Questions and Answers
What is the system of preparing financial statements based on recognizing revenues when the cash is received and reporting expenses when the cash is paid called?
cash basis accounting
Financial statements are typically prepared in the following order: What is the correct sequence?
What do adjusting entries affect?
both income statement and balance sheet accounts
What is a classified balance sheet?
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Which of the following accounts would not be impacted by adjusting journal entries?
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What is the entry to close the dividend account at the end of the year for Awn Services which paid a dividend of $8,700?
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Which of the following accounts would be closed at the end of the accounting period?
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What is the adjusting entry to record the earned but unpaid salaries of employees at the end of an accounting period?
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Which of the following statements regarding financial statement preparation is false?
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What is the end-of-period adjusting entry to record the portion of unearned legal fees that have been earned?
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Study Notes
Cash Basis Accounting
- Recognizes revenues when cash is received and expenses when cash is paid.
- Used primarily by small businesses and for tax purposes.
Financial Statement Preparation Order
- Typically organized as follows: income statement, statement of retained earnings, and balance sheet.
- This sequence reflects the flow of financial information.
Adjusting Entries
- Necessary for accurate financial reporting, affecting both income statement and balance sheet accounts.
- Ensure that all revenues and expenses are recognized in the correct accounting period.
Classified Balance Sheet
- Organizes assets and liabilities into important subgroups for clarity.
- Common categories include current and non-current assets, as well as current and long-term liabilities.
Impact of Adjusting Journal Entries
- Certain accounts, such as cash, are generally not affected by adjusting entries.
- Adjusting entries typically involve revenue, expenses, receivables, or payables.
Closing Dividend Account Entry
- To close the dividend account, debit retained earnings and credit dividends by the amount paid.
- Example transaction: Debit retained earnings $8,700, Credit dividends $8,700.
Accounts Closed at Period-End
- Temporary accounts, such as service revenue, are closed at the end of the accounting period.
- This process resets the balances for the next accounting period.
Adjusting Entry for Unpaid Salaries
- At the end of an accounting period, record earned but unpaid salaries with an adjusting entry.
- Example transaction: Debit salaries expense and Credit salaries payable.
False Statement in Financial Statement Preparation
- Financial statements are not prepared with the balance sheet first; the income statement is prepared first.
- Adjusted trial balances facilitate the preparation of financial statements.
Adjusting Entry for Unearned Legal Fees
- Record earned legal fees from advance payments by adjusting unearned legal fees.
- Example transaction: Debit unearned legal fees and Credit legal fees earned to reflect the income earned in the period.
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Description
This quiz covers essential concepts of cash basis accounting, financial statement preparation, adjusting entries, and classified balance sheets. It provides a comprehensive overview for those studying accounting principles and practices. Understand the importance of adjusting journal entries in financial reporting accurately.
