Accounting for Decisions - Accrue Means To Build Up

Accrue means to build up. If revenue is accruing that means the business has not yet been paid. This creates an asset for the business. An example would be performing a service on account: Debit Accounts Receivable Credit Service Revenue The accounts receivable would be an asset, the sales revenue would be a revenue, both are increasing. Which of the following statements is NOT TRUE regarding closing entries? All permanent accounts must be closed to retained earnings at the end of the period. The incorrect statement regarding closing entries is all permanent accounts must be closed to retained earnings at the end of the period. All other answer options are correct statements regarding closing entries. -Accounts that must be closed include depreciation expense, service revenue, and dividends. -Expenses are closed by debiting retained earnings and crediting each expense account. -Revenue accounts are closed with a debit to each revenue and a credit to Retained Earnings. Smith & Associates had the following information available related to revenues and expenses for the current period: Services provided for cash - $120,000 Services provided on account - $200,000 Expenses paid in cash - $150,000 Expenses incurred on account - $40,000 Assuming no subsequent collection or payment for revenues and expenses on account, what is Smith & Associates net income under both the cash and accrual basis of accounting? Cash basis: Net Loss of $30,000; Accrual basis: Net Income of $130,000. Smith & Associates would have a Net Loss under the cash basis of $30,000 and Net Income under the accrual basis of $130,000. Under the cash basis of accounting, revenues and expenses are only recorded when cash is received or paid. Therefore, neither the revenues nor expenses on account would be recorded as revenues or expenses. This would result in a net loss of $30,000 calculated as: Cash Revenues $120,000 Less Cash Expenses $(150,000) Cash basis Net Loss $(30,000) Under the accrual basis of accounting, revenues are recorded when earned and expenses recorded when incurred, no matter when cash was received or paid. This would result in revenues and expenses both increasing because of the revenues and expenses on account. The accrual basis of accounting would result in Net Income of $130,000, calculated as: Accrual Revenues ($120,000 + $200,000) = $320,00 Less Accrual Expenses ($150,000 + $40,000) = (190,000) Accrual basis Net Income $130,000 The accountant for Ace Electronics forgot to make the adjusting entry for depreciation on the company's equipment. As a result of this mistake, __________. net income is too high As a result of this mistake, net income is too high. If the depreciation adjusting entry is not recorded, then total expenses reported on the income statement are too low and accumulated depreciation reported on the balance sheet is also too low, resulting in total assets that are too high. Because total expenses are too low, net income is now too high. Net income is then closed to retained earnings, which means that retained earnings (stockholder's equity) reported on the balance sheet is also too high. Which of the following statements is NOT TRUE regarding closing entries? - Revenue accounts are closed with a debit to each revenue and a credit to Retained Earnings. - Accounts that must be closed include depreciation expense, service revenue, and dividends. - Expenses are closed by debiting retained earnings and crediting each expense account. - All permanent accounts must be closed to retained earnings at the end of the period. The incorrect statement regarding closing entries is all permanent accounts must be closed to retained earnings at the end of the period. All other answer options are correct statements regarding closing entries. The adjusting entry to record accrued revenue increases both a revenue and __________. - an expense - an asset - Cash - a liability An asset The adjusting entry to record accrued revenue increases both a revenue and an asset. Accrue means to build up. If revenue is accruing that means the business has not yet been paid. This creates an asset for the business. An example would be performing a service on account: Debit Accounts Receivable Credit Service Revenue The accounts receivable would be an asset, the sales revenue would be a revenue, both are increasing. Georgia Company paid $48,000 for two years of insurance coverage on July 1, 2019. The company prepares financial statements on July 31, 2019. What is the amount of insurance expense on July 31, 2019? $46,000 $24,000 $2,000 $48,000 $2,000