BASIC ACCOUNTING

True or False
1. Many business transactions affect more than one time period.
2. The time period assumption states that the economic life of a business entity can be
divided into artificial time periods.
3. The time period assumption is often referred to as the matching principle.
4. A company's calendar year and fiscal year are always the same.
5. Accounting time periods that are one year in length are referred to as interim periods.
6. Income will always be greater under the cash basis of accounting than under the accrual
basis of accounting.
7. The cash basis of accounting is not in accordance with generally accepted accounting
principles.
8. The matching principle requires that efforts be matched with accomplishments.
9. Expense recognition is tied to revenue recognition.
10. The revenue recognition principle dictates that revenue be recognized in the accounting
period in which cash is received.
11. Adjusting entries are not necessary if the trial balance debit and credit columns balances
are equal.
12. An adjusting entry always involves two balance sheet accounts.
13. Adjusting entries are often made because some business events are not recorded as they
occur.
14. Adjusting entries are recorded in the general journal but are not posted to the accounts in
the general ledger.
15. Revenue received before it is earned and expenses paid before being used or consumed
are both initially recorded as liabilities.
16. Accrued revenues are revenues which have been received but not yet earned.

17. The book value of a depreciable asset is always equal to its market value because
depreciation is a valuation technique.
18. Accumulated Depreciation is a liability account and has a credit normal account balance.
19. A liabilityrevenue account relationship exists with an unearned rent revenue adjusting
entry.
20. The balances of the Depreciation Expense and the Accumulated Depreciation accounts
should always be the same.
21. Unearned revenue is a prepayment that requires an adjusting entry when services are
performed.
22. Asset prepayments become expenses when they expire.
23. A contra asset account is subtracted from a related account in the balance sheet.
24. If prepaid costs are initially recorded as an asset, no adjusting entries will be required in
the future.
25. The cost of a depreciable asset less accumulated depreciation reflects the book value of
the asset.
26. Accrued revenues are revenues that have been earned and received before financial
statements have been prepared.
27. Financial statements can be prepared from the information provided by an adjusted trial
balance.
28. The adjusting entry at the end of the period to record an expired cost may be different
depending on whether the cost was initially recorded as an asset or an expense.
29. Rent received in advance and credited to a rent revenue account which is still unearned at
the end of the period, will require an adjusting entry crediting a liability account for the
amount still unearned.
30. An adjusting entry requiring a credit to Insurance Expense indicates that the initial
transaction was charged to an asset account.

Multiple Choice
1. Monthly and quarterly time periods are called
a. calender periods.
b. fiscal periods.
c. interim periods.
d. quarterly periods.
2. The time period assumption states that
a. a transaction can only affect one period of time.
b. estimates should not be made if a transaction affects more than one time period.
c. adjustments to the enterprise's accounts can only be made in the time period when
the business terminates its operations.
d. the economic life of a business can be divided into artificial time periods.
3. An accounting time period that is one year in length, but does not begin on January 1, is
referred to as
a. a fiscal year.
b. an interim period.
c. the time period assumption.
d. a reporting period.
4. The matching principle matches
a. customers with businesses.
b. expenses with revenues.
c. assets with liabilities.
d. creditors with businesses.
5. Under accrual-basis accounting
a. cash must be received before revenue is recognized.
b. net income is calculated by matching cash outflows against cash inflows.
c. events that change a company's financial statements are recognized in the period
they occur rather than in the period in which cash is paid or received.
d. the ledger accounts must be adjusted to reflect a cash basis of accounting before
financial statements are prepared under generally accepted accounting principles.
6. Adjusting entries are required
a. because some costs expire with the passage of time and have not yet been
journalized.
b. when the company's profits are below the budget.
c. when expenses are recorded in the period in which they are incurred.
d. when revenues are recorded in the period in which they are earned.
7. An adjusting entry
a. affects two balance sheet accounts.
b. affects two income statement accounts.
c. affects a balance sheet account and an income statement account.
d. is always a compound entry.

8. The preparation of adjusting entries is

a. straight forward because the accounts that need adjustment will be out of balance.
b. often an involved process requiring the skills of a professional.
c. only required for accounts that do not have a normal balance.
d. optional when financial statements are prepared.
9. If a resource has been consumed but a bill has not been received at the end of the
accounting period, then
a. an expense should be recorded when the bill is received.
b. an expense should be recorded when the cash is paid out.
c. an adjusting entry should be made recognizing the expense.
d. it is optional whether to record the expense before the bill is received.
10. A law firm received P2,000 cash for legal services to be rendered in the future. The full
amount was credited to the liability account Unearned Legal Fees. If the legal services
have been rendered at the end of the accounting period and no adjusting entry is made,
this would cause
a. expenses to be overstated.
b. net income to be overstated.
c. liabilities to be understated.
d. revenues to be understated.
11. Which of the following reflect the balances of prepayment accounts prior to adjustment?
a. Balance sheet accounts are understated and income statement accounts are
understated.
b. Balance sheet accounts are overstated and income statement accounts are
overstated.
c. Balance sheet accounts are overstated and income statement accounts are
understated.
d. Balance sheet accounts are understated and income statement accounts are
overstated.
12. Macalalad Company purchased office supplies costing P6,000 and debited Office Supplies
for the full amount. At the end of the accounting period, a physical count of office supplies
revealed P2,400 still on hand. The appropriate adjusting journal entry to be made at the
end of the period would be
a. Debit Office Supplies Expense, P2,400; Credit Office Supplies, P2,400.
b. Debit Office Supplies, P3,600; Credit Office Supplies Expense, P3,600.
c. Debit Office Supplies Expense, P3,600; Credit Office Supplies, P3,600.
d. Debit Office Supplies, P2,400; Credit Office Supplies Expense, P2,400.
13. Lee Company purchased a computer for P4,800 on December 1. It is estimated that
annual depreciation on the computer will be P960. If financial statements are to be
prepared on December 31, the company should make the following adjusting entry:
a. Debit Depreciation Expense, P960; Credit Accumulated Depreciation, P960.
b. Debit Depreciation Expense, P80; Credit Accumulated Depreciation, P80.
c. Debit Depreciation Expense, P3,840; Credit Accumulated Depreciation, P3,840.
d. Debit Office Equipment, P4,800; Credit Accumulated Depreciation, P4,800.

14. Jack Frost Company's Prepaid Insurance account has the following balances:
Balance beginning of year
Balance end of year

P5,600
6,400

During the year, an additional business insurance policy was purchased. A 2-year premium of
P2,500 was paid and charged to Prepaid Insurance.
The adjusting entry that was made to arrive at the ending balance included
a. A debit to Prepaid Insurance of P800
b. A debit to Insurance Expense of P1,700
c. A credit to Prepaid Insurance of P800
d. A credit to Insurance Expense of P1,700
15. Lee Company signed a new P136,800 3-year lease beginning March 1, 2012 for a storage
facility for finished goods inventory. Lee recorded the first year's payment of P45,600 in the
prepaid rent account. The balance in the prepaid rent account prior to this entry was P30,780.
This prior balance relates to the previous lease for this facility that had expired February 28,
2012. Lee records adjustments only at May 31, the end of the fiscal year. At May 31, 2012, the
adjusting entry needed to reflect the correct balances in the prepaid rent and rent expense
accounts is to debit
a. Prepaid rent for P11,400 and credit rent expense for P11,400
b. Rent expense for P34,200 and credit prepaid rent for P34,200
c. Prepaid rent for P42,180 and credit rent expense for P42,180
d. Rent expense for P42,180 and credit prepaid rent for P42,180
16. Tavera's Styling Salon, a Sole Proprietorship, pays weekly salaries of P5,000 each Friday
for a five-day week ending on that day. The accrual required for a fiscal period ending on
Thursday is:
a.
Debit Salaries Payable, P4,000; credit Cash, P4,000
b.
Debit Salary Expense, P4,000; credit Drawing, P4,000
c.
Debit Salary Expense, P4,000; credit Salaries Payable, P4,000
d.
Debit Drawing, P4,000; credit Cash, P4,000
17. Diola's Hardware, a Corporation, pays its employees each Friday for a five-day total
workweek. The payroll is P12,000 per week. If the end of the accounting period occurs on a
Wednesday, the adjusting entry to record Salaries Payable would include a:
a.
Debit to Salary Expense of P4,800.
b.
Debit to Salary Expense of P6,000.
c.
Credit to Salaries Payable of P2,400.
d.
Credit to Salaries Payable of P7,200.
18. Rental Services, Inc. reviews its records at the end of December 2014 in anticipation of the
end of its calendar year. This process reveals that:

2,000 of Accounts Receivable outstanding at the beginning of December has been

collected and recorded.
The December utility bill has not yet been paid. A phone call to the provider reveals that
the invoice will total P1,200 and will be mailed on January 4, 2015.

Billing of P25,000 has been issued for the month.

Services of P5,000 to Construction Experts were completed on December 30, 2014, but
billing will not be rendered until January 3, 2015.
If Rental Services takes no action on any of the above items:
a.
Expenses for 2014 will be overstated by P1,200.
b.
Expenses for 2014 will be understated by P5,000.
c.
Expenses for 2015 will be overstated by P1,200.
d.
Expenses for 2015 will be understated by P5,000.

.
19. Airah Lee Company, a Sole Proprietorship, signed a two-year rental agreement on October
1, 2014, for P9,600. The agreement covers its building for the next two years. Airah Lee debited
Prepaid Rent to record the payment. The December 31, 2014 adjusting entry includes a credit
to:
a.
Rent Expense of P1,200
b.
Rent Expense of P8,400
c.
Prepaid Rent of P1,200
d.
Prepaid Rent of P8,400
20. At the beginning of the year, the Unearned Rent account has a balance of P30,000. The
Unearned Rent account balance at the end of the year is P6,000. Given this information, Rent
Revenue for the current year must be:
a.
P30,000
b.
P24,000
c.
P12,000
d.
P6,000
21. The asset account, Supplies, has a balance of P1,950 at the beginning of the year and was
debited during the year for P5,600, representing the total of supplies purchased during the year.
If P1,500 of supplies is on hand at the end of the year, Supplies Expense reported on the
income statement for the year is:
a.
P1,500
b.
P1,900
c.
P5,600
d.
P6,050
22. At the beginning of the period, ALSM, Inc. had P3,600 in the asset account, Supplies.
During the period, it purchased P1,400 of additional items, debiting the Supplies asset account.
At the end of the period, ALSM determined that only P1,200 of supplies were still on hand. What
adjusting entry should ALSM, Inc. make at the end of the period?
a.
Debit: Supplies ..........................
1,200
Credit: Supplies Expense ................
1,200
b.
Debit: Supplies ..........................
3,400
Credit: Supplies Expense ................
3,400
c.
Debit: Supplies Expense ..................
3,800
Credit: Supplies ........................
3,800
d.
Debit: Supplies Expense ..................
1,200
Credit: Supplies ........................
1,200

23. The Unearned Revenue account before adjustment at the end of the month has a credit
balance of P2,400, representing an advance payment received on the first day of the month. If
P1,600 of Revenue is earned during the month, the balance in the Unearned Revenue at the
end of the month, after adjustments, is:
a.
P 800 credit
b.
P 1,600 credit
c.
P 2,400 credit
d.
P 4,000 credit
24. Macalalad Corporation renewed an insurance policy for 3 years beginning July 1, 2012 and
recorded the P81,000 premium in the prepaid insurance account. The P81,000 premium
represents an increase of P23,400 from the P57,600 premium charged 3 years ago. Assuming
Macalalad's records its insurance adjustments only at the end of the calendar year, the
adjusting entry required to reflect the proper balances in the insurance accounts at December
31, 2012, Macalalad's year-end is to
a. Debit insurance expense for P13,500 and credit prepaid insurance for P13,500
b. Debit prepaid insurance for P13,500 and credit insurance expense for P13,500
c. Debit insurance expense for P67,500 and credit prepaid insurance for P67,500
b. Debit insurance expense for P23,100 and credit prepaid insurance for P23,100
25. ALSM&Co. received a check for P30,000 on October 1 which represents a one year
advance payment of rent on an office it rents to a client. Unearned Rental Revenue was
credited for the full P30,000. Financial statements are prepared on December 31. The
appropriate adjusting journal entry to make on December 31 would be:
a. Debit Rental Revenue P2,500; credit Unearned Rental Revenue P2,500.
b. Debit Unearned Rental Revenue P7,500; credit Rental Revenue P7,500
c. Debit Unearned Rental Revenue P22,500; credit Rental Revenue P22,500
d. Debit Rental Revenue P22,500; credit Unearned Rental Revenue P22,500