Adjusting The Accounts Learning Objectives 3-1

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Questions and Answers

Which accounting principle states that efforts (expenses) should be matched with results (revenues)?

Revenue recognition principle

Time period assumption

Accrual-basis accounting

Expense recognition principle (correct)

What does the time period assumption state in accounting?

Companies record transactions in the period in which the events occur

Companies record transactions when cash is paid or received

Accountants divide the economic life of a business into artificial time periods (correct)

Efforts (expenses) should be matched with results (revenues)

What is the purpose of accrual-basis accounting?

Record transactions when cash is paid or received

Divide a business's economic life into artificial time periods

Match expenses with revenues (correct)

Start the accounting year on January 1

What is the concept behind the expense recognition principle?

Expenses should be matched with revenues Signup and view all the answers

In accrual-basis accounting, when are expenses typically recognized?

When services are performed Signup and view all the answers

What does the revenue recognition principle focus on?

Recognizing revenues when services are performed Signup and view all the answers

What is the main purpose of the time period assumption in accounting?

To divide the economic life of a business into artificial time periods Signup and view all the answers

In accrual-basis accounting, when are transactions recorded?

In the period in which events occur Signup and view all the answers

According to accrual-basis accounting, when should revenue be recognized?

When it is earned Signup and view all the answers

What is the purpose of matching expenses with revenues in accounting?

To show the true cost of generating revenue Signup and view all the answers

Why do most large companies prepare both quarterly and annual financial statements?

To satisfy regulatory requirements Signup and view all the answers

What is the fiscal year in accounting?

A year that corresponds with the calendar year Signup and view all the answers

Which of the following statements about the accrual basis of accounting is true?

Events that change a company’s financial statements are recorded in the periods in which the events occur. Signup and view all the answers

Why are adjusting entries necessary in accounting?

To have correct balances in balance sheet and income statement accounts at the end of an accounting period. Signup and view all the answers

What principle guides revenue recognition in accounting?

Recording revenue when the performance obligation is met. Signup and view all the answers

When should expenses be recognized according to accounting standards?

In the period in which they are incurred. Signup and view all the answers

Which of the following is NOT consistent with generally accepted accounting principles (GAAP)?

Only recording revenue upon cash receipt. Signup and view all the answers

What is the primary purpose of ensuring that balance sheet and income statement accounts have correct balances through adjusting entries?

To provide accurate financial information for decision-making. Signup and view all the answers

Study Notes

Accountants use the accrual basis of accounting to record transactions when they occur, not necessarily when cash is exchanged.
Adjusting entries are necessary to ensure that revenue recognition and expense recognition principles are followed accurately.
The time period assumption divides the economic life of a business into artificial time periods like months, quarters, or years.
Adjusting entries can be categorized into deferrals (prepaid expenses, unearned revenues) and accruals (accrued revenues, accrued expenses).
Adjusting entries are essential to update the trial balance with accurate and complete data before preparing financial statements.

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Description

Test your knowledge on the accrual basis of accounting, preparing adjusting entries for deferrals and accruals, and understanding the nature of an adjusted trial balance. Explore the reasons for adjusting entries and the Time Period Assumption in accounting.