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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?
- When the funds are deposited into the company's bank account.
- Whenever the company decides to recognize the payment.
- When the job is completed and the revenue is earned. (correct)
- When payment is received from the customer.
What does the matching principle in accounting state?
What does the matching principle in accounting state?
- Assets should always equal liabilities plus equity.
- All transactions must be recorded at historical cost.
- Revenue should be recorded when it is received.
- Expenses should be recorded in the same period as the revenues they help generate. (correct)
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?
- Accounts Receivable
- Unearned Revenue (correct)
- Service Revenue
- Prepaid Expenses
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?
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?
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?
Which of the following best describes adjusting entries?
Which of the following best describes adjusting entries?
When must adjusting entries be recorded?
When must adjusting entries be recorded?
Flashcards
Revenue Recognition Principle
Revenue Recognition Principle
Revenue is recognized when earned, regardless of when cash is received.
Matching Principle
Matching Principle
Expenses are matched with the revenues they help generate in the same accounting period.
Unearned Revenue
Unearned Revenue
A liability account used when a company receives payment before providing goods or services.
Prepaid Expenses
Prepaid Expenses
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Cash Basis Accounting
Cash Basis Accounting
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Accrual Basis Accounting
Accrual Basis Accounting
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Adjusting Entries
Adjusting Entries
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Prepaid Expenses Adjustment
Prepaid Expenses Adjustment
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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
- 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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