Topic 3: Adjusting Accounts for Financial Statements

Question 1

Time Period (Fiscal Year and Calendar Year) Time Period Assumptions

Answer 1

The assumption that an organization’s activities can be divided into specific time periods such as months, quarters, or years.

Question 2

Accrual Basis Accounting

Answer 2

Accounting system that recognizes revenues when goods or services are provided and expenses when incurred; the basis for GAAP.

Question 3

Revenue recognition principle

Answer 3

The principle prescribes that revenue is recognized when goods or services are delivered to customers.

Question 4

Expense Recognition

Answer 4

Also known as the matching principle. Prescribes expenses to be reported in the same period as the revenues that were earned as a result of the expenses.

Question 5

Adjusting Entry

Answer 5

Journal entry at the end of an accounting period to bring an asset or liability account to its proper amount and update the related expense or revenue account.

Question 6

Prepaid Expenses

Answer 6

Items paid for in advance of receiving their benefits; classified as assets.

Question 7

Plant Assets

Answer 7

tangible long-lived assets used to produce or sell products and services; also called property, plant, and equipment (PP&E) or fixed assets.

Question 8

Depreciation

Answer 8

Expense created by allocating the cost of plant and equipment to periods in which they are used; represents the expense of using the asset.

Question 9

Straight-Line Depreciation

Answer 9

A method that allocates an equal portion of the depreciable cost of plant asset (cost minus salvage) to each accounting period in its useful life.

Question 10

Accumulated Depreciation

Answer 10

Cumulative sum of all depreciation expense recorded for an asset.

Question 11

Contra Account

Answer 11

Account linked with another account and having an opposite normal balance; reported as a subtraction from the other account’s balance

Question 12

Unadjusted Trial Balance

Answer 12

List of accounts and balances prepared before accounting adjustments are recorded and posted.

Question 13

Adjusted Trial Balance

Answer 13

List of accounts and balances prepared after period-end adjustments are recorded and posted.