Accounting Quiz 4: Adjustment Process
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Questions and Answers

What is the correct journal entry to record the depreciation expense using the straight-line method at the end of Year 1?

  • DR furniture, CR Bank
  • DR accumulated depreciation – furniture, CR depreciation
  • DR depreciation expense, CR accumulated depreciation – furniture (correct)
  • DR depreciation expense, CR furniture

    • Which accounting principle explains the timing difference between ABC Company’s net income and cash balance?

  • Going concern principle
  • Matching principle (correct)
  • Cost principle
  • Revenue recognition principle

    • In the context of ABC Company's financials, what does the cash balance represent?

  • Available liquid assets (correct)
  • Net income after all expenses
  • Total revenues generated during the period
  • Expenses incurred during the period

    • What do adjusting entries account for in the financial reporting process?

    <p>Unpaid expenses or accrued revenues</p> Signup and view all the answers

    Why might ABC Company have a higher cash balance in comparison to its net income?

    <p>Unpaid expenses or credit sales impacting cash flow</p> Signup and view all the answers

    What is the adjusting entry when supplies are used during the year?

    <p>DR Supplies Expense CR Supplies</p> Signup and view all the answers

    What kind of account is 'Prepaid Rent' classified as before it is adjusted?

    <p>Asset</p> Signup and view all the answers

    When should an adjusting entry for unearned revenue be made?

    <p>When the work is completed</p> Signup and view all the answers

    Which entry is made when recording the original purchase of supplies?

    <p>DR Supplies CR Accounts Payable</p> Signup and view all the answers

    What is the purpose of depreciating long-term assets?

    <p>To allocate costs over their useful lives</p> Signup and view all the answers

    When a business pays for insurance in advance, which account is credited?

    <p>Prepaid Insurance</p> Signup and view all the answers

    What represents the amount of expenses incurred when invoices arrive late?

    <p>Accrued Expenses</p> Signup and view all the answers

    Which of the following accounts is adjusted to reflect the expenses for prepaid insurance after use?

    <p>Insurance Expense</p> Signup and view all the answers

    What is the primary purpose of adjusting journal entries in accounting?

    <p>To bring accounts up to date and follow accounting principles.</p> Signup and view all the answers

    Which concept assumes that the economic life of a business can be divided into specific time periods?

    <p>Time Period Concept</p> Signup and view all the answers

    When is revenue considered to be earned in a service business?

    <p>When the service is completed.</p> Signup and view all the answers

    What does the matching principle require from accountants?

    <p>Expenses must be matched with revenues in the same accounting period.</p> Signup and view all the answers

    Which of the following is NOT a type of adjusting entry?

    <p>Sales revenue</p> Signup and view all the answers

    Under the accrual basis of accounting, when should expenses be recognized?

    <p>When goods are received or services are used to generate revenue.</p> Signup and view all the answers

    What is one requirement for accountants when preparing financial statements?

    <p>To ensure all accounts are accurate, current, and consistent.</p> Signup and view all the answers

    Which of the following accurately describes the revenue recognition principle?

    <p>Revenue is recognized when it is earned, not when payment is made.</p> Signup and view all the answers

    What type of account is Unearned Revenue classified as?

    <p>Liability</p> Signup and view all the answers

    When cash is received in advance for services not yet rendered, what is the correct journal entry?

    <p>DR Bank, CR Unearned Revenue</p> Signup and view all the answers

    How should the entry be adjusted when the revenue is earned from previously prepaid services?

    <p>DR Unearned Revenue, CR Revenue</p> Signup and view all the answers

    What happens to the balance of Unearned Revenue once the service is provided?

    <p>Decreases</p> Signup and view all the answers

    What type of entry is needed when prepaid rent is recorded on the landlord's books?

    <p>DR Prepaid Rent, CR Unearned Revenue</p> Signup and view all the answers

    What is the primary concept behind the revenue recognition principle?

    <p>Revenue is recognized when it is earned.</p> Signup and view all the answers

    What is the effect on the financial statements when Unearned Revenue is not adjusted after the service is performed?

    <p>Revenue will be understated.</p> Signup and view all the answers

    Which statement is true regarding depreciation?

    <p>It allocates costs over the asset's useful life.</p> Signup and view all the answers

    What is the formula to calculate Net Book Value (NBV)?

    <p>Cost of an Asset - Accumulated Depreciation</p> Signup and view all the answers

    What is the journal entry for recording depreciation expense for furniture?

    <p>DR Depreciation Expense $2,500, CR Accumulated Depreciation $2,500</p> Signup and view all the answers

    Which method is suggested for calculating depreciation expense?

    <p>Straight-line method</p> Signup and view all the answers

    What is the primary purpose of preparing closing entries?

    <p>To reset temporary accounts for the next period</p> Signup and view all the answers

    What does the salvage value represent in the context of depreciation?

    <p>The amount received when the asset is disposed of</p> Signup and view all the answers

    What would happen if adjusting entries are not prepared?

    <p>Net income will be incorrectly reported</p> Signup and view all the answers

    When closing the revenue account, which of the following is the correct journal entry?

    <p>DR Owner's Capital, CR Revenue</p> Signup and view all the answers

    Which of the following best describes accumulated depreciation?

    <p>The total depreciation expense recognized to date</p> Signup and view all the answers

    What is the adjusting entry that corresponds to the supplies purchased and remaining at the end of the year?

    <p>DR Supplies Expense $1050, CR Supplies $1050</p> Signup and view all the answers

    Which journal entry properly records the purchase of a 2-year insurance policy for $2400?

    <p>DR Prepaid Insurance $2400, CR Bank $2400</p> Signup and view all the answers

    What is the adjusting entry at the end of the year for the 2-year insurance policy purchased on January 1?

    <p>DR Insurance Expense $1200, CR Prepaid Insurance $1200</p> Signup and view all the answers

    If a customer pays $10,000 upfront for work not yet done, which is the correct journal entry for ABC Company?

    <p>DR Bank, CR Unearned Revenue</p> Signup and view all the answers

    Which adjusting entry should ABC Company record after completing 50% of the work for the prepaid customer?

    <p>DR Unearned Revenue, CR Revenue</p> Signup and view all the answers

    What does the Accumulated Depreciation account represent?

    <p>The total amount charged as an expense against the asset over time</p> Signup and view all the answers

    What is the journal entry for purchasing new office furniture worth $8000?

    <p>DR Furniture $8000, CR Cash $8000</p> Signup and view all the answers

    What is the annual depreciation expense for office furniture purchased for $8000 with a lifespan of 8 years and a salvage value of $0?

    <p>$1000</p> Signup and view all the answers

    Study Notes

    Review for Quiz 4

    • Format:
      • Part A: Knowledge (10 marks)
      • Part B: Application (10 marks)
      • Part C: Thinking (10 marks)

    The Adjustment Process

    • Financial Statements (F/S) must be accurate, current, and consistent.
    • Accountants are responsible for F/S accuracy.
    • Accountants must ensure:
      • All accounts are up-to-date
      • Late transactions are included
      • Calculations are correct
      • Accounting principles are followed
    • Adjustments are made through adjusting journal entries.
    • These adjustments bring accounts up to date and ensure accounting standards are followed.

    Time Period Concept

    • A business's economic life can be divided into periods (e.g., month, quarter, year).
    • A fiscal year is a one-year accounting period.
    • Accounts are adjusted at the end of each fiscal period.

    Revenue Recognition Principle

    • Revenue is recognized when earned, not when cash is received.
    • In service businesses, revenue is recognized when the service is performed.
    • Some customers pay in advance.

    Matching Principle

    • Expenses are matched with revenues in the same time period.

    Accrual Basis of Accounting

    • Revenue is recognized when earned, not when cash is received.
    • Expenses are recognized when incurred, not when cash is paid.

    Adjusting Entries

    • Required to apply accrual basis accounting principles.
    • Five types:
      • Supplies
      • Prepaid Expenses
      • Unearned Revenue
      • Late Arriving Purchase Invoices
      • Depreciation

    Supplies

    • Used supplies are recorded as expense.
    • Supplies on hand at the end are recorded as assets.
    • Adjusting entry will reflect supplies used.

    Prepaid Expenses

    • Expenses paid in advance are recorded as assets.
    • As expenses are incurred, they are reclassified as expenses.
    • Adjusting entry will recognize the used pre-paid expenses.

    Unearned Revenue

    • Cash received in advance for services or goods.
    • Recognized as revenue as services are performed.
    • Adjusting entry will reflect the revenue earned.

    Depreciation

    • Allocating the cost of a long-term asset to expense over its useful life.
    • Attempts to match the cost with revenue generated.
    • Estimate, rather than a factual amount.
    • Balance Sheet presentation:
      • Office equipment (Cost)
      • Less: Accumulated depreciation (Depreciation)
      • Net book value (NBV) = Cost - Accumulated Depreciation
    • Factors in cost, estimated useful life, and salvage value.
      • Straight Line method example is provided.

    Closing Entries

    • Permanent accounts (balance sheet) vs. temporary accounts (income statement).
    • Closing procedures at the end of an accounting period.
    • Transferring temporary account balances to owner's equity.

    Part A: Knowledge

    • Questions on revenue recognition, matching, adjusting entries, and closed accounts.

    Part B: Application

    • Applying DR and CR rules to various accounting transactions.
    • Example question on adjusting supplies.

    Part C: Thinking

    • Case study scenario involving ABC Company's net income and cash balance.
    • Questions on assets, expenses, matching principle, adjusting entries, and net income.

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    Description

    This quiz focuses on the adjustment process in accounting, including the preparation and accuracy of financial statements. It covers key concepts such as the time period concept and revenue recognition principle. Test your knowledge through multiple parts designed to assess your understanding of these principles.

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