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Questions and Answers
When using the accrual basis of accounting, when should revenue be recognized?
When using the accrual basis of accounting, when should revenue be recognized?
What does the matching principle in accounting state?
What does the matching principle in accounting state?
If a company receives payment for a job before it is completed, which type of account is used?
If a company receives payment for a job before it is completed, which type of account is used?
A company paid $1,200 for a two-year insurance policy on January 1st, 2023. If the company's fiscal year ends on December 31st, what is correct journal entry on December 31st, 2023?
A company paid $1,200 for a two-year insurance policy on January 1st, 2023. If the company's fiscal year ends on December 31st, what is correct journal entry on December 31st, 2023?
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A company starts with $3,000 in supplies and purchases an additional $1,500. At the end of the year they have $1,000 in supplies. What is the supplies expense for the year?
A company starts with $3,000 in supplies and purchases an additional $1,500. At the end of the year they have $1,000 in supplies. What is the supplies expense for the year?
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A customer pays $600 on November 1st for a service, on February 1st the service ends. If the company's fiscal year ends on Dec 31st, what is the journal entry to record earned revenue on Dec 31st?
A customer pays $600 on November 1st for a service, on February 1st the service ends. If the company's fiscal year ends on Dec 31st, what is the journal entry to record earned revenue on Dec 31st?
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Which of the following best describes adjusting entries?
Which of the following best describes adjusting entries?
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When must adjusting entries be recorded?
When must adjusting entries be recorded?
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Study Notes
Key Accounting Principles
- Revenue Recognition Principle: Revenue is recorded when earned, not when cash is received.
- Matching Principle: Expenses should be recorded in the same period as the revenues they generate.
- Unearned Revenue: Recorded when payment is received before services are completed, adjusted when the service is delivered.
- Prepaid Expenses: Payment made before receiving a service, expense recorded when the service is used.
Cash vs. Accrual Accounting
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Example (Home Renovation):
- Year 1: 80,000inexpensespaid,80,000 in expenses paid, 80,000inexpensespaid,110,000 billed, no payment received.
- Accrual: Year 1: 110,000income(revenuewhenearned).Year2:110,000 income (revenue when earned). Year 2: 110,000income(revenuewhenearned).Year2:0 income.
- Cash: Year 1: 0income.Year2:0 income. Year 2: 0income.Year2:110,000 income (revenue when cash is received).
Adjusting Entries
- Purpose: Update accounts at the end of a period to reflect accurate amounts. Recorded before financial statements.
Supplies Adjustment
- Example Calculation: Beginning supplies: 5,000,Purchasesduringyear:5,000, Purchases during year: 5,000,Purchasesduringyear:2,000, Ending supplies: 3,000.Suppliesused:3,000. Supplies used: 3,000.Suppliesused:4,000 (5,000 + 2,000 - 3,000).
- Journal Entry: Debit Supplies Expense 4,000,CreditSupplies4,000, Credit Supplies 4,000,CreditSupplies4,000
Prepaid Expenses Adjustment
- Example (Insurance): One-year insurance policy (3,600)purchasedMarch1,2018.YearendDecember31,2018.Coveragefor10months.Expense=(10/12)∗3,600) purchased March 1, 2018. Year end December 31, 2018. Coverage for 10 months. Expense = (10/12) * 3,600)purchasedMarch1,2018.YearendDecember31,2018.Coveragefor10months.Expense=(10/12)∗3,600 = $3,000.
- Journal Entry: Debit Insurance Expense 3,000,CreditPrepaidInsurance3,000, Credit Prepaid Insurance 3,000,CreditPrepaidInsurance3,000
Unearned Revenue Adjustment
- Example (Driveway Plowing): Customer pays 1,200December1,2017(3months).YearendsDecember31,2017.Revenueearned=(1,200 December 1, 2017 (3 months). Year ends December 31, 2017. Revenue earned = (1,200December1,2017(3months).YearendsDecember31,2017.Revenueearned=(1,200 / 3 months) * 1 month = $400.
- Journal Entry: Debit Unearned Revenue 400,CreditServiceRevenue400, Credit Service Revenue 400,CreditServiceRevenue400
Late Arriving Invoices Adjustment
- Example: January 15, 2018, invoices from 2017 arrive—Telephone bill 120,Utilitybill120, Utility bill 120,Utilitybill230.
- Journal Entry: Debit Telephone Expense 120,DebitUtilitiesExpense120, Debit Utilities Expense 120,DebitUtilitiesExpense230, Credit Accounts Payable $350 (assuming bills weren't previously recorded).
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Description
Test your knowledge on key accounting principles such as revenue recognition and the matching principle. Understand the differences between cash and accrual accounting through practical examples. This quiz is designed to help reinforce your understanding of foundational accounting concepts.
