Let's Answer Accounting! Adjusting Entries 1 Answers

The rules that I apply here are under basic accounting for service concern firms. If you have any comments, rectifications, suggestions or violent reactions, please do comment here! I appreciate them. 

True or False!

1. Adjusting entries is a required step in the accounting cycle. 

TRUE. 

Explanation:
If entries that need adjusting aren't adjusted before preparing financial statements, then there may be overstatements or understatements of amounts of different accounts.

2. If an entity credits a real account when given a payment before rendering a service, the adjusting entry would debit liability and credit an income account in the amount of the earned portion.

TRUE. 

Explanation:
Since the entity credits a real account, then it can be said that the entity credits a liability account - which, in this case, is an Unearned Income, arising from the precollection of payment before service. The adjusting entry is right in debiting liability and crediting the income; and further made correct by crediting an income account. When you credit an income account, then you increase income - meaning, you recognize the income. 
Example:
Mr. Mario Miller, proprietor of Setzer Printing Company, received $1,000 on November 1, 2012 from Urdaneta Food Kiosks for advance payment of the space Setzer Printing Company owns. The rate of rent at the time is $500 per month. Mr. Mario Miller then tells his accountant about the transaction, which in turn leads to the accountant recording the said transaction. The accountant records, "Debit Rent Income, $1,000; Credit Unearned Rent Income, $1,000".

At year end, the Rent Income is realized or earned through the passage of time. Hence, the accountant makes an adjusting entry, "Debit Unearned Rent Income, $1,000; Credit, Rent Income, $1,000"

The adjusting transaction means that the liability of Unearned Income worth $1,000 is removed, and the Rent Income worth $1,000 is realized.

3. An unearned rent income is an example of a deferred charge.

FALSE.

It should be an example of a deferred credit, not debit or charge. A deferred charge is synonymous with a deferred debit. One does not debit an income account to increase the said account, instead, one credits it to increase the amount. However, it is deferred, meaning, it is to be realized or earned in the future. 

4. Adjusting entries and correcting entries are essentially the same.

FALSE.

Adjusting entries are required and unavoidable. These are needed to maintain the firm's true state in its financial statements. However, correcting entries may be avoided by not making a mistake in journalizing.
5. Precollected income is income already collected but not yet earned. 

TRUE. 

Precollected income and unearned income are synonymous. Both can be only realized or earned through rendering a service completely.

Let's Answer Accounting! Adjusting Entries

Try to answer this theoretical question. This is under basic accounting for a service concern businesss; some rules may vary from advanced or higher accounting. Don't worry, explanations will be given later. 

True or False!
1. Adjusting entries is a required step in the accounting cycle. 

2. If an entity credits a liability account when given a payment before rendering a service, the adjusting entry would debit liability and credit an income account in the amount of the earned portion.

3. An unearned rent income is an example of a deferred debit.

4. Adjusting entries and correcting entries are essentially the same.

5. Precollected income is income already collected but not yet earned.