Accruals and Estimates Quiz

Which of the following is the purpose of reversing entries?

When are reversing entries made?

Which of the following is not a type of adjusting entry that may require reversing?

When is a reversing entry for prepaid expense necessary?

What is the purpose of the reversing entry for rent income?

What is the balance of the rent receivable account after the reversing entry for rent income?

What is the adjustment for prepaid rent under the expense method?

What would be the adjustment if the asset method was used?

Which one of these is an example of an accrual?

Which one of these is an example of an adjusting entry that does not involve cash flows?

Which one of these is an example of a basic financial statement?

Which one of these is an example of a nominal or temporary account?

Which one of these is an example of a year-end statement of financial position?

Which one of these is an example of a liability account?

Which one of these is an example of a closing entry?

Reversing Entries

Reversing entries are made to eliminate the effects of previous accruals or prepayments, ensuring that financial statements are presented accurately.
Reversing entries are typically made at the beginning of an accounting period, immediately after the financial statements are prepared.

Types of Adjusting Entries

Not all adjusting entries require reversing entries.
Examples of adjusting entries that do not require reversing entries include depreciation and bad debt expenses.

Prepaid Expense

A reversing entry for prepaid expense is necessary when the expense is initially recorded as an asset, but needs to be expensed in the subsequent period.

Rent Income

The purpose of the reversing entry for rent income is to remove the rent income that was recorded in the previous period, but is not yet earned in the current period.
After the reversing entry, the rent receivable account has a balance of zero.

Adjusting Entries for Prepaid Rent

Under the expense method, the adjustment for prepaid rent is to debit rent expense and credit prepaid rent.
Under the asset method, the adjustment for prepaid rent is to debit rent expense and credit rent payable.

Examples of Accrual, Adjusting Entries, and Financial Statements

Accrual: recording rent revenue in the current period, even though it will not be received until the next period.
Adjusting entry that does not involve cash flows: recording depreciation expense.
Basic financial statement: income statement.
Nominal or temporary account: rent revenue.
Year-end statement of financial position: balance sheet.
Liability account: rent payable.
Closing entry: transferring rent revenue to retained earnings.

Test your knowledge on accruals and estimates with this quiz. Learn about the recognition of income or expenses before cash flow, as well as the concept of accrued income and expenses. Challenge yourself with questions on debits, credits, and liabilities.