WEEK 2

Question 1

What is the Time Period Assumption in accounting?

Answer 1

It’s the idea that the life of a business can be divided into artificial time periods (like months, quarters, or years) for reporting purposes.

Question 2

What is a timing issue in accounting?

Answer 2

It’s when a transaction impacts more than one accounting period, making it tricky to decide when to record revenues or expenses.

Question 3

What are interim periods?

Answer 3

Monthly and quarterly accounting periods used for reporting.

Question 4

What is accrual-basis accounting?

Answer 4

It records revenues and expenses when they happen, not when cash is received or paid.

Question 5

What is cash-basis accounting?

Answer 5

It records revenue when cash is received and expenses when cash is paid.

Question 6

Which basis of accounting does GAAP require?

Answer 6

Accrual-basis accounting

Question 7

What is the Revenue Recognition Principle?

Answer 7

Companies must record (or “recognize”) revenue when they satisfy a performance obligation — not when cash is received.

Question 8

What is the Expense Recognition Principle (also called the Matching Principle)?

Answer 8

Expenses should be recorded in the same period as the revenues they help generate.

Question 9

How are the Revenue and Expense Recognition Principles related?

Answer 9

They work together under accrual accounting to match efforts (expenses) with results (revenue) in the same period to show true profit.

Question 10

What are the two main types of adjusting entries?

Answer 10

Deferrals
Accruals

Question 11

What is a deferral?

Answer 11

Cash happens before the revenue or expense is recorded.

Question 12

What are examples of deferrals?

Answer 12

1. Prepaid expenses (e.g., insurance, supplies, depreciation)
2. Unearned revenues (cash received before service is done)

Question 13

What is a prepaid expense?

Answer 13

An asset created when cash is paid for something that will be used in future periods (like insurance or rent). Adjusted later as it’s used.

Question 14

What is unearned revenue?

Answer 14

A liability created when a company receives cash before performing a service. It becomes revenue as the service is done.

Question 15

What is an accrual?

Answer 15

Revenue or expense is recorded before cash is received or paid.

Question 16

What are examples of accruals?

Answer 16

1. Accrued revenues (work done but not billed yet)
2. Accrued expenses (expenses incurred but not paid yet, like wages or interest)

Question 17

Depreciation

Answer 17

the process of allocating the cost of an asset to expense over its useful life

Question 18

Accumulated Depreciation

Answer 18

Equipment is a contra asset account

Question 19

adjusted trial balance

Answer 19

to prove the equality of the total debit balances and the total credit balances in the ledger after all adjustments

Question 20

worksheet

Answer 20

multiple-column form used in the adjustment process and in preparing financial statements

Question 21

is a worksheet a permanent tool or working tool

Answer 21

working tool

Question 22

What is the first step in preparing a worksheet?

Answer 22

List all account balances from the unadjusted trial balance (taken from the ledger).

Question 23

What happens in the second step of the worksheet?

Answer 23

Enter all adjusting entries in the adjustments columns, and make sure debits = credits.

Question 24

What is the third step in the worksheet?

Answer 24

Calculate and list the adjusted trial balance by combining original balances with adjustments.

Question 25

What is the fourth step in the worksheet?

Answer 25

Transfer (extend) the adjusted balances to the Income Statement and Balance Sheet columns.

Question 26

What are temporary accounts?

Answer 26

Accounts that relate to only one accounting period, like revenues, expenses, and the drawings account. They are closed at the end of the period.

Question 27

What are permanent accounts?

Answer 27

Accounts that carry over to the next period — like assets, liabilities, and the owner's capital. These are not closed.

Question 28

Why do we make closing entries?

Answer 28

To reset all temporary accounts to zero for the next accounting period and transfer the net income/loss to Owner’s Capital.

Question 29

What is the Income Summary account?

Answer 29

A temporary account used only during the closing process to collect revenues and expenses before transferring the net result to capital.

Question 30

drawings

Answer 30

opnames door de eigenaren van geld of gebruik uit de zaak van privegebruik

Question 31

debit or credit: drawings

Answer 31

debit

Question 32

explain income summary

Answer 32

Revenues have a credit balance, so you debit them → send to Income Summary. Expenses have a debit balance, so you credit them → also to Income Summary. Then you calculate net income or loss in Income Summary and transfer it to Owner’s Capital. Drawings have a debit balance, so you credit them and send directly to Owner’s Capital (not to Income Summary).

Question 33

When should a correcting entry be made?

Answer 33

As soon as the error is discovered, and before closing entries are made.

Question 34

classified balance sheet

Answer 34

groups together similar assets and similar liabilities, using a number of standard classifications and sections

Question 35

why are these groupings useful?

Answer 35

* whether the company has enough assets to pay its debts as they come due, and * the claims of short- and long-term creditors on the company’s total assets.

Question 36

operating cycle

Answer 36

the average time that it takes to purchase inventory, sell it on account, and then collect cash from customers

Question 37

retailers

Answer 37

Merchandising companies that purchase and sell directly to consumers

Question 38

wholesalers

Answer 38

Merchandising companies that sell to retailers

Question 39

A merchandising company has two categories of expenses:

Answer 39

COGS operating expenses

Question 40

Multi-step Income Statement

Answer 40

Sales Revenue − Cost of Goods Sold (COGS) ——————————————— = Gross Profit Gross Profit − Operating Expenses ——————————————— = Net Income (or Net Loss)

Question 41

perpetual inventory system

Answer 41

These records continuously—perpetually—show the inventory that should be on hand for every item

Question 42

periodic inventory system

Answer 42

they determine the cost of goods sold only at the end of the accounting period.

Question 43

FOB Shipping Point

Answer 43

the seller places the goods free on board the carrier, and the buyer pays the freight costs.

Question 44

FOB Destination

Answer 44

the seller places the goods free on board to the buyer’s place of business, and the seller pays the freight

Question 45

purchase allowance

Answer 45

when someone is not happy with the product but they can keep it but do get a allowance (deduction) from the purchase price

Question 46

what on the balance sheet changes when a purchase discount is used

Answer 46

inventory Account Debit / Credit Amount Accounts Payable Debit $3,500 → You're paying off the full invoice (reduce liability) Cash Credit $3,430 → Actual amount paid Inventory Credit $70 → Discount reduces the cost of inventory

Question 47

What are Sales Returns and Allowances?

Answer 47

They are transactions where the seller accepts returned goods or gives the buyer a price reduction (allowance) to keep the goods.

Question 48

Is Sales Returns and Allowances a revenue or contra-revenue account?

Answer 48

contra-revenue account meaning it reduces total sales on the income statement.

Question 49

whats a contra account

Answer 49

A contra account is an account that goes against another account. So a contra-revenue account goes against revenue — it reduces it.

Question 50

What are the journal entries for a sales return (when goods are returned)?

Answer 50

Dr. Sales Returns and Allowances Cr. Accounts Receivable Dr. Inventory Cr. Cost of Goods Sold (COGS)

Question 51

What if the returned goods are damaged or not worth full value?

Answer 51

Record Inventory and COGS at the fair value of the returned goods, not the original cost.

Question 52

What is the journal entry for a sales allowance (goods not returned)?

Answer 52

Dr. Sales Returns and Allowances Cr. Accounts Receivable ✅ No effect on Inventory or COGS

Question 53

net sales formula

Answer 53

sales revenue - sales returns/allowances - sales discount = net sales

Question 54

Nonoperating activities

Answer 54

consist of various revenues and expenses and gains and losses that are unrelated to the company’s main line of operations

Question 55

COGS formula

Answer 55

beginning inventory + COGP ---- COG available for sale - ending inventory ----- cost of goods sold

Question 56

What’s the main difference between periodic and perpetual in how purchases are recorded?

Answer 56

perpetual: Purchases go directly into Inventory periodic: Purchases go into a Purchases account