Chapter 3 - Adjusting Journal Entries

Question 0

Name two types of accounts associated with AJE.

Answer 0

• Depreciation Expense (Always a Debit)

- Accumulated Depreciation (Always a Credit)

Question 1

What is an AJE?

Answer 1

An Adjusted Journal Entry

Question 2

What is the “Expense Recognition Principle or Matching Principle”?

Answer 2

It requires expenses are recorded in the same time period as the Revenue they helped earned are posted.

Question 3

What is the “Revenue Recognition Principle”?

Answer 3

It requires recording Revenue when it is earned.

Question 4

When do AJE’s include Cash?

Answer 4

Never

Question 5

What is a “Pre-Paid Expense”?

Answer 5

Assets such as prepaid insurance, prepaid rent, supplies, etc. after being used, some of its cost then become an expense.

Question 6

Expenses are?

Revenues are?

Answer 6

Expenses are Debits

Revenues are Credits

Question 7

What is an “Accumulated Depreciation”?

Answer 7

Reveals that this account includes total depreciation expense for all prior periods for which the asset was used.

Question 8

What is a “Depreciation Expense”?

Answer 8

It’s a decreasing value of a long term tangible assets value over its useful life.

Question 9

Give an example of “ Deferred / Unearned Revenue”.

Answer 9

Money received in advance for a service, but not recorded as revenue until the work is completed.

Question 10

What is an “Accrued Expense” or “Accrual Based Accounting”?

Answer 10

Used but not yet recorded and not yet paid.
Uses the adjusting process to recognize revenues when earned and expenses when incurred (matched with revenues).
(Debit to an Expense and a Credit to a Payable.)

Question 11

What is an “Accrued Revenue”?

Answer 11

Earned, but not yet recorded and not yet received.

A Debit to Accounts Receivable and a Credit to Service Revenue.

Question 12

Why are “Adjusted Journal Entries” important?

Answer 12

They are necessary before financial statements are prepared in order to bring revenues, expenses, assets, and liabilities to their proper balances for that time period so that the financial statements will be as accurate as possible.

Question 13

What is a “Plant Asset”?

Answer 13

A long term tangible asset such as machinery, equipment and computers.

Question 14

Explain “Adjusting Unearned Revenue”.

Answer 14

1. Unearned Revenue becomes Revenue when it is earned (which is a liability).
2. Amount earned becomes Revenue, unearned Revenue DECREASES by the same amount.

Question 15

How do you figure “Profit Margin”?

Answer 15

Net income divided by Net sales.
Net Income
Profit Margin = ——————
Net Sales

Question 16

What is a “Contra Account”?

Answer 16

An account linked with another account. It has an opposite Normal Balance, and it is reported as a subtraction from that other accounts balance.

Question 17

What is a “Fiscal Year”?

Answer 17

A reporting period consisting of 12 consecutive months.

Question 18

What is a “Natural Business Year”?

Answer 18

Companies experiencing seasonal variations in sales often choose a Natural Business Year end, which is when sales activities are at their lowest level. For example Walmart usually ends their year at January 31, after the holiday season.

Question 19

What is “Cash Basis Accounting”?

Answer 19

It recognizes revenue when Cash is received and records expenses when cash is paid.