue is earned. (C) Signup and view all the answers

How are expenses typically recorded for the period they are incurred?

They are reported immediately in the period incurred. (C) Signup and view all the answers

What entry is made to adjust a prepaid expense?

Dr. Expense account, Cr. Asset account. (B) Signup and view all the answers

What is the primary difference between accrual basis accounting and cash basis accounting?

Accrual basis recognizes revenues and expenses when they occur, not just when cash is received or paid. (A) Signup and view all the answers

When is revenue typically recognized according to the revenue recognition criteria?

When the service is performed or goods are sold and delivered. (A) Signup and view all the answers

Which of the following best describes interim periods in accounting?

Any accounting period shorter than a fiscal year. (D) Signup and view all the answers

What type of entries must be prepared for prepayments?

Adjusting entries for both assets and liabilities. (C) Signup and view all the answers

Which of these statements accurately defines a fiscal year?

It is an accounting period of one year. (A) Signup and view all the answers

Which financial reporting practice involves recording transactions in the period they occur rather than when cash changes hands?

Accrual basis accounting. (A) Signup and view all the answers

In accounting, what are adjusting entries used for?

To ensure that revenues and expenses are recorded in the correct accounting period. (A) Signup and view all the answers

What is the main purpose of Generally Accepted Accounting Principles (GAAP)?

To enhance consistency and comparability in financial reporting. (B) Signup and view all the answers

What is straight-line depreciation used for?

Allocating the cost of long-lived assets to expense (A) Signup and view all the answers

What is the adjusting entry for recording depreciation expense?

Dr. Depreciation expense, Cr. Accumulated depreciation (D) Signup and view all the answers

How is accumulated depreciation presented on the balance sheet?

Deducted from the cost of the asset (B) Signup and view all the answers

What happens to the liabilities prior to adjustment of unearned revenues?

They are overstated (B) Signup and view all the answers

What is included in the adjusting entry for earned unearned revenue?

Dr. Liability account, Cr. Revenue account (D) Signup and view all the answers

What does the carrying amount of an asset refer to?

The cost less accumulated depreciation (A) Signup and view all the answers

In accrual accounting, when should expenses be recognized?

When they are incurred, regardless of cash payment (A) Signup and view all the answers

Which of the following is NOT an example of unearned revenues?

Sales of inventory (A) Signup and view all the answers

What is accrued revenue?

Revenue earned but not yet received in cash or recorded (C) Signup and view all the answers

What is the necessary adjustment entry for accrued revenues?

Dr. an asset account; Cr. a revenue account (D) Signup and view all the answers

Which of the following is an example of accrued expenses?

Salaries payable for work performed but not yet paid (C) Signup and view all the answers

What is the impact on the accounting equation prior to adjustments for accrued revenues?

Assets and revenues are understated (B) Signup and view all the answers

In the case of accrued expenses, which accounts are affected by the adjusting entry?

An expense account and a liability account (C) Signup and view all the answers

Which of the following correctly describes the effect of accrued expenses before adjustment?

Liabilities and expenses are understated (D) Signup and view all the answers

What type of accounts typically represent accrued revenues?

Accounts receivable and rent receivable (A) Signup and view all the answers

What does the adjustment process for accrued items typically involve?

Adjusting entries that account for earned revenues or incurred expenses (C) Signup and view all the answers

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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Description

Test your knowledge on key accounting principles including time periods, accrual vs. cash basis accounting, and revenue and expense recognition. This quiz covers essential concepts that every accountant should understand to ensure accurate financial reporting.