3. Adjusting Entries

Question 1

what is an operating cycle

Answer 1

• a cash-to-cash sequence of transactions

Question 2

what is accrual accounting

Answer 2

• the process of recognizing revenues when earned and expenses when incurred
• regardless of when cash is exchanged

Question 3

what does the matching principle require

Answer 3

• that expenses are reported in the same period as the revenues they helped generate

Question 4

what is the difference between accrued revenue and accrued expenses

Answer 4

• accrued revenue is revenue that has been earned but has not been collected or recorded yet
• accrued expenses are expenses that have been incurred but have not been paid or recorded yet

Question 5

where are adjustments recorded

Answer 5

• in adjusting entries

Question 6

what is useful life

Answer 6

• an estimate of how long an asset will be used to produce benefits for the business

Question 7

what is depreciation

Answer 7

• the process of allocating the cost of a long-lived asset over the period of time its expected to be used

Question 8

what is a contra account

Answer 8

• a general ledger account that is related to another account

Question 9

why is land often referred to as a non-depreciable asset

Answer 9

• because its benefits dont decrease over time

Question 10

what are the columns in an adjusted trial balance

Answer 10

• account number and corresponding account
• unadjusted trial balance
• adjustments
• adjusted trial balance

Question 11

where does the adjusted trial balance fit in the accounting cycle

Answer 11

• after an unadjusted trial balance is prepared to ensure total debits equal total credits
• the unadjusted account balances are analyzed and adjusting entries are journalized in the general journal and posted to the general ledger
• the adjusted trial balance is then prepared to prove the equality of debits and credits

Question 12

after the adjusted trial balance is used to prepare financial statements, what are two more steps in the accounting cycle

Answer 12

• closing entries are journalized and posted
• a post-closing trial balance is prepared

Question 13

what do closing entries do

Answer 13

• they transfer each revenue and expense account balance
• as well as any balance in the dividend account
• into retained earnings

Question 14

why are revenues, expenses and dividends accounts referred to as temporary accounts

Answer 14

• because their balances are zeroed at the end of each accounting period

Question 15

which kinds of balance sheet accounts are permanent accounts, having their continuing balance from one fiscal year to the next

Answer 15

• cash and retained earnings accounts

Question 16

what are the 4 entries in the closing process relating to the income summary

Answer 16

• 1: close the revenue accounts to the income summary account
• 2: close the expense accounts to the income summary account
• 3: close the income summary account to the retained earnings account
• 4: close the dividends account to retained earnings

Question 17

what is the main characteristic of post-closing trial balances

Answer 17

• only permanent accounts remain

Question 18

what are the 5 types of adjusting entries

Answer 18

• adjust prepaid assets
• adjust unearned liabilities
• adjust plant and equipment assets
• adjust accrued revenues
• adjust accrued expenses