Prelim Accounting1-1st Semester Sy 2018-2019

When a debit is made, it increases an asset account. This means that the transaction results in an increase in the value of an asset, such as cash, inventory, or accounts receivable. Debits are used to record incoming resources or the reduction of liabilities. By increasing an asset account, it reflects that there has been an addition to the company's resources or an increase in the value of an existing asset.

The accounting equation states that the total assets of a company are equal to the sum of its liabilities and owner's equity. This equation is the foundation of double-entry bookkeeping and helps maintain the balance between what a company owns and what it owes. Therefore, the statement "The Accounting Equation is: ASSETS = LIABILITIES + OWNER'S EQUITY OR ASSETS - LIABILITIES = OWNER'S EQUITY" is true.

Calculations: 20,000-6,000=14,000

A prepaid expense refers to an expense that has been paid for in advance but has not yet been used or consumed. It is an asset because the payment made for the expense is considered an investment that will provide future benefits. This type of expense is recorded on the balance sheet as a current asset until it is used or consumed, at which point it is recognized as an expense on the income statement.

The correct answer is "Increase a Liability Account." This means that when a credit is made, it results in an increase in a liability account. Liabilities are obligations or debts that a company owes to external parties. By increasing a liability account, it indicates that the company has incurred more debt or has taken on additional obligations. This could include loans, accounts payable, or other forms of liabilities.

The statement is false because adjusting entries recorded in the worksheet still need to be journalized and posted. The purpose of adjusting entries is to update the accounts and ensure that the financial statements reflect the correct balances. Journalizing and posting the adjusting entries is necessary to incorporate these changes into the general ledger accounts and maintain accurate financial records.

When an account is "debited," it means that there is an increase in that particular category of account. In this case, the correct answer is Assets. When the Assets account is debited, it signifies that there is an increase in the value of the assets owned by the entity. This could include things like cash, inventory, equipment, or property. By debiting the Assets account, the entity is recording an increase in its total assets.

Revenue and expenses are known as temporary or nominal accounts because they are used to track the income and expenses of a business during a specific period of time. These accounts are closed at the end of each accounting period and their balances are transferred to the owner's equity account. This allows for the calculation of the net income or loss for the period and helps in determining the financial performance of the business.

Current assets are assets that are expected to be converted into cash or used up within one year. Cash and receivables are both examples of current assets. Cash refers to the physical currency and coins as well as the balances in bank accounts. Receivables, on the other hand, represent amounts owed to the company by customers or other entities. These can include accounts receivable, which are amounts owed for goods or services provided on credit, and notes receivable, which are formal written promises to pay a specific amount on a specific date. Both cash and receivables are easily convertible into cash and are therefore considered current assets.

The trial balance is a statement that lists all the general ledger accounts and their balances. It is used to ensure that the debits and credits in the accounting system are equal and to identify any errors or discrepancies. Therefore, the trial balance totals should always agree, as it is a fundamental principle of double-entry bookkeeping that every debit must have a corresponding credit.

Revenue is the correct answer because when revenue is increased, it is credited. In accounting, the credit side is used to record an increase in revenue. Revenue represents the income earned by a company through its primary business activities, such as sales of goods or services. When revenue increases, it is recorded as a credit entry in the accounting books to reflect the increase in the company's overall income.

An accrued expense is a liability that arises from an expense that has been incurred but not yet paid. This means that the expense has been recorded in the accounting books, but the payment for it has not been made. It is important to recognize accrued expenses because they represent obligations that the company has and will need to settle in the future. Examples of accrued expenses include salaries payable, interest payable, and utilities payable.

Adjusting entries are prepared at the end of the accounting period to update certain accounts. These entries are necessary to ensure that the financial statements accurately reflect the company's financial position and performance. Adjusting entries are made for things like accrued expenses, prepaid expenses, unearned revenue, and depreciation. By making these adjustments, the company can provide a more accurate picture of its revenues, expenses, and net income for the period. This helps to ensure that the financial statements are in compliance with accounting principles and provide useful information for decision-making.

Prepaid insurance is reported on the balance sheet as an asset because it represents an amount paid in advance for insurance coverage that has not yet been used. It is considered an asset because it has future economic benefits and can be utilized to cover potential losses or damages. As the insurance coverage is used over time, the prepaid amount is gradually recognized as an expense on the income statement.

The correct answer is "adjusted trial balance" because financial statements are prepared using the adjusted trial balance. The adjusted trial balance is prepared after making necessary adjustments to the unadjusted trial balance. These adjustments include accruals, deferrals, estimates, and corrections of errors. The adjusted trial balance ensures that all accounts are up to date and reflects the correct balances. It serves as the basis for preparing financial statements, such as the income statement, balance sheet, and cash flow statement.

Under accrual accounting, revenue is recorded when the services are performed, regardless of when the cash is received. This means that revenue is recognized when the company has fulfilled its obligation to provide goods or services to the customer, regardless of whether the customer has paid for it or not. This method ensures that revenue is matched with the expenses incurred to generate that revenue, providing a more accurate representation of the company's financial performance. It also allows for better comparability between different accounting periods, as revenue is recognized based on the timing of the service rather than the timing of the cash inflow.

Adjusting entries are made at the end of an accounting period to update the accounts in the books and ensure that they reflect the correct financial position and performance of a company. These entries are necessary to apply the matching principle, which requires that expenses be recognized in the same period as the related revenues. By making these adjustments, the net income reported on the financial statements will be more accurate. Additionally, adjusting entries help in maintaining the fundamental accounting equation, A=L+C, by ensuring that assets, liabilities, and equity are properly recorded. Therefore, all of the given options are valid purposes of adjusting entries.

The Accumulated Depreciation account is classified as a contra-asset account. Contra-asset accounts are used to offset the value of an asset on the balance sheet. In the case of Accumulated Depreciation, it is used to track the total depreciation expense of an asset over its useful life. By subtracting the accumulated depreciation from the original cost of the asset, the net book value or carrying value of the asset can be determined.

Calculations: 15,000/3=5,000

Calculations: 800-150=650

According to the revenue principle, revenue should be recorded when it has been earned. This means that revenue should be recognized and recorded in the financial statements when the goods or services have been delivered or performed, and the customer is obligated to pay. This ensures that revenue is recognized in the period it is earned, matching it with the related expenses and providing an accurate representation of the company's financial performance.

Calculations: 5,400/3= 1,800 rent per month. 1,800 *2 months used =3,600

Depreciation expense is the correct answer because it is the account that is debited in the adjusting entry to record the depreciation expense during the current period. Depreciation expense is an expense account that represents the decrease in value of an asset over time. By debiting the depreciation expense account, it is being recognized as an expense on the income statement, which reduces the net income of the company. This adjustment is necessary to accurately reflect the decrease in value of the asset and allocate the cost of the asset over its useful life.

Calculations: 5,400/6= 900 revenue per month. 900 *5 months used =4,500 earned
Beg bal in unearned 5,400 less 4,500 earned = 900 ending balance

The current portion of a long-term debt should be reclassified as a current liability because it represents the amount of the debt that is due within the next year. This is important for financial reporting purposes as it provides a more accurate picture of the company's short-term obligations. By separating the current portion from the long-term portion, it allows for better analysis of the company's liquidity and ability to meet its short-term obligations.

Calculations: 9,000/6=1,500 insurance expense per month
1,500*2 months = 3,000 insurance expense Beg bal 9,000-3,000=6,000

Accrual accounting involves recognizing revenue and expenses when they are earned or incurred, regardless of when cash is received or paid. This means that revenue is recorded when it is earned, even if cash has not been received yet. Therefore, the correct answer is "recording all revenues when cash was received" as it goes against the principles of accrual accounting.