ACC 303 Chapter 3

The accounting equation (A = L + SE) must remain in balance: A. throughout each step in the accounting cycle. B. only when journal entries are recorded. C. only at the time the trial balance is prepared. D. only when formal financial statements are prepared.

A. throughout each step in the accounting cycle.

If the following journal entry was made for the purchase of a three-year insurance policy in February of the first year, would an adjusting entry and/or a reversing entry be appropriate at the end of the first year? Unexpired Insurance 3,000 Cash 3,000 Adjusting Entry Reversing Entry A. Yes No B. No Yes C. Yes Yes D. No No

A. yes no

recognizes revenue when the performance obligation is satisfied and expenses when incurred without regard to the time of receipt or payment of cash.

Accrual Basis Accounting

After adjusted journal entries are posted a ____________ is prepared.

Adjusted trial balance

shows the balance of all accounts at the end of the accounting period. A trial balance prepared immediately after all adjustments have been posted.

Adjusted trial balance

What is the basic equation in accounting?

Assets= Liability + Stockholder's Equity

An accrued expense can best be described as an amount: A.Paid and not currently matched with earnings. B.Not paid and currently matched with earnings. C. Not paid and not currently matched with earnings. D. Paid and currently matched with earnings.

B. Not paid and currently matched with earnings.

A prepaid expense can best be described as an amount: A. Paid and currently matched with earnings. B. Paid and not currently matched with earnings. C. Not paid and not currently matched with earnings. D. Not paid and currently matched with earnings.

B. Paid and not currently matched with earnings.

Which of the following is an example of an accrued liability? A. Supplies purchased at the beginning of the year and debited to an expense account. B. Property taxes incurred during the year, to be paid in the first quarter of the subsequent year. C. Depreciation expense. D. Rent, provided as a service during the period, cash to be received next year.

B. Property taxes incurred during the year, to be paid in the first quarter of the subsequent year.

An adjusting entry should never include: A. a debit to expense and a credit to a liability. B. a debit to expense and a credit to revenue. C. a debit to a liability and a credit to revenue. D. a debit to revenue and a credit to a liability.

B. a debit to expense and a credit to revenue.

During the first year of Wisnewski Co.'s operations, all purchases were recorded as assets. Store supplies in the amount of $6,540 were purchased. Actual year-end store supplies inventory amounted to $2,150. The adjusting entry for store supplies will: A. increase net income $4,390. B. increase expenses by $4,390. C. decrease store supplies by $6,540. D. debit accounts payable for $2,150.

B. increase expenses by $4,390.

When a company makes reversing entries A. it credits all cash payments of expenses to the related expense account. B. it debits all cash payments of expenses to the related expense account. C. it debits all cash receipts to the related revenue account. D. all subsequent cash receipts and cash payments are credited to Income Summary.

B. it debits all cash payments of expenses to the related expense account.

Which of the following journal entries is appropriate when a company receives payment in advance for goods or services? A. Debit cash and credit an expense account B. Credit cash and debit a revenue account C. Debit cash and credit a liability account D. Credit cash and debit a liability or revenue account.

C. Debit cash and credit a liability account

Which of the following is correct regarding double-entry accounting? A. Each transaction is recorded twice, once in the general journal and once in aspecialized journal. B. Each transaction must involve two entries, either two debits, two credits, or one debit and one credit. C. Each transaction must result in equal amounts of debits and credits. D. Each transaction appears in at least two of the financial statements.

C. Each transaction must result in equal amounts of debits and credits.

Which of the following statements best describes the purpose of closing entries? A. To facilitate posting and preparing a trial balance. B. To determine the amount of gain or loss for the period. C. To reduce the balances of revenue and expense accounts to zero so that they may be used to accumulate the revenues and expenses of the next period. D. To complete the record of various transactions that were started in a prior period.

C. To reduce the balances of revenue and expense accounts to zero so that they may be used to accumulate the revenues and expenses of the next period.

A trial balance prepared at year end showed Puccineli Co.'s debit total exceeding the credit total by $6,300. This discrepancy could have been caused by: A. the balance of $47,000 in accounts receivable being entered in the trial balance as $40,700. B. an error in adding the Sales Journal. C. the balance of $700 in the Equipment account being entered as a debit of $7,000. D. a net loss of $6,300.

C. the balance of $700 in the Equipment account being entered as a debit of $7,000.

revenue is recognized only when cash is received, and expenses are recorded only when cash is paid.

Cash Basis Accounting

The formal process by which all nominal accounts are reduced to zero and the net income or net loss is determined and transferred to the owners' equity account.

Closing entries

Which of the following is not a principal purpose of an unadjusted trial balance? A. It proves that debits and credits of equal amounts are in the ledger. B. It is the basis for any adjustments to the account balances. C. It supplies a listing of open accounts and their balances. D. It proves that debits and credits were properly entered in the ledger accounts.

D. It proves that debits and credits were properly entered in the ledger accounts.

If expenses are greater than revenues, the Income Summary account will be closed by a debit to: A. Income Summary and a credit to Cash. B. Income Summary and a credit to Retained Earnings. C. Cash and a credit to Income Summary. D. Retained Earnings and a credit to Income Summary.

D. Retained Earnings and a credit to Income Summary.

With regard to the accounting cycle, which of the following pairings of activities provides a correct chronology? A. The financial statements are prepared and later an adjusted trial balance is prepared. B. Reversing entries are prepared and later a post-closing trial balance is prepared. C. Closing entries are prepared and later financial statements are prepared. D. Transactions are journalized and later posted to the ledger.

D. Transactions are journalized and later posted to the ledger.

The Murphy Company sublet a portion of its warehouse for five years at an annual rental of $24,000, beginning on May 1, 2020. The tenant, Sheri Charter, paid one year's rent in advance, which Murphy recorded as a credit to unearned rental income. Murphy reports on a calendar-year basis. The adjustment on December 31, 2020 for Murphy should be: Dr. Cr. A. No entry B. Unearned Rental Income 8,000 Rental Income 8,000 C.Rental Income 8,000 Unearned Rental Income 8,000 D. Unearned Rental Income 16,000 Rental Income 16,000

D. Unearned Rental Income 16,000 Rental Income 16,000

Rent collected in advance by a landlord is a (an): A. Accrued liability. B. Deferred asset. C. Accrued revenue. D. Unearned revenue.

D. Unearned revenue.

A worksheet A. can be used in place of financial statements. B. is a formal device for accumulating, sorting, and recording information in the general ledger. C. is used to record and post the closing entries. D. provides considerable assurance the company properly handled all of the details related to end-of-period accounting.

D. provides considerable assurance the company properly handled all of the details related to end-of-period accounting.

refers to the process used in recording transactions. The terms debit and credit are used in the accounting process to indicate the effect a transaction has on account balances.

Double-entry accounting

events that are between the enterprise and its environment

External events

T or F: If an entity fails to post one of its journal entries to its general ledger, the trial balance will not show an equal amount of debit and credit balance accounts.

Failure to post one journal entry to the general ledger will misstate the debit and credit side of a trial balance by the same amount. Thus, the trial balance will show an equal amount of debits and credits.

T or F: Adjusting entries are an optional step in the accounting process.

False. Adjusting entries are necessary in order for revenues to be recorded in the period in which services are performed and for expenses to be recognized in the period in which they are incurred and to achieve an accurate statement of assets, liabilities, and equities at the end of the period.

T or F: Adjusting entries are used to correct errors that occur during the posting process.

False. Adjusting entries are necessary in order for revenues to be recorded in the period in which services are performed and for expenses to be recognized in the period in which they are incurred and to achieve an accurate statement of assets, liabilities, and equities at the end of the period. If errors are made in the posting process, they are corrected by means of correcting entries, not adjusting entries.

T or F: An adjusted trial balance that shows equal debit and credit columnar totals proves the accuracy of the adjusting entries.

False. An adjusted trial balance that shows equal debit and credit columnar totals proves nothing more than the fact that each adjusting entry contained an equal amount of debits and credits. Adjusting entries could have included the wrong total dollar amount or an inappropriate account could have been debited or credited. Mistakes such as these would still produce an adjusted trial balance that shows equal debit and credit columnar totals.

T or F: In general, debits refer to increases in account balances, and credits refer to decreases.

False. Debits are recorded on the left side of an account and can be increases or decreases in account balances, depending on the account involved. Debits increase asset and expense accounts; they decrease liability, owner equity, and revenue accounts. Credits result in the opposite effect on account balances.

T or F: It is not necessary to post the closing entries to the ledger accounts because new revenue and expense accounts will be opened in the subsequent accounting period.

False. Failure to post closing entries to the general ledger will leave a balance in revenue and expense accounts from a previous period and the retained earnings account will be misstated.

T or F: Real (permanent) accounts are revenue and expense accounts and are periodically closed.

False. Real (permanent) accounts are asset, liability, and owners' equity accounts. Nominal (temporary) accounts are revenue and expense accounts. Nominal accounts are periodically closed; real accounts are not.

T or F: Reversing entries are made at the end of the accounting cycle to correct errors in the original recording of transactions.

False. Reversing entries are made to simplify the recording of a subsequent transaction related to an adjusting entry. When an entry is reversed, the related subsequent transaction can be recorded as if the adjusting entry had never been recorded. Reversing entries have nothing to do with the correction of errors.

T or F: A general journal may be used by any entity in recording its transactions, whereas special journals may be used only by entities whose transactions meet certain requirements.

False. Special journals can be used by any entity for any groups of transactions possessing common characteristics.

T or F: The Income Summary account used during the closing process is shown in the stockholders' equity section of the balance sheet.

False. The income summary account is a clearing account through which all revenue and expense accounts are closed at the end of an accounting period. Once the revenue and expense accounts have been closed, any balance existing in the income summary account is closed to retained earnings. Thus, the income summary account never appears on a financial statement.

T or F: The post-closing trial balance consists of asset, liability, stockholders' equity, revenue and expense accounts.

False. The post-closing trial balance consists only of asset, liability, and owners' equity (the real) accounts.

T or F: An example of an internal event would be a flood that destroyed a portion of an entity's inventory.

False. This statement characterizes an external event rather than an internal event. Internal events occur within an entity, whereas external events involve interaction between an entity and its environment.

The financial statement which measures the results of operations during the period.

Income Statement

All nominal accounts are reduced to zero by closing them through the _______ _________account.

Income Summary

events that relate to transactions totally within the enterprise.

Internal events

Transactions are initially recorded in a:

Journal

(temporary) accounts are revenue, expense and dividend accounts; except for dividends, they appear on the income statement.

Nominal Account

In the closing process, ______ accounts should be reduced to zero in preparation for recording the transactions of the next period.

Nominal Accounts

shows that equal debits and credits have been posted properly to the Income Summary account

Post Closing Trial Balance

A third trial balance may be prepared after the closing entries are recorded and posted called:

Post-Closing Trial Balance

Transferring amounts from a journal to the ledger is called

Posting

An item paid and recorded in advance of its use or consumption, part of it properly represents expense of the current period and part represents an asset on hand at the end of the period.

Prepaid expense

(permanent) accounts are asset, liability, and equity accounts and they appear on the balance sheet.

Real account

After closing the books, a company may reverse some of the adjusting entries before recording the regular transactions of the next period.

Reverse Entries

made at the beginning of the next accounting period and is the exact opposite of the adjusting entry made in the previous period.

Reverse Entries

The financial statement which measures the cash provided and used by operating, investing, and financing activities during the period.

Statement of Cash Flows

The financial statement which reconciles the balance of the retained earnings account from the beginning to the end of the period.

Statement of retained earnings

Contains the details related to a given general ledger account.

Subsidiary Ledger

requires recording and posting of closing entries

The Closing Process

An external event involving a transfer or exchange between two or more entities.

Transaction

T or F: A worksheet completed through the adjusted trial balance column provides the information needed for preparation of the financial statements without reference to the ledger or other records.

True

T or F: Adjusting entries result from compliance with the revenue recognition and expense recognition principles.

True

T or F: An adjustment for salaries and wages expense, incurred but unpaid at year end, is an example of an accrued liability.

True

T or F: Bad debts are recorded in the period in which the sale was made to ensure that receivables are reported at their net realizable value.

True

T or F: Double-entry accounting is the process that leads to the basic equality in accounting expressed by the formula: assets = liabilities + stockholders' equity.

True

T or F: In general, reversing entries are used for two types of adjusting entries: accrued revenues and accrued expenses.

True

T or F: One purpose of a trial balance is to prove that debits and credits of an equal amount are in the general ledger

True

T or F: The Interest Expense account is credited during the closing process.

True

T or F: The use of a worksheet at the end of each month or quarter permits the preparation of interim financial statements even though the books are closed only at the end of each year.

True

T or F: Use of reversing entries does not change the amounts reported in the financial statements for the previous period.

True

an aid to the accountant in adjusting the account balances and preparing the financial statements. provides an orderly format for the accumulation of information necessary for preparation of financial statements.

Worksheets

Expenses incurred but not yet paid.

accrued expenses

Revenues for which the performance obligation has been satisfied, but for which cash has not yet been received.

accrued revenue

What are accruals?

accrued revenues and accrued expenses

entries made at the end of accounting period to bring all accounts up to date on an accrual accounting basis so that correct financial statements can be prepared. Entries made at the end of an accounting period to bring all accounts up to date on an accrual accounting basis.

adjusted journal entry

After preparing a trial balance, the next step is to prepare:

adjusting journal entries

The financial statement that shows the financial condition of the enterprise at the end of the period.

balance sheet

After financial statements have been prepared, then begins the _______ process

closing

The right side of an account.

credit

The left side of an account.

debit

Liabilities, owners' equity, and revenues are (increased/decreased) by debits and (increased/decreased) by credits.

decreased, increased

Adjusting entries can be classified as:

deferrals or accruals

What are the two events that represent transactions that should be recorded?

external and internal events

From the adjusted trial balance a company can directly prepare its:

financial statements

a chronological listing of transactions expressed in terms of debits and credits to particular accounts. The book containing the accounts.

general journal

After journalizing, amounts should be transferred over to the:

general ledger

Assets and expenses are (increased/decreased) by debits and (increased/decreased) by credits

increased, decreased

What are deferrals?

prepaid expenses and unearned revenues

One common characteristic of adjusting entries is that they affect at least one _____account and one _____account

real account, nominal account

used to accumulate transactions possessing common characteristics.

specializing journals

a book that usually contains a separate page for each account. A collection of all the asset, liability, owners' equity, revenue, and expense accounts.

the general ledger

A list of all open accounts in the ledger and their balances.

trial balance

After posting to the ledger, the next step is preparing a:

trial balance

a list of all open accounts in the general ledger and their balances.

trial balance

Cash received and recorded as a liability because the service obligation has not yet been satisfied by providing goods or services to customers.

unearned revenue

A worksheet or spreadsheet used to help a company prepare its financial statements.

worksheet