Question 1

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 as a liability. Accrued revenue represents income earned but not yet received, and it is recorded as an asset, indicating both have been recorded but represent different stages of the revenue cycle.

Question 2

The matching principle supports matching expenses with the related revenues.

Accepted Answer

The matching principle is a fundamental accounting concept that requires expenses to be recorded in the same accounting period as the related revenues. This ensures that the financial statements reflect the accurate financial performance of an organization.

Question 3

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

Accepted Answer

Although GAAP requires the accrual basis of accounting, some businesses may choose to use the cash basis because it is simpler and easier to understand. However, they should be aware that financial statements prepared using cash basis accounting may not accurately reflect the company's true financial position or performance.

Question 4

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 concept that requires expenses to be recorded in the same period as the related revenue is recognized. This principle ensures that financial statements accurately reflect the income earned and expenses incurred during a specific period.

Question 5

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 states that revenue should be recognized when it is earned and when it is measurable, regardless of when payment is received. This means that revenue can be recognized even if payment is received at a later date or in installments.

Question 6

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

Accepted Answer

For large businesses, the accrual basis of accounting is generally preferred as it provides a more accurate picture of the company's financial performance and position. The cash basis may be used for smaller businesses or certain specific circumstances.

Question 7

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, the credit portion could also be to a revenue, expense, or equity account depending on the specific adjusting entry needed. It does not have to be to a liability account.

Question 8

An example of deferred revenue is Unearned Rent.

Accepted Answer

Unearned Rent is an example of deferred revenue because the rent has been collected in advance but the services (renting the property) have not yet been provided. The revenue will be recognized as the property is rented out over time.

Question 9

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

Accepted Answer

The adjusting process is the process of updating accounts at the end of an accounting period, before the financial statements are prepared.

Question 10

Adjusting entries affect only expense and asset accounts.

Accepted Answer

Adjusting entries can affect both expense and asset accounts, as well as liability and revenue accounts. The purpose of adjusting entries is to bring the accounts up to date and reflect accurate financial information.

Question 11

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

Accepted Answer

Adjusting entries are made to update the accounts for items that have been incurred or earned but not yet recorded in the accounting system. An adjusting entry for an expense account would ensure that the expense is reported in the correct period, based on when it was incurred.

Question 12

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

Accepted Answer

This is the principle of accrual accounting, which requires that revenues and expenses be recognized in the same period in which they are earned or incurred, regardless of when payment is received or made. This ensures that financial statements accurately reflect the financial performance of a business for a given period.

Question 13

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

Accepted Answer

Adjusting entries affect both balance sheet and income statement accounts. They are necessary to ensure that financial statements accurately reflect the company's financial position and performance.

Question 14

Generally accepted accounting principles require accrual-basis accounting.

Accepted Answer

Generally accepted accounting principles (GAAP) require businesses to use accrual-basis accounting, which means that transactions are recognized when they occur, not when cash is received or paid. This method provides a more accurate picture of a company's financial health over time, as it takes into account both current and future obligations and revenue.

Question 15

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

Accepted Answer

Deferrals refer to transactions where the recognition of an expense or revenue is delayed to a later accounting period. This can be done through the use of prepaid expenses or unearned revenues.

Question 16

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 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 accrual basis of accounting. The cash basis of accounting records revenues and expenses when cash is received or paid out.

Question 17

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

Accepted Answer

Accrued expenses are expenses that have been incurred but not yet paid, so an adjusting entry to accrue them will increase the amount of liabilities on the balance sheet.

Question 18

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 recorded when it is earned, regardless of when the cash is received. This is important for accurate financial statements and to avoid misleading investors or stakeholders.

Question 19

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

Accepted Answer

Adjusting entries are used to ensure that revenues and expenses are reported in the correct accounting period according to the accrual basis of accounting. This means that revenue should be reported when it is earned, regardless of when cash is received, and adjusting entries are used to record this timing difference.

Question 20

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

Accepted Answer

Accruals help to ensure that financial statements reflect the correct amount of revenues earned and expenses incurred in a given period, even if they have not yet been recorded in the accounting system. This is necessary to provide users of the financial statements with a more accurate picture of the company's financial performance and position.

Quiz 3: Adjustments: Accruals and Deferrals

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.