Questions and Answers
What is Accrual Accounting?
What are Accruals?
Revenues earned or expenses incurred before cash has been exchanged
What are Adjusting Entries?
Journal entries made to measure the period's income accurately
What is Cash-Basis Accounting?
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What are Deferrals?
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What is a Fiscal Year?
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What is the Matching Principle?
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What does the Revenue Recognition Principle state?
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What are Accrued Expenses?
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What is Accumulated Depreciation?
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How do you calculate Book Value?
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What is carrying value?
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What is a Contra Account?
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What are Deferred Expenses?
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What is Deferred Revenue?
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What is Depreciation?
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What are Long-Term Assets?
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What is Net Value?
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What are Prepaid Expenses?
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What is Salvage Value?
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What is the Straight-Line Depreciation Method?
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What is an Unadjusted Trial Balance?
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What is Unearned Revenue?
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What is an Adjusted Trial Balance?
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What are Closing Entries?
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What is a Permanent Account?
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What is a Post-Closing Trial Balance?
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What are Temporary Accounts?
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What describes the type of adjusting entries?
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Unearned revenue is always a:
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Study Notes
Accrual Accounting
- Recognizes business transactions when they occur, regardless of cash movement.
- Key distinction from cash-basis accounting, which only records transactions on cash exchange.
Accruals
- Represents revenues earned or expenses incurred prior to cash exchange, indicating timing differences in transactions.
Adjusting Entries
- Essential journal entries at the end of accounting periods to accurately report income and adjust asset and liability accounts before financial statements are generated.
Cash-Basis Accounting
- Records transactions only when cash is received or paid, potentially misleading the financial position if not supplemented with accruals.
Deferrals
- Cash transactions that occur before related revenues are earned or expenses incurred, affecting the timing of income and expense recognition.
Fiscal Year
- A consecutive 12-month period used for financial reporting, influencing the timing of expense recognition and revenue reports.
Matching Principle
- States that expenses should be recorded in the same period as the revenues they help generate, ensuring accurate profit measurement.
Revenue Recognition Principle
- Indicates that revenues should be recorded when earned by delivery of goods or services, establishing a basis for recognizing income.
Accrued Expenses
- Expenses incurred but not yet recorded in accounts, requiring adjusting entries to accurately reflect liabilities.
Accumulated Depreciation
- A contra asset account that shows the total depreciation expense taken to date against long-term assets.
Book Value
- The difference between an asset's cost and its accumulated depreciation, reflecting its net value on the balance sheet.
Carrying Value
- Calculated as an asset's cost minus its accumulated depreciation, important for financial analysis.
Contra Account
- An account linked to another that has a balance opposite to that of its associated account, used to track adjustments (e.g., accumulated depreciation).
Deferred Expenses
- Prepaid amounts that will benefit future periods, recorded as assets until consumed.
Deferred Revenue
- A liability representing cash received for services or goods yet to be delivered, requiring careful tracking until earned.
Depreciation
- The allocation of an asset's cost over its useful life, impacting expense recognition and asset valuation.
Long-Term Assets
- Assets such as property, plant, and equipment that have a useful life exceeding two years, critical for capital investment assessments.
Net Value
- The amount found by subtracting the balance of a contra account from the related account, useful for evaluating asset value.
Prepaid Expenses
- Payments made for future expenses recorded as assets until the benefit is realized.
Salvage Value
- The estimated residual value of a long-term asset at the end of its useful life, considered in depreciation calculations.
Straight-Line Depreciation Method
- A common method for calculating depreciation; determined by subtracting salvage value from asset cost and dividing by useful life.
Unadjusted Trial Balance
- A preliminary trial balance prepared before making adjusting entries, important for identifying discrepancies before finalizing accounts.
Unearned Revenue
- A liability created from cash received before providing services or goods; crucial for managing cash flow and revenue recognition.
Adjusted Trial Balance
- A comprehensive listing of all accounts and their balances after adjusting entries, serving as a foundation for financial statement preparation.
Closing Entries
- Entries made at the end of the accounting period to reset temporary accounts to prepare for the next period.
Permanent Accounts
- Accounts such as assets, liabilities, and equity that carry over into the next accounting period and are not closed.
Post-Closing Trial Balance
- A final list of accounts and balances after closing entries, ensuring accuracy in ongoing reporting.
Temporary Accounts
- Accounts like revenue, expenses, and dividends that are closed at the end of the period to reset for the next accounting cycle.
Types of Adjusting Entries
- Two main types: deferrals (prepaid expenses and unearned revenue) and accruals (accrued expenses and revenues).
Importance of Adjusting Accounts
- Updating accounts at the end of the accounting period is essential for accurate financial reporting and compliance.
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Description
This quiz explores the key concepts of accrual and cash-basis accounting, focusing on the timing of transactions and the impact on financial reporting. You will learn about accruals, adjusting entries, deferrals, and fiscal year considerations. Test your understanding of how these principles influence income and expense recognition.