Home » Questions » Adjusting entries - Accruals & prepayments Short Answer Questions




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1. What are adjusting entries?

Journal or double entries that convert normal cash based revenues and expenses into accrual accounting based revenues and expenses of an entity

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2. What is the Accrual Concept of accounting?

An accounting concept which dictates that revenues and costs/expenses should be recorded as they are earned or incurred and they shouldn't be recorded when money is received or paid.

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3. Why do we need to pass adjusting entries?

Adjusting entries are required to allocate the expenses and revenues to the appropriate financial period (e.g. a year)

Adjusting entries are helpful in reflecting the true and fair financial performance and financial position of an entity

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4. What are accrual expenses?

Expenses which have been incurred by the business but not yet paid them. For example business used building but rent expense of the building is still unpaid

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5. What are prepaid expenses?

Expenses which have been paid by the business but they are not yet incurred. For example business paid out rent expense of the building before using the building

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6. What are accrued incomes or revenues?

Revenues or incomes which have been earned by the business but not yet received them. For example Telephone Company has earned the telephone services fee but not yet received money from the customer

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7. What are unearned incomes or revenues?

Revenues or incomes which have been received by the business but not yet earned them. For example Telephone Company has received money for telephone service but not yet earned it

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8. What is the Double entry for accrued expenses?

DEBIT = Expenses Account

CREDIT = Accrued expenses Account

It’s a an adjusting entry, it will adjust the amount of expenses that should be recorded in the books of accounts for this accounting period

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9. Under which category the accrued expenses are shown in the balance sheet?

Accrued expenses are classified or categorized as a liability of the business because the entity has to pay these expenses and these expenses will decrease the future economic benefits of the business

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10. What is the Double entry for prepaid expenses?

DEBIT = Prepaid expenses account

CREDIT = Expenses account

Since prepaid expenses are the assets of a business, any increase in assets is considered as debit while decrease in expenses is regarded as credit in accounting

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11. Under which category the prepaid expenses are shown in the balance sheet?

Since prepaid expenses have future economic benefits and these expenses are the resources of business, prepaid expenses are treated as assets of the business

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12. What is the Double entry for Accrued revenues

DEBIT = Accrued revenues account

CREDIT = Revenues account

Accrued revenues are the assets of a business. Therefore, any increase in assets would be accounted as debit and while an increase in revenue is, as you know, considered as credit in accounting

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13. Under which category the Accrued revenues are shown in the balance sheet?

Accrued revenue is a resource of the business that possesses the future economic benefits for the business. Therefore, accrued revenue is always treaded as an asset of the business

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14. What is the double entry for unearned revenues?

DEBIT = Revenue account

CREDIT = unearned revenue account

An increase in liabilities is always recorded as credit and in this case unearned revenue plays the role of liability while revenue is decreasing which is debit

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15. Under which category the unearned revenues are shown in the balance sheet?

Since it decreases the future economic benefits of a business and creates obligation for the business to earn this revenue by providing services or products, unearned revenue is considered as a liability

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16. What’s the difference between closing entries and adjusting entries?

Closing entries are passed at the end of an accounting period to close all nominal ledger accounts such as accounts of revenues and expenses. Closing entries are journal entries usually passed after the preparation of financial statements

On the other hand, adjusting entries are passed at the end of an accounting period to allocate revenues and expenses to the current accounting period. Adjusting entries are journal entries usually passed before the preparation of financial statements

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17. Are the balances of adjusting entries reported in the financial statements?

Of course, they are presented in the financial statements

Earned incomes and incurred expenses are shown in income statement whereas accrued revenues, unearned revenues, prepaid expenses, accrued expenses are reported in balance sheet. Moreover any increase or decrease in the balances of accrued revenues, unearned revenues, prepaid expenses, and accrued expenses are presented in the cash flow statement

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18. What is the difference between accruals and prepayments?

Accruals are expenses and revenues that we have not paid yet but we (business) have incurred these expenses and earned these revenues. Examples of accrual can be: accrued expenses and accrued revenues

Prepayments are expenses and revenues that we have not yet incurred and earned but we have paid or received them. Examples of prepayments can be: prepaid expense and unearned revenues

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