Accounts Adjusting Entries Quiz Exam!

Depreciation is the process of allocating the cost of an asset over its useful life. This is done systematically to account for the wear and tear, obsolescence, or loss of value that the asset experiences over time. By spreading out the cost, depreciation helps to accurately reflect the decrease in value of the asset as it is used and consumed in the production of goods or services. This allows businesses to match the expense of the asset with the revenue it generates, resulting in more accurate financial statements and better decision-making.

Adjusting entries are necessary to ensure that the financial statements accurately reflect the company's financial position and performance. While these entries are typically recorded in the worksheet, they still need to be journalized and posted to the general ledger accounts. This is because the general ledger is the official record of all financial transactions and adjustments made by the company. Therefore, the statement that adjusting entries recorded in the worksheet do not need to be journalized or posted is incorrect.

The correct answer is "beginning inventory + purchases - ending inventory." This formula calculates the cost of goods sold by adding the value of the beginning inventory to the value of purchases made during a specific period and then subtracting the value of the ending inventory. This calculation is commonly used in accounting to determine the cost of the goods that were sold during a specific period.

Inventory refers to the goods or products that a company possesses and intends to sell to customers. It includes all the items that a business has in stock, whether they are raw materials, work-in-progress, or finished goods. Inventory is a crucial asset for a company as it represents potential sales and revenue. It is typically accounted for and tracked to ensure efficient management and optimization of stock levels.

The matching principle is the correct answer because it states that efforts (expenses) should be matched with accomplishments (revenues) in the same accounting period. This principle ensures that expenses are recognized when they are incurred and matched with the revenues they generate, providing a clearer picture of a company's financial performance. By following the matching principle, companies can accurately report their profitability and make informed business decisions.

Net income is the correct answer because it represents the net increase in owner's equity that results from business operations. It is calculated by subtracting all expenses (including cost of goods sold, operating expenses, and taxes) from total revenues. Net income is an important financial metric that indicates the profitability of a business and is often used to assess its financial performance.

A contra asset account is actually subtracted from its related asset account. It is used to reduce the overall value of the asset account and reflects a decrease in the value of the asset. This is done to provide a more accurate representation of the asset's net value.

Gross profit is the amount left after deducting the cost of goods sold from net sales. It represents the profit generated from the core business operations before considering other expenses such as operating expenses, taxes, and interest. Gross profit is a key indicator of a company's profitability and efficiency in producing and selling its products or services. It helps assess the company's ability to cover its operating expenses and generate sufficient funds for future growth and investment.

The correct answer is temporary accounts. Temporary accounts are accounts that are closed at the end of each accounting period, such as revenue, expense, and dividend accounts. These accounts are used to track the flow of income and expenses during a specific period and their balances are transferred to the retained earnings account at the end of the period. In contrast, permanent accounts, such as asset, liability, and equity accounts, are not closed at the end of the period and their balances are carried forward to the next accounting period. Unearned revenue accounts and contra-asset accounts are specific types of temporary and permanent accounts, respectively.

The statement is false because the minor expense of a merchandiser is not the cost of goods sold. The cost of goods sold refers to the cost of the products that have been sold by the merchandiser. The minor expense, on the other hand, refers to other smaller expenses incurred in the process of running the business, such as operating expenses, marketing expenses, or administrative expenses.

The purpose of adjusting entries is to update the accounts in the books, apply the matching principle, properly reflect the correct net income, and make the equation A=L+OE more accurate. Adjusting entries are necessary to ensure that the financial statements accurately reflect the financial position and performance of a company. These entries are made at the end of an accounting period to record any transactions or events that have occurred but have not yet been recorded. By making these adjustments, the accounts are updated, the matching principle is applied by recognizing revenues and expenses in the correct period, the net income is properly reflected, and the accounting equation is more accurately balanced.

Under a perpetual inventory system, there is a continuous and real-time tracking of inventory levels. This means that the inventory is constantly updated as goods are bought or sold. However, a physical inventory count is still necessary to reconcile any discrepancies between the recorded inventory levels and the actual inventory on hand. This helps to ensure the accuracy of the inventory records and identify any potential issues such as theft or errors in recording transactions. Therefore, the statement that there is no need to conduct a physical inventory count under a perpetual inventory system is false.

The correct answer is earned revenues. This is because earned revenues are not a type of adjusting entry. Adjusting entries are made to ensure that revenues and expenses are recognized in the correct accounting period. Prepaid expenses, accrued revenues, and accrued expenses are all types of adjusting entries that are made to properly record expenses and revenues that have been incurred but not yet recorded.

The Unearned Revenue account is listed in the Statement of Financial Position because it represents a liability for the company. Unearned revenue refers to the money received by a company in advance for goods or services that have not yet been provided. It is considered a liability because the company still owes the customer the goods or services that they have paid for. The Statement of Financial Position shows a company's assets, liabilities, and shareholders' equity at a specific point in time, and the Unearned Revenue account falls under the liabilities section.

The second adjusting entry for merchandise inventory, when using the periodic inventory system, does not cause a zero balance in the Merchandise Inventory account. This is because the periodic inventory system does not continuously update the Merchandise Inventory account with each purchase or sale. Instead, the balance in the account is only adjusted periodically, typically at the end of the accounting period, to reflect the cost of goods sold. Therefore, the second adjusting entry does not result in a zero balance in the Merchandise Inventory account.

The adjusted trial balance is a list of accounts and their balances at the end of the accounting period immediately after adjusting entries have been posted. This means that all necessary adjustments, such as accruals and deferrals, have been made to the accounts before preparing the trial balance. By doing so, the adjusted trial balance provides an accurate representation of the financial position of the company at the end of the accounting period, taking into account any adjustments that needed to be made.

The accrual basis of accounting recognizes revenue in the period in which it is earned, regardless of when cash is received. Similarly, expenses are recorded in the period in which they are incurred, regardless of when cash is paid. This method is in accordance with generally accepted accounting principles (GAAP), which require the recognition of revenue and expenses based on the matching principle. Therefore, the statement "Revenue is recorded only when cash is received, and expense is recorded only when cash is paid" is false.

The correct answer is "Purchase discount" because it refers to a reduction in the purchase price of goods received from a supplier. The purchaser is able to receive a discount on the purchase price by paying in cash or within a specified time period. This discount is given by the supplier as an incentive for prompt payment and is a common practice in business transactions. Therefore, "Purchase discount" is the most appropriate term to describe the cash discount received from a supplier of goods.

Adjusting entries are made to ensure that expenses are recognized in the period in which they are incurred, revenues are recorded in the period on which they are earned, and balance sheet and income statement accounts have correct balances at the end of the accounting period. This means that all of the options mentioned in the question are correct. Adjusting entries are necessary to accurately reflect the financial position and performance of a company, and to adhere to the matching principle of accounting.

Accrual accounting involves recognizing revenue when it is earned, regardless of when cash is received. This means that revenue is recorded when the goods or services are provided, not when the payment is received. Therefore, the correct answer is "recording all revenues when cash was received" because it goes against the principle of accrual accounting.

Accounts that are partly income statement accounts and balance sheet accounts are actually referred to as mixed accounts, not dual accounts. Dual accounts typically refer to accounts that have two columns, one for recording debit entries and one for recording credit entries. Therefore, the given statement is incorrect.

Under the periodic inventory system, entries to the inventory account are made at year end. This means that throughout the year, the inventory account is not updated with every purchase or sale of merchandise. Instead, the cost of goods sold and ending inventory are determined at the end of the accounting period through a physical count of inventory. This count helps determine the cost of goods sold and the value of the remaining inventory, which are then recorded in the inventory account. This method is simpler and less time-consuming compared to the perpetual inventory system, where inventory is continuously updated with each transaction.

Adjusting entries are used to correct errors in the recording of earlier transactions. These entries are made at the end of an accounting period to ensure that the financial statements accurately reflect the company's financial position and performance. Adjusting entries are necessary because some transactions may not have been recorded or may have been recorded incorrectly during the regular course of business. By making these adjustments, the financial statements can provide a more accurate representation of the company's financial health.

When adjustments are made for unearned revenues, it means that the company has received payment for goods or services that have not yet been delivered. This unearned revenue is initially recorded as a liability on the balance sheet. However, as the company fulfills its obligations and delivers the goods or services, the liability decreases. At the same time, the company recognizes the revenue earned from delivering those goods or services, which increases the revenue. Therefore, the correct answer is "decrease liabilities and increase revenues."

Recognizing an unearned revenue is an example of a deferral because it involves receiving cash from a customer for goods or services that have not yet been provided. The revenue is initially recorded as a liability on the balance sheet and is then recognized as revenue over time as the goods or services are delivered. This deferral allows for the accurate matching of revenue with the corresponding expenses incurred to generate that revenue.

The matching rule refers to the practice of assigning revenues to the accounting period in which goods are delivered or services are performed, and expenses to the accounting period in which they are used to produce revenues. This ensures that the expenses incurred to generate revenue are properly matched with the revenue they help to generate, resulting in accurate financial statements.

The correct answer is "credits Office Equipment." This is because the purchase of office supplies was mistakenly recorded in the Office Equipment account. To correct this error, a credit entry should be made in the Office Equipment account to reduce the balance and reflect the accurate information.

The statement is false because when revenues and expenses are equal for the same accounting period, it is called the break-even point, not the matching principle. The matching principle states that expenses should be recognized in the same period as the revenues they help generate, regardless of whether they are equal or not.

Adjustments for accrued revenues have an assets and revenues account relationship. This means that when a company earns revenue but has not yet received the cash, an adjustment is made to recognize the revenue and increase the corresponding asset account (such as accounts receivable) and the revenue account. This adjustment reflects the increase in the company's assets and revenues, as the revenue has been earned but not yet received in cash.

The statement is false because unearned revenue refers to money received in advance for goods or services that will be provided in a future period. In the case of a publishing company, subscriptions received in advance would be considered unearned revenue if the revenue will be earned over multiple fiscal periods, not just one.

The time period assumption in accounting is based on the idea that the economic life of a business can be divided into artificial time periods. This assumption allows for the preparation of financial statements at regular intervals, such as monthly, quarterly, or annually. By dividing the economic life of a business into these time periods, it becomes easier to track and measure the financial performance of the business over time. This assumption also enables the matching of expenses with revenues, as well as the recognition of revenue in the accounting period in which it is earned. Therefore, the given answer accurately reflects the time period assumption in accounting.

A cash discount refers to a reduction in the amount owed on a receivable or payable if it is paid within a specified discount period. This discount is typically offered as an incentive for prompt payment and is deducted from the total amount due. It is different from a trade discount, which is a reduction in the list price of goods or services offered to customers. Therefore, the correct answer in this case is "cash discount."

Premium on Bonds is an adjunct account because it is a temporary account that is used to track the premium paid on bonds. Adjunct accounts are used to provide additional information or detail to the main accounts in a company's financial statements. In this case, the Premium on Bonds account would be used to show the amount paid above the face value of the bonds, which is an important piece of information for investors and creditors.

The purpose of adjusting entry under the Expense Method is to record the unused portion of the asset. This means that when an asset is not fully utilized or consumed during a specific accounting period, the adjusting entry is made to recognize the portion of the asset that remains unused. By recording this unused portion as an expense, it ensures that the financial statements accurately reflect the true value of the asset and the expenses incurred.

Under the perpetual inventory system, the ending inventory is not determined solely by a physical count. Instead, it is continuously updated and recorded through the use of computerized systems and barcode scanners. This allows for real-time tracking of inventory levels and eliminates the need for a physical count to determine the ending inventory. Therefore, the statement is false.

A business can choose a fiscal year that corresponds to the calendar year, the natural business year, or any twelve-month period. This means that the business has the flexibility to align its fiscal year with the traditional calendar year or choose a different period that better suits its operational needs. Therefore, the correct answer is "any of the above."

In the periodic system, adjusting entries are made at the end of the accounting period to update the Merchandise Inventory account. The second adjusting entry for merchandise inventory involves debiting Merchandise Inventory and crediting Income Summary. This entry is made to transfer the cost of goods sold from the Income Summary account to the Merchandise Inventory account, reflecting the decrease in inventory and the corresponding increase in cost of goods sold.

The purpose of adjusting entry under the Liability Method is to record the earned portion of the revenue received in advance. This means that when a company receives cash in advance for goods or services that have not yet been provided, it cannot recognize the entire amount as revenue immediately. Instead, it needs to adjust its financial records to reflect the portion of the revenue that has been earned at a given point in time. This adjustment ensures that the company's financial statements accurately reflect its current financial position and performance.

The reason for adjusting the asset account Merchandise Inventory in two steps when using the periodic inventory system is that both the beginning and ending inventory amounts must appear as separate figures on the income statement. This is necessary to accurately calculate the cost of goods sold and determine the gross profit. By separating the beginning and ending inventory amounts, the income statement provides a clear picture of the inventory's impact on the company's profitability.

The debit to the Merchandise Inventory account in the adjustments column of the worksheet represents the ending inventory. This means that the amount recorded in the adjustments column is the value of the inventory at the end of the accounting period. It is important to adjust the inventory value to accurately reflect the amount of inventory on hand at the end of the period for financial reporting purposes.