Ch. 4: Recording Adjusting, Closing, and Reversing Entries

Question 1

Adjusting Entries

Answer 1

Journal entries recorded in order to reflect the appropriate balances in the various ledger accounts for a specific accounting period. The entries are usually prepared at the end of the accounting period, but may be prepared at any time that the accountant considers appropriate.

Question 2

Closing Entries

Answer 2

Journal entries usually prepared at the end of the accounting period to eliminate the balances in the temporary capital accounts and to transfer these balances to the income summary account and eventually to the permanent capital account.

Question 3

Reversing Entries

Answer 3

Entries recorded at the very beginning of the new accounting period, each representing the exact opposite of the adjusting entry, recorded at the end of the previous accounting period. A reversing entry is necessary any time an adjusting entry sets up an account that will not be closed at the end of the accounting period and that does not normally carry a balance on the books during the year.

Question 4

Accrual

Answer 4

An accumulation of assets or expenses or revenue items, as well as liabilities, whose value has been incurred but for which no cash has yet been transferred.

Question 5

Accrual Basis

Answer 5

An accounting system that recognizes the receipt of cash when it is earned rather than when it is actually received, and records an expense when it is actually incurred rather than when the cash is disbursed. When a sale of a product or a service is made on credit, this transaction is recognized as revenue even though the cash is not received until later. Most businesses are on the accrual basis.

Question 6

Accrued Revenue

Answer 6

Revenue that has been earned but not yet received. This concept allows the company to match revenue earned in the same accounting period in which the associated costs were incurred.

Question 7

Cash Basis

Answer 7

An accounting system that recognizes the revenue when the cash is received, and the expense when the cash is disbursed. It does not match the expense with the related revenue produced during the same accounting period. This system is used mainly by individuals for income tax purposes.

Question 8

Contra-asset Account

Answer 8

An account that has a credit balance and reduces an asset account to reflect the proper amount on the balance sheet. The accumulated depreciation account and the allowance for bad debts account are examples of contra-asset accounts.

Question 9

Credit Balance

Answer 9

The balance that results when the total credit amount exceeds the total debit amount.

Question 10

Deferral

Answer 10

Postponement of the recognition of either an expense or a revenue item.

Question 11

Depreciation

Answer 11

The systematic and rational allocation of the cost of an asset over its useful life.

Question 12

Interim (Financial) Statement

Answer 12

A statement prepared for any period of time that is less than a complete accounting period (1 year).

Question 13

Net Earnings Summary

Answer 13

A temporary capital account used to close out all other temporary capital accounts at the end of the accounting period.

Question 14

Post-Closing Trial Balance

Answer 14

A trial balance prepared after closing the ledger. Temporary capital accounts, having no balances after the closing entries have been posted, will not be found in the post-closing trial balance.

Question 15

Prepaid Expense

Answer 15

An asset account—an item that normally is considered to be an expense but, because it is paid in advance, is classified as an asset. When the value of the asset has been used up, an adjusting entry will convert this prepaid expense (asset) to an actual expense.

Question 16

Matching Principle

Answer 16

The principal and the interest that the note will have earned on the due date of the note.

Question 17

Residual Value

Answer 17

The value of a fixed asset after it has been fully depreciated. It is an estimate of what the asset will be sold for when it is no longer usable.

Question 18

Straight-Line Method

Answer 18

The most common method used by companies to reflect the deterioration of assets. The total cost of the asset, less any residual value, is divided by the useful life of the asset to determine the annual depreciation cost. The name given to the method reflects the fact that the same depreciation is recognized each year for a given plant asset.

Question 19

Unearned Revenue

Answer 19

An advance payment for services that have not yet been performed. Unearned revenue represents a liability or obligation of the company receiving the payment for a service not yet rendered.

Question 20

Unrecorded Expenses

Answer 20

Expenses incurred but not recorded. Usually these expenses will be recorded when paid. To adhere to the concept of matching costs and revenue, it is necessary to record the unrecorded expenses as an adjusting entry at the end of the accounting period.

Question 21

Unrecorded Revenue

Answer 21

Payment due for services that have been rendered but not yet billed. By the end of the accounting period an adjusting entry should be made to recognize this revenue, even though it has not actually been received in the form of cash, thus converting unrecorded revenue to recorded revenue.

Question 22

Worksheet

Answer 22

An expanded trial balance. The purpose of the worksheet is to enable the accountant to easily prepare the adjusting entries as well as various financial statements, including the income statement, statement of capital, and balance sheet.