A company pays an employee $1,000 for a five day work week, Monday - Friday.

The adjusting entry on

December 31, which is a Wednesday, is debit Wages Expense, $200 and credit Wages Payable, $200.

A company pays $240 for a yearly trade magazine on August 1. The adjusting entry on December 31 is
debit Unearned Subscription Revenue, $100 and credit Subscription Revenue, $100.

A building was purchased for $75,000. Assuming annual depreciation of $2,500, the book value of the
building one year later is $77,500.

The difference between the balance of a fixed asset account and the balance of its related accumulated
depreciation account is termed the book value of the asset.

The matching concept supports matching expenses with the related revenues.

The balance in the prepaid insurance account before adjustment at the end of the year is $4,000. The
amount of the journal entry required to record insurance expense will be $2,500 if the amount of
unexpired insurance applicable to future periods is $1,500.

Even though GAAP requires the accrual basis of accounting, some businesses prefer using the cash basis
of accounting.

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The Accumulated Depreciation's account balance is the sum of depreciation expense recorded in past
periods.

Adjusting journal entries are dated on the last day of the period.

A contra asset account for Land will normally appear in the balance sheet.

The revenue recognition concept states that revenue should be recorded in the same period as the cash
is received.

An adjusting entry would adjust revenue so it is reported when earned and not when cash is received.

Adjustments for accruals are needed to record a revenue that has been earned or an expense that has
been incurred but not recorded.

If the adjustment to recognize expired insurance at the end of the period is inadvertently omitted, the
assets at the end of the period will be understated.

Deferrals are recorded transactions that delay the recognition of an expense or revenue.

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Adjusting entries affect only expense and asset accounts.

Generally accepted accounting principles require accrual-basis accounting.

The difference between deferred revenue and accrued revenue is that accrued revenue has been
recorded and needs adjusting and deferred revenue has never been recorded

A company pays $5,600 for two season tickets on September 1. If $1,400 is earned by December 31, the
adjusting entry made at that time is debit Cash, $1,400 and credit Ticket Revenue, $1,400.

Revenue recognition concept requires that the reporting of revenue be included in the period when
cash for the service is received.

An example of deferred revenue is Unearned Rent.

The updating of accounts is called the adjusting process.

A company pays $12,000 for twelve month's rent on October 1. The adjusting entry on December 31 is
debit Rent Expense, $4,000 and credit Prepaid Rent, $4,000.
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Depreciation Expense is reported on the balance sheet as an addition to the related asset.

If the adjustment of the unearned rent account at the end of the period to recognize the amount of rent
earned is inadvertently omitted, the net income for the period will be overstated.

The accrual basis of accounting requires revenue be recorded when cash is received from customers.

An unearned revenue is a liability.

The system of accounting where revenues are recorded when they are earned and expenses are
recorded when they are incurred is called the cash basis of accounting.

A company does not realize that the last two day's revenue for the month was not recorded. The
adjusting entry on December 31 is debit Accounts Receivable and credit Fees Earned.

Proper reporting of revenues and expenses in a period is due to the accounting period concept.

An adjusting entry would adjust an expense account so the expense is reported when incurred.
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By ignoring and not posting the adjusting journal entries to the appropriate accounts, net income will
always be overstated.

Revenues and expenses should be recorded in the same period in which they relate.

If the debit portion of an adjusting entry is to an asset account, then the credit portion must be to a
liability account.

The financial statements are prepared from the unadjusted trial balance.

The market value of a fixed asset is reflected in the Balance Sheet after the proper adjustment is made.

Prepaid Rent is a deferred expense.

Adjusting entries are made at the end of an accounting period to adjust accounts on the balance sheet.

If the adjustment for accrued salaries at the end of the period is inadvertently omitted, both liabilities
and owner's equity will be overstated for the period.
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The financial statements measure precisely the financial condition and results of operations of a
business.

An adjusting entry to accrue an incurred expense will affect total liabilities.

The systematic allocation of land's cost to expense is called depreciation.

The heading of an adjusted trial balance contains the heading "For the Month Ended December 31,
2008."

Accumulated Depreciation accounts are liability accounts.

Most retailers record all credit card sales as credit sales.

The adjusting entry to record inventory shrinkage would generally include a debit to Cost of
Merchandise Sold.

A customer discount encourages customers to pay accounts more quickly than if a discount were not
available.
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The single-step income statement is easier to prepare, but a criticism of this format is that gross profit
and income from operations are not readily available.

Merchandise is sold for $3,600, terms FOB destination, 2/10, n/30, with prepaid freight costs of $150.
The amount of the sales recorded is $3,528.

The abbreviation FOB stands for "free on board."

In a multiple-step income statement, the dollar amount for income from operations is always the same
as net income.

Purchased goods in transit, shipped FOB destination, should be excluded from ending inventory of the
buyer.

Freight in is considered a cost of purchasing inventory.

If the perpetual inventory system is used, an account entitled Cost of Merchandise Sold is included in
the general ledger.

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There is no difference between the recording of cash sales and the recording of MasterCard or VISA
sales.

When the seller offers a sales discount, even if borrowing has to be done, it is generally advantageous
for the buyer to pay within the discount period.

In a perpetual inventory system, when merchandise is returned to the supplier, Cost of Merchandise
Sold is debited as part of the transaction.

Sellers and buyers are required to record trade discounts.

When merchandise that was sold is returned, a credit to sales returns and allowances is made.

When a merchandising business is compared to a service business, the financial statement that is not
affected by that change is the statement of owner's equity.

In a perpetual inventory system, the Merchandise Inventory account is only used to reflect the
beginning inventory.

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The fees associated with credit card sales are periodically recorded as expenses.

Purchased goods in transit should be included in the ending inventory of the buyer if the goods were
shipped FOB shipping point.

When the terms of sale are FOB shipping point, the buyer should pay the freight charges.

When merchandise is sold for $600 plus 6% sales tax, the Sales account should be credited for $636.

Freight in is the amount paid by the company to deliver merchandise sold to a customer.

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Closing entries for a merchandising business are not similar to those for a service business.

Large businesses that make sales to customers who use nonbank credit cards, such as American Express,
generally treat these sales as credit sales.

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In a merchandise business, sales minus operating expenses equals net income.

If the ownership of merchandise passes to the buyer when the seller delivers the merchandise for
shipment, the terms are stated as FOB destination.

A sale of $750 on account, subject to a sales tax of 6%, would be recorded as an account receivable of
$750.

Sales is equal to the cost of merchandise sold less the gross profit.

Purchases of merchandise are typically credited to the merchandise inventory account under the
perpetual inventory system.

Buyers and sellers do not normally record the list prices of merchandise and the trade discounts in
accounts.

The cost of merchandise inventory is limited to the purchase price less any purchase discounts.

The account form of the balance sheet is presented in a downward sequence in three sections.

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Merchandise Inventory normally has a debit balance.

The chart of accounts for a merchandising business would include an account called Delivery Expense.

A seller may grant a buyer a reduction in selling price and this is called a customer discount.

Under the perpetual inventory system, a company purchases merchandise on terms 2/10, n/30. The
entry to record the purchase will include a debit to Cash and a credit to Sales.

Title to merchandise shipped FOB shipping point passes to the buyer upon delivery of the merchandise
to the buyer's place of business.

Because many companies use computerized accounting systems, periodic inventory is widely used.

The most important differences between a service business and a retail business are reflected in their
operating cycles and financial statements.

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Estimated Returns Inventory is an account used when adjusting for expected merchandise sales in the
next period.

Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally treated as
credit sales.

When companies use a perpetual inventory system, the recording of the purchase of inventory will
include a debit to Purchases.

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Gross profit minus selling expenses equals net income.

Customer Refunds Payable is an account used to record merchandise returns from customers.

A deduction allowed to wholesalers and retailers from the price of merchandise listed in catalogs is
called cash discounts.