Under which basis of accounting would adjusting entries never be recorded? Cash
ID: 2616243 • Letter: U
Question
Under which basis of accounting would adjusting entries never be recorded?
Cash basis of accounting
Accrual basis of accounting
Which accounts would most likely not be used under the cash basis of accounting? Check all that apply.
Unearned Fees
Supplies Expense
Accounts Payable
Cash
Accounts Receivable
Service Revenue
Matching Concept/Revenue Recognition
Under the accrual basis of accounting, many of the account balances in the ledger at the end of the accounting period are reported in the financial statements without change. Some accounts require updating, though. When preparing financial statements, the economic life of the business is divided into time periods. The matching concept states that
A purchase made by a business is matched with the actual cost of the item.
The expenses incurred during a period are matched with the revenue that those expenses generated.
The transactions of a business are matched with the transactions of its owner, creditors and other businesses.
The accounting records and reports are matched with objective evidence.
Under accrual basis of accounting, the revenue recognition concept states that
Revenues are recognized when services have been performed or products have been delivered to customers.
Revenues are recognized when a contract is signed with the customer.
Revenues are recognized when the cash is received.
Revenues may not be recognized until the company is deemed to be profitable.
Review the following selected transaction data of a business for March. Keeping the matching concept in mind, indicate which of the following would be used to calculate net income for the month of March. Check all that apply.
Cash received from cash customers for services performed in March.
Expenses incurred in March but not paid until April.
Services provided to customers on account during March.
Cash paid in March for expenses incurred in March.
Cash paid in March for expenses incurred in February.
Cash received in March from customers for services performed in February.
Overstated, Understated
Assume that the Cole Designs financial statements in the Unadjusted Financial Statements panel were prepared from the unadjusted trial balance and the financial statements in the Adjusted Financial Statements panel were prepared from the adjusted trial balance.
For the following financial statement items, indicate if the item was overstated, understated or neither in the financial statements prepared using the unadjusted trial balance.
Overstated
Understated
Neither
Adjusting Entries
Journalize the six December 31 adjusting entries for Cole Designs that adjusted the accounts to arrive at the financial statements in the Adjusted Financial Statements panel. Refer to the Chart of Accounts for exact wording of account titles. Record each adjustment as a separate entry.
PAGE 25
JOURNAL
1
Adjusting Entries
2
3
4
5
6
7
8
9
10
11
12
13
Chart of Accounts
Unadjusted Financial Statements
These financial statements were prepared from the unadjusted trial balance.
Cole Designs
Income Statement
For the Year Ended December 31, 2016
1
Fees earned
$69,400.00
2
Wages expense
44,600.00
3
Net income
$24,800.00
Cole Designs
Balance Sheet
December 31, 2016
1
Assets
2
Cash
$4,000.00
3
Accounts receivable
32,000.00
4
Supplies
3,575.00
5
Prepaid Insurance
3,400.00
6
Equipment
11,000.00
7
Total assets
$53,975.00
8
Liabilities
9
Unearned fees
$9,800.00
10
Owner’s equity
11
Ann Cole, capital
44,175.00
12
Total liabilities and owner’s equity
$53,975.00
Adjusted Financial Statements
These financial statements were prepared from the adjusted trial balance.
Cole Designs
Income Statement
For the Year Ended December 31, 2016
1
Fees earned
$75,250.00
2
Expenses:
3
Wages expense
$46,600.00
4
Supplies expense
3,455.00
5
Insurance expense
1,700.00
6
Depreciation expense
1,600.00
7
Total expenses
53,355.00
8
Net income
$21,895.00
Cole Designs
Balance Sheet
December 31, 2016
1
Assets
2
Cash
$4,000.00
3
Accounts receivable
32,450.00
4
Supplies
120.00
5
Prepaid Insurance
1,700.00
6
Equipment
$11,000.00
7
Less accumulated depreciation
1,600.00
9,400.00
8
Total assets
$47,670.00
9
Liabilities
10
Wages payable
$2,000.00
11
Unearned fees
4,400.00
12
Total liabilities
$6,400.00
13
Owner’s equity
14
Ann Cole, capital
41,270.00
15
Total liabilities and owner’s equity
$47,670.00
Overstated
Understated
Neither
Net income Owner’s equity Revenues Total assets Total expenses Total liabilitiesExplanation / Answer
(1) Adjustment entries are required only in Accrual basis of accounting as there is a frequent mismatch between expense and cash outflow and income and cash inflow. Adjustment entries are made so as to reconcile financial statements to the accrual basis of accounting. Cash flow of accounting on the other hand record expenses only when actual cash outflow occurs and record income only when actual cash inflow occurs.
Hence, the correct option is (a).
NOTE: Please raise separate queries for solutions to the remaining unrelated questions.
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