➢ Which events during an accounting period trigger the recording of normal journal entries? Which event triggers the making of adjusting entries?
➢ Describe the difference between the cash basis and accrual basis of accounting.
➢ Why are adjusting entries necessary? Why not treat every cash disbursement as an expense and every cash receipt as a revenue when the cash changes hands?
➢ “Adjusting entries would not be necessary if the ‘pure’ cash basis of accounting were followed (assuming no mistakes were made in recording cash transactions as they occurred). Under the cash basis, receipts that are of a revenue nature are considered revenue when received, and expenditures that are of an expense nature are considered expenses when paid. It is the use of the accrual basis of 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?