Most asked questions from Accrual accounting

concepts
1. Under the accrual basis of accounting, which of the following is TRUE?

a) Expenses are recorded only when cash is paid

b) Revenues are recorded only when cash is received
c) Revenues and expenses are recognized when they are earned or incurred, regardless of cash
flow
d) Adjusting entries are unnecessary

Answer: c) Revenues and expenses are recognized when they are earned or incurred, regardless
of cash flow

2. If an expense is recorded in the books before it is paid in cash, it is known as:

a) A deferred expense
b) A prepaid expense
c) An accrued expense
d) An unearned expense

Answer: c) An accrued expense

3. Which of the following transactions requires an adjusting entry at the end of the period?

a) Paying rent in advance for six months

b) Purchasing inventory for cash
c) Recognizing interest revenue that has been earned but not yet received
d) Collecting cash from a customer for services performed

Answer: c) Recognizing interest revenue that has been earned but not yet received

4. If a company fails to record an adjusting entry for an accrued revenue, which of the
following is TRUE?

a) Assets will be overstated

b) Expenses will be overstated
c) Liabilities will be overstated
d) Revenues will be understated

Answer: d) Revenues will be understated

5. Unearned revenue should be classified as a(n):

a) Asset
b) Expense
c) Liability
d) Revenue

Answer: c) Liability

6. Which of the following accounts is increased when an adjusting entry is made to recognize
an accrued expense?

a) Cash
b) Accounts Payable
c) Interest Payable
d) Prepaid Expenses

Answer: c) Interest Payable

7. Which of the following is an example of a deferred revenue?

a) A company provides services on credit and invoices the customer

b) A business collects payment from customers before performing services
c) A company records salaries that have been earned by employees but not yet paid
d) A company purchases supplies and immediately records them as an expense

Answer: b) A business collects payment from customers before performing services

8. An adjusting entry for depreciation will affect:

a) The cash balance

b) Total assets and total expenses
c) Total liabilities and total expenses
d) Revenues and liabilities
Answer: b) Total assets and total expenses

9. A company pays for a one-year insurance policy in advance. At the end of the first month,
which adjusting entry should be made?

a) Debit Prepaid Insurance, Credit Insurance Expense

b) Debit Insurance Expense, Credit Prepaid Insurance
c) Debit Insurance Expense, Credit Cash
d) Debit Cash, Credit Insurance Expense

Answer: b) Debit Insurance Expense, Credit Prepaid Insurance

10. If a company forgets to adjust for prepaid expenses, which of the following happens?

a) Net income is overstated

b) Assets are understated
c) Expenses are overstated
d) Liabilities are understated

Answer: a) Net income is overstated

Other questions from the chapter

1. Which of the following best describes accrual accounting?

a) Recording revenues and expenses when cash is received or paid

b) Recording revenues when they are earned and expenses when they are incurred
c) Recording only cash transactions in financial statements
d) Recognizing expenses only when cash is available

Answer: b) Recording revenues when they are earned and expenses when they are incurred

2. According to the revenue recognition principle, when should revenue be recognized?

a) When cash is received

b) When goods or services are delivered, and collection is reasonably assured
c) When the customer places an order
d) At the end of the accounting period

Answer: b) When goods or services are delivered, and collection is reasonably assured
3. The matching principle requires that:

a) Expenses be recorded only when paid

b) Expenses be matched with revenues in the period they help to generate revenue
c) Revenues be recognized when cash is received
d) Expenses be recorded only when incurred

Answer: b) Expenses be matched with revenues in the period they help to generate revenue

4. Which of the following is an example of an adjusting entry for an accrued expense?

a) Recording revenue for services provided but not yet paid

b) Recognizing prepaid rent as an expense
c) Recording unpaid salaries at the end of the accounting period
d) Depreciating equipment over its useful life

Answer: c) Recording unpaid salaries at the end of the accounting period

5. Which of the following accounts is affected by adjusting entries for accrued revenues?

a) Cash
b) Unearned Revenue
c) Accounts Receivable
d) Revenue Expenses

Answer: c) Accounts Receivable

6. Prepaid expenses are:

a) Recorded as an expense when paid

b) An asset that represents payments made for future expenses
c) A liability representing future obligations
d) Not recorded in accrual accounting

Answer: b) An asset that represents payments made for future expenses

7. Unearned revenue is:

a) An expense
b) A liability until the related revenue is earned
c) Recognized as revenue when cash is received
d) An asset

Answer: b) A liability until the related revenue is earned

8. Which of the following is an example of an accrued revenue adjustment?

a) Recording depreciation on office equipment

b) Recognizing rent received in advance as revenue
c) Recording interest earned but not yet received
d) Paying salaries before they are due

Answer: c) Recording interest earned but not yet received

9. Which financial statement is most affected by accrual accounting adjustments?

a) Cash Flow Statement

b) Balance Sheet
c) Income Statement
d) Both b and c

Answer: d) Both b and c

10. Under the accrual basis of accounting, revenues are recorded when:

a) Cash is received
b) The performance obligation is satisfied
c) The invoice is sent
d) Cash is paid for expenses

Answer: b) The performance obligation is satisfied

11. Adjusting entries are made:

a) Only at the end of the accounting period

b) Every time cash is received
c) Only for unpaid expenses
d) At the beginning of the accounting period
Answer: a) Only at the end of the accounting period

12. Which of the following requires an adjusting entry at year-end?

a) A payment received in advance for next year’s services

b) The purchase of office supplies during the year
c) The sale of merchandise on credit
d) A utility bill paid in cash at the time of usage

Answer: a) A payment received in advance for next year’s services

13. What is the primary purpose of adjusting entries?

a) To correct errors made in previous entries

b) To ensure revenues and expenses are recorded in the proper period
c) To move cash from one account to another
d) To reconcile bank statements

Answer: b) To ensure revenues and expenses are recorded in the proper period

14. An accrued expense is an expense that:

a) Has been paid in advance

b) Has been incurred but not yet paid
c) Is recorded only when cash is paid
d) Is recognized after cash is received

Answer: b) Has been incurred but not yet paid

15. Which account is increased when adjusting for accrued salaries at the end of the period?

a) Salaries Expense
b) Prepaid Salaries
c) Cash
d) Salaries Payable

Answer: d) Salaries Payable

16. If an expense is prepaid, it is initially recorded as a(n):

a) Liability
b) Expense
c) Asset
d) Revenue

Answer: c) Asset

17. Accrued revenues:

a) Are recorded when cash is received

b) Require an adjusting entry to recognize revenue before cash is received
c) Are recognized only after cash is collected
d) Are always recorded in the same period as expenses

Answer: b) Require an adjusting entry to recognize revenue before cash is received

18. Depreciation is an example of:

a) An accrued revenue
b) An accrued expense
c) An adjusting entry to allocate asset cost over time
d) A cash expense

Answer: c) An adjusting entry to allocate asset cost over time

19. Which of the following accounts is NOT affected by an adjusting entry?

a) Prepaid Insurance
b) Unearned Revenue
c) Accounts Payable
d) Accumulated Depreciation

Answer: c) Accounts Payable

20. A business pays $6,000 for insurance covering the next six months. What should it record?
a) Prepaid Insurance of $6,000
b) Insurance Expense of $6,000
c) Unearned Revenue of $6,000
d) Accrued Liability of $6,000

Answer: a) Prepaid Insurance of $6,000

21. The adjusting entry for depreciation includes:

a) A debit to Cash and a credit to Equipment

b) A debit to Depreciation Expense and a credit to Accumulated Depreciation
c) A debit to Accumulated Depreciation and a credit to Equipment
d) A debit to Equipment and a credit to Depreciation Expense

Answer: b) A debit to Depreciation Expense and a credit to Accumulated Depreciation

22. Unearned revenue appears on which financial statement?

a) Income Statement
b) Cash Flow Statement
c) Balance Sheet
d) Statement of Retained Earnings

Answer: c) Balance Sheet

23. If adjusting entries are not made, which of the following is TRUE?

a) Net income will always be understated

b) Some revenues and expenses will be misstated
c) The company’s cash balance will be incorrect
d) Financial statements will not change

Answer: b) Some revenues and expenses will be misstated

24. The journal entry to recognize unearned revenue that has now been earned includes:

a) Debit to Unearned Revenue, Credit to Revenue

b) Debit to Revenue, Credit to Unearned Revenue
c) Debit to Cash, Credit to Unearned Revenue
d) Debit to Unearned Revenue, Credit to Cash

Answer: a) Debit to Unearned Revenue, Credit to Revenue

25. Which of the following is an example of an accrued liability?

a) Prepaid Rent
b) Accounts Receivable
c) Salaries Payable
d) Unearned Revenue

Answer: c) Salaries Payable

26. When adjusting for prepaid expenses, the adjusting entry will include:

a) A debit to an asset account

b) A credit to an asset account
c) A debit to a revenue account
d) A credit to a liability account

Answer: b) A credit to an asset account

27. The accrual basis of accounting improves financial reporting by:

a) Recognizing revenues only when cash is received

b) Matching revenues and expenses to the correct period
c) Avoiding adjusting entries
d) Ignoring prepaid expenses

Answer: b) Matching revenues and expenses to the correct period

28. Adjusting entries for prepaid expenses involve:

a) Decreasing an asset account and increasing an expense account

b) Increasing an asset account and decreasing an expense account
c) Increasing an asset account and increasing an expense account
d) Decreasing an expense account and decreasing an asset account
Answer: a) Decreasing an asset account and increasing an expense account

29. What happens if accrued expenses are not recorded?

a) Expenses are overstated

b) Liabilities are understated
c) Assets are understated
d) Revenue is understated

Answer: b) Liabilities are understated

30. If an adjusting entry is omitted for an accrued revenue, which of the following is TRUE?

a) Assets will be overstated

b) Revenues will be understated
c) Liabilities will be overstated
d) Expenses will be overstated

Answer: b) Revenues will be understated