Topic 4: Adjusting the Accounts & Preparing the Financial Statements

Question 1

What is Accrual Accounting?

Answer 1

Revenues and expenses are recognised when they occur, and not when the cash is received or paid. E.g., credit purchases. They’ve purchased inventory so it is recognised then, not when they pay for it a month later.

Question 2

What is Accrued Revenue?

Answer 2

You have earned revenue but have not invoiced or been paid for it (Asset)

Question 3

What are Accrued Expenses?

Answer 3

You incur an expense but have not yet paid for it (Liability)

Question 4

What are Prepayments?

Answer 4

You pay for an item in one year that may fully or partially relate to the next year.

Question 5

What is Unearned Service Revenue?

Answer 5

You have been paid money to deliver a service, but you have not yet delivered the service (Liability)

Question 6

What are the Four Categories of Adjustments?

Answer 6

1. Unearned Revenue (Liability)
2. Accrued Revenue (Asset)
3. Accrued Expenses (Liability)
4. Prepaid Expenses (Asset)

Question 7

What are the 3 stages of the Trial Balance?

Answer 7

1. The Unadjusted Trial Balance
2. The Adjusted Trial Balance
3. Post Closing Trial Balance

Question 8

What is Unexpired Prepaid Expense?

Answer 8

The amount of the prepaid expense that has not been used (Asset)

Question 9

What is Prepaid Expense?

Answer 9

An expense that has been paid in advance (Asset)