Test Your Accounting Basics: Quiz!

An adjusting entry is a journal entry made at the end of an accounting period to update certain accounts and ensure that the financial statements accurately reflect the financial position of the company. In this case, an adjusting entry would be made to adjust an expense account so that the expense is reported when it is incurred, rather than when it is paid. This is in accordance with the accrual basis of accounting, which recognizes expenses when they are incurred, regardless of when the payment is made. Therefore, the statement "An adjusting entry would adjust an expense account so the expense is reported when incurred" is true.

The accounting period concept refers to the practice of dividing the financial activities of a business into specific time periods, such as months, quarters, or years. This concept ensures that revenues and expenses are properly recorded and reported within the designated period. By adhering to this concept, businesses can accurately track their financial performance over time, make informed decisions, and comply with accounting standards and regulations. Therefore, it can be concluded that the proper reporting of revenues and expenses in a period is indeed due to the accounting period concept.

Generally accepted accounting principles require that companies use the accrual basis of accounting. This means that companies record revenues and expenses when they are earned or incurred, regardless of when the cash is actually received or paid. The accrual basis provides a more accurate representation of a company's financial position and performance, as it matches revenues and expenses to the period in which they are related, rather than when the cash is exchanged. This allows for better decision-making and financial analysis. The cash basis of accounting, on the other hand, only records transactions when cash is received or paid, which can lead to distortions in financial reporting.

By matching revenues and expenses in the same period in which they incur, net income or loss will be properly reported on the income statement. This is because the matching principle requires that expenses be recognized in the same period as the revenues they help generate. This ensures that the income statement accurately reflects the financial performance of the company during a specific time period. Properly reporting net income or loss is crucial for investors, creditors, and other stakeholders to assess the profitability and financial health of the business.

The correct answer is Supplies Expense, debit; Supplies, credit. This entry is used to adjust for the cost of supplies that have been used during the accounting period. By debiting Supplies Expense, we increase the expense account to reflect the cost of supplies used. And by crediting Supplies, we decrease the asset account to show that supplies have been consumed. This entry ensures that the financial statements accurately reflect the cost of supplies used in generating revenue.

The revenue recognition concept refers to the principle that determines when revenue should be recognized or credited to a revenue account. It provides guidelines for recognizing revenue based on when it is earned and when it can be reliably measured. This concept is important in accrual accounting as it ensures that revenue is recognized in the appropriate period, regardless of when cash is received. It is different from the cash basis of accounting, which recognizes revenue only when cash is received.

The revenue recognition concept states that revenue should be recorded when it is earned, regardless of when the cash is received. This means that revenue should be recognized when a company has completed a service or delivered a product to a customer, and the customer is obligated to pay for it. The timing of cash receipt may not align with the recognition of revenue, as there may be instances where revenue is recognized before or after cash is received. Therefore, the statement that revenue should be recorded in the same period as the cash is received is false.

The proper adjusting entry at April 30 would be to debit Insurance Expense for $10,000 and credit Prepaid Insurance for $10,000. This is because the prepaid insurance account balance before adjustment is $16,000, but the unexpired amounts per the analysis of policies is only $6,000. Therefore, the difference of $10,000 represents the amount of insurance that has been used/expired during the fiscal year and should be recognized as an expense. The prepaid insurance account is reduced by the same amount to reflect the decrease in the prepaid asset.