ACG 2021 exam 2 Questions and All
Correct Answers 2025-2026 Updated.
Periodicity Assumption - Answer - The economic life of a business can be divided into
artificial time periods (month, quarter, or year)
The revenue recognition principle - Answer - Companies recognize revenue in the accounting
period in which the performance obligation is satisfied.
- Revenue is recorded when it is earned, not when the cash is received.
- So if the firm sells items on credit the firm will need to adjust the financial statements even
though cash is not received.
Expense recognition Principle - Answer - Match expenses with revenues in the period when
the company makes efforts to generate those revenues.
Matching principle - Answer - Same as expense recognition, match expenses to the revenues
they help generate
Revenue and expense recognition - Answer - in accordance with generally accepted
accounting principles.
Cash basis accounting - Answer - Revenues and expenses are recognized only when cash is
received or paid.
- Prohibited under GAAP
- Results in incomplete financial statements and ignores important information
Accrual basis accounting - Answer - transactions recorded in the periods in which the vents
occurred
- revenues are recognized (journalized) when services performed, even if cash was not paid.
- Expenses are recognized when incurred, even if cash was not paid.
- Required by GAAP
Adjusting Entries - Answer - Ensure that the revenue recognition and expense recognition
principles are followed
- Are required every time a company prepares financial statements
- Includes atleast one income statement account (rev/exp) and one balance sheet account
- Never includes cash
,- These are internal transactions, not external. Nothing has happened
Three catalysts that create the need for adjustment - Answer - Accruals- action before dollars
- Deferrals- dollars before action
- Depreciation (also a deferral)
Types of Deferrals - Answer - Prepaid expenses: expenses paid in cash and recorded as assets
before they are used or consumed
- Unearned revenue: cash received before services are performed
Types of accruals: - Answer - Accrued revenues: revenues for services performed but not yet
received in cash or recorded
- Accrued expenses: expenses incurred but not yet paid in cash or recorded
Deferrals are either: - Answer - Prepaid expenses (assets) or Unearned revenues (liabilities)
Deferred revenue - Answer - Creates unearned revenue (a liability) for the firm
- Represents when cash has been received before performing services or delivering the goods
- Examples: season tickets, magazine...
Unearned Revenue - Answer - Deferred revenue
- Receipt of cash recorded as a liability before services are performed
- Examples: rent, airline tickets, magazine subscriptions, and customer deposits
Adjusting entries for unearned revenues - Answer - adjusting entry to record the revenue
that has been earned and to show the correct amount of liability that remains
- Initially, the firm records the transaction:
o cash (balance sheet) is debited. Unearned revenue (liability on the balance sheet) is credited
- Later, the firm makes an adjustment entry to record the revenue that has been earned
(portion of the unearned revenue that has subsequently been delivered):
o Unearned revenue (liability on the balance sheet) is debited. Revenue (income statement) is
credited.
If adjustment for unearned revenue was not made - Answer - Liabilities would have been
overstated and revenues would be understated.
Prepaid expenses - Answer - Deferred expense
, - payment of cash, that is recorded as an asset because service or benefit will be received in the
future
- cash payment before expense recorded
- Examples: Ins, rent, supplies
Adjusting entries for Prepaid expenses - Answer - costs that expire wither with the passage
of time or through use
- Initially, the firm records the transaction:
o Prepaid (assets on the balance sheet) are debited. Cash (balance sheet) is credited.
- Later, the firm makes an adjusting entry to record expenses that have been incurred (prepaids
that have been used):
o Expenses (income statement) are debited. Prepaids (assets on the balance sheet) are credited.
If the adjusting entry for a prepaid expenses was not made - Answer - Assets would have
been overstated and expenses would be understated
Deferred expenses - Answer - Depreciation, prepaid expenses
Depreciation - Answer - Deferred expense
- the method firms use to match the expense of long-term assets to the asset's useful life. This is
another example of rules that result from the matching principle (expense recognition)
- companies report a portion of the cost of a long-lived asset as an expense during each period
of the assets useful life.
- Does not attempt to report the actual change in the value of the asset.
Depreciation Expense - Answer - 'non-cash expense' on the income statement
- the matching principle (expense recognition) dictates that the firm recognizes the expense of
this machine over the life of the asset (when it is being used to generate revenues), not entirely
up front when the cash is spent.
Depreciation notes: - Answer - depreciate things like buildings and machinery. Do NOT
depreciate Land
- Depreciation does NOT necessarily represent physical wear and tear... but it tries too
- Depreciation does NOT have anything to do with the market value of the asset.
Recording Depreciation - Answer - Accumulated Depreciation- equipment is a contra asset
account
- Appears just after the account it offsets (equipment) on the balance sheet
Correct Answers 2025-2026 Updated.
Periodicity Assumption - Answer - The economic life of a business can be divided into
artificial time periods (month, quarter, or year)
The revenue recognition principle - Answer - Companies recognize revenue in the accounting
period in which the performance obligation is satisfied.
- Revenue is recorded when it is earned, not when the cash is received.
- So if the firm sells items on credit the firm will need to adjust the financial statements even
though cash is not received.
Expense recognition Principle - Answer - Match expenses with revenues in the period when
the company makes efforts to generate those revenues.
Matching principle - Answer - Same as expense recognition, match expenses to the revenues
they help generate
Revenue and expense recognition - Answer - in accordance with generally accepted
accounting principles.
Cash basis accounting - Answer - Revenues and expenses are recognized only when cash is
received or paid.
- Prohibited under GAAP
- Results in incomplete financial statements and ignores important information
Accrual basis accounting - Answer - transactions recorded in the periods in which the vents
occurred
- revenues are recognized (journalized) when services performed, even if cash was not paid.
- Expenses are recognized when incurred, even if cash was not paid.
- Required by GAAP
Adjusting Entries - Answer - Ensure that the revenue recognition and expense recognition
principles are followed
- Are required every time a company prepares financial statements
- Includes atleast one income statement account (rev/exp) and one balance sheet account
- Never includes cash
,- These are internal transactions, not external. Nothing has happened
Three catalysts that create the need for adjustment - Answer - Accruals- action before dollars
- Deferrals- dollars before action
- Depreciation (also a deferral)
Types of Deferrals - Answer - Prepaid expenses: expenses paid in cash and recorded as assets
before they are used or consumed
- Unearned revenue: cash received before services are performed
Types of accruals: - Answer - Accrued revenues: revenues for services performed but not yet
received in cash or recorded
- Accrued expenses: expenses incurred but not yet paid in cash or recorded
Deferrals are either: - Answer - Prepaid expenses (assets) or Unearned revenues (liabilities)
Deferred revenue - Answer - Creates unearned revenue (a liability) for the firm
- Represents when cash has been received before performing services or delivering the goods
- Examples: season tickets, magazine...
Unearned Revenue - Answer - Deferred revenue
- Receipt of cash recorded as a liability before services are performed
- Examples: rent, airline tickets, magazine subscriptions, and customer deposits
Adjusting entries for unearned revenues - Answer - adjusting entry to record the revenue
that has been earned and to show the correct amount of liability that remains
- Initially, the firm records the transaction:
o cash (balance sheet) is debited. Unearned revenue (liability on the balance sheet) is credited
- Later, the firm makes an adjustment entry to record the revenue that has been earned
(portion of the unearned revenue that has subsequently been delivered):
o Unearned revenue (liability on the balance sheet) is debited. Revenue (income statement) is
credited.
If adjustment for unearned revenue was not made - Answer - Liabilities would have been
overstated and revenues would be understated.
Prepaid expenses - Answer - Deferred expense
, - payment of cash, that is recorded as an asset because service or benefit will be received in the
future
- cash payment before expense recorded
- Examples: Ins, rent, supplies
Adjusting entries for Prepaid expenses - Answer - costs that expire wither with the passage
of time or through use
- Initially, the firm records the transaction:
o Prepaid (assets on the balance sheet) are debited. Cash (balance sheet) is credited.
- Later, the firm makes an adjusting entry to record expenses that have been incurred (prepaids
that have been used):
o Expenses (income statement) are debited. Prepaids (assets on the balance sheet) are credited.
If the adjusting entry for a prepaid expenses was not made - Answer - Assets would have
been overstated and expenses would be understated
Deferred expenses - Answer - Depreciation, prepaid expenses
Depreciation - Answer - Deferred expense
- the method firms use to match the expense of long-term assets to the asset's useful life. This is
another example of rules that result from the matching principle (expense recognition)
- companies report a portion of the cost of a long-lived asset as an expense during each period
of the assets useful life.
- Does not attempt to report the actual change in the value of the asset.
Depreciation Expense - Answer - 'non-cash expense' on the income statement
- the matching principle (expense recognition) dictates that the firm recognizes the expense of
this machine over the life of the asset (when it is being used to generate revenues), not entirely
up front when the cash is spent.
Depreciation notes: - Answer - depreciate things like buildings and machinery. Do NOT
depreciate Land
- Depreciation does NOT necessarily represent physical wear and tear... but it tries too
- Depreciation does NOT have anything to do with the market value of the asset.
Recording Depreciation - Answer - Accumulated Depreciation- equipment is a contra asset
account
- Appears just after the account it offsets (equipment) on the balance sheet
