1) The adjusting entry to record $500 of expired insurance would include a debit to insurance expense.
2) Revenue that has been earned but not yet collected is called an accrued revenue.
3) Adjusting entries only involve income statement accounts.
4) Adjusting entries assign revenues to the period in which they are earned and expenses to the period in which they are incurred.
5) The process of allocating the cost of property, plant and equipment to expense over their useful lives is called amortization.
6) The cost of a property, plant, and equipment asset less its accumulated amortization is referred to as historical cost.
7) The adjusting entry to record accrued salaries includes a debit to salary expense.
8) Failure to adjust for an accrued expense will overstate expenses and understate net income.
9) Failure to adjust for accrued revenue results in net income being understated and assets being understated.
10) Every adjusting entry affects an account on the income statement and an account on the balance sheet.
The Correct Answer and Explanation is :
Here are the correct answers and explanations for each statement:
1) True – The adjusting entry to record $500 of expired insurance would include a debit to insurance expense.
- When insurance expires, the amount of the insurance that has been used up needs to be recognized as an expense. An adjusting entry will debit insurance expense and credit prepaid insurance to reflect the expired portion of the prepaid insurance.
2) True – Revenue that has been earned but not yet collected is called accrued revenue.
- Accrued revenue refers to earnings that have been recognized, but payment has not yet been received. For example, a company may provide a service or deliver goods but not yet receive the cash, creating a receivable on the balance sheet.
3) False – Adjusting entries do not only involve income statement accounts.
- Adjusting entries can involve both income statement and balance sheet accounts. They are necessary to ensure the proper matching of revenues and expenses, and the correct reporting of assets and liabilities at the end of an accounting period.
4) True – Adjusting entries assign revenues to the period in which they are earned and expenses to the period in which they are incurred.
- This statement refers to the matching principle in accounting, which ensures that income is recorded in the period it is earned and expenses are recognized in the period they are incurred. Adjusting entries help achieve this goal.
5) False – The process of allocating the cost of property, plant, and equipment to expense over their useful lives is called depreciation, not amortization.
- Depreciation is used for tangible assets, such as machinery or buildings, while amortization applies to intangible assets, such as patents or goodwill.
6) False – The cost of a property, plant, and equipment asset less its accumulated depreciation (not amortization) is referred to as book value, not historical cost.
- Historical cost refers to the original cost of acquiring the asset. The book value is the current value of the asset after accounting for depreciation.
7) True – The adjusting entry to record accrued salaries includes a debit to salary expense.
- Accrued salaries refer to salaries earned by employees but not yet paid. The adjusting entry includes a debit to salary expense and a credit to accrued salaries payable.
8) False – Failure to adjust for an accrued expense will understate expenses and overstate net income.
- Accrued expenses, such as wages or utilities, represent costs that have been incurred but not yet paid. If they are not recorded, expenses will be understated and net income will be overstated.
9) True – Failure to adjust for accrued revenue results in net income being understated and assets being understated.
- If revenue is earned but not recorded, both income and assets (accounts receivable) will be understated, leading to inaccurate financial reporting.
10) True – Every adjusting entry affects an account on the income statement and an account on the balance sheet.
- Adjusting entries are made to update both the income statement (for revenues and expenses) and the balance sheet (for assets, liabilities, and equity) to reflect accurate financial positions at the end of the period.
In summary, adjusting entries are essential in accounting to ensure that the financial statements accurately reflect the economic activities of a company during a specific period. They help in adhering to accounting principles like the matching principle and the revenue recognition principle. By recording these adjustments, companies ensure that their financial reports are complete and comply with Generally Accepted Accounting Principles (GAAP).