Accrual Accounting: Revenue & Expense Recognition

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Questions and Answers

Under accrual basis accounting, when is revenue recognized?

When it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured. (correct)
When the customer places the order.
When cash is received, regardless of when it is earned.
When cash is disbursed.

Cash basis accounting recognizes revenue when it is earned, not necessarily when cash is received.

False (B)

According to the expense recognition principle (matching principle), when should an expense be recorded?

When an asset is used up or a liability is incurred to earn revenue.

A deferred expense, also known as a "prepaid expense", is classified as an ______ on the balance sheet.

asset Signup and view all the answers

Which of the following is the primary driver for expense recognition under accrual accounting?

Used an asset or incurred a liability to earn revenue (A) Signup and view all the answers

Under expense recognition, a cash outflow always indicates that an expense should be recorded.

False (B) Signup and view all the answers

Rand Co. pays $3,000 rent for January. How much rent expense should Rand recognize for January?

$3,000 Signup and view all the answers

Match the following terms with their descriptions:

Accrual Basis Accounting = Recognizes revenue when earned, expenses when incurred, regardless of cash flow. Cash Basis Accounting = Recognizes revenue when cash is received and expenses when cash is paid. Period Costs = Indirect costs that are difficult to match directly to revenue and are matched to the period they occur. Matching Principle = Expenses are recorded when an asset is used up or a liability is incurred to earn revenue. Signup and view all the answers

Which financial statement reports a company's financial performance over a period of time?

Income Statement (B) Signup and view all the answers

According to the revenue recognition principle, which of the following is the MOST important factor in determining when revenue should be recorded?

When the earnings process is complete, or virtually complete and collection is probable. (A) Signup and view all the answers

The Statement of Stockholders' Equity is prepared before the Income Statement.

False (B) Signup and view all the answers

Deferred revenue represents revenue that has been earned but not yet collected.

False (B) Signup and view all the answers

What is the formula to calculate net income?

Total Revenues - Total Expenses Signup and view all the answers

A company provides a service in December but doesn't receive payment until January. In which month should the company recognize the revenue, according to accrual accounting?

December Signup and view all the answers

The cost of goods sold is an example of a(n) ________ on the income statement.

expense Signup and view all the answers

Revenue recognition is NOT driven by cash receipt; it is most important that the revenue is ______.

earned Signup and view all the answers

If Seneca Company's total revenues were $95,000 and total expenses were $78,000, what would be the net income?

$17,000 (A) Signup and view all the answers

A construction company receives $50,000 as a down payment for a project that will take six months to complete. What is the correct classification of this $50,000 upon receipt?

Deferred Revenue (Liability) (D) Signup and view all the answers

Which of the following is NOT typically classified as an expense on the income statement?

Dividend Payments (A) Signup and view all the answers

Using the information provided for Seneca Company, what is the percentage of wage expense relative to total revenues?

22.36% (D) Signup and view all the answers

Target sells a $1,000 TV to a customer on September 15th. The customer writes a check to purchase the TV. How does this transaction immediately impact Target's accounting equation?

Assets and stockholders' equity increase. (A) Signup and view all the answers

________ expense represents the allocation of the cost of a tangible asset over its useful life.

Depreciation Signup and view all the answers

A magazine company receives $12,000 on September 16th for a one-year subscription, with subscriptions beginning in October. How much revenue should the magazine company recognize in September?

$0 (B) Signup and view all the answers

Which of the following situations would NOT be considered 'revenue' according to the accrual basis of accounting?

A law firm receives cash from a client in advance for services to be performed next month. (B) Signup and view all the answers

Which of the following statements accurately describes the purpose of adjusting entries?

To allocate revenues and expenses to the correct accounting period. (A) Signup and view all the answers

Adjusting entries always affect the cash account.

False (B) Signup and view all the answers

What type of account is a prepaid expense considered before it is adjusted?

asset Signup and view all the answers

Adjusting entries are typically made at the ______ of the accounting period.

end Signup and view all the answers

Match the term with its description:

Prepaid Expense = Cash paid before expense is incurred Deferred Revenue = Cash received before revenue is earned Adjusting Entry = Record events that have occurred but have not been recorded yet Accrual Accounting = Recognizing revenues and expenses when they are earned or incurred, not necessarily when cash changes hands Signup and view all the answers

Clark Company purchased three years of flood insurance on January 1st for $45,000. What is the journal entry to record the year-end adjusting entry on December 31st?

Debit Insurance Expense $15,000, Credit Prepaid Insurance $15,000 (D) Signup and view all the answers

If Clark Company failed to record the year-end adjusting entry for prepaid insurance, which of the following would be the effect on their financial statements?

Assets would be overstated and net income would be understated. (D) Signup and view all the answers

In accrual accounting, when should revenue be recognized?

when earned Signup and view all the answers

TR Company performed $300 of services on December 31st but will bill the customer on January 3rd. If the adjusting entry is not recorded, what is the impact on the financial statements?

Assets and revenues will both be understated. (C) Signup and view all the answers

Adjusting entries are only required for accounts that involve cash transactions during the accounting period.

False (B) Signup and view all the answers

What is the purpose of an adjusted trial balance?

To prove the equality of the total debit balances and total credit balances after adjustments have been made. Signup and view all the answers

The adjusting entry for accrued revenue involves a debit to ______ and a credit to revenue.

accounts receivable Signup and view all the answers

Match each term related to adjusting entries with its correct description:

Accrued Revenue = Revenue earned but not yet received in cash. Accrued Expense = Expense incurred but not yet paid in cash. Prepaid Expense = Expense paid in advance. Unearned Revenue = Cash received for services not yet performed. Signup and view all the answers

Seneca Company's unadjusted trial balance shows Prepaid Insurance with a $5,000 debit balance. If $1,200 of insurance expired during the period, what is the amount of Insurance Expense that should be reported on the income statement?

$1,200 (D) Signup and view all the answers

The accumulated depreciation account is increased with a debit entry.

False (B) Signup and view all the answers

Why is it important to prepare adjusting entries at the end of an accounting period?

To ensure that revenues are recognized when earned and expenses are recognized when incurred (matching principle). Signup and view all the answers

If a company fails to record depreciation expense, assets will be and net income will be .

overstated, overstated Signup and view all the answers

Which of the following is the correct adjusting entry for accrued wages of $800?

Debit Wages Expense, Credit Wages Payable (A) Signup and view all the answers

In the closing entry process, what happens to revenue accounts?

They are debited, and Retained Earnings is credited. (A) Signup and view all the answers

What is the purpose of the post-closing trial balance?

Both A and C. (C) Signup and view all the answers

The closing entry for expenses involves debiting Retained Earnings and crediting the expense accounts.

True (A) Signup and view all the answers

After the closing entries are posted, what types of accounts should have a zero balance?

temporary Signup and view all the answers

The account used to accumulate the net effect of revenues and expenses during the closing process is called .

Retained Earnings Signup and view all the answers

Why are dividend accounts closed at the end of an accounting period?

To decrease the balance of Retained Earnings. (C) Signup and view all the answers

Match each account type with the appropriate action taken during the closing process:

Revenue Accounts = Debited; Retained Earnings credited. Expense Accounts = Credited; Retained Earnings debited. Dividend Accounts = Credited; Retained Earnings debited. Signup and view all the answers

What type of accounts appear on the post-closing trial balance?

Only assets, liabilities, and equity accounts. (B) Signup and view all the answers

The purpose of closing entries is to prepare the accounts for the next accounting period by zeroing out all permanent accounts.

False (B) Signup and view all the answers

In what order are the closing entries typically prepared?

revenues, expenses, income summary, dividends Signup and view all the answers

The post-closing trial balance verifies that total _ equal total _ after the closing entries have been made.

debits; credits Signup and view all the answers

Which of the following accounts would NOT appear on a post-closing trial balance?

Rent Expense (D) Signup and view all the answers

Closing entries affect only the income statement accounts.

False (B) Signup and view all the answers

What is the ultimate effect of closing entries on the accounting equation (Assets = Liabilities + Equity)?

no change Signup and view all the answers

After closing entries are completed, the balance in the Retained Earnings account represents the company's cumulative income less cumulative _.

net; dividends Signup and view all the answers

Flashcards

Revenue Recognition Principle

Revenue is recognized when a good or service is provided to a customer.

When to Record Revenue

Revenue is recorded in the period when the good or service was provided, regardless of when cash is received.