Financial Accounting and Reporting Batch 96

Questions and Answers

What is the purpose of adjusting entries?

To correct errors made during the initial recording.

To eliminate temporary accounts at the end of the fiscal year.

To ensure that revenues and expenses are recorded in the period they occur. (correct)

To transfer amounts from one account to another without affecting financial statements.

Which accounts are affected by the adjusting entry for ending inventory?

One nominal account and one asset account.

One real account and one nominal account. (correct)

Two real accounts.

Two nominal accounts.

What is the correct adjusting entry for depreciation?

Debit accumulated depreciation and credit expense.

Debit depreciation and credit expense.

Debit asset and credit cash.

Debit depreciation and credit accumulated depreciation. (correct)

What is the adjusting entry for accrued expenses?

Debit expenses and credit accrued expenses. Signup and view all the answers

Which option describes the adjusting entry for prepaid expenses using the expense method?

Debit expenses and credit prepaid expenses. Signup and view all the answers

What is the adjusting entry for bad debts?

Debit doubtful accounts and credit accounts receivable. Signup and view all the answers

When using the asset method for adjusting prepaid expenses, what entry should be made?

Debit expenses and credit prepaid expenses. Signup and view all the answers

Which of the following is true about adjusting entries?

They are essential for proper financial reporting. Signup and view all the answers

What is the first step in the accounting process?

Adjusting entries are recorded. Signup and view all the answers

Which statement correctly describes how debits function in accounting?

Increase assets and expenses and decrease liabilities, revenue and equity. Signup and view all the answers

What does a general journal do?

Chronologically lists transactions and other events in terms of debit and credit. Signup and view all the answers

Which of the following combinations of journal entries is not possible?

Decrease liability and decrease in asset. Signup and view all the answers

What is the definition of posting in accounting?

Transferring information from journal to the general ledger. Signup and view all the answers

How is a general ledger best defined?

The entire group of accounts. Signup and view all the answers

Which scenario may not allow a trial balance to prove that debits and credits are equal?

An amount could be entered in the wrong account. Signup and view all the answers

Which option best describes a nominal account?

It encompasses temporary accounts used to track income and expenses. Signup and view all the answers

What is the adjusting entry for accrued income?

Debit income and credit accrued income Signup and view all the answers

What is the adjusting entry for unearned income using the income method?

Debit unearned income and credit income Signup and view all the answers

Which of the following describes the adjusting entry for unearned income if the liability method is used?

Debit unearned income and credit income Signup and view all the answers

When are closing entries made?

All choices are correct about closing entries Signup and view all the answers

Which type of adjusting entries do reversing entries typically apply to?

All accruals Signup and view all the answers

A reversing entry should never be made for an adjusting entry that:

Adjusts expired costs from an asset account to an expense account Signup and view all the answers

Which entry is correct for recording accrued expenses?

Debit expenses and credit accrued expenses Signup and view all the answers

The main objective of closing entries is to:

Transfer net income to retained earnings Signup and view all the answers

Study Notes

Accounting Process

The first step in the accounting process is recording adjusting entries, followed by preparing financial statements, closing nominal accounts, and finally preparing a post-closing trial balance.
Debits increase assets and expenses, while they decrease liabilities, revenue, and equity.
A general journal chronologically records transactions and events, detailing the associated debit and credit amounts.
Valid combinations of journal entries include an increase in asset with an increase in liability, while a decrease in both liability and asset is also possible.
Posting involves transferring data from the journal to the general ledger.
A general ledger is defined as the entire group of accounts, encompassing all assets, liabilities, and equity.
A trial balance confirms that debits and credits are equal, although it may not detect errors like incorrect account entries, duplicate transactions, or omitted entries.
Adjusting entries typically affect one nominal account alongside one real account or can involve two nominal accounts.

Adjusting Entries

The adjusting entry for ending inventory requires debiting the ending inventory and crediting the income summary.
For doubtful accounts, the entry involves debiting doubtful accounts and crediting the allowance for doubtful accounts.
Depreciation requires an adjusting entry of debiting depreciation and crediting accumulated depreciation.
Accrued expenses adjusting entry is made by debiting expenses and crediting accrued expenses.
For prepaid expenses using the expense method, the entry is to debit expenses and credit prepaid expenses.
Under the asset method for prepaid expenses, debit prepaid expenses and credit expenses.
Accrued income adjustments involve debiting accrued income and crediting income.
Unearned income adjustments differ based on method: debit unearned income and credit income for the income method; and debit income and credit unearned income for the liability method.

Closing Entries and Reversing Entries

Closing entries occur at the end of the accounting period to reset nominal accounts to zero, following the preparation of adjusting entries and financial statements.
Reversing entries specifically apply to accrued income and accrued expenses, while deferrals and accrual adjustments may also have reversing entries.
A reversing entry should not be made for adjusting entries that accrue unrecorded revenue or expenses, or those that adjust costs from an asset account to an expense account.

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Description

Test your knowledge of the accounting process with this quiz designed for Batch 96 of the CPA Review School of the Philippines. Cover essential topics such as financial statements, closing accounts, and adjusting entries that are critical for understanding financial accounting.