Chapter 3
> Things You Should Know
1. What is the difference between cash basis accounting and accrual basis accounting?
Cash basis accounting: Revenue is recorded only when cash is received, and expenses are recorded only when cash is paid.
Does not follow GAAP
Often used by small businesses
Accrual basis accounting: Revenue is recorded when earned, and expenses are recorded when incurred.
2. What concepts and principles apply to accrual basis accounting?
The time period concept assumes that a business’s activities can be sliced into small time segments and that financial statements can be prepared for specific periods, such as a month, quarter, or year.
The revenue recognition principle requires companies to record revenue when it has satisfied each performance obligation.
The matching principle guides accounting for expenses and ensures that all expenses are recorded when they are incurred during the period.
It then matches those expenses against the revenues of the period.
3. What are adjusting entries, and how do we record them?
Adjusting entries are completed at the end of the accounting period and record revenues to the period in which they are earned and expenses to the period in which they occur.
Adjusting entries also update the asset and liability accounts.
Four types of adjusting entries:
Deferred expenses (or prepaid expenses): advance payment of future expenses adjusted for amount used
Deferred revenues (or unearned revenues): advance receipts of future revenues adjusted for amount earned
Accrued expenses: expenses that have been incurred but not paid
Accrued revenues: revenues that have been earned but not collected
4. What is the purpose of the adjusted trial balance, and how do we prepare it?
An adjusted trial balance is a list of all the accounts with their adjusted balances.
It ensures that total debits equal total credits.
5. What is the impact of adjusting entries on the financial statements?
If adjusting entries are not recorded, the balance sheet and income statement accounts will either be overstated or understated.
Overstating or understating accounts causes the financial statements to be incorrect.
6. How could a worksheet help in preparing adjusting entries and the adjusted trial balance?
A worksheet is an internal document that helps identify the accounts that need adjustments.
In addition, a worksheet helps summarize data for the preparation of the financial statements.
Chapter 3
> Things You Should Know
1. What is the difference between cash basis accounting and accrual basis accounting?
Cash basis accounting: Revenue is recorded only when cash is received, and expenses are recorded only when cash is paid.
Does not follow GAAP
Often used by small businesses
Accrual basis accounting: Revenue is recorded when earned, and expenses are recorded when incurred.
2. What concepts and principles apply to accrual basis accounting?
The time period concept assumes that a business’s activities can be sliced into small time segments and that financial statements can be prepared for specific periods, such as a month, quarter, or year.
The revenue recognition principle requires companies to record revenue when it has satisfied each performance obligation.
The matching principle guides accounting for expenses and ensures that all expenses are recorded when they are incurred during the period.
It then matches those expenses against the revenues of the period.
3. What are adjusting entries, and how do we record them?
Adjusting entries are completed at the end of the accounting period and record revenues to the period in which they are earned and expenses to the period in which they occur.
Adjusting entries also update the asset and liability accounts.
Four types of adjusting entries:
Deferred expenses (or prepaid expenses): advance payment of future expenses adjusted for amount used
Deferred revenues (or unearned revenues): advance receipts of future revenues adjusted for amount earned
Accrued expenses: expenses that have been incurred but not paid
Accrued revenues: revenues that have been earned but not collected
4. What is the purpose of the adjusted trial balance, and how do we prepare it?
An adjusted trial balance is a list of all the accounts with their adjusted balances.
It ensures that total debits equal total credits.
5. What is the impact of adjusting entries on the financial statements?
If adjusting entries are not recorded, the balance sheet and income statement accounts will either be overstated or understated.
Overstating or understating accounts causes the financial statements to be incorrect.
6. How could a worksheet help in preparing adjusting entries and the adjusted trial balance?
A worksheet is an internal document that helps identify the accounts that need adjustments.
In addition, a worksheet helps summarize data for the preparation of the financial statements.
