Accounting 1 (Summer 2018)

The accounting equation states that the total assets of a business are equal to the sum of its liabilities and owner's equity. This equation is the foundation of double-entry bookkeeping and helps to ensure that a company's financial records are accurate and balanced. By maintaining this equation, businesses can track and analyze their financial position and make informed decisions. Therefore, the statement that the accounting equation is true is correct.

The statement is false because although adjusting entries are recorded in the worksheet, they still need to be journalized and posted to the general ledger. The purpose of adjusting entries is to ensure that the financial statements are accurate and reflect the correct financial position of the company. Therefore, these entries must go through the journalizing and posting process to update the accounts in the general ledger and reflect the adjustments made.

A prepaid expense refers to an expense that has been paid for in advance but has not yet been used or consumed. It is considered an asset because it represents a future benefit that the company will receive. This type of expense is recorded on the balance sheet as an asset until it is used or consumed, at which point it is recognized as an expense on the income statement.

Calculations: 20,000-6,000=14,000

A debit is an entry made in the accounting system that increases an asset account. Assets are resources owned by a company that have economic value, such as cash, inventory, or equipment. When a debit is made to an asset account, it means that the company has received or acquired more of that particular asset. This increases the balance of the asset account, reflecting the higher value of assets held by the company.

Calculations: 15,000/3=5,000

According to the revenue principle, revenue should be recorded when it has been earned. This means that revenue should be recognized and recorded in the financial statements when the company has completed the earnings process, regardless of when the cash is received. This principle ensures that revenue is reported accurately and reflects the company's actual performance in generating income. By recording revenue when it has been earned, financial statements provide a more reliable and transparent representation of the company's financial position and performance.

Current assets are assets that are expected to be converted into cash or used up within one year or the operating cycle of a business. Cash and receivables are examples of current assets because they are expected to be converted into cash within a short period of time. Cash represents the amount of money a company has on hand, while receivables refer to the amounts owed to the company by its customers or clients. Including cash and receivables as current assets on the balance sheet allows for a clear representation of the company's liquidity and ability to meet short-term obligations.

Adjusting entries are prepared at the end of the accounting period to update certain accounts. These entries are necessary to ensure that the financial statements reflect the correct financial position of the company. They are used to record accrued revenues or expenses, reconcile accounts, allocate expenses, and adjust the values of assets and liabilities. By making these adjustments, the financial statements become more accurate and reliable, providing a true representation of the company's financial performance. Therefore, adjusting entries are an essential part of the accounting process and are prepared at the end of the accounting period.

The financial statements are prepared from the adjusted trial balance because it reflects all the necessary adjustments made to the unadjusted trial balance. The adjusted trial balance includes adjustments for items such as accruals, deferrals, and estimates, which are necessary to ensure that the financial statements accurately represent the financial position and performance of the company. Therefore, the adjusted trial balance provides a more accurate and reliable basis for preparing the financial statements.

When the category of account "Purchases" is increased, it means that more purchases have been made. This leads to an increase in the amount of money spent on purchasing goods or services. Therefore, the account "Purchases" is debited to record this increase in expenses.

Prepaid insurance is reported on the balance sheet as an asset because it represents an advance payment made by the company for insurance coverage that will benefit the company in the future. As the coverage period progresses, the prepaid insurance amount is gradually recognized as an expense on the income statement. Until then, it remains as an asset on the balance sheet, reflecting the company's right to receive insurance coverage in the future.

Calculations: 5,400/3= 1,800 rent per month. 1,800 *2 months used =3,600

The trial balance is a statement that lists all the balances of the general ledger accounts in a company. It is used to ensure that the debits and credits in the accounting system are equal and balanced. The purpose of the trial balance is to identify any errors or discrepancies in the accounting records. Therefore, it is necessary for the trial balance totals to agree at all times. If the totals do not agree, it indicates that there is an error in the accounting records that needs to be identified and corrected.

Adjusting entries are necessary to update the accounts in the books, apply the matching principle, and properly reflect the correct net income. By making these adjustments, the financial statements will provide more accurate and reliable information. Additionally, adjusting entries ensure that the accounting equation A=L+C remains balanced, making it a more accurate representation of the company's financial position. Therefore, all of the given options are valid purposes for adjusting entries.

Calculations: 800-150=650

The current portion of a long-term debt should be reclassified as a current liability because it represents the amount of the debt that is expected to be paid within the next year. This is important for financial reporting purposes as it provides a more accurate representation of the company's current financial obligations. By separating the current portion from the long-term portion of debt, stakeholders can better assess the company's liquidity and ability to meet its short-term obligations.

Revenue is considered a temporary or nominal account. It is a type of account that tracks the income earned by a company during a specific period, such as sales revenue or service revenue. These accounts are temporary because their balances are closed at the end of each accounting period and transferred to the company's retained earnings or owner's equity account. This helps to reset the revenue account for the next accounting period and accurately measure the company's financial performance.

Calculations: 5,400/6= 900 revenue per month. 900 *5 months used =4,500 earned
Beg bal in unearned 5,400 less 4,500 earned = 900 ending balance

Under accrual accounting, revenue is recorded when the services are performed, regardless of when the cash is received. This means that revenue is recognized when the company has fulfilled its obligations to provide goods or services to the customer, regardless of whether the customer has paid for them yet. This is because accrual accounting aims to match revenues with the expenses incurred to generate those revenues, providing a more accurate representation of the company's financial performance.

The book value of a plant asset is calculated by subtracting the accumulated depreciation from the cost of the asset. This is because accumulated depreciation represents the total amount of depreciation expense that has been recorded for the asset over its useful life, and it is subtracted from the original cost of the asset to determine its net value on the balance sheet. Therefore, the correct answer is "cost of the asset less the accumulated depreciation".

An accrued expense refers to a liability that arises from an expense that has been incurred but has not yet been paid. This means that the expense has been recognized in the accounting records even though the payment has not been made. It is important to record accrued expenses to ensure that the financial statements accurately reflect the company's financial position and performance.

Revenue is the correct answer because revenue is a category of account that is credited when it is increased. In accounting, revenue represents the income generated by a company through its normal business activities. When revenue increases, it is recorded as a credit entry in the accounting books. This is because revenue is considered a source of funds for the company, and a credit entry increases the company's overall funds. Therefore, revenue is credited when it is increased.

The correct answer is "Contra-asset account." Accumulated Depreciation is a contra-asset account because it is used to track the decrease in value of an asset over time. It is subtracted from the original cost of the asset to determine its net book value. Contra-asset accounts have a credit balance and are used to offset the balance of the related asset account on the balance sheet.

Depreciation expense is the correct answer because it represents the decrease in value of an asset over time. In the adjusting entry, the account is debited to reflect the expense incurred during the current period. This entry helps to accurately reflect the decrease in the value of the asset on the financial statements.

Accrual accounting involves recognizing revenue and expenses when they are incurred, rather than when cash is received or paid. This allows for a more accurate representation of a company's financial position and performance. Therefore, recording all revenues when cash is received would be inconsistent with the principles of accrual accounting.

Calculations: 9,000/6=1,500 insurance expense per month
1,500*2 months = 3,000 insurance expense Beg bal 9,000-3,000=6,000