Accounting Made Simple 13

Question 1

1. What is the major shortcoming of the CASH METHOD (as opposed to the ACCRUAL METHOD)?

Answer 1

Distortions of economic reality due to the frequent time lag between a service being performed and the service being paid for.

Question 2

2. What is an “ACCRUAL”?

Answer 2

Whenever an EXPENSE is recorded prior TO ITS BEING PAID FOR, the Journal entry is referred to as an ACCRUAL, hence the “ACCRUAL METHOD.”

Question 3

3. Checklist Construction pays their supervisor monthly, on the 15th of every month. In July, they owe 10K in salary. The Accrual entry is:

Answer 3

At the end of July:
Salaries Expense……..10k
Salaries Payable………10k

Question 4

4. The need for the above entry could be stated by saying that at the end of July:

Answer 4

Checklist Construction has to ACCRUE 10k of SALARIES EXPENSE.

Question 5

5. On August 15th, when Checklist Construction pays their supervisors, the entry is:

Answer 5

Salaries Payable…..10k

Cash………………..10k

Question 6

6. Because Checklist Construction uses the ACCRUAL METHOD, the salary expense is recorded when:

Answer 6

the services are performed, regardless of when they are paid for, so that the FINANCIAL STATEMENTS reflect the appropriate amount of SALARY EXPENSE for July.

Question 7

7. Checklist Construction takes out a 20k loan, and the terms are that, instead of monthly payments, the full amount is due in six months, along with $900 in interest. Because the ACCRUAL METHOD is used,

Answer 7

The INTEREST EXPENSE must be recorded over the LIFE OF THE LOAN, rather than recording it all at the end when the loan is paid off.

Question 8

8. When Checklist Construction originally takes out the loan, the entry is:

Answer 8

Cash………..20k

Notes Payable…..20k

Question 9

9. At the end of every month, Checklist Construciton makes the following entry for INTEREST:

Answer 9

Interest Expense……..150

Interest Payable………150

Question 10

10. When the loan is paid (at the end of the loan period), the entry is:

Answer 10

Notes Payable……20k
Interest Payable…900
Cash…………….20,900

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