Question 1

Expense recognition is tied to changes in assets and liabilities.

Accepted Answer

Expense recognition is indeed tied to changes in assets and liabilities, as it follows the matching principle, which dictates that expenses should be recognized when the revenues that they helped generate are recognized, often resulting in changes to assets (like cash or receivables) and liabilities.

Question 2

Accumulated Depreciation is a liability account and its normal account balance is a credit.

Accepted Answer

Accumulated Depreciation is a contra asset account, not a liability account, and its normal balance is indeed a credit, which offsets the asset account it is associated with.

Question 3

Revenue must be recognized when (or as) the company satisfies the performance obligation, regardless of whether or not the transaction price has been determined.

Accepted Answer

Revenue can only be recognized when the transaction price is determined, as it is essential to measure the amount of revenue to be recognized.

Question 4

The purchase of certain types of long-lived (non-current) assets is essentially a long-term prepayment for services.

Accepted Answer

Long-lived (non-current) assets such as buildings, machinery, and equipment are purchased by companies as a means to obtain the benefits and services they provide over a long period, effectively acting as a long-term prepayment for those services.

Question 5

An accounting transaction never affects more than one accounting time period.

Accepted Answer

Many accounting transactions can affect more than one accounting period, especially those that involve prepaid expenses, accruals, or deferrals.

Question 6

The balances of the Depreciation Expense and the Accumulated Depreciation accounts should always be the same.

Accepted Answer

Depreciation Expense is recorded annually to reflect the cost of using the asset during the period, while Accumulated Depreciation is a cumulative account that records the total depreciation taken on an asset since it was acquired, thus their balances are not the same.

Question 7

Since some costs are not recorded, adjusting entries are necessary.

Accepted Answer

Adjusting entries are necessary to record revenues and expenses in the period in which they occur, including those that have not been previously recorded by the end of the accounting period.

Question 8

The carrying amount of a depreciable asset is always equal to its actual value because depreciation is a valuation technique.

Accepted Answer

Depreciation is an accounting method for allocating the cost of a tangible asset over its useful life, not a technique for determining its current market value. The carrying amount reflects the asset's cost minus accumulated depreciation, which may not represent its actual value.

Question 9

Expense recognition always coincides with revenue recognition.

Accepted Answer

Expense recognition does not always coincide with revenue recognition due to the matching principle, which dictates that expenses should be recognized in the period in which they help generate revenues, not necessarily when the expenses are paid or revenues are received.

Question 10

The cost of any depreciable asset less accumulated depreciation reflects the carrying amount of the asset.

Accepted Answer

The carrying amount (or book value) of a depreciable asset is calculated by subtracting the accumulated depreciation from the cost of the asset. This reflects the asset's current value on the balance sheet.

Question 11

Under the accrual basis of accounting, expenses are only recognized when they are paid.

Accepted Answer

Under the accrual basis of accounting, expenses are recognized when they are incurred, not necessarily when they are paid. This means that an expense is recognized at the time the business receives goods or services, even if payment is made at a later date.

Question 12

Expenses paid before being used or consumed are initially recorded as liabilities.

Accepted Answer

Expenses paid before being used or consumed are initially recorded as assets, specifically as prepaid expenses, not liabilities.

Question 13

For a private company reporting under ASPE, adjusting entries must be prepared at least quarterly.

Accepted Answer

Under Accounting Standards for Private Enterprises (ASPE) in Canada, there is no specific requirement that adjusting entries must be prepared quarterly. Adjusting entries are typically prepared as part of the year-end closing process to ensure that the financial statements are accurate and complete, but the frequency can vary based on company policy or specific circumstances.

Question 14

Revenue recognition follows expense recognition.

Accepted Answer

Revenue recognition and expense recognition are guided by different principles in accounting. Revenue is recognized when it is earned and realizable, regardless of when cash is received, while expenses are recognized when they are incurred to generate revenue, following the matching principle.

Question 15

Revenue results when there is an increase in a liability or a decrease in an asset.

Accepted Answer

Revenue results from a company's primary operations, such as sales of goods or services, not from changes in liabilities or assets.

Question 16

Under the cash basis of accounting, revenue is only recognized when cash is received.

Accepted Answer

Under the cash basis of accounting, revenue is recognized when cash is actually received, regardless of when the services were performed or goods were delivered.

Question 17

When money is received from a customer prior to the delivery of goods or the performance of a service, it is recorded as revenue.

Accepted Answer

When money is received from a customer prior to the delivery of goods or the performance of a service, it is recorded as a liability (specifically, unearned revenue or deferred revenue) on the balance sheet, not as revenue. Revenue is recognized when the goods are delivered or the service is performed.

Question 18

Prepaid expenses are costs that are paid for before they are used.

Accepted Answer

Prepaid expenses are costs paid in advance for goods or services to be received in the future, recognized as assets on the balance sheet until they are incurred as expenses.

Question 19

Under the cash basis of accounting, expense recognition generally does not follow revenue recognition.

Accepted Answer

Under the cash basis of accounting, expenses are recognized when cash is paid out, not necessarily when they are incurred or when they directly relate to earning specific revenues, which differs from the accrual basis where expense recognition is more closely aligned with revenue recognition.

Question 20

Accounting divides the economic life of a business entity into time periods.

Accepted Answer

This concept, known as the Periodicity Assumption or Time Period Principle, allows businesses to measure and report their financial performance and position in discrete intervals, typically monthly, quarterly, or annually, facilitating comparison and analysis over time.

Quiz 4: Accrual Accounting Concepts