Adjusting accounts

Question 1

What are the 3 steps for preparing trial balance?

Answer 1

1. List all accounts and balance as taken from ledger
2. Presented in account number order: A, L, E, R, E
3. Ensure total debit posted - total credit posted

Question 2

What is the use of a trial balance?

Answer 2

The use of a trial balance is to asses the equation integrity of A=L+E.
(not the same as statement of financial position)

Question 3

What is one disadvantage of trials balance?

Answer 3

It does not tell if journal entries were posted correctly or whether entries were posted at all

Question 4

What is accrual accounting?

Answer 4

Accrual accounting is where revenue is recognized when earned and expenses are recognized when incurred.

Question 5

How does accrual accounting improve financial statements?

Answer 5

1. Accrual accounting reflects better business performance than information about cash receipts and payments.
2. Accrual accounting also increases comparability of financial statements across period.

Question 6

Why does accrual accounting satisfy GAAP?

Answer 6

Revenue recognition principle: Recognize revenue in the same accounting period when it is earned
Matching principle: A company must record its expenses incurred to generate the revenue reported

Question 7

What is adjusting entries required at the end of each accounting period for?

Answer 7

1. AFTER

2. PRIOR TO

Question 8

Why is adjusting entries required at the end of each accounting period for accrual basis accounting?

Answer 8

To reflect proper amounts of assets, liabilities and equity on the statement of financial position
To reflect proper amounts of revenues and expenses on the income statement

Question 9

What are some criteria of adjusting entries?

Answer 9

1. Always involves at least one income statement and one statement of financial position.
2. Adjusting entries never involve cash (any transaction involving cash is a business transaction that must have been recorded)

Question 10

Paid cash before expense recognized are _________

Answer 10

Prepaid (deferred) expenses

Question 11

Received cash before revenue recognized are ____________

Answer 11

Unearned (deferred) revenues

Question 12

What are prepaid expenses?

Answer 12

Prepaid expenses are when resources are paid for prior to receiving the actual benefits

Question 13

What are some examples of prepaid expense?

Answer 13

1. Insurance, rent
2. Supplies
3. Depreciation of long term asset

Question 14

Under prepaid expenses, what is the difference in the original and the adjusting account?

Answer 14

Original: Increasing asset and decreasing cash
Adjusting: Increasing expense and decreasing asset

Question 15

How to calculate straight-line depreciation expense?

Answer 15

Straight-line depreciation = (Asset cost - residual cost)/ Useful life

Question 16

What is the definition of depreciation?

Answer 16

Depreciation is the process of allocating the cost of an item (Property/Plant/Equipment) to the exxpense in the accounting period