Adjusting Entries Quiz: 50 True or False Questions with Answers

Test your accounting knowledge with this Adjusting Entries Quiz. These 50 True or False questions cover accrued revenues, accrued expenses, prepaid expenses, unearned revenues, depreciation, estimates, and the purpose of adjusting entries. Each answer includes a detailed explanation to help accounting students prepare for exams and strengthen their understanding of the accounting cycle.

Adjusting Entries Quiz – Questions 1–10

Question 1

Adjusting entries are prepared at the end of an accounting period to ensure that revenues and expenses are recognized in the correct period.

Answer: True

Explanation:
Adjusting entries are an essential part of accrual accounting because they ensure that revenues and expenses are reported in the appropriate accounting period. They are normally prepared at the end of a month, quarter, or year before financial statements are issued. For example, if employees have earned salaries that have not yet been paid, an adjusting entry recognizes the salary expense and related liability. This process supports the matching principle and helps financial statements present a more accurate picture of the company’s financial performance and financial position.

---

Question 2

Adjusting entries are used to record every cash transaction that occurs during an accounting period.

Answer: False

Explanation:
Adjusting entries are not designed to record every cash transaction. Routine transactions involving cash are normally recorded when they occur during the accounting period. Adjusting entries are specifically used to update certain accounts before financial statements are prepared. Common examples include accrued salaries, accrued interest, depreciation, expired prepaid expenses, and earned portions of unearned revenue. Their primary purpose is to bring account balances up to date under accrual accounting. Therefore, recording ordinary cash transactions is not the main function of adjusting entries.

---

Question 3

Every adjusting entry affects at least one income statement account and one balance sheet account.

Answer: True

Explanation:
A typical adjusting entry affects both an income statement account and a balance sheet account. For example, an accrued salary adjustment debits Salaries Expense and credits Salaries Payable. Similarly, depreciation expense is recognized with a debit to Depreciation Expense and a credit to Accumulated Depreciation. This relationship allows the accounting system to recognize the appropriate revenue or expense while simultaneously updating the related asset, liability, or equity account. Adjusting entries therefore connect the income statement with the balance sheet at the end of an accounting period.

---

Question 4

Adjusting entries normally involve at least one temporary account and one permanent account.

Answer: True

Explanation:
Adjusting entries generally involve one income statement account, such as revenue or expense, and one balance sheet account, such as an asset or liability. Revenue and expense accounts are temporary accounts because their balances are eventually closed to retained earnings. Asset and liability accounts are permanent accounts and continue into future accounting periods. For example, an adjustment for accrued revenue debits Accounts Receivable and credits Service Revenue. The revenue affects current-period income, while the receivable remains on the balance sheet until collected or otherwise settled.

---

Question 5

Adjusting entries are usually prepared after the financial statements have been issued.

Answer: False

Explanation:
Adjusting entries are normally prepared before financial statements are prepared and issued. Their purpose is to update account balances so that the financial statements accurately reflect the economic activity of the accounting period. If adjustments were made only after financial statements were issued, the original statements could contain materially incorrect revenue, expense, asset, or liability balances. The normal accounting cycle therefore includes preparing the unadjusted trial balance, recording adjusting entries, preparing the adjusted trial balance, and then preparing the financial statements.

---

Question 6

An adjusting entry can be required when revenue has been earned but has not yet been recorded.

Answer: True

Explanation:
This situation is known as accrued revenue or unearned-to-earned revenue recognition, depending on the circumstances. When a company has performed services or earned revenue but has not yet received cash or recorded the transaction, an adjusting entry is necessary. The entry generally debits Accounts Receivable and credits Revenue. This adjustment increases both the asset and revenue accounts. Without the adjustment, the company would understate revenue and assets for the period, causing the financial statements to fail to reflect the economic activity that actually occurred.

---

Question 7

Accrued expenses are expenses that have been incurred but have not yet been paid or recorded.

Answer: True

Explanation:
Accrued expenses arise when a company has consumed goods or services during the accounting period but has not yet paid the related cash or recorded the expense. Common examples include salaries, interest, utilities, and taxes payable. An adjusting entry recognizes the expense in the period in which it was incurred and establishes the related liability. For example, accrued salaries are recorded by debiting Salaries Expense and crediting Salaries Payable. This treatment follows accrual accounting and ensures that expenses are matched with the revenues they helped generate.

---

Question 8

The adjusting entry for an accrued expense normally includes a debit to an expense account and a credit to a liability account.

Answer: True

Explanation:
When an expense has been incurred but remains unrecorded, the adjusting entry normally increases the expense and the related liability. For example, suppose employees have earned $2,000 in salaries by the end of the month but will be paid next month. The adjusting entry is a debit to Salaries Expense for $2,000 and a credit to Salaries Payable for $2,000. The expense reduces current-period net income, while the liability reports the company’s obligation to pay the employees in the future.

---

Question 9

An adjusting entry for accrued revenue normally debits a revenue account and credits an asset account.

Answer: False

Explanation:
The normal adjusting entry for accrued revenue is the opposite. The company debits an asset account, usually Accounts Receivable, and credits a revenue account. For example, if a company has earned $3,000 from services provided but has not yet billed the customer, it records a $3,000 debit to Accounts Receivable and a $3,000 credit to Service Revenue. This adjustment increases both assets and revenues. Debiting revenue and crediting an asset would generally reduce revenue and reduce the asset, which is not appropriate for accrued revenue.

---

Question 10

Accrued revenues increase both assets and revenues when the adjusting entry is recorded.

Answer: True

Explanation:
Accrued revenue represents revenue that has already been earned but has not yet been received or recorded. The adjusting entry increases an asset, usually Accounts Receivable, because the company has a right to receive payment. At the same time, revenue is increased because the company has already earned it. For example, a $5,000 accrued service revenue adjustment would debit Accounts Receivable for $5,000 and credit Service Revenue for $5,000. Consequently, total assets and reported revenue both increase, assuming no other effects are involved.

---

Adjusting Entries Quiz – Questions 11–20

Question 11

Prepaid expenses are initially recorded as expenses under all accounting systems.

Answer: False

Explanation:
Prepaid expenses are commonly recorded initially as assets because the company has paid for benefits that will be received in future periods. Examples include prepaid insurance, prepaid rent, and prepaid subscriptions. As the benefits are consumed, the appropriate portion is transferred from the asset account to an expense account through an adjusting entry. For example, if a company pays $12,000 for one year of insurance, it may initially debit Prepaid Insurance. Each month, part of that amount becomes Insurance Expense as the coverage is used.

---

Question 12

An adjusting entry for an expired portion of prepaid insurance decreases the prepaid asset and increases insurance expense.

Answer: True

Explanation:
When prepaid insurance coverage is consumed, the related asset must be reduced and an expense must be recognized. Suppose a company paid $12,000 for twelve months of insurance and one month has expired. The company should recognize $1,000 of Insurance Expense. The adjusting entry debits Insurance Expense for $1,000 and credits Prepaid Insurance for $1,000. This reduces the asset because one month of future benefit has been consumed. It also ensures that the expense is reported in the period when the insurance coverage was actually used.

---

Question 13

Adjusting entries for prepaid expenses always increase total assets.

Answer: False

Explanation:
Adjusting entries related to expired prepaid expenses normally decrease total assets because part of the prepaid benefit has been consumed. For example, when prepaid insurance becomes insurance expense, Prepaid Insurance is credited, reducing the asset balance. At the same time, Insurance Expense is debited, reducing net income. The adjustment does not increase total assets. Instead, it reallocates the amount from an asset representing a future benefit to an expense representing a benefit already consumed during the current accounting period.

---

Question 14

Unearned revenue represents cash received before the company has earned the related revenue.

Answer: True

Explanation:
Unearned revenue, also called deferred revenue or contract liability in some contexts, occurs when a company receives cash before providing the related goods or services. Because the company still has an obligation to perform, the amount is initially recognized as a liability rather than revenue. As the company fulfills its performance obligation, an adjusting entry may transfer the earned portion from Unearned Revenue to Revenue. This treatment prevents premature revenue recognition and ensures that revenue is reported in the period in which it is actually earned.

---

Question 15

An adjusting entry for revenue earned from previously unearned revenue increases the liability account and decreases revenue.

Answer: False

Explanation:
When previously unearned revenue becomes earned, the company should reduce the liability and recognize revenue. Therefore, the adjusting entry normally debits Unearned Revenue and credits Revenue. For example, if $2,000 of previously unearned service revenue has now been earned, the company debits Unearned Revenue for $2,000 and credits Service Revenue for $2,000. The liability decreases because the company no longer owes that portion of the service, while revenue increases because the company has fulfilled its obligation.

---

Question 16

Depreciation is an example of an adjusting entry.

Answer: True

Explanation:
Depreciation is commonly recognized through an adjusting entry because the cost of a long-lived asset must be allocated systematically over its useful life. At the end of each accounting period, the company records depreciation expense for the portion of the asset’s cost consumed during that period. The entry generally debits Depreciation Expense and credits Accumulated Depreciation. Accumulated Depreciation is a contra-asset account that reduces the carrying amount of the related asset. This process reflects the use of the asset in generating revenue.

---

Question 17

Depreciation adjusting entries normally credit the asset’s original cost account directly.

Answer: False

Explanation:
Under normal accounting practice, depreciation is recorded by crediting Accumulated Depreciation, not the asset’s original cost account. For example, the entry for $4,000 of depreciation on equipment is Debit Depreciation Expense $4,000 and Credit Accumulated Depreciation—Equipment $4,000. Keeping the original equipment cost unchanged provides useful information about the historical cost of the asset. Accumulated Depreciation separately shows the total depreciation recognized to date and allows users to determine the asset’s carrying amount.

---

Question 18

Accumulated Depreciation is a contra-asset account.

Answer: True

Explanation:
Accumulated Depreciation is classified as a contra-asset account because it has a normal credit balance and is presented as a deduction from the related long-term asset. For example, if equipment has a historical cost of $50,000 and accumulated depreciation of $15,000, its carrying amount is $35,000 before considering other adjustments. The contra-asset structure allows financial statements to show both the original cost of the asset and the total depreciation recognized. This provides more transparent information about the company’s investment in long-lived assets.

---

Question 19

Recording depreciation expense through an adjusting entry causes cash to decrease.

Answer: False

Explanation:
Depreciation is a noncash expense, meaning that recording depreciation does not involve a current cash payment. The adjusting entry debits Depreciation Expense and credits Accumulated Depreciation. Cash is not included in the entry. Depreciation recognizes the allocation of an asset’s cost to expense over time rather than recording a new cash outflow. Although depreciation reduces accounting income, it does not directly reduce the company’s cash balance when the adjusting entry is recorded. This distinction is especially important when preparing and analyzing the statement of cash flows.

---

Question 20

The adjusted trial balance is prepared after all required adjusting entries have been recorded and posted.

Answer: True

Explanation:
The adjusted trial balance is prepared after adjusting entries have been journalized and posted to the appropriate ledger accounts. It contains the updated balances of all accounts and provides the basis for preparing the financial statements. The accounting sequence generally proceeds from the unadjusted trial balance to adjusting entries, the adjusted trial balance, financial statements, and closing entries. Reviewing the adjusted trial balance helps accountants verify that total debits equal total credits and that account balances reflect the necessary end-of-period adjustments.

---

Adjusting Entries Quiz – Questions 21–30

Question 21

Adjusting entries are required under the accrual basis of accounting but are generally unnecessary under a purely cash basis of accounting.

Answer: True

Explanation:
Adjusting entries are closely associated with accrual accounting because accrual accounting recognizes revenues when earned and expenses when incurred, regardless of when cash changes hands. Adjustments are therefore needed to update accounts for accrued and deferred items. Under a pure cash basis, transactions are generally recognized when cash is received or paid, so many of the adjustments required under accrual accounting would not be necessary. Generally accepted accounting principles require accrual accounting for financial reporting by many entities, making adjusting entries an important component of the accounting cycle.

---

Question 22

Every adjusting entry involves a cash account.

Answer: False

Explanation:
Adjusting entries generally do not involve cash. Their purpose is to recognize revenues earned or expenses incurred that have not yet been properly recorded, or to allocate previously recorded amounts between periods. Examples include accrued salaries, accrued interest revenue, depreciation, expired prepaid insurance, and earned unearned revenue. None of these adjustments requires a cash account at the adjustment date. Cash is usually recorded when the actual cash transaction occurs. Keeping cash out of adjusting entries prevents the company from recording the same cash transaction twice.

---

Question 23

Adjusting entries are normally recorded at the end of an accounting period.

Answer: True

Explanation:
Adjusting entries are generally prepared at the end of an accounting period, immediately before the financial statements are prepared. Their purpose is to update account balances for economic events that have occurred but have not yet been completely recognized. Depending on the company’s reporting system, adjustments may be prepared monthly, quarterly, or annually. Common examples include accrued wages, interest, depreciation, expired prepaid expenses, and earned portions of deferred revenue. Once these entries are posted, the adjusted trial balance can be prepared.

---

Question 24

Adjusting entries are made only when the company has made an error.

Answer: False

Explanation:
Adjusting entries are not primarily error corrections. They are a normal part of the accounting process under accrual accounting. They are required because certain economic events occur over time and may not be recorded through routine transactions. For example, employees may earn salaries before payday, or an insurance policy may expire gradually. These situations do not necessarily represent errors; they simply require period-end adjustments. Error corrections are generally recorded through correcting entries, which are conceptually different from adjusting entries.

---

Question 25

An adjusting entry can increase an expense and increase a liability at the same time.

Answer: True

Explanation:
This is common when recording an accrued expense. Suppose a company owes employees $3,000 for work performed during the final days of the accounting period, but payroll will be paid later. The company records a debit to Salaries Expense and a credit to Salaries Payable. The expense increases because employees have earned the salaries during the current period. The liability also increases because the company has an obligation to pay the employees. This adjustment ensures that both the income statement and balance sheet reflect the economic event.

---

Question 26

An adjusting entry for accrued interest expense normally decreases a liability.

Answer: False

Explanation:
When interest has been incurred but has not yet been paid, the company needs to recognize both the expense and the liability. The adjusting entry debits Interest Expense and credits Interest Payable. Therefore, the liability increases, rather than decreases. For example, if $500 of interest has accumulated by the end of the period, the company records $500 of Interest Expense and $500 of Interest Payable. The adjustment ensures that the expense is recognized in the correct period and that the outstanding obligation is reported on the balance sheet.

---

Question 27

An accrued expense adjustment increases expenses and decreases net income.

Answer: True

Explanation:
An accrued expense represents a cost incurred during the current period that has not yet been recorded. The adjusting entry increases the appropriate expense account through a debit. Because expenses reduce net income, recording the accrued expense decreases current-period net income. At the same time, the related liability increases because the company has an unpaid obligation. For example, recognizing $1,500 of accrued utilities increases Utilities Expense by $1,500 and reduces net income by the same amount, assuming no related tax effects or other considerations.

---

Question 28

Accrued revenue adjustments decrease net income because they increase liabilities.

Answer: False

Explanation:
Accrued revenue adjustments generally increase net income because they recognize revenue that has already been earned but has not yet been recorded. The adjusting entry typically debits Accounts Receivable and credits Revenue. Revenue increases net income, while Accounts Receivable increases assets. No liability is created by the normal accrued revenue adjustment. For example, if $2,500 of service revenue has been earned but not billed, recognizing it increases both Accounts Receivable and Service Revenue by $2,500, thereby increasing current-period net income.

---

Question 29

If an adjusting entry is omitted, the financial statements may contain misstated account balances.

Answer: True

Explanation:
Omitting a required adjusting entry can cause both the income statement and balance sheet to be misstated. For example, if accrued salaries are not recorded, expenses and liabilities will be understated, while net income will be overstated. Similarly, failing to record depreciation causes depreciation expense to be understated and the carrying amount of assets to be overstated. Because adjusting entries ensure that revenues, expenses, assets, and liabilities are reported in the appropriate period, their omission can significantly affect financial statement accuracy.

---

Question 30

If an adjusting entry is omitted, the accounting equation will always become mathematically unbalanced.

Answer: False

Explanation:
An omitted adjusting entry does not necessarily cause the accounting equation to become mathematically unbalanced. Because a valid adjusting entry has equal debits and credits, failing to record both sides may leave total debits and credits equal while individual accounts remain misstated. For example, omitting an accrued expense means both an expense and liability are understated, but the trial balance can still balance. This demonstrates why a balanced trial balance does not guarantee that all financial statement accounts are correctly stated.

---

Adjusting Entries Quiz – Questions 31–40

Question 31

An adjusting entry for an accrued expense is recorded because the expense has already been incurred.

Answer: True

Explanation:
The key characteristic of an accrued expense is that the economic benefit has already been consumed or the obligation has already been incurred, even though cash payment may occur later. Under accrual accounting, the expense must be recognized in the period in which it is incurred. For example, employees may work during December but receive their salaries in January. The December adjusting entry recognizes the salary expense and salary payable. This ensures that the expense is matched with the period in which the employees provided their services.

---

Question 32

Unearned revenue is classified as an asset because the company has already received cash.

Answer: False

Explanation:
Unearned revenue is classified as a liability, not an asset. Although the company has received cash, it has not yet earned the related revenue and generally still owes goods or services to the customer. The cash increases an asset, but the corresponding obligation creates a liability. For example, if a company receives $10,000 in advance for services, it may debit Cash and credit Unearned Revenue. As the services are performed, the liability is reduced and revenue is recognized through the appropriate entry.

---

Question 33

When previously unearned revenue is earned, total liabilities decrease and revenues increase.

Answer: True

Explanation:
When a company satisfies its obligation related to previously unearned revenue, the liability should be reduced and revenue should be recognized. The adjusting entry normally debits Unearned Revenue and credits Revenue. For example, if $4,000 of services previously paid for in advance have now been performed, the company decreases its Unearned Revenue liability by $4,000 and increases revenue by $4,000. This reflects the economic reality that the company no longer owes the customer those services and has now earned the related amount.

---

Question 34

A prepaid expense is an example of an accrued expense.

Answer: False

Explanation:
Prepaid expenses and accrued expenses are different types of adjustments. A prepaid expense occurs when a company pays for a future benefit before consuming it, creating an asset. An accrued expense occurs when the company consumes a benefit or incurs a cost before paying for it, creating a liability. For example, prepaid insurance is an asset initially, while accrued salaries represent a liability. Understanding the difference is important because the adjusting entries move accounts in opposite directions: prepaid expenses reduce assets and increase expenses, while accrued expenses increase liabilities and expenses.

---

Question 35

The adjusting entry for a prepaid expense involves transferring the expired portion from an asset account to an expense account.

Answer: True

Explanation:
When a prepaid expense is initially recorded as an asset, it represents a future economic benefit. As time passes and the benefit is consumed, the appropriate amount must be recognized as an expense. The adjusting entry debits the expense account and credits the prepaid asset account. For example, if $1,200 of prepaid insurance has expired, the company debits Insurance Expense $1,200 and credits Prepaid Insurance $1,200. This adjustment reduces the remaining asset and recognizes the cost in the appropriate accounting period.

---

Question 36

Adjusting entries are used to close revenue and expense accounts to retained earnings.

Answer: False

Explanation:
Closing entries, not adjusting entries, are used to transfer temporary account balances such as revenues and expenses to retained earnings or the appropriate equity account. Adjusting entries update account balances before financial statements are prepared. After adjustments and financial statements are completed, closing entries are normally recorded to reset temporary accounts to zero for the next accounting period. Confusing adjusting entries with closing entries can lead to errors in the accounting cycle. The two types of entries serve different purposes and occur at different stages.

---

Question 37

Adjusting entries can affect retained earnings indirectly through revenues and expenses.

Answer: True

Explanation:
Although adjusting entries normally do not directly debit or credit Retained Earnings, they can affect retained earnings indirectly. Adjustments change revenue and expense balances, which changes net income. Net income ultimately affects retained earnings when closing entries are recorded. For example, recognizing an additional $5,000 of accrued revenue increases current-period revenue and net income by $5,000. After closing, the increased net income contributes to higher retained earnings. Thus, adjusting entries can have an indirect effect on equity through their impact on profitability.

---

Question 38

The normal balance of an expense account is a credit.

Answer: False

Explanation:
Expense accounts normally have debit balances. When an expense is recognized, the expense account is debited, increasing the account balance. For example, an adjusting entry for accrued salaries debits Salaries Expense. Because expenses reduce net income, their debit balances ultimately reduce retained earnings when the accounts are closed. Revenue accounts, by contrast, normally have credit balances. Understanding the normal balances of revenues and expenses is essential for correctly analyzing and recording adjusting entries and for identifying potential errors in journal entries.

---

Question 39

The normal balance of a liability account is a credit.

Answer: True

Explanation:
Liability accounts normally have credit balances because liabilities represent obligations owed by the company. When an adjusting entry recognizes an accrued expense, the related liability is credited. For example, an accrued interest adjustment credits Interest Payable. When the liability is eventually paid, the liability account is debited to reduce its balance. Understanding the normal balance of liabilities helps accountants determine the correct debit and credit treatment for accrued expenses, unearned revenues, and other obligations reported on the balance sheet.

---

Question 40

An adjusting entry for depreciation increases the carrying amount of a fixed asset.

Answer: False

Explanation:
Depreciation reduces the carrying amount of a fixed asset over time. The adjusting entry debits Depreciation Expense and credits Accumulated Depreciation. Because Accumulated Depreciation is a contra-asset account, it reduces the asset’s net carrying amount on the balance sheet. For example, if equipment has accumulated depreciation of $20,000, the equipment’s carrying amount is reduced by that amount from its historical cost. Depreciation reflects the systematic allocation of the depreciable cost of a long-lived asset over its estimated useful life.

---

Adjusting Entries Quiz – Questions 41–50

Question 41

Adjusting entries are necessary to apply the matching principle properly.

Answer: True

Explanation:
The matching principle requires expenses to be recognized in the period in which they help generate revenue or when the related resources are consumed. Adjusting entries help accomplish this by recognizing expenses that have been incurred but not yet recorded and by allocating prepaid costs over the periods benefiting from them. Depreciation is another example because the cost of a long-lived asset is allocated over its useful life. Without appropriate adjustments, expenses may be recognized too early or too late, resulting in misleading measures of periodic profitability.

---

Question 42

An adjusting entry can be recorded directly to the Cash account when recognizing accrued revenue.

Answer: False

Explanation:
Accrued revenue exists because revenue has been earned but cash has not yet been received. Therefore, the adjusting entry normally does not involve Cash. Instead, the company debits an asset such as Accounts Receivable and credits Revenue. Cash is recorded later when the customer makes payment. For example, if $3,000 of services have been provided but not yet collected, the adjustment is Debit Accounts Receivable $3,000 and Credit Service Revenue $3,000. Recording Cash at this stage would incorrectly imply that payment has already occurred.

---

Question 43

If a company fails to adjust for expired prepaid insurance, assets and net income may both be overstated.

Answer: True

Explanation:
When prepaid insurance expires, the consumed portion should be transferred from the asset account to Insurance Expense. If the adjustment is omitted, the prepaid insurance asset remains too high because it includes benefits that have already been used. At the same time, Insurance Expense is understated, causing net income to be overstated. Therefore, one omitted adjustment creates errors in both the balance sheet and income statement. This example demonstrates why period-end adjustments are essential for presenting reliable financial information.

---

Question 44

If accrued salaries are not recorded, liabilities and expenses will be overstated.

Answer: False

Explanation:
If accrued salaries are omitted, both liabilities and expenses will generally be understated, not overstated. Employees may have earned salaries during the period even though the company will pay them later. The required adjustment debits Salaries Expense and credits Salaries Payable. Without this entry, the expense is too low, causing net income to be too high, and the liability is too low because the company’s obligation is not reported. This is a classic example of how omitted accrued expenses distort financial statements.

---

Question 45

Adjusting entries can be used to recognize interest revenue that has been earned but not yet collected.

Answer: True

Explanation:
Interest revenue is often earned over time, even when the cash payment will not be received until a later date. If the company has earned interest by the end of the reporting period but has not recorded it, an adjusting entry is necessary. The entry typically debits Interest Receivable and credits Interest Revenue. This recognizes the revenue in the period in which it was earned and reports the related receivable as an asset. The adjustment therefore improves the accuracy of both income and financial position.

---

Question 46

A company should record an adjusting entry for every transaction that occurs after the end of the accounting period.

Answer: False

Explanation:
Adjusting entries relate primarily to economic activity that belongs to the current accounting period but has not yet been properly recorded. Transactions occurring entirely in a future period are normally recorded in that future period. Accountants must distinguish between current-period adjustments and subsequent transactions or events. For example, if a company pays a supplier in January for an expense incurred in December, the December expense may require an adjusting entry, while the January cash payment is recorded separately when it occurs. Timing is therefore critical.

---

Question 47

The adjusted trial balance contains the balances of accounts after adjusting entries have been posted.

Answer: True

Explanation:
The adjusted trial balance is prepared after all necessary adjusting entries have been recorded and posted. It contains updated balances for assets, liabilities, equity, revenues, and expenses. Accountants use these adjusted balances to prepare the financial statements. For example, after recording depreciation, accrued salaries, and prepaid insurance adjustments, the adjusted trial balance reflects the revised balances of Depreciation Expense, Accumulated Depreciation, Salaries Payable, Salaries Expense, and Prepaid Insurance. It is therefore an important checkpoint before preparing the financial statements.

---

Question 48

An adjusted trial balance should always have total debits equal to total credits.

Answer: True

Explanation:
The double-entry accounting system requires every journal entry to have equal total debits and credits. This principle also applies to the adjusted trial balance. After adjusting entries have been posted, the sum of debit balances should equal the sum of credit balances. However, a balanced adjusted trial balance does not prove that every account is correctly stated. An omitted adjustment, classification error, or transaction recorded in the wrong account could still exist while debits and credits remain equal. Accountants therefore need additional review procedures.

---

Question 49

Adjusting entries are optional when financial statements are prepared using accrual accounting.

Answer: False

Explanation:
Adjusting entries are an important component of accrual-basis financial reporting because they ensure that revenues and expenses are recognized in the appropriate periods. Without necessary adjustments, accrued items, deferrals, depreciation, and other time-related balances may be misstated. Although the exact frequency and process may vary among organizations, the underlying accounting requirement remains: financial statements must properly reflect the economic events of the reporting period. Therefore, required adjusting entries cannot simply be ignored because they are inconvenient or because the trial balance already balances.

---

Question 50

The primary purpose of adjusting entries is to ensure that financial statements present accurate revenues, expenses, assets, and liabilities for the accounting period.

Answer: True

Explanation:
This statement summarizes the fundamental purpose of adjusting entries. They update account balances so that financial statements properly reflect the economic activity of the reporting period under accrual accounting. Adjustments address items such as accrued revenues, accrued expenses, prepaid expenses, unearned revenues, depreciation, and other estimates or allocations. By recognizing revenues when earned and expenses when incurred, adjusting entries improve the accuracy of net income and financial position. They are therefore a critical step between the unadjusted trial balance and the preparation of reliable financial statements.

 

Adjusting Entries Quiz

Question 1: Adjusting entries are required at the end of an accounting period to align revenues and expenses with the period in which they actually occurred under accrual accounting.

Answer: True

Explanation: Under the accrual basis of accounting, transactions are recorded in the periods in which the events occur rather than when cash is received or paid. Adjusting entries ensure that the revenue recognition principle and the matching principle are strictly followed. Without adjusting entries, financial statements would fail to reflect the true financial position and operating performance of a business. They update asset, liability, revenue, and expense accounts prior to the preparation of final financial statements.

Question 2: Cash account balances are routinely modified through standard adjusting journal entries at year-end.

Answer: False

Explanation: Standard adjusting journal entries never involve the Cash account. Adjusting entries are performed to record revenues earned or expenses incurred that have not yet been processed through cash transactions, or to update previously deferred cash transactions. Cash transactions are recorded in real-time through standard cash receipts or disbursements journals. If Cash requires adjustment at the end of a period, it indicates a bank reconciliation correction or an error correction, which are not categorized as normal adjusting entries.

Question 3: Prepaid expenses are classified as current liabilities on the balance sheet until they are fully consumed.

Answer: False

Explanation: Prepaid expenses represent economic resources paid in advance for future benefits, such as prepaid insurance or prepaid rent. Consequently, they are initially recorded as assets on the balance sheet. As time elapses or the asset is consumed through operations, an adjusting entry transfers the consumed portion from the asset account to an expense account on the income statement. Classifying prepaid expenses as liabilities is incorrect because they represent future economic benefits owned by the company rather than obligations owed to external parties.

Question 4: Unearned revenue represents cash collected from customers before the related goods or services are delivered.

Answer: True

Explanation: Unearned revenue is created when a customer pays in advance for goods or services to be rendered in the future. Because the business has an ongoing obligation to fulfill its promise or return the cash, unearned revenue is classified as a liability on the balance sheet. When the company performs the required service or delivers the product, an adjusting entry is made to debit Unearned Revenue (reducing the liability) and credit Revenue (recognizing earned income on the income statement).

Question 5: An accrued expense is an expense that has been incurred but not yet paid or recorded in the ledger.

Answer: True

Explanation: Accrued expenses reflect economic obligations that have accumulated over time due to business operations but have not yet been settled with cash or recorded via a supplier invoice. Examples include unpaid employee wages, accrued interest on debts, and unbilled utility services at the end of the accounting period. The adjusting entry for an accrued expense requires debiting an expense account to recognize the cost in the current period and crediting a liability account to record the obligation owed.

Question 6: The matching principle dictates that expenses must be recognized in the same period as the revenues they helped generate.

Answer: True

Explanation: The matching principle (also known as the expense recognition principle) is a cornerstone of accrual accounting. It mandates that companies record expenses in the exact accounting period during which those expenses contributed to earning revenue. Adjusting entries are the primary mechanism used to achieve this alignment. By recognizing unpaid costs or allocating prepaid assets during the period of consumption, financial reporting accurately reflects net income and presents a realistic picture of company profitability.

Question 7: If a company fails to record an adjusting entry for accrued revenues, assets and revenues on the financial statements will be overstated.

Answer: False

Explanation: Failing to record an accrued revenue adjusting entry causes assets and revenues to be understated, not overstated. Accrued revenue represents services rendered or goods delivered for which cash has not yet been received. The correct adjusting entry debits an asset account (Accounts Receivable) and credits a revenue account. Omitting this entry leaves both the balance sheet asset balance and the income statement revenue balance lower than their actual values, leading to an understatement of net income and equity.

Question 8: Depreciation expense represents the systematic allocation of a physical asset’s cost over its estimated useful life.

Answer: True

Explanation: Depreciation is an accounting procedure designed to allocate the historical cost of tangible fixed assets (such as machinery, equipment, and buildings) over the periods that benefit from their use. It does not measure physical wear and tear or changes in market value. By recording depreciation through an adjusting entry, businesses adhere to the matching principle by expense-allocating the asset’s cost against the income generated over its productive lifecycle.

Question 9: Accumulated Depreciation is a contra asset account that carries a normal debit balance.

Answer: False

Explanation: Accumulated Depreciation is indeed a contra asset account, but it carries a normal credit balance. Contra asset accounts are paired directly with specific asset accounts (such as Equipment or Buildings) on the balance sheet to offset their values. Accumulated Depreciation reduces the historical cost of property, plant, and equipment to calculate book value. Because it acts as a deduction from assets, its normal balance is opposite to that of standard assets, making its natural balance a credit.

Question 10: Adjusting entries can be categorized into two primary categories: deferrals and accruals.

Answer: True

Explanation: All standard adjusting entries fall under either deferrals or accruals. Deferrals occur when cash is exchanged before the underlying expense is incurred or revenue is earned (e.g., prepaid insurance, unearned rent). Accruals occur when the expense is incurred or revenue is earned before any cash changes hands (e.g., accrued salaries, accrued interest). Recognizing this fundamental distinction helps accountants determine whether an initial transaction was previously recorded or if a brand-new obligation/asset must be recognized.

Question 11: The adjustment for supplies consumed during a period involves debiting Supplies and crediting Supplies Expense.

Answer: False

Explanation: The correct adjusting entry to record supplies used involves debiting Supplies Expense and crediting Supplies (the asset account). During the period, purchases of supplies are added to the Supplies asset account. At period-end, a physical count determines the remaining inventory. The difference between the starting balance plus purchases and the physical ending inventory represents the cost of supplies consumed. Debiting Supplies Expense recognizes the resource spent, while crediting Supplies reduces the balance sheet asset.

Question 12: Failing to adjust an unearned revenue account at year-end causes liabilities to be overstated and revenues to be understated.

Answer: True

Explanation: When customer prepayments are initially recorded as Unearned Revenue, a liability exists. As work is completed throughout the period, an adjusting entry is required to reduce Unearned Revenue and increase Revenue. If this adjustment is neglected, the liability remains artificially high on the balance sheet because earned income stays trapped in the unearned account. Consequently, total liabilities are overstated, while total revenue and net income on the income statement are understated.

Question 13: Accrued interest on a note payable requires an adjusting entry that debits Interest Expense and credits Notes Payable.

Answer: False

Explanation: Accrued interest on a note payable is recorded by debiting Interest Expense and crediting Interest Payable, not Notes Payable. The principal balance of the note is tracked separately in the Notes Payable account. Interest incurred over time represents a distinct short-term liability that must be recorded separately. Conflating interest obligations with principal debt obscures the true terms and maturity structure of the liabilities on the balance sheet.

Question 14: The book value of a long-term asset is calculated as its historical cost minus its accumulated depreciation.

Answer: True

Explanation: Book value (or carrying value) reflects the net net cost of an asset remaining on the balance sheet. It is determined by subtracting the cumulative total of all depreciation recorded to date (Accumulated Depreciation) from the original purchase price (Historical Cost). Book value does not necessarily equal market value; rather, it indicates how much of the original asset cost has not yet been allocated as an expense on past income statements.

Question 15: Adjusting entries are typically recorded on the last day of the accounting period, prior to preparing financial statements.

Answer: True

Explanation: Adjusting entries serve as the crucial link between routine day-to-day bookkeeping and formal financial reporting. They are dated as of the final day of the accounting period (monthly, quarterly, or annually). Performing adjustments before drafting financial statements ensures that all revenues earned and expenses incurred during that timeframe are captured, thereby guaranteeing that the income statement, balance sheet, and statement of owner’s equity reflect complete and accurate financial information.

Question 16: Under cash-basis accounting, adjusting entries for prepaid items and accrued expenses are required at the end of every month.

Answer: False

Explanation: Cash-basis accounting records transactions only when cash physically changes hands. Therefore, concepts like prepaid expenses, unearned revenues, and accrued items do not exist under strict cash-basis rules. Adjusting entries are exclusively a requirement of accrual-basis accounting, which seeks to match economic performance regardless of cash flow timing. Cash-basis financial reports ignore unpaid obligations and uncollected earnings, eliminating the need for periodic accrual adjustments.

Question 17: An adjusting entry for accrued wages will increase total liabilities and increase total expenses.

Answer: True

Explanation: When employees work during the final days of an accounting period but will not be paid until the next payroll cycle, the company owes wages for work performed. The adjusting entry requires a debit to Salaries and Wages Expense and a credit to Salaries and Wages Payable. The debit increases total operating expenses on the income statement, while the credit increases total liabilities on the balance sheet, ensuring both statements reflect the incurred labor cost.

Question 18: Deferred expenses are also referred to as prepaid expenses.

Answer: True

Explanation: The terms deferred expense and prepaid expense are used interchangeably in financial accounting. “Deferred” signifies that the recognition of the expense is postponed until a future period when the benefits are consumed. The initial payment creates an asset. As time passes or consumption occurs, an adjusting journal entry systematically reduces the prepaid asset and recognizes the corresponding expense on the income statement.

Question 19: If an adjusting entry for depreciation is omitted, net income for the period will be understated.

Answer: False

Explanation: Omitting a depreciation adjusting entry results in an overstatement of net income, not an understatement. Depreciation is an expense. Omitting an expense keeps total expenses artificially low on the income statement. When total expenses are understated, net income (Revenues minus Expenses) is calculated at a higher value than it should be. Additionally, assets on the balance sheet will be overstated because Accumulated Depreciation was not credited.

Question 20: Accrued revenues represent amounts earned for services rendered or goods provided for which cash has not yet been received.

Answer: True

Explanation: Accrued revenues arise when a company completes work or delivers products during an accounting period but has not yet billed the customer or collected cash by the period’s end. To satisfy the revenue recognition principle, an adjusting entry is made debiting Accounts Receivable (or Accrued Revenue Receivable) and crediting a Revenue account, ensuring that the income earned is recognized in the period of performance.

Question 21: Every adjusting entry impacts at least one balance sheet account and at least one income statement account.

Answer: True

Explanation: A fundamental rule of adjusting entries is that they bridge the balance sheet and the income statement. Every valid adjusting entry involves at least one asset or liability account (balance sheet) and at least one revenue or expense account (income statement). Adjusting entries never affect cash, nor do they strictly involve two balance sheet accounts or two income statement accounts. This dual impact ensures that both financial statements are adjusted simultaneously.

Question 22: Unearned Rent Revenue is classified as a revenue account on the income statement.

Answer: False

Explanation: Despite having “Revenue” in its name, Unearned Rent Revenue is a liability account reported on the balance sheet. It represents an advance payment received from a tenant for future occupancy. The company owes the customer physical space or a refund. Only after the rental period elapses does the company earn the revenue, prompting an adjusting entry to debit Unearned Rent Revenue (reducing liability) and credit Rent Revenue (income statement).

Question 23: An adjusting entry involving a deferral always decreases a balance sheet account and increases an income statement account.

Answer: True

Explanation: Deferrals involve cash exchanged prior to performance or consumption. In prepaid expenses (deferred costs), the adjusting entry debits an expense (increasing income statement) and credits an asset (decreasing balance sheet). In unearned revenues (deferred income), the adjusting entry debits a liability (decreasing balance sheet) and credits a revenue (increasing income statement). In both scenarios, the balance sheet account is reduced while the income statement account is increased.

Question 24: If a company purchases a two-year insurance policy for $2,400 on January 1, the monthly insurance expense adjustment is $100.

Answer: True

Explanation: The monthly cost is calculated by dividing the total cost by the number of coverage months. A two-year policy spans 24 months. Dividing $2,400 by 24 months yields an insurance cost of $100 per month. Each month, an adjusting entry must be made debiting Insurance Expense for $100 and crediting Prepaid Insurance for $100, systematically expensing the asset over its benefit period.

Question 25: Accrual adjusting entries always increase both a balance sheet account and an income statement account.

Answer: True

Explanation: Accruals represent transactions where the service or obligation has occurred, but no cash has been exchanged or previously recorded. For accrued expenses, the adjustment debits an expense (increasing income statement) and credits a liability (increasing balance sheet). For accrued revenues, the adjustment debits an asset (increasing balance sheet) and credits a revenue (increasing income statement). Thus, accrual entries always grow both financial statements.

Question 26: Straight-line depreciation calculates annual expense by dividing the asset’s cost minus residual value by its estimated useful life.

Answer: True

Explanation: Straight-line depreciation distributes an equal amount of expense to each year of an asset’s useful life. The formula subtracts estimated salvage (residual) value from historical cost to determine depreciable cost. Dividing this depreciable base by the useful life in years gives the annual depreciation expense, which is then recorded through yearly adjusting entries debiting Depreciation Expense and crediting Accumulated Depreciation.

Question 27: Adjusting entries require formal documentation in the general journal and must be posted to the general ledger.

Answer: True

Explanation: Like all official accounting transactions, adjusting entries are first recorded in the general journal with detailed descriptions and then posted to the respective general ledger accounts. This process updates account balances so that an adjusted trial balance can be generated. Omitting journalizing or posting prevents ledger accounts from reflecting true period-end balances, compromising the accuracy of financial statements.

Question 28: An adjusting entry for unearned revenue decreases net income for the accounting period.

Answer: False

Explanation: Adjusting unearned revenue increases net income. The adjusting entry debits Unearned Revenue (a liability) and credits Revenue (an income account). Increasing revenue directly increases net income on the income statement. This reflects the realization of earned revenue after fulfilling obligations to customers who paid in advance.

Question 29: The adjusted trial balance is prepared immediately before recording adjusting entries.

Answer: False

Explanation: The adjusted trial balance is prepared after adjusting entries have been journalized and posted to the general ledger. The sequence begins with the unadjusted trial balance, followed by recording and posting adjusting entries. Then, the adjusted trial balance is constructed to prove the equality of total debit and credit balances prior to drafting the final financial statements.

Question 30: If a business receives a $6,000 payment for six months of service in advance and records it as Unearned Revenue, $1,000 is recognized as revenue each month.

Answer: True

Explanation: Dividing $6,000 by six months yields $1,000 of revenue earned per month as services are provided. At the end of each month, an adjusting entry debits Unearned Revenue for $1,000 and credits Service Revenue for $1,000. This systematically transfers $1,000 from liabilities to earned revenue, keeping the financial statements accurate.

Question 31: Overstating ending prepaid expense balances results in an overstatement of owner’s equity.

Answer: True

Explanation: If prepaid expenses (assets) are overstated, it means insufficient expense was recognized during the period. Understating expenses leads to an overstatement of net income. Because net income flows directly into Retained Earnings or Owner’s Equity on the balance sheet, overstating assets ultimately causes an artificial overstatement of owner’s equity.

Question 32: Accrued interest on an investment is recorded by debiting Interest Revenue and crediting Interest Receivable.

Answer: False

Explanation: The correct entry to record accrued interest earned on an investment is to debit Interest Receivable (an asset) and credit Interest Revenue (an income account). Debiting Interest Revenue would incorrectly reduce income, while crediting Interest Receivable would incorrectly reduce an asset. The proper accrual entry increases both assets and income.

Question 33: Time period assumption states that the economic life of a business can be divided into artificial time periods for financial reporting.

Answer: True

Explanation: The periodicity or time period assumption allows companies to divide ongoing business activities into specific time intervals, such as months, quarters, or years. This concept makes financial reporting useful by providing timely feedback to stakeholders. Adjusting entries are necessary because economic events often overlap these artificial boundaries.

Question 34: An entry debiting Accounts Receivable and crediting Service Revenue is an example of a deferral adjustment.

Answer: False

Explanation: Debiting Accounts Receivable and crediting Service Revenue is an accrual adjustment, not a deferral. Deferrals deal with past cash flows where recognition was postponed. Accruals involve recognizing unrecorded revenues or expenses before cash changes hands. Because no cash was exchanged previously, this entry accrues earned revenue.

Question 35: Recording depreciation expense directly reduces the historical cost balance in the main asset account.

Answer: False

Explanation: Depreciation expense is credited to Accumulated Depreciation, a contra asset account, rather than directly reducing the main asset account (e.g., Equipment). Maintaining historical cost in the asset account and tracking cumulative depreciation separately preserves important accounting information required for reporting and analysis.

Question 36: An adjusting entry for accrued utilities expense includes a credit to Utilities Payable.

Answer: True

Explanation: Utility services consumed before receiving an invoice create an accrued expense. The adjusting entry debits Utilities Expense to recognize the cost and credits Utilities Payable to record the obligation owed to the utility provider, adhering to the matching principle.

Question 37: Adjusting entries are optional under Generally Accepted Accounting Principles (GAAP) for small businesses.

Answer: False

Explanation: Adjusting entries are mandatory under GAAP and International Financial Reporting Standards (IFRS) regardless of business size. Any financial statement prepared under accrual accounting standards must incorporate adjusting entries to present accurate balances for assets, liabilities, revenues, and expenses.

Question 38: A company that omits the adjusting entry for accrued wages will understate its liabilities on the balance sheet.

Answer: True

Explanation: Accrued wages represent labor costs incurred that have not yet been paid. Omitting the adjusting entry (debit Salaries Expense, credit Salaries Payable) leaves the obligation unrecorded, resulting in an understatement of liabilities on the balance sheet and an overstatement of net income.

Question 39: When adjusting unearned subscription revenue, the amount transferred to Subscription Revenue equals the unearned portion.

Answer: False

Explanation: The amount transferred to Subscription Revenue represents the earned portion of the prepayment, not the unearned portion. The remaining balance in the Unearned Subscription Revenue account reflects the services or goods still owed to customers in future periods.

Question 40: The primary purpose of an adjusting entry is to ensure cash flows match net income precisely.

Answer: False

Explanation: The primary goal of adjusting entries is to apply accrual accounting principles—specifically revenue recognition and matching—so financial statements reflect revenues earned and expenses incurred. Net income under accrual accounting is explicitly distinct from net cash flow.

Question 41: Prepaid Rent is recorded as an expense as soon as the cash payment is made.

Answer: False

Explanation: Prepaid Rent is initially recorded as a current asset because it represents future economic benefits. It becomes an expense gradually over time as the rented property is occupied. An adjusting entry periodically transfers the used portion from Prepaid Rent to Rent Expense.

Question 42: Accrued interest formula is calculated as: Principal × Annual Interest Rate × Time (in fraction of a year).

Answer: True

Explanation: Interest accumulation follows the simple interest formula $I = P \times R \times T$. To calculate accrued interest for an adjusting entry, the outstanding principal is multiplied by the annual interest rate and adjusted for the fraction of the year elapsed (e.g., 3/12 for three months).

Question 43: Accumulated depreciation appears on the income statement as a direct operating expense.

Answer: False

Explanation: Depreciation Expense appears on the income statement, whereas Accumulated Depreciation is reported on the balance sheet as a contra asset account subtracted from the related fixed asset.

Question 44: Failing to adjust for supplies used during the period overstates both total assets and net income.

Answer: True

Explanation: Omitting the supplies adjustment leaves the Supplies asset balance too high (overstating assets) and fails to record Supplies Expense (understating expenses). Understating expenses leads directly to an overstatement of net income.

Question 45: The adjusted trial balance forms the direct basis for preparing the financial statements.

Answer: True

Explanation: Once all adjusting entries are journalized and posted, the adjusted trial balance provides verified, up-to-date ledger balances used directly to construct the income statement, statement of owner’s equity, and balance sheet.

Question 46: If $3,000 of supplies were purchased and $1,000 remain at year-end, the adjusting entry amount for Supplies Expense is $2,000.

Answer: True

Explanation: Supplies consumed equal the starting amount plus purchases minus ending inventory ($3,000 – $1,000 = $2,000). The adjusting entry debits Supplies Expense for $2,000 and credits Supplies for $2,000 to reflect the consumed cost.

Question 47: Revenue recognition principle requires revenue to be recognized when cash is collected, regardless of when services are rendered.

Answer: False

Explanation: Under accrual accounting and GAAP, the revenue recognition principle dictates that revenue is recognized when performance obligations are satisfied (goods delivered or services rendered), regardless of when cash is collected.

Question 48: Salary expenses earned by employees on December 31 but paid on January 5 require an accrual adjusting entry on December 31.

Answer: True

Explanation: Because labor was performed in December, the expense belongs in December’s financial statements. An adjusting entry on December 31 debits Salaries Expense and credits Salaries Payable to match expenses to the correct period.

Question 49: Adjusting entries for deferrals update accounts that were previously recorded in the general ledger.

Answer: True

Explanation: Deferral adjustments modify existing asset or liability accounts created during initial cash transactions (such as Prepaid Insurance or Unearned Revenue), reallocating balances between the balance sheet and income statement as benefits are realized.

Question 50: Closing entries are prepared before adjusting entries at the end of the accounting cycle.

Answer: False

Explanation: Adjusting entries are always prepared before closing entries. Adjustments update all account balances so that accurate financial statements can be produced. Only after financial statements are finalized are closing entries executed to reset temporary accounts for the next accounting period.

Adjusting Entries Quiz – True or False

Here are 50 True/False questions on Adjusting Entries. Each includes the statement, the correct answer, and a detailed explanation (approximately 50–100 words).

1. Adjusting entries are made at the end of the accounting period to update accounts under the accrual basis of accounting. Answer: True Adjusting entries ensure that revenues are recognized when earned and expenses when incurred, regardless of cash timing. They bring the accounts up to date so the financial statements fairly present the company’s financial position and performance according to the revenue recognition and matching principles.

2. Cash is never involved in an adjusting entry. Answer: True Adjusting entries record non-cash events or allocate amounts from prior cash transactions. Because cash has already been recorded when received or paid, adjustments affect only asset, liability, revenue, or expense accounts—never the Cash account itself.

3. Depreciation is an example of an accrued expense adjusting entry. Answer: False Depreciation is a deferral (allocation) of a prepaid cost. The cost of a long-lived asset is recorded as an asset when purchased; adjusting entries systematically allocate that cost to expense over the asset’s useful life through Depreciation Expense and Accumulated Depreciation.

4. Accrued revenues are revenues that have been earned but not yet recorded or received in cash. Answer: True Accrued revenues arise when a company performs services or delivers goods before billing or collecting payment. The adjusting entry debits a receivable and credits revenue so both the balance sheet and income statement reflect the economic activity of the period.

5. Unearned revenue is classified as a liability until it is earned. Answer: True Cash received in advance creates an obligation to deliver goods or services in the future. Until the performance obligation is satisfied, the amount remains a liability (Unearned Revenue). The adjusting entry transfers the earned portion to revenue.

6. Prepaid expenses are assets that will become expenses as they are used or expire. Answer: True Payments made in advance for future benefits (insurance, rent, supplies) are recorded as assets. As time passes or the benefits are consumed, adjusting entries transfer the expired portion from the asset account to the related expense account.

7. Failure to record an adjusting entry for accrued salaries understates expenses and overstates net income. Answer: True Omitting the entry leaves Salaries Expense too low and fails to recognize the liability. Consequently, net income and retained earnings are overstated, and the balance sheet understates liabilities.

8. The matching principle requires that expenses be recorded in the same period as the related revenues. Answer: True Adjusting entries help achieve matching by recognizing expenses in the period they help generate revenue, even if cash payment occurs earlier or later. This produces a more accurate measure of periodic net income.

9. Accumulated Depreciation is a contra-liability account. Answer: False Accumulated Depreciation is a contra-asset account. It has a normal credit balance and is subtracted from the related asset’s cost on the balance sheet to report the asset’s book value (carrying amount).

10. Adjusting entries are required only under the cash basis of accounting. Answer: False The cash basis records revenues and expenses when cash changes hands and needs no adjusting entries. Adjusting entries are essential under the accrual basis to recognize economic events in the proper period.

11. An adjusting entry for expired prepaid insurance debits Insurance Expense and credits Prepaid Insurance. Answer: True As the insurance coverage is used, the prepaid asset decreases and the related expense increases. This entry allocates the cost to the periods that benefited from the insurance protection.

12. Accrued expenses are also known as accrued liabilities. Answer: True Accrued expenses represent costs incurred but not yet paid. The adjusting entry records both the expense and the corresponding liability (payable), so the obligation appears on the balance sheet.

13. Closing entries are a type of adjusting entry. Answer: False Adjusting entries update permanent and temporary accounts before financial statements are prepared. Closing entries occur afterward and transfer temporary account balances (revenues, expenses, dividends) to retained earnings.

14. The adjusted trial balance is prepared after adjusting entries have been journalized and posted. Answer: True Once all adjusting entries are recorded, an adjusted trial balance is prepared to verify that total debits equal total credits. This listing of account balances is then used to prepare the financial statements.

15. Book value of a depreciable asset equals cost minus salvage value. Answer: False Book value (carrying amount) equals original cost minus accumulated depreciation to date. Salvage value is used only to compute the depreciable base; it does not appear in the book-value calculation until the asset is fully depreciated.

16. Omitting the adjusting entry for unearned revenue that has been earned understates liabilities and overstates revenues. Answer: False The opposite is true: the liability remains too high (overstated) and revenue is understated because the earned portion has not been transferred from Unearned Revenue to Revenue.

17. Supplies used during the period are determined by comparing the beginning balance plus purchases with the ending physical count. Answer: True The difference represents supplies consumed and becomes Supplies Expense. The adjusting entry reduces the Supplies asset account and records the expense for the period.

18. Interest receivable results from an accrued revenue adjusting entry. Answer: True When interest has been earned on a note receivable but not yet received, the adjusting entry debits Interest Receivable and credits Interest Revenue, recognizing both the asset and the income.

19. All adjusting entries affect at least one income-statement account and one balance-sheet account. Answer: True Every adjusting entry changes a temporary account (revenue or expense) and a permanent account (asset or liability). This dual effect ensures both the income statement and balance sheet are correct.

20. Depreciation expense appears on the balance sheet. Answer: False Depreciation Expense is reported on the income statement. Accumulated Depreciation, the related contra-asset account, appears on the balance sheet and reduces the asset’s reported cost.

21. A company that receives cash in advance for services must make an adjusting entry when the services are performed. Answer: True The original receipt creates a liability (Unearned Revenue). As services are performed, an adjusting entry reduces the liability and recognizes revenue for the earned portion.

22. Accruals record events that have already been entered in the accounts. Answer: False Accruals record economic events that have occurred but have not yet been recorded (unbilled revenues or unpaid expenses). Deferrals allocate amounts that were previously recorded when cash changed hands.

23. The time-period assumption is the main reason adjusting entries are needed. Answer: True Because the continuous life of a business is divided into artificial reporting periods, adjusting entries are required to assign revenues and expenses to the correct periods under accrual accounting.

24. Prepaid rent is a deferred expense. Answer: True Prepaid rent is a payment made in advance for future occupancy. It is recorded as an asset and then systematically transferred to Rent Expense as time passes—an example of a deferred (prepaid) expense.

25. Failure to record depreciation overstates assets and understates net income. Answer: False Omitting depreciation leaves the asset’s book value too high (assets overstated) and fails to record the expense, so net income is also overstated.

26. Unearned revenue becomes revenue only when cash is collected. Answer: False Under the accrual basis, unearned revenue is recognized as revenue when the related goods or services are provided, not when cash is received. Cash collection creates the liability; performance earns the revenue.

27. The normal balance of Accumulated Depreciation is a credit. Answer: True As a contra-asset account, Accumulated Depreciation carries a normal credit balance. Each period’s depreciation adjusting entry increases this credit balance.

28. Adjusting entries are optional under GAAP if the company uses the cash basis. Answer: True GAAP requires the accrual basis for most external financial statements, which necessitates adjusting entries. Companies that properly use the cash basis (permitted in limited circumstances) do not need adjusting entries.

29. An adjusting entry that increases an expense and increases a liability records an accrued expense. Answer: True Accrued expenses (such as salaries or interest payable) have been incurred but not yet paid. The entry debits the expense account and credits a liability account.

30. Straight-line depreciation allocates an equal amount of cost to each year of an asset’s useful life. Answer: True Under the straight-line method, annual depreciation equals (cost − salvage value) divided by useful life. The same amount is recorded each year through the adjusting entry.

31. Accounts Receivable can be increased by an adjusting entry for accrued revenue. Answer: True When revenue has been earned but not yet billed, the adjusting entry debits Accounts Receivable (or a similar receivable) and credits the revenue account.

32. Closing the books eliminates the need for adjusting entries in the next period. Answer: False Closing entries reset temporary accounts to zero. Adjusting entries must still be made at the end of every subsequent period to update accounts for accruals, deferrals, and estimates.

33. The purpose of adjusting entries is to correct errors made during the period. Answer: False Although some adjustments may correct prior mistakes, the primary purpose of routine adjusting entries is to apply accrual accounting principles—recognizing revenues when earned and expenses when incurred.

34. Interest payable is the result of an accrued expense adjusting entry. Answer: True When interest has been incurred on a note payable but not yet paid, the adjusting entry debits Interest Expense and credits Interest Payable, recognizing both the expense and the liability.

35. Supplies on the balance sheet represent the cost of supplies remaining at period-end. Answer: True After the adjusting entry for supplies used, the Supplies account balance equals the cost of the supplies still on hand, which is reported as a current asset.

36. Revenue is recognized under the accrual basis only when cash is received. Answer: False The revenue recognition principle requires recognition when the performance obligation is satisfied (goods delivered or services performed), independent of the timing of cash collection.

37. An adjusting entry for depreciation always credits the asset account directly. Answer: False GAAP prefers crediting Accumulated Depreciation (a contra-asset) rather than the asset account itself. This preserves the original cost information while showing the cumulative depreciation taken.

38. Deferred revenues are the same as unearned revenues. Answer: True Both terms describe cash received before goods or services are provided. The amount is recorded as a liability and later transferred to revenue through adjusting entries as it is earned.

39. Omitting an adjusting entry for accrued revenue understates assets and understates net income. Answer: True Without the entry, Accounts Receivable is too low and revenue is omitted, so both assets and net income (and equity) are understated.

40. Prepaid insurance is reported as an expense on the income statement when purchased. Answer: False When purchased, prepaid insurance is recorded as an asset. Only the portion that expires during the period is transferred to Insurance Expense by an adjusting entry.

41. The adjusted trial balance contains only permanent accounts. Answer: False The adjusted trial balance includes all accounts—both permanent (balance-sheet) and temporary (income-statement)—after adjusting entries have been posted. Temporary accounts are closed later.

42. Accrued revenues increase both assets and revenues. Answer: True The adjusting entry debits a receivable (asset) and credits a revenue account. This simultaneously increases total assets and increases net income for the period.

43. A company must make adjusting entries before preparing the financial statements. Answer: True Financial statements are prepared from the adjusted trial balance. Therefore, all necessary adjusting entries must be journalized and posted before the statements can be accurately prepared.

44. The matching principle is applied only to accrued expenses. Answer: False The matching principle applies to all adjusting entries. Both accruals and deferrals help ensure that expenses are recognized in the same period as the revenues they help generate.

45. Book value decreases each period as depreciation is recorded. Answer: True Because Accumulated Depreciation increases with each adjusting entry, the difference between cost and accumulated depreciation (book value) declines over the asset’s life.

46. Unearned revenue is a temporary account that is closed at year-end. Answer: False Unearned revenue is a permanent liability account. Only the earned portion is transferred to a temporary revenue account; the remaining unearned balance stays on the balance sheet.

47. Adjusting entries for prepaid expenses decrease assets and increase expenses. Answer: True The entry transfers the expired cost from the prepaid asset account to the related expense account, reducing total assets and increasing total expenses for the period.

48. The existence of unearned revenue always requires an adjusting entry at period-end. Answer: False An adjusting entry is needed only if some or all of the unearned amount has been earned by the end of the period. If none has been earned, the full liability remains and no adjustment is required.

49. Depreciation is a cash expense. Answer: False Depreciation is a non-cash allocation of a previously recorded cost. No cash changes hands when the adjusting entry for depreciation is made.

50. After adjusting entries are posted, the next step is usually to prepare the adjusted trial balance. Answer: True Once all adjusting entries have been journalized and posted to the ledger, an adjusted trial balance is prepared to confirm that debits equal credits and to provide the account balances needed for the financial statements.

 

Adjusting Entries Quiz: 50 True or False Questions

Part 1: Basic Concepts & The Accounting Cycle

Part 2: Deferrals – Prepaid Expenses

Part 3: Deferrals – Unearned Revenues

Part 4: Accruals – Accrued Revenues and Expenses

Part 5: Depreciation, Estimates, and Comprehensive