Page 135 - Accounting Principles (A Business Perspective)

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Fiscal year An accounting year of any 12 consecutive months that may or may not coincide with the
calendar year. For example, a company may have an accounting, or fiscal, year that runs from April 1 of one
year to March 31 of the next.
Matching principle An accounting principle requiring that expenses incurred in producing revenues be
deducted from the revenues they generated during the accounting period.
Prepaid expense An asset awaiting assignment to expense. An example is prepaid insurance. Assets such
as cash and accounts receivable are not prepaid expenses.
Service potential The benefits that can be obtained from assets. The future services that assets can render
make assets “things of value” to a business.
Trend percentages Calculated by dividing the amount of an item for each year by the amount of that item
for the base year.
Unearned revenue Assets received from customers before services are performed for them. Since the
revenue has not been earned, it is a liability, often called revenue received in advance or advances by
customers.
Self-test
True-false

Indicate whether each of the following statements is true or false:
Every adjusting entry affects at least one income statement account and one balance sheet account.
All calendar years are also fiscal years, but not all fiscal years are calendar years.
The accumulated depreciation account is an asset account that shows the amount of depreciation for the current
year only.
The Unearned Delivery Fees account is a revenue account.
If all of the adjusting entries are not made, the financial statements are incorrect.

Multiple-choice
Select the best answer for each of the following questions.
An insurance policy premium of USD 1,200 was paid on 2010 September 1, to cover a one-year period from that
date. An asset was debited on that date. Adjusting entries are prepared once a year, at year-end. The necessary
adjusting entry at the company’s year-end, 2010 December 31, is:
a. Prepaid insurance 400
Insurance expense 400
b. Insurance expense 800
Prepaid insurance 800
c. Prepaid insurance 800
Insurance expense 800
d. Insurance expense 400
Prepaid insurance 400
The Supplies on Hand account has a balance of USD 1,500 at year-end. The actual amount of supplies on hand
at the end of the period was USD 400. The necessary adjusting entry is:
a. Supplies expense 1,100
Supplies on hand 1,100
b. Supplies expense 400
Supplies on hand 400
c. Supplies on hand 1,100
Supplies expense 1,100
d. Supplies on hand 400
Supplies expense 400
A company purchased a truck for USD 20,000 on 2010 January 1. The truck has an estimated residual value of
USD 5,000 and is expected to last five years. Adjusting entries are prepared only at year-end. The necessary
adjusting entry at 2010 December 31, the company’s year-end, is:

Accounting Principles: A Business Perspective 136 A Global Text