Warren SMChap03 - CHAPTER 3 THE ADJUSTING PROCESS EYE...

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CHAPTER 3 THE ADJUSTING PROCESS EYE OPENERS 1. a. Under cash-basis accounting, revenues are reported in the period in which cash is received and expenses are reported in the period in which cash is paid. b. Under accrual-basis accounting, reve- nues are reported in the period in which they are earned and expenses are reported in the same period as the reve- nues to which they relate. 2. a. 2010 b. 2009 3. a. 2010 b. 2009 4. The matching concept is related to the ac- crual basis of accounting. 5. Yes. The cash amount listed on the trial bal- ance is normally the amount of cash on hand and needs no adjustment at the end of the period. 6. No. The amount listed on the trial balance, before adjustments, normally represents the cost of supplies on hand at the beginning of the period plus the cost of the supplies pur- chased during the period. Some of the sup- plies have been used; therefore, an adjust- ment is necessary for the supplies used before the amount for the balance sheet is determined. 7. Adjusting entries are necessary at the end of an accounting period to bring the ledger up to date. 8. Adjusting entries bring the ledger up to date as a normal part of the accounting cycle. Correcting entries correct errors in the ledger. 9. Four different categories of adjusting entries include prepaid expenses (deferred ex- penses), unearned revenues (deferred reve- nues), accrued expenses (accrued liabili- ties), and accrued revenues (accrued assets). 10. Statement (b): Increases the balance of a revenue account. 11. Statement (a): Increases the balance of an expense account. 12. Yes, because every adjusting entry affects expenses or revenues. 13. a. The balance is the sum of the beginning balance and the amount of the insur- ance premiums paid during the period. b. The balance is the unexpired premiums at the end of the period. 14. a. The rights acquired represent an asset. b. The justification for debiting Rent Ex- pense is that when the ledger is summa- rized in a trial balance at the end of the month and statements are prepared, the rent will have become an expense. Hence, no adjusting entry will be neces- sary. 15. a. The portion of the cost of a fixed asset deducted from revenue of the period is debited to Depreciation Expense. It is the expired cost for the period. The re- duction in the fixed asset account is re- corded by a credit to Accumulated De- preciation rather than to the fixed asset account. The use of the contra asset account facilitates the presentation of original cost and accumulated deprecia- tion on the balance sheet. b. Depreciation Expense—debit balance; Accumulated Depreciation—credit bal- ance. c. No, it is not customary for the balances of the two accounts to be equal in amount. d.
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Warren SMChap03 - CHAPTER 3 THE ADJUSTING PROCESS EYE...

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