CB Adjusting and Closing Entries — Questions and Answers
Question 1: What is the purpose of adjusting entries?
- To correct errors in financial records
- To allocate revenues and expenses to the proper period (Correct answer)
- To record cash transactions
- To close temporary accounts
Correct answer: To allocate revenues and expenses to the proper period
Adjusting entries ensure that revenues and expenses are recorded in the appropriate accounting period according to the accrual basis of accounting.
Question 2: Which of the following accounts typically requires an adjusting entry?
- Cash
- Prepaid expenses (Correct answer)
- Owner’s capital
- Accounts payable
Correct answer: Prepaid expenses
Prepaid expenses, such as insurance or rent, require adjusting entries to allocate costs over time properly.
Question 3: What is the purpose of closing entries?
- To adjust for accrued expenses
- To reset revenue and expense accounts for the next period (Correct answer)
- To reconcile bank statements
- To create adjusting journal entries
Correct answer: To reset revenue and expense accounts for the next period
Closing entries transfer balances from temporary accounts (revenues, expenses, and dividends) to permanent equity accounts.
Question 4: Which accounts are NOT closed during the closing process?
- Revenue accounts
- Expense accounts
- Asset and liability accounts (Correct answer)
- Dividends account
Correct answer: Asset and liability accounts
Permanent accounts such as assets, liabilities, and equity are not closed at the end of the period, unlike temporary accounts.
Question 5: Which financial statement is directly affected by closing entries?
- Balance sheet
- Income statement (Correct answer)
- Statement of cash flows
- Statement of financial position
Correct answer: Income statement
Closing entries impact the income statement by resetting temporary accounts and transferring net income to retained earnings.
Question 6: Which type of adjusting entry records unpaid salaries?
- Prepaid expense
- Accrued expense (Correct answer)
- Deferred revenue
- Depreciation expense
Correct answer: Accrued expense
An accrued expense adjusting entry records salaries or other expenses that have been incurred but not yet paid.
CB Adjusting and Closing Entries
What is the purpose of adjusting entries?