#1
Which accounting method records revenues and expenses when they are earned or incurred, regardless of when the cash is received or paid?
Accrual Accounting
ExplanationRecords transactions when they occur, not when cash changes hands.
#2
What is the purpose of the revenue recognition principle in accrual accounting?
To recognize revenue when it is earned and realizable
ExplanationEnsures revenue is recorded when earned and collectible.
#3
What is the key difference between cash accounting and accrual accounting?
Timing of revenue and expense recognition
ExplanationCash accounting records transactions when cash changes hands; accrual accounting records when transactions occur.
#4
What is the purpose of the accrual accounting system?
To match revenues and expenses in the appropriate period
ExplanationEnsures transactions are recorded in the period they occur.
#5
Which financial statement reports the financial performance of a business over a specific period?
Income Statement
ExplanationSummarizes revenue, expenses, and profit.
#6
What is the primary advantage of accrual accounting over cash accounting?
Matches revenues and expenses in the correct period
ExplanationAligns revenue and expenses with their respective periods.
#7
Under accrual accounting, when is revenue recognized?
When the product is delivered or service is performed
ExplanationRecognized upon delivery of product or service.
#8
Which financial statement is not affected by adjusting entries?
Statement of Cash Flows
ExplanationAdjusting entries do not impact cash flow reporting.
#9
What is the purpose of the expense recognition principle in accrual accounting?
To match expenses with revenues
ExplanationEnsures expenses are recorded in the same period as related revenues.
#10
In accrual accounting, which type of account is affected by the adjusting entry for accrued expenses?
Liability
ExplanationIncreases the amount owed by the company.
#11
What is the adjusting entry required when unearned revenue is earned?
Debit Unearned Revenue, Credit Revenue
ExplanationTransfers unearned revenue to earned revenue.
#12
In accrual accounting, which financial statement is directly impacted by adjusting entries?
Income Statement
ExplanationAdjusted entries affect the calculation of income.
#13
Which adjusting entry is made for an expense that has been incurred but not yet paid?
Debit Expense, Credit Accounts Payable
ExplanationRecords incurred expense and increases liabilities.
#14
Under accrual accounting, what is the purpose of the contra-asset account?
To decrease assets
ExplanationOffsets the balance in an asset account.
#15
Under accrual accounting, how does the recognition of prepaid expenses impact financial statements?
Decreases assets and increases expenses
ExplanationPrepaid expenses are expensed over time.