About Adjusting Entries

At the conclusion of each accounting period, adjusting entries must be made in order to ensure the accuracy of the financial statements. An adjusting entry is an entry made to ensure that each accounting period is assigned the correct amount of income and costs. As a result, all financial accounts are correct and up-to-date when they are presented at year-end.

An adjusting Entry example

Suppose a car shop has a three-month payment plan for its customers who need repair work done.

Cash expected to be received is recorded in accounts receivable in June. The adjustment entry will be made in August, when the customer submits payment. Adjusting entries are used to turn receivables into revenue in this situation.

Why the need for an adjusting Entry?

The matching principle is an accounting guideline that must be followed. According to the matching principle, revenue is recorded as soon as it is generated and costs as soon as they are incurred. It only pertains to the accrual accounting model, not the cash accounting model. Adjusting inputs aren't necessary if you're using the cash basis technique.

Significance of Adjusting Entries

Accurate and timely business transactions can be recorded through the use of adjusting entries. To keep track of your receivables and liabilities, as well as to discover the precise profit and loss of your firm at year-end, this is a great tool.

Your business' financial health will be skewed if you don't include adjusting entries in your financial statements. Expenses and liabilities will be minimized while net income and owner equity would be exaggerated. This is why tax and accounting professionals propose adopting the accrual basis and revising entries.

Following are some of the multiple choice questions on the Adjusting Entries with answers that will help the students in developing their knowledge.

Adjusting Entries MCQ

1. What type of account is prepaid expense?

  • Asset
  • Expense
  • Liability
  • Revenue

2. Why adjusting entries are necessary before preparing financialstatements?

  • To alter the journal entries in the book
  • To locate errors in unbalanced trial balance
  • To update the revenue and expense accounts
  • To check the accuracy of the debit and credit amounts

3. Adjusting entries are necessary to

  • Update and correct the accounts at the end of the period
  • balance the books at the end of the period
  • record the sales of the period
  • ensure the equality of the debits and credits

4. When you generate revenue in one accounting period, but don’t recognize it until a later period, you need to make a(n) ___________________ adjustment

  • Prepaid expense
  • Unearned income
  • Accrued Revenue
  • Accumulated depreciation

5. At the end of the month Shop Rong owes salaries which will not be paid until the next accounting period. Which account should receive an adjusting debit entry?

  • Salaries Payable
  • Salaries expense
  • Accounts payable
  • Accounts receivable

6. On December 1, 2020, Republica Importing purchased $4,500 of supplies and recorded as an asset. On December 31, 2020, Republica checked supplies and found $1,200 in the inventory. Prepare the adjusting journal entry for December 31

  • Supplies expense/supplies both $3,300
  • Supplies/supplies expense both $3,300
  • Supplies/cash both $4,500
  • Accumulated supplies/supplies expense both $1,200

7. Equipment costing $60,000 has useful life of 5 years and its estimated salvage value is $10,000. Depreciation is provided using the straight line depreciation method. At the end of one year which accounts will be debited/credited

  • Depreciation Expense/Equipment
  • Prepaid Equipment/Depreciation expense
  • Depreciation expense/accumulated depreciation
  • None of these

8. $3,000 worth of service has been provided to a customer who paid advance amount of $4,000. The accounting period has come to an end with 25% of the work undone. The following debit/credit is required:

  • service revenue/unearned revenue
  • unearned revenue/service revenue
  • accrued revenue/cash
  • service expense/services

9. On January 1 a company purchased billboard advertising for 12 months for $6,000. On January 31, an adjusting credit was made to the __________account for $__________.

  • Prepaid Advertising/$500
  • Advertising Expense/$500
  • Cash/$1,000
  • Accrued Advertising/$500

10. Recognizing that a loss of value has occurred to vehicles during an accounting period requires a debit to

  • Vehicles
  • Cash
  • Accounts Payable
  • Depreciation Expense

11. Adjusting entries should be made

  • Prior to posting to the General Journal
  • Prior to posting to the General Ledger
  • After posting to the General Ledger
  • After Posting to the Balance Sheet

12. After completing adjustments the worksheet must

  • Still be in balance
  • Contain only negative numbers
  • Have more debits than credits
  • Havre credits than debits

13. If you paid for insurance in advance for a year, and some time elapses, what account will need to be adjusted

  • Supplies
  • Depreciation Expense
  • Prepaid Insurance
  • Equipment

14. Adjusting entries are required due to

  • Mistakes
  • Changes in circumstances, for example increased depreciation
  • Inventory adjustments, such as when inventory is stolen or missing.
  • All of the above

15. After adjustments have made if the debits and credits are in balance:

  • There have been no posting errors.
  • There still could have been posting errors.
  • The company is profitable.
  • GAAP principles have been followed.

16. If an accountant realizes an earlier posting mistake during an accounting period, she should:

  • Go back and erase the original entry and then replace it correctly.
  • Inform the IRS
  • Make (an) adjusting entry(ies)
  • None of these

17. Which of these would likely require adjusting entries

  • Expiration of prepaid insurance.
  • The accrual of unpaid expenses.
  • Receipt of unearned income
  • All of these would require adjustments.

18. Adjusting entries are required when using

  • The cash basis of accounting
  • The accrual basis of accounting
  • Double entry accounting
  • Both B and C

19. Closing entries are made at the end of the fiscal period so that:

  • the balance sheet will be up to date
  • the Capital account will be up to date
  • the income statement accounts will begin the next fiscal period with a zero balance
  • both b) and c)

20. A red Dodge Viper was bought on July 1 of the current year for $180,000. It is expected to last 20 years with 0 Salvage Value. Calculate the amount of depreciation as of December 31st of the current year using the straight line method of depreciation.

  • $4500
  • $9000
  • $54,000
  • $2,700

21. A silver Nissan 350Z was bought for $80,000 on January 1st of the current year. Calculate the depreciation for this vehicle as of December 31st of the current using the declining balance method (30%).

  • $12,000
  • $20,000
  • $40,000
  • $24,000

22. Unearned revenue is a(n) _________________ account.

  • Revenue
  • Expense
  • Asset
  • Liability

23. Accumulated Depreciation is a(n) ________________ account.

  • Asset
  • Liability
  • Expense
  • Revenue

24. At the beginning of Year 1, the Supplies account had a debit balance of $2,300. During the year, the business purchased $900 of supplies. An inventory count at the end of the year revealed that $650 of supplies remained. The adjusting entry as a result of this information is:

  • DR Supplies Expense $1,650, credit Supplies $1,650
  • DR Supplies Expense $3,850, credit Accumulated Depreciation -Supplies $3,850
  • DR Supplies Expense $750, credit Supplies $750
  • DR Supplies Expense $2,550, credit Supplies $2,550

25. A business purchased a one-year insurance policy costing $480 on April 15 of the current year. The journal entry to record this transaction is:

  • a debit to Insurance Expense $480, credit Bank $480
  • debit Prepaid Insurance $480, credit Bank $480
  • debit Prepaid Insurance $340, credit Insurance Expense $340
  • debit Insurance Expense $340, credit Prepaid Insurance $340

26. Which of the following statements concerning the Accumulated Depreciation account is false?

  • it appears on the balance sheet
  • it is an asset account
  • it has a credit balance
  • it is closed at the end of the fiscal period

27. Adjusting entries are necessary because accounts are allowed to become inaccurate between financial statement dates.

  • True
  • False

28. The Accumulated Depreciation account is known as a "contra" account because even though it is a ____________ account, it has a ________________ balance.

  • asset, credit
  • liability, debit
  • asset, debit
  • liability, credit

29. Using the declining balance method of depreciation, calculate the depreciation (30%) for a Truck bought for $65,000 on January 1st of the current year if it is now March 31st.

  • $19,500
  • $1,626
  • $4,875
  • $9,750

30. Which of the following are temporary accounts?

  • Accounts Receivable, Accounts Payable
  • Fees Earned, Drawings
  • Capital, Drawings
  • Bank Loan, Mortgage Payable

31. Which of the following is NOT closed out at the end of the accounting period?

  • Wages
  • Accounts Receivable
  • Bank Charges
  • Loss on Sale of Equipment

32. When all closing entries have been posted, a net income will be shown on the:

  • credit side of the Drawings account
  • debit side of the Capital account
  • credit side of the Capital account
  • debit side of the Drawings account

33. The source of data for preparing closing entries is the:

  • trial balance
  • worksheet
  • worksheet plus general journal
  • all of the above are possible

34. The Accumulated Depreciation account is decreased when it is credited.

  • True
  • False

35. A post-closing Trial Balance (which is done after closing entries) includes no Revenue or Expense accounts.

  • True
  • False

36. Whenever supplies are used (like a paper clip from a supply drawer), the Supplies Expense should immediately be debited.

  • True
  • False

37. Bad debts is always associated with receivables from sales or service revenue.

  • True
  • False

38. This refers to the process of entering information in the journals which occurs immediately after the analysis phase of the accounting cycle.

  • Adjusting
  • Closing
  • Journalizing
  • Classifying

39. This is the process of transferring amounts from journals to ledgers.

  • Classifying
  • Posting
  • Summarizing
  • Recording

40. These are revenues which are already incurred but not yet collected.

  • Accrued Revenue
  • Accrued expenses
  • Both A & B
  • none of the above

41. On May 1, 2020, Lappy Services received a Php450,000, 9% note for selling an equipment not being used by the business anymore. The note is payable in 2 years. How much is the accrued interest income?

  • Php2,700
  • Php27,000
  • Php40,500
  • None

42. Which of the following is NOT a method of estimating doubtful accounts?

  • Double-declining method
  • Percentage of Accounts Receivable
  • Percentage of Sales
  • Aging of Accounts Receivable

43. The following steps in the accounting process are theoretically done throughout the year, EXCEPT:

  • Preparation of closing entries
  • Preparation of financial statements
  • Preparation of journal entries
  • Preparation of adjusting entries

44. Which of the following do NOT have a negative effect on the owner's capital?

  • Depreciation expense
  • Adjusting entry for unearned revenue
  • Owner's drawings
  • Payment of liabilities

45. Which of the following is TRUE about the allowance for doubtful accounts?

  • It is always equal to bad debts expense
  • It is never equal to bad debts expense
  • It will always be less than accounts receivable
  • It will never be less than the accounts receivable

46. From which accounting document is the trial balance prepared?

  • Journals
  • Ledgers
  • Source documents
  • Vouchers

47. The adjusting entry to record an accrued expense results in which of the following types of accounts being debited and credited?

  • Asset/Revenue
  • Asset/Liability
  • Expense/Asset
  • Expense/Liability

48. The adjusting entry to record an accrued revenue results in which of the following types of accounts being debited and credited?

  • Asset/Revenue
  • Asset/Liability
  • Expense/Asset
  • Expense/Liability

49. Office Equipment was purchased on May 1, 2017 at a cost of P 140,000 with a salvage value of P 20,000. The equipment’s useful life is five years. How much is the depreciation expense on December 31, 2017.

  • Php 24,000
  • Php 10,000
  • Php 16,000
  • Php 28,000

50. On September 1, 2017, the company collected P72,000 rent in advance. A debit to Cash and a credit to Unearned Revenue was made. The tenant was paying for one year's rent. How much is the Rental Revenue to be recorded in the adjusting entry on Dec. 31, 2017?

  • Php 6,000
  • Php 24,000
  • Php 30,000
  • Php 36,000

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