Match the accounting terms on the left with the corresponding definitions on the right (This exercise links back to Chapters 2 & 3).
Answer – a. b. c. d. e. f. g. Accounts receivable
- a. b. c. d. e. f. g. Prepaid Expenses
- a. b. c. d. e. f. g. Accumulated depreciation
- a. b. c. d. e. f. g. Accounts payable
- a. b. c. d. e. f. g. Unearned service revenue
- a. b. c. d. e. f. g. Accrued liabilities
- a. b. c. d. e. f. g. Depreciation
Answer a. A liability for which the business knows the amount owed, but has not paid the bill
b. An asset for which the advance payment provides a future benefit
c. A contra asset that holds the sum of all the depreciation recorded for an asset
d. The allocation of a plant’s cost to expense
e. The promise to pay a debt arising from a credit purchase
f. A promise of future cash receipts
g. Receipt of cash before earning it
The Correct Answer and Explanation is :
Correct Answers:
- Accounts receivable – (f) A promise of future cash receipts
- Prepaid Expenses – (b) An asset for which the advance payment provides a future benefit
- Accumulated Depreciation – (c) A contra asset that holds the sum of all the depreciation recorded for an asset
- Accounts payable – (e) The promise to pay a debt arising from a credit purchase
- Unearned service revenue – (g) Receipt of cash before earning it
- Accrued liabilities – (a) A liability for which the business knows the amount owed, but has not paid the bill
- Depreciation – (d) The allocation of a plant’s cost to expense
Explanation:
Each of these accounting terms relates to specific financial transactions in a business.
- Accounts receivable represents money that customers owe a company for goods or services provided on credit. It is an asset because it represents future cash inflows.
- Prepaid expenses occur when a business pays in advance for a service or product, such as rent or insurance. This is considered an asset because it provides future benefits.
- Accumulated depreciation is a contra asset account that records the total depreciation of an asset over time. It reduces the book value of the asset on the balance sheet.
- Accounts payable represents a business’s obligation to pay off short-term debts to suppliers. This arises when a company purchases goods or services on credit.
- Unearned service revenue is recorded when a company receives payment for services it has yet to perform. It is initially recorded as a liability because the company has an obligation to fulfill the service.
- Accrued liabilities are expenses that a business recognizes but has yet to pay, such as wages or utilities. The amount is known, but the payment is deferred.
- Depreciation spreads out the cost of a tangible asset (like equipment) over its useful life. This ensures that the asset’s cost is matched with the revenue it helps generate.
Understanding these terms helps businesses track financial transactions accurately and ensure proper financial reporting.