Accounting Week 3 Individual Assignment

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2 State two generally accepted accounting principles that relate to adjusting the accounts? A) The revenue recognition principle, which states that revenue, should be recognized in the accounting period in which it is earned.

B) The matching principle, which states that efforts (expenses) be matched with accomplishments (revenues).

3 Rick Marsh, a lawyer, accepts a legal engagement in March, performs the work in April, and is paid in May. If Marsh’s law firm prepares monthly financial statements, when should it recognize revenue from this engagement? Why?

The law firm should recognize the revenue in April. The revenue recognition principle states that revenue should be recognized in the accounting period in which it was earned.

4 Why do accrual-basis financial statements provide more useful information than cash-basis statements?

Information presented on an accrual basis is more useful than on a cash basis because it reveals relationships that are likely to be important in predicting future results. To illustrate, under accrual accounting, revenues are recognized when earned so they can be related to the economic environment in which they occur. Trends in revenues are thus more meaningful.

8. Distinguish between the two categories of adjusting entries, and identify the types of adjustments applicable to each category.

The two categories of adjusting entries are deferrals and accruals. Deferrals consist of prepaid expenses and unearned revenues. Accruals consist of accrued revenues and accrued expenses.

E3-7 The ledger of Piper Rental Agency on March 31 of the current year includes the following selected accounts before adjusting entries have been prepared.

1. Mar. 31 Depreciation Expense ($400 X 3)   1,200

Accumulated Depreciation—

  Equipment   1,200

2. 31 Unearned Rent 3,300

Rent Revenue ($9,900 X 1/3) 3,300

3. 31 Interest Expense   500

Interest Payable   500

4. 31 Supplies Expense 2,100