Question 1

Accruals are needed when an unrecorded expense has been incurred or an unrecorded revenue has been earned.

Accepted Answer

Accruals are journal entries made to record revenue or expenses that have been earned or incurred but have not yet been recorded in the accounting system. They are necessary to ensure that financial statements reflect the true financial position of the company.

Question 2

Even though GAAP requires the accrual basis of accounting, some businesses prefer using the cash basis of accounting.

Accepted Answer

While GAAP requires the accrual basis of accounting, some businesses may choose to use the cash basis for simplicity or because it better reflects their financial situation. However, they may need to make adjustments to their financial statements to comply with GAAP if they use cash basis accounting.

Question 3

If the debit portion of an adjusting entry is to an asset account, then the credit portion must be to a liability account.

Accepted Answer

If the debit portion of an adjusting entry is to an asset account, then the credit portion must be to a contra asset or an equity account, not necessarily a liability account.

Question 4

The system of accounting where revenues are recorded when services have been performed or products have been delivered to customers and expenses are recorded when they are incurred is called the cash basis of accounting.

Accepted Answer

The system of accounting described in the statement is actually the accrual basis of accounting, not the cash basis. In cash basis accounting, revenues and expenses are recorded when cash is received or paid out.

Question 5

Generally accepted accounting principles require accrual-basis accounting.

Accepted Answer

Accrual-basis accounting is required by generally accepted accounting principles, which means that revenue and expenses are recorded when earned or incurred, regardless of when the cash is received or paid. This method provides a more accurate picture of a company's financial position and performance.

Question 6

An example of deferred revenue is Unearned Rent.

Accepted Answer

Unearned Rent is an example of deferred revenue because it represents money received in advance for rent that has not yet been earned. It is classified as a liability until the rental period has begun and the revenue can then be recognized.

Question 7

An adjusting entry would adjust revenue so it is reported when earned and not when cash is received.

Accepted Answer

Adjusting entries are made to ensure that the financial statements accurately reflect the company's financial position and performance. One type of adjusting entry is to recognize revenue when it is earned, not just when cash is received. This is in accordance with the accrual basis of accounting, which requires revenue to be recognized when it is earned, regardless of when cash is received.

Question 8

The matching principle requires expenses be recorded in the same period that the related revenue is recorded.

Accepted Answer

The matching principle is a fundamental accounting principle that requires expenses to be recognized in the same period as the related revenue. This principle ensures that the income statement accurately reflects the results of operations for a given period.

Question 9

Adjusting entries affect only expense and asset accounts.

Accepted Answer

Adjusting entries affect both expense and asset accounts as well as liability and revenue accounts.

Question 10

For most large businesses, the cash basis of accounting will provide accurate financial statements for user needs.

Accepted Answer

For most large businesses, the accrual basis of accounting is preferred as it provides a more accurate picture of the company's financial situation. The cash basis may be used for small businesses or those with simple financial transactions.

Question 11

An adjusting entry would adjust an expense account so the expense is reported when incurred.

Accepted Answer

Adjusting entries are made to ensure that financial statements reflect the correct financial position of a company. An adjusting entry may adjust an expense account so that the expense is reported when it is incurred, even if the cash payment for the expense has not yet been made. This ensures that expenses are properly matched to the period in which they were incurred, which is a key accounting principle.

Question 12

An adjusting entry to accrue an incurred expense will affect total liabilities.

Accepted Answer

Accruing an incurred expense means recognizing an expense that has been incurred but not yet paid. This increases the company's total liabilities as it represents an obligation that must be paid in the future.

Question 13

The updating of accounts when financial statements are prepared is called the adjusting process.

Accepted Answer

The adjusting process involves updating accounts in preparation for financial statements.

Question 14

The revenue recognition principle states that revenue should be recorded in the same period as the cash is received.

Accepted Answer

The revenue recognition principle states that revenue should be recognized when it is earned, regardless of when cash is received. This means that revenue should be recorded when goods or services are delivered or rendered, regardless of whether payment has been received.

Question 15

Revenues and expenses should be recorded in the same period to which they relate.

Accepted Answer

This is the matching principle of accounting which states that revenues should be recognized when earned and expenses should be recognized when incurred, regardless of when the cash is actually received or paid. This ensures accurate financial reporting and reflects the true financial position of the entity.

Question 16

Adjusting entries affect balance sheet accounts to the exclusion of income statement accounts.

Accepted Answer

Adjusting entries affect both balance sheet accounts and income statement accounts. They are recorded at the end of an accounting period to ensure that the financial statements accurately reflect the accounts' balances and are typically related to accrued expenses or revenue, prepayments, and depreciation or amortization.

Question 17

Deferrals are recorded transactions that delay the recognition of an expense or revenue.

Accepted Answer

Deferrals involve delaying the recognition of an expense or revenue, and are therefore recorded as such.

Question 18

The matching principle supports matching expenses with the related revenues.

Accepted Answer

The matching principle states that expenses should be recognized and recorded in the same period as the related revenues. This helps to accurately reflect the true financial performance of a company in a specific period.

Question 19

The revenue recognition principle requires that the reporting of revenue be included in the period when cash for the service is received.

Accepted Answer

The revenue recognition principle requires that revenue be recognized in the period when the service is provided or the goods are delivered, regardless of when payment is received. Cash receipt may occur before or after the service is provided, but revenue should be recognized when the service is performed, not when cash is received.

Question 20

The difference between deferred revenue and accrued revenue is that accrued revenue has been recorded and needs adjusting and deferred revenue has never been recorded.

Accepted Answer

Deferred revenue refers to money received by a company for goods or services yet to be delivered or performed, thus it has been recorded on the balance sheet as a liability. Accrued revenue represents income earned but not yet received, and it is recorded as an asset on the balance sheet. Both require adjusting entries to reflect the actual revenue recognition in accordance with the matching principle.

Quiz 3: The Adjusting Process