Adjusting Entries in Accounting

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Questions and Answers

What is the purpose of adjusting accrued expenses?

  • To decrease the value of liabilities on the balance sheet.
  • To increase the value of assets on the balance sheet.
  • To reduce the amount of revenue recognized in the accounting period.
  • To accurately reflect expenses incurred during the accounting period. (correct)

What is the effect of adjusting for accrued expenses on the balance sheet?

  • Decreases assets.
  • Decreases liabilities.
  • Increases assets.
  • Increases liabilities. (correct)

What is the impact of adjusting for accrued revenues on the income statement?

  • Increases expenses.
  • Decreases expenses.
  • Decreases revenue.
  • Increases revenue. (correct)

What is the impact of adjusting for accrued revenues on the balance sheet?

<p>Increases assets. (A)</p> Signup and view all the answers

How does the adjustment for accrued expenses affect the Statement of Profit or Loss?

<p>It increases the total expenses reported. (D)</p> Signup and view all the answers

What is the correct journal entry to record the adjustment for accrued expenses?

<p>Debit: Expense Account, Credit: Accrued Expenses (B)</p> Signup and view all the answers

What is the primary difference between accrued expenses and accrued revenues?

<p>Accrued expenses represent money owed, while accrued revenues represent money earned. (D)</p> Signup and view all the answers

How does the adjustment for accrued expenses impact the company's cash balance?

<p>The cash balance remains unchanged. (C)</p> Signup and view all the answers

What is the appropriate classification for accrued expenses on the Statement of Financial Position?

<p>Current Liabilities (D)</p> Signup and view all the answers

What is recorded when a stocktake reveals fewer items in stock than are shown on the stock item record?

<p>A balance day adjustment is recorded. (A)</p> Signup and view all the answers

How does an inventory shortage affect the gross profit figure?

<p>It decreases the gross profit. (D)</p> Signup and view all the answers

What entry is made in the general journal for an inventory adjustment reflecting a shortage?

<p>Debit the Inventories Control account. (D)</p> Signup and view all the answers

If a physical stocktake reveals an inventory gain, what adjustment should be made?

<p>Make a balance day adjustment reflecting the gain. (B)</p> Signup and view all the answers

What happens to the Inventories Control account when a shortage is identified?

<p>It is decreased to reflect the actual inventory. (D)</p> Signup and view all the answers

What record ultimately reflects the balance day adjustments made for inventory shortages?

<p>Statement of Profit or Loss (C)</p> Signup and view all the answers

Which of the following is not typically performed to control inventory levels?

<p>Ignoring discrepancies in stock records. (B)</p> Signup and view all the answers

What is the effect of the depreciation adjustment on the motor vehicle?

<p>It appears as an administrative expense in the Statement of Profit or Loss. (C)</p> Signup and view all the answers

What is the accumulated depreciation on the motor vehicle after the adjustment?

<p>$9,000 (A)</p> Signup and view all the answers

What is the correct journal entry to record the write off depreciation on the motor vehicle?

<p>Debit Depreciation on Motor Vehicle $3,000; Credit Accumulated Depreciation $3,000 (D)</p> Signup and view all the answers

In the Statement of Financial Position, how is the motor vehicle reported?

<p>At a cost of $15,000 less accumulated depreciation of $9,000. (C)</p> Signup and view all the answers

What is the GST procedure mentioned that does not affect profit but is necessary to complete accounting?

<p>Clearing GST Collected and GST Credits Received accounts. (B)</p> Signup and view all the answers

What is the main problem identified with Net Realizable Value (NRV)?

<p>It is an estimated figure that may not accurately reflect actual values. (C)</p> Signup and view all the answers

What happens when the NRV of an item is lower than its cost?

<p>An anticipated loss is recognized in the financial statements. (B)</p> Signup and view all the answers

What is the calculated Gross Profit using the lower of cost and NRV rule?

<p>$550 (C)</p> Signup and view all the answers

Under which circumstance would the amount for inventories be shown as $250?

<p>If the NRV is lower than the total cost of inventory. (B)</p> Signup and view all the answers

Which of the following correctly represents a journal entry for recording a $50 loss due to the lower of cost and NRV?

<p>Debit Inventory Adjustment $50, Credit Inventories Control $50 (A)</p> Signup and view all the answers

In what condition is revenue recognized under accrual accounting regarding inventory sales?

<p>When the goods are delivered to customers. (C)</p> Signup and view all the answers

How do selling costs impact the calculation of Net Realizable Value (NRV)?

<p>They reduce the NRV directly. (B)</p> Signup and view all the answers

For which item would the NRV equal the cost based on the provided data?

<p>Item D (D)</p> Signup and view all the answers

What is meant by 'cost' in the context of inventory valuation?

<p>The total expenses incurred to procure the inventory. (D)</p> Signup and view all the answers

What amount for rent revenue appears in the Profit or Loss Summary account after adjustment?

<p>$900 (C)</p> Signup and view all the answers

What is the purpose of the Provision for Doubtful Debts account?

<p>To estimate the amount of accounts receivable that may be uncollectible (B)</p> Signup and view all the answers

What effect does transferring Bad and Doubtful Debts to the Provision for Doubtful Debts account have?

<p>Decreases the Provision for Doubtful Debts account (D)</p> Signup and view all the answers

What necessary entry increases the expenses of the period for Bad and Doubtful Debts?

<p>Dr Bad and Doubtful Debts / Cr Provision for Doubtful Debts (B)</p> Signup and view all the answers

What balance is reflected for Unearned Revenues in the Statement of Financial Position?

<p>$100 (A)</p> Signup and view all the answers

Which adjustment entry is made to ensure the new Provision for Doubtful Debts balance is correct?

<p>Dr Bad and Doubtful Debts / Cr Provision for Doubtful Debts (A)</p> Signup and view all the answers

At the end of the accounting year, how is the total amount of bad debts treated?

<p>Only those bad debts expected to occur in the next accounting period are estimated (B)</p> Signup and view all the answers

Which of the following statements is true about the adjustment entries for bad debts?

<p>They adjust the Provision for Doubtful Debts to match current estimations (A)</p> Signup and view all the answers

How does the adjustment for Bad and Doubtful Debts impact the Profit or Loss summary?

<p>It reflects the estimated bad debts as an expense in the period (A)</p> Signup and view all the answers

What is the total amount of accounts receivable that is considered likely to become bad in the next accounting period?

<p>Only the small portion represented in current accounts (C)</p> Signup and view all the answers

Flashcards

Statement of Profit or Loss

A financial statement showing revenues and expenses over a period.

Balance Day Adjustments

Adjustments made to accounts at the end of a reporting period.

Inventory Adjustment

Changes made to inventory records based on physical counts.

Gross Profit Decrease

A reduction in gross profit due to inventory shortages.

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Cost of Goods Sold

The total cost of producing goods sold by a company.

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Physical Stocktake

A count of all inventory items to confirm records.

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Reversing Entries

Entries made to counteract previous adjustments in the next accounting period.

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Accrued Expenses Journal Entry

A journal entry that recognizes expenses incurred but not yet paid, increasing the Expense account and creating a liability.

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Effect of Accrued Expenses Entry

Increases the expense account and creates a liability for expenses owed on balance day.

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Trial Balance and Accrued Expenses

A snapshot of accounts showing expenses and liabilities; adjustments reflect unrecorded expenses at balance day.

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Accrued Revenues Journal Entry

A journal entry for revenues earned but not yet received, creating an asset and increasing revenue.

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Effect of Accrued Revenues Entry

Creates an asset for amounts owed to the business and increases the revenue account.

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Outstanding Commission

Commission revenue that has been earned but not yet received, needing adjustment in accounts.

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Profit or Loss Summary Impact

Adjustments to accrued expenses and revenues affect the Profit or Loss Summary, reflecting overall performance.

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Selling Expenses Section

Part of the Statement of Profit or Loss that includes expenses like advertising after adjustments are made.

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Statement of Financial Position

A financial statement that shows the company's assets, liabilities, and equity on a specific date.

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Accrued Revenues vs Accrued Expenses

Accrued revenues are earned but not received, while accrued expenses are incurred but not paid.

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Net Realizable Value (NRV)

The estimated selling price of an inventory item minus any selling costs.

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Lower of Cost and NRV

A rule that values inventory at the lower of its historical cost or NRV.

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Cost

The original price paid to acquire an inventory item.

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Gross Profit

Revenue from sales minus the cost of goods sold (COGS).

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Accrual Accounting

An accounting method where revenue is recognized when goods are sold, not when cash is received.

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Recognized Loss

An anticipated loss recorded in the accounts from the lower of cost and NRV.

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Journal Entry

A formal record of a financial transaction in the accounting system.

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Selling Costs

Expenses incurred when selling inventory, such as transportation and selling fees.

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Rent Revenue

Income earned from renting out property.

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Unearned Revenues

Money received for services not yet performed.

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Profit or Loss

Financial summary showing income vs expenses.

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Provision for Doubtful Debts

Account for estimating uncollectible receivables.

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Bad and Doubtful Debts

Amount of receivables that may not be collected.

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Adjusting Entries

Entries made to update account balances at period end.

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Closing Balance

Final amount in an account at year-end.

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Expense Recognition

Recording expenses in the period they occur.

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Accounts Receivable

Money owed to a business from its customers.

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Profit or Loss Summary

An account that summarizes profit or loss at the end of the accounting year.

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Accumulated Depreciation

The total depreciation of an asset recorded over its useful life.

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Straight Line Method

A method of calculating depreciation evenly over the asset's useful life.

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GST Clearing

The process of reconciling GST accounts to reflect net GST liabilities.

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Study Notes

Balance Day Adjustments

  • Businesses need to assess operating efficiency and future prospects
  • Accounting periods are arbitrary (e.g., yearly) to determine profitability
  • Not all transactions fit neatly into accounting periods—adjustments needed
  • Traditionally, matching expenses with revenues in the period was common
  • Modern approach focuses on whether items fit revenue/expense definitions
  • All relevant period items (assets, liabilities, revenues, expenses) are considered for accurate statements
  • Adjustments needed when daily transactions aren't recorded daily or if more information is needed for the accounting period

Adjusting Entries

  • Needed when general ledger isn't complete for the accounting period
  • Reasons for incompleteness:
    • Daily events may not be recorded daily (e.g., employee pay, supplies used)
    • External party transactions (e.g., interest earned, electricity) may be paid or received later than the month they are recorded
    • Time-based events (e.g., insurance, depreciation)

Inventory Adjustments

  • Inventory adjustments made for two reasons:
    • Ensuring correct valuation of inventory holdings (hand stock)
    • Stocktaking (Yearly) for losses or shortages of stock,
  • Inventory shortages/losses reduce gross profit and decrease inventory value (and is recorded with an adjusting entry)
  • Inventory gains increase gross profit and increase inventory value

Accrued Expenses

  • Expenses incurred but not paid in the current accounting period
  • Increase the expense account and create an accrued expense liability

Accrued Revenues

  • Revenues earned in the current period but not yet received
  • Create an asset account for accrued revenue (money owed to business)
  • Increase revenue amount in trial balance

Prepaid Expenses

  • Expenses paid in the current accounting period but used in the future
  • Increase related expense account and decrease related prepaid account
  • Reduces the pre-paid expense asset

Unearned Revenue

  • Revenues received in the current period, but will be earned in the future
  • Revenue account decreases and liability increases (unearned revenue)

Provision for Doubtful Debts

  • Represents estimated amount of uncollectible accounts receivable
  • Decrease provision for doubtful debts and bad and doubtful debts accounts
  • Ensure the closing balance is equal to the estimated portion of bad debts in the next accounting period

Depreciation

  • Method to spread asset cost over its useful (active) life
  • Expense is recognised as depreciation.
  • Accumulated depreciation is a contra-asset account.

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