F2-M3-Adjusting Journal Entries

Question 1

What four situations require adjusting journal entries in order to properly present financial statements on the accrual basis?

Answer 1

1. Cash is received before the performance obligation is met (deferred revenues)
2. Cash is paid before the expense is incurred (prepaid expenses)
3. Cash is received after the performance obligation has been met (receivable)
4. Cash is paid after the expense has been incurred (accrued expenses)

Question 2

What is the journal entry to record the earning of deferred revenue

Answer 2

DR Deferred revenue $xxx
CR Revenue $xxx

Question 3

What are the three rules for recording adjusting journal entries?

Answer 3

1. Adjusting journal entries must be recorded by the end of the entity’s fiscal year, before the preparation of financial statements.
2. Adjusting journal entries never involve the cash account
3. All adjusting entries will hit one income statement account and one balance sheet account