Page 138 - Accounting Principles (A Business Perspective)

3. Adjustments for financial reporting

accounting, where an effort is made to match expenses incurred against the revenues they create,
that makes adjusting entries necessary.” Do you agree with this statement? Why?

➢ Why do accountants not keep all the accounts at their proper balances continuously throughout the
period so that adjusting entries would not have to be made before financial statements are prepared?
➢ What is the fundamental difference between deferred items and accrued items?
➢ Identify the types of adjusting entries included in each of the two major classes of adjusting entries.
➢ Give an example of a journal entry for each of the following:

➢ Equal growth of an expense and a liability.
➢ Earning of revenue that was previously recorded as unearned revenue.
➢ Equal growth of an asset and a revenue.
➢ Increase in an expense and decrease in an asset.
➢ A fellow student makes the following statement: “You can easily tell whether a company is using the
cash or accrual basis of accounting. When an amount is paid for future rent or insurance services, a
firm that is using the cash basis debits an expense account while a firm that is using the accrual basis
debits an asset account.” Is the student correct?
➢ You notice that the Supplies on Hand account has a debit balance of USD 2,700 at the end of the
accounting period. How would you determine the extent to which this account needs adjustment?

➢ Some assets are converted into expenses as they expire and some liabilities become revenues as they
are earned. Give examples of asset and liability accounts for which this statement is true. Give
examples of asset and liability accounts to which the statement does not apply.
➢ Give the depreciation formula to compute straight-line depreciation for a one-year period.
➢ What does the term accrued liability mean?

➢ What is meant by the term service potential?
➢ When assets are received before they are earned, what type of an account is credited? As the amounts
are earned, what type of account is credited?
➢ What does the word accrued mean? Is there a conceptual difference between interest payable and
accrued interest payable?
➢ Matching expenses incurred with revenues earned is more difficult than matching expenses paid
with revenues received. Do you think the effort is worthwhile?
➢ Real world question Refer to the financial statements of The Limited, Inc., in the Annual report
appendix. Approximately what percentage of the depreciable assets under property, plant, and
equipment has been depreciated as of the end of the most recent year shown?

Exercises
Exercise A Select the correct response for each of the following multiple-choice questions:
The cash basis of accounting:
(a) Recognizes revenues when sales are made or services are rendered.
(b)Recognizes expenses as incurred.

(c) Is typically used by some relatively small businesses and professional persons.
(d)Recognizes revenues when cash is received and recognizes expenses when incurred.

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