Accrual Basis Balance Sheet

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Introduction to Accounting

Accrual Basis Balance Sheet

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Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.

1. Accounts receivable is reported on the balance sheet because

a. amounts are collected from customers before the goods are delivered
b. amounts are paid by the company before the service is provided
c. amounts are paid by the company after the service is provided
d. amounts are collected from customers after goods are delivered

Answer
D. Accounts receivable means that the customer owes the company. The customer did not pay in the period the goods were provided and will pay the company in a future period.
2. Which of the following accounts will not be reported in the same transaction?

a. amounts collected from customers and accounts receivable
b. amounts paid by the company and prepaid expense
c. amounts paid by the company and accounts receivable
d. amounts collected from customers and unearned revenue

Answer
C. Amounts paid by the company is either a prepaid asset or an expense in the period the cash is paid. Receivables are collected by the company and not paid by the company. Accounts receivable is reduced when cash is collected from customers in a later period. Amounts paid by the company before the service is provided is prepaid expense. Amounts collected from customers before providing the goods or service is unearned revenue.
3. A prepaid asset becomes an expense when

a. amounts are paid by the company before the service is provided
b. amounts are paid by the company after the service is provided
c. the prepaid service is provided over time
d. the prepaid asset is paid for

Answer
C. A prepaid is recorded when the company pays for a service that has not yet been received. The service is commonly insurance or rent that is provided over time. As the time passes, the prepaid asset is used up and no longer prepaid. The asset is used up over time and when the asset is used up an expense is incurred.
4. Deferred revenue becomes revenue when

a. amounts are collected from customers before the goods are delivered
b. the goods are provided to the customer
c. the customer pays for the goods
d. amounts are collected from customers after goods are delivered

Answer
B. Revenue occurs when goods are provided to the customer. The unearned revenue is recorded when the customer pays and the revenue is recorded when the customer received the goods. Unearned revenue is a liability that is repaid when the goods are provided to the customer (and the unearned revenue is traded for revenue.)
5. The difference in accrued liability and accounts payable is

a. the goods not yet delivered to the customer is accrued liability and accounts payable occurs when payment is made before goods are delivered to the customer
b. one is always short-term and the other is always long-term
c. accrued liabilities is always unpaid expenses and accounts payable is always unpaid assets
d. one represents various operating expenses that have not been paid and the other represents payment has not yet been made for repeat purchases

Answer
D. Accrued liabilities (or accrued expenses) represents various operating expenses that have not been paid and accounts payable represents payment has not yet been made for repeat purchases (such as inventory, utilities, supplies.) Unearned revenue occurs when the customer pays before the goods or services are provided. Accounts payable can be for assets or expenses; it is for all repeat, consistent purchases.
6. Unearned revenue is a liability because

a. the customer has not yet paid the company
b. the company owes the customer for payment previously made
c. the company owes suppliers for repeat purchases
d. the customer owes the company for services provided

Answer
B. Unearned revenue is recorded when the customer pays the company before goods or services are provided to the customer. The company owes the customer the goods or services that have been paid for. Accounts receivable occurs when the customer has not yet paid the company. Accounts payable is recorded when the company owes suppliers for repeat purchases.
7. All receivables are an indication that the company

a. has not been paid for amounts earned
b. has not paid what is owed to others
c. has not paid for assets purchased
d. has not paid for expenses incurred

Answer
A. A receivable occurs when the company is owed for amounts earned. The revenue has been earned and the company expects to be paid in a future period.
8. Which of the following is reported when the company collects cash before the goods are provided to the customer?

before the goods are provided to the customer?
a. prepaid expense
b. unearned revenue
c. accounts receivable
d. accrued liability

Answer
B. Unearned revenue is recorded when the customer pays the company before the goods or services are provided to the customer. Unearned revenue is a liability.
9. Which of the following is reported when the company pays cash before the service is provided to the company?

a. prepaid expense
b. unearned revenue
c. accounts receivable
d. accrued liability

Answer
A. A prepaid expense is recorded when the company pays cash before the service is provided to the company. Prepaid expense is an asset until the asset is used up as time passes.
10. Which of the following is reported when employees are not paid for services provided to the company?

a. prepaid expense
b. unearned revenue
c. accounts receivable
d. accrued compensation

Answer
D. Accrued means “not yet paid” and compensation is related to employees. Accrued compensation represents amounts not yet paid related to employees.
11. Accrued expense is reported on the balance sheet because the company

a. has not been paid for amounts earned
b. has not been paid by customers
c. has used long-term assets to produce revenues
d. has not paid for various operating expenses incurred

Answer
D. Accrued means “not yet paid”. Accrued expense represents expenses that have been incurred and have not yet been paid. The account that represents long-term physical assets have been used is “accumulated depreciation”. A receivable is recorded when the company has not yet been paid for amounts earned.
12. Which of the following accounts indicate that the company has received

funds from owners for ownership?
a. common stock
b. paid in capital
c. treasury stock
d. both a. and b.

Answer
D. Common stock and paid in capital are both used to represent amounts received from owners for ownership. Common stock is the par value and paid in capital is the difference in the total cash received from investors and the par value. Treasury stock is common stock the company now owns because the company bought back shares from previous investors.
13. Deferred revenue is reported when

a. the customer has not yet paid the company
b. the company owes the customer for payment that has been made
c. the company owes suppliers for repeat purchases
d. the customer owes the company for services provided

Answer
B. Deferred revenue is recorded when the customer pays the company before goods or services are provided to the customer. The company owes the customer the goods or services that have been paid for. Accounts receivable occurs when the customer has not yet paid the company. Accounts payable is recorded when the company owes suppliers for repeat purchases. (Deferred revenue and unearned revenue mean the same thing.)
14. Property, plant and equipment is recorded as an asset when purchased and

the cost of using the long-term asset is reported when
a. the long-term asset is disposed of and no longer used
b. the long-term asset is paid for
c. the long-term asset is used to produce revenue
d. the period the long-term asset is purchased

Answer
C. The cost of using the asset is recorded as an expense in the period the asset is used to produce revenue. This is due to the matching principle. The cost of using the long-term asset is called “depreciation expense” for the current period. The cumulative cost of using the asset from the time the company began using it to the end of the current period is reported as “accumulated depreciation” on the balance sheet.
15. Which of the following accounts is used to report when goods are provided to the customer and the customer will pay in a future period?

a. prepaid expense
b. unearned revenue
c. accounts receivable
d. accrued compensation

Answer
C. Accounts receivable is recorded when the goods or services have been provided to the customer and the customer has not yet paid the company. The revenue is recorded when the goods or services are provided regardless of when the customer pays.