4. Accrual accounting and adjusting entries

Question 1

cash basis of accounting

Answer 1

Records revenues when cash is received and records expenses when cash is paid.

Question 2

accrual basis of accounting

Answer 2

Records revenues when they are earned and records expenses when they are incurred.

Question 3

adjusting journal entries

Answer 3

Entries made in the general journal to record revenues that have been earned but not recorded and expenses that have been incurred but not recorded.

Question 4

When a company receives cash before it provides the service, it has a ________ ________.

Answer 4

When a company receives cash before it provides the service, it has a deferred revenue.

(sometimes known as revenue received in advance or unearned revenue).

Question 5

When a company receives cash before it provides a service, the company should always increase a _______ account for the amount received.

Answer 5

When a company receives cash before it provides a service, the company should always increase a liability account for the amount received.

Question 6

As the company provides the service, the _______ account is adjusted down (decreased) and the related _______ account is adjusted up (increased).

Answer 6

As the company provides the service, the liability account is adjusted down (decreased) and the related revenue account is adjusted up (increased).

Question 7

When a company earns a revenue before it receives cash, it has an ________ ________.

Answer 7

When a company earns a revenue before it receives cash, it has an accrued revenue.

Question 8

The term ‘accrue’ means to ________ or ________.

An accrued revenue is another name for a ________.

Answer 8

The term ‘accrue’ means to accumulate or increase.

An accrued revenue is another name for a receivable.

Question 9

When a company earns a revenue before it receives cash, the company should increase a _______ _______ (_______) and a _______ account for the amount earned.

Answer 9

When a company earns a revenue before it receives cash, the company should increase a receivable account (asset) and a revenue account for the amount earned.

Question 10

When the company collects the receivable, the receivable account is _________ and the cash account is _________.

Answer 10

When the company collects the receivable, the receivable account is decreased and the cash account is increased.

Question 11

When a company pays for a resource before it uses or consumes it, the company has a ________ ________.

(e.g. paying ________)

Answer 11

When a company pays for a resource before it uses or consumes it, the company has a deferred expense.

(e.g. paying rent)

Question 12

A deferred expense is nothing more than an _______ – a resource to be used.

Answer 12

A deferred expense is nothing more than an asset – a resource to be used.

Question 13

An accrued expense is another name for a _______.

(e.g. paying _______)

Answer 13

An accrued expense is another name for a liability.

(e.g. paying employees)

Question 14

When a company incurs an expense before it pays cash, the company should always increase a _______ account and an _______ account for the amount incurred.

Answer 14

When a company incurs an expense before it pays cash, the company should always increase a payable account and an expense account for the amount incurred.

Question 15

The purpose of adjusting entries is to record revenues that have been _______ but not recorded and expenses that have been _______ but not recorded.

Answer 15

The purpose of adjusting entries is to record revenues that have been earned but not recorded and expenses that have been incurred but not recorded.

Question 16

The purpose of adjusting entries is to record _______ that have been earned but not recorded and _______ that have been incurred but not recorded.

Answer 16

The purpose of adjusting entries is to record revenues that have been earned but not recorded and expenses that have been incurred but not recorded.

Question 17

Every adjusting journal entry will affect at least one _______ or one _______ account.

In addition, every adjusting journal entry will affect at least one _______ or _______ account.

This means that every adjusting entry will affect at least one account from the _______ _______ and one account from the _______ _______.

Answer 17

Every adjusting journal entry will affect at least one revenue or one expense account.

In addition, every adjusting journal entry will affect at least one asset or liability account.

This means that every adjusting entry will affect at least one account from the income statement and one account from the balance sheet.

Question 18

Adjusting journal entries arise because the timing of ______ and ______ recognition differs from the exchange of cash.

Therefore, ______ will never be increased or decreased in an adjusting entry.

Answer 18

Adjusting journal entries arise because the timing of revenue and expense recognition differs from the exchange of cash.

Therefore, cash will never be increased or decreased in an adjusting entry.

Question 19

closing process

Answer 19

The process of transferring all revenue, expense and dividend account balances to the Retained Earnings account.

Question 20

temporary accounts

Answer 20

Accounts that accumulate balances only for the current period.

(revenue, expense and dividend accounts)

Question 21

________, ________ and ________ accounts are all temporary accounts.

After the period ends and financial statements are prepared, all temporary accounts must be reset to ________ for the start of the next period.

Answer 21

Revenue, expense and dividend accounts are all temporary accounts.

After the period ends and financial statements are prepared, all temporary accounts must be reset to zero for the start of the next period.

Question 22

The closing process is the mechanism that updates the actual ________ ________ account balance in the ledger.

Answer 22

The closing process is the mechanism that updates the actual Retained Earnings account balance in the ledger.

Question 23

closing entries

Answer 23

Entries made in the journal and posted to the ledger that eliminate the balances in all temporary accounts and transfer those balances to the Retained Earnings account

Question 24

accounting cycle

Answer 24

The sequence of steps in which an accounting information system captures, processes and reports a company’s accounting transactions during a period.