Chapter 3

Question 1

What is cash basis accounting?

Answer 1

accounting method that records revenues when cash is received and when expenses when cash is paid

Question 2

What is accrual basis accounting?

Answer 2

accounting system that records the business event based on when it occurs, not when cash is exchanged

Question 3

What is unearned revenue?

Answer 3

liability created when customers pay in advance for goods and services to be delivered in the future

Question 4

What is an accrued expense?

Answer 4

expenses that have been incurred prior to being paid for

• salaries payable
• interest payable

Question 5

What is a closing entry?

Answer 5

journal entries that are prepared at the end of the accounting period. Closing entries zero out the REVENUE, EXPENSE, and DIVIDENDS accounts so that accounting can begin for the next period

Question 6

How do you close revenue and expense accounts?

Answer 6

• debit each account for the amount of its credit balance

- transfer balances to retained earnings by crediting retained earnings for the total amount of the R+E accounts

Question 7

How do you close the dividends account?

Answer 7

• credit for the amount of the debit balance

- transfer balance to retained earnings by debiting retained earnings for the total amount of the Dividends account