4 - Accrual Accounting Concepts

Question 1

Revenue is often used interchangeably with the term _______.

Answer 1

Revenue is often used interchangeably with the term income.

Question 2

Revenue is normally the term used for income that results from a company’s ______ activities, such as the provision of ________ in a service company or the sale of __________ in a merchandising company.

Answer 2

Revenue is normally the term used for income that results from a company’s ordinary activities, such as the provision of services in a service company or the sale of merchandise (goods) in a merchandising company.

• gains = non-ordinary activities (subjective for firms)

Question 3

Both ______ and _____ include revenue recognition standards.

Answer 3

Both ASPE and IFRS include revenue recognition standards.

Question 4

5-step process to use to measure and report revenue:

1. Identify the _____ with the client or customer.
2. Identify the _______ obligations in the contract.
3. Determine the transaction ______.
4. Allocate the transaction ______ to the performance obligations in the _______.
5. Recognize ______ when (or as) the company satisfies the performance obligation.

Answer 4

5-step process to use to measure and report revenue:

1. Identify the contract with the client or customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations in the contract.
5. Recognize revenue when (or as) the company satisfies the performance obligation.

Question 5

A contract—whether informal or formal— includes the _____ of the transaction, the ____ of the transaction, and the ______ that must be met by the seller and the buyer before the obligation is considered to be satisfied.

Answer 5

A contract—whether informal or formal— includes the terms of the transaction, the price of the transaction, and the promises that must be met by the seller and the buyer before the obligation is considered to be satisfied.

Question 6

In a service company, revenue is recognized (recorded) at the time the service is _______.

Answer 6

In a service company, revenue is recognized (recorded) at the time the service is performed.

• merchandising –> when sold

Question 7

Expense recognition is linked to revenue recognition in that expenses are recognized, wherever possible, in the period in which a company makes efforts to generate revenues.

Answer 7

Expense recognition is linked to revenue recognition in that expenses are recognized, wherever possible, in the period in which a company makes efforts to generate revenues.

• matching

Question 8

Distribution of dividends to a shareholder is never an _____.

Answer 8

Distribution of dividends to a shareholder is never an expense.

Question 9

Accrual basis accounting means that transactions affecting a company’s financial statements are recorded in the _____ in which the events occur, rather than when the company actually receives or pays cash.

Answer 9

Accrual basis accounting means that transactions affecting a company’s financial statements are recorded in the periods in which the events occur, rather than when the company actually receives or pays cash.

Question 10

Under cash basis accounting, revenue is recorded only when cash is ______, and an expense is recorded only when cash is _______.

Answer 10

Under cash basis accounting, revenue is recorded only when cash is received, and an expense is recorded only when cash is paid.

• simple, but misleading b/c of timing
• not permitted in Canada

Question 11

Some events are not recorded daily, because it would not be ______ or _____ to do so.

Answer 11

Some events are not recorded daily, because it would not be practical or efficient to do so.

• recorded at the end of an accounting period

Ex. Use of supplies and the earning of salaries by employees.

Question 12

Some costs are not recorded during the accounting period because these costs expire with the passage of time rather than as a result of recurring daily transactions.

Ex. ?

Answer 12

Rent, insurance, and depreciation.

Question 13

Some items may be unrecorded during the accounting period because their amounts were unknown.

Ex. ?

Answer 13

Utility service bill that is not received until after the end of an accounting period, but covers services delivered in that period.

Question 14

Because many of the amounts listed in the trial balance are incomplete until adjusting entries are prepared, this trial balance is commonly referred to as an ________ trial balance.

Answer 14

Because many of the amounts listed in the trial balance are incomplete until adjusting entries are prepared, this trial balance is commonly referred to as an unadjusted trial balance.

Question 15

Adjusting entries can be classified as either ______ or _______.

Answer 15

Adjusting entries can be classified as either prepayments (prepaid expenses, unearned revenue) or accruals (accrued expenses, accrued revenues).

Question 16

Prepaid expenses: Expenses paid in ______ and recorded as ______ before they are used

Answer 16

Prepaid expenses: Expenses paid in cash and recorded as assets before they are used

Question 17

Unearned revenues: Cash received and recorded as ________ before revenue is earned

Answer 17

Unearned revenues: Cash received and recorded as liabilities before revenue is earned

Question 18

Accrued expenses: Expenses incurred but not yet ______ in cash or _______ through _______ ________ entries

Answer 18

Accrued expenses: Expenses incurred but not yet paid in cash or recorded through transaction journal entries

Question 19

Accrued revenues: Revenues earned but not yet _______ in cash or ________ through ________ _______ entries

Answer 19

Accrued revenues: Revenues earned but not yet received in cash or recorded through transaction journal entries

Question 20

Sometimes a company will pay a cost in advance, such as paying for a 12-month insurance policy. This is called a _________.

Answer 20

Sometimes a company will pay a cost in advance, such as paying for a 12-month insurance policy. This is called a prepayment.

Question 21

Prepayments are also known as ________.

Answer 21

Prepayments are also known as deferrals.

Question 22

Prepaid expenses (an asset) —expenses paid in cash ______ they are used or consumed.

Answer 22

Prepaid expenses (an asset) —expenses paid in cash before they are used or consumed.

• asset is increased/debited to show the service or benefit that the company will receive in the future and cash is decreased (credited)

Ex. insurance, supplies, advertising, and rent.

Question 23

Prepaid expenses ______ either with the passage of time (such as ______) or through use (such as _______).

Answer 23

Prepaid expenses expire either with the passage of time (such as insurance) or through use (such as supplies).

Question 24

A cost can be an ______ or an ______. If the cost has ______ _______ (that is, the benefits have not yet expired), it is an asset. If the cost has no _____ _______ (that is, the benefits have expired), it is an expense.

Answer 24

A cost can be an asset or an expense. If the cost has future benefits (that is, the benefits have not yet expired), it is an asset. If the cost has no future benefits (that is, the benefits have expired), it is an expense.

Question 25

Insurance payments (______) made in advance are recorded in the asset account ______ _______.

Answer 25

Insurance payments (premiums) made in advance are recorded in the asset account Prepaid Insurance.

Question 26

The purchase of supplies, such as paper and envelopes, results in an increase (a _____) to an ______ (Supplies) account.

Answer 26

The purchase of supplies, such as paper and envelopes, results in an increase (a debit) to an asset (Supplies) account.

Question 27

The period of service is called the ______ ____.

Answer 27

The period of service is called the useful life.

Ex. buildings and equipment

Question 28

Depreciation is the process of _______ the ______ of a long-lived or non-current asset, such as buildings and equipment, to expense over its _____ ______.

Answer 28

Depreciation is the process of allocating the cost of a long-lived or non-current asset, such as buildings and equipment, to expense over its useful life.

Question 29

A common practice for calculating depreciation expense for a period of time is to divide the ______ of the asset by its ____ _____. This is known as the ______-_____ ______ of depreciation.

Answer 29

A common practice for calculating depreciation expense for a period of time is to divide the cost of the asset by its useful life. This is known as the straight-line method of depreciation.

Question 30

Equipment is a ______ asset account.

Answer 30

Equipment is a contra asset account.

Question 31

A contra asset is a ________ asset account that ________ the asset account with which it is paired.

Answer 31

A contra asset is a negative asset account that offsets the asset account with which it is paired. The purpose of a contra asset account is to store a reserve that reduces the balance in the paired account.

Question 32

Every contra account has a normal balance ________ to that of the account to which it relates.

Answer 32

Every contra account has a normal balance opposite to that of the account to which it relates.

Question 33

Unearned revenues are also called ______ revenues.

Answer 33

Unearned revenues are also called deferred revenues.

Question 34

Adjusting entries for unearned revenues require a debit to a _______ account and a credit to a ________ account.

Answer 34

Adjusting entries for unearned revenues require a debit to a liability account and a credit to a revenue account.

Question 35

Accruals are recorded only by adjusting ______ ______.

Answer 35

Accruals are recorded only by adjusting journal entries.

Question 36

Accrued expenses are expenses that have been ________ but not yet ______ or _______ through transaction journal entries.

Answer 36

Accrued expenses are expenses that have been incurred but not yet paid or recorded through transaction journal entries.

Question 37

Accrued expenses are also referred as accrued ________ because both are created in the same ________ _____.

Answer 37

Accrued expenses are also referred as accrued payables because both are created in the same adjusting entry.

Question 38

Because accrued expenses are not recorded by a _______ ______ entry, an ______ _______ is required for two purposes:

(1) to record the ________ that exist at the end of the period, and
(2) to ________ the expenses that apply to the current accounting period.

Answer 38

Because accrued expenses are not recorded by a transaction journal entry, an adjusting entry is required for two purposes:

(1) to record the obligations that exist at the end of the period, and
(2) to recognize the expenses that apply to the current accounting period.

Question 39

Interest rates are always stated as an _______ rate.

Answer 39

Interest rates are always stated as an annual rate.

Question 40

Accrued revenues are revenues that have been ________ but not yet ________ through journal entries.

Answer 40

Accrued revenues are revenues that have been earned but not yet recorded through journal entries.

• impractical to record interest daily

Question 41

Accrued revenues are also referred to as accrued ______ because both are created in the same _______ _______.

Answer 41

Accrued revenues are also referred to as accrued receivables because both are created in the same adjusting entry.

Ex. legal services (client will not be billed until the service has been completed)

Question 42

Because accrued revenues are not recorded by a _________ journal entry, an ________ entry for accrued revenues is required for two purposes:

(1) to show the _______ that exists at the end of the period, and
(2) to ______ the revenue that has been earned during the period.

Answer 42

Because accrued revenues are not recorded by a transaction journal entry, an adjusting entry for accrued revenues is required for two purposes:

(1) to show the receivable that exists at the end of the period, and
(2) to record the revenue that has been earned during the period.

Question 43

It is also important to understand that adjusting entries never involve the _______ account.

Answer 43

It is also important to understand that adjusting entries never involve the Cash account.

Question 44

The title of the adjusted trial balance includes the name of the ______, the type of _____ ______, and the _____.

Answer 44

The title of the adjusted trial balance includes the name of the company, the type of trial balance, and the date.

Question 45

total shareholders’ equity =

(_____ ______ + _____ earnings;

retained earnings = _____ retained earnings + net _____ – ________ declared).

Answer 45

total shareholders’ equity =

(common shares + retained earnings;

retained earnings = opening retained earnings + net income – dividends declared).

Question 46

All statement of financial position accounts are considered _______ accounts.

Answer 46

All statement of financial position accounts are considered permanent accounts.

Question 47

Closing entries produce a ________ balance in each temporary account, in addition to _______ Retained Earnings to its ending balance.

Answer 47

Closing entries produce a zero balance in each temporary account, in addition to updating Retained Earnings to its ending balance.

Question 48

4 closing entries necessary to close the temporary accounts:

1. Close all _______ accounts to Income Summary
2. Close all ______ accounts to Income Summary
3. Close ______ ______ to Retained Earnings
4. Close ______ _______ to Retained Earnings

Answer 48

4 closing entries necessary to close the temporary accounts:

1. Close all revenue accounts to Income Summary
2. Close all expense accounts to Income Summary
3. Close Income Summary to Retained Earnings
4. Close Dividends Declared to Retained Earnings

Question 49

Do not close Dividends Declared to the Income Summary account along with expenses. Dividends declared are not ________ and do not affect ______ ______; they are a _______ of retained earnings.

Answer 49

Do not close Dividends Declared to the Income Summary account along with expenses. Dividends declared are not expenses and do not affect net income; they are a distribution of retained earnings.