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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    Balance Day Adjustments PDF

    Description

    This quiz covers the purpose and effects of adjusting entries, particularly accrued expenses and revenues, on financial statements. Explore how these adjustments influence the balance sheet, income statement, and cash flow. Test your knowledge on correct journal entries and the implications of inventory adjustments as well.

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