ACCOUNTING (THEORIES)

PRELIM EXAM
1. Objectivity- All business transactions that will be entered in the accounting records must be
fully supported by verifiable evidence.
2. Consistency- Approaches used in reporting must be consistently employed from period to
period.
3. Materiality- Financial reporting is concerned with significant information enough to effect
evaluations and decisions.
4. Accrual Basis- Revenue is recognized when actually earned.
5. Full Disclosure- All material facts that will significantly affect the financial statements must
be indicated.
6. Going Concern- Assumes that business has the ability to operate indefinitely.
7. Economic Entity- The business organization is separate and distinct from its owners.
8. Accounting System- Methods used by a business to keep records of its financial activities and
to summarize these activities in periodic accounting reports.
9. Generally Accepted Accounting Principle (GAAP) - Standards, concepts and measuring
techniques used in the preparation and presentation of financial statements.
10. Accounting- Systematic process of measuring and reporting relevant financial information
about the activities of an economic organization or unit.
11. Historical Cost- All properties and services acquired by the business must be recorded at its
original cost.
12. Accrual Principle- Expense is recognized when actually incurred or used.
13. Periodicity- Financial accounting provides information about the activities of an economic
enterprise for specified time periods.
14. Transaction- Completed action which can be expresses in monetary terms.
15. Rent expense- Amount paid for the use of space, equipment or other rentals.
16. Supplies expense- Amount of supplies used in the conduct of daily business.
17. Service Revenue- Revenues earned by performing services for a customer.
18. Insurance expense- expired portion of premiums paid on insurance coverage.
19. Salaries expense- Payments made to employees for rendering services to the company.
20. Utilities expense- Expenses related to the use of electricity, fuel, water and telecommunications
facilities.
FACTS:
1. Failure to record the adjusting entry for accrued salaries results in the current years profit being
overstated.
2. As equipment is depreciated, its book value and its accumulated depreciation decreases.
3. An adjusting entry includes at least one balance sheet account and at least one income statement
account.
4. Not all decreases in owners equity are a result of expenses.
5. Accounting periods should be of equal length to facilitate comparisons between periods.
6. Failure to record the adjusting entry for depreciation will overstate assets on the balance sheet.
7. In recording the adjusting entry for accrued salaries, all the accounts involved are not affected.
8. The owners personal withdrawals for the year cause a decrease in equity.
9. The expiration of usefulness of equipment during an accounting period is called depreciation.
10. Acquiring a computer for cash is just exchanging one asset for another and will result in an expense
even in future periods.
11. Applying accrual accounting results in a more accurate measurement of profit for the period than
does the cash basis of accounting.
12. Not all increases to cash represent revenues.
13. Adjusting entries will not affect cash flows in the current period.
14. Cash basis of accounting recognizes revenues and expenses at the point that cash changes hands.
15. An accrual is the recognition of an expense that has arisen but has not yet been recorded.
16. Assets become expenses when they expire.
17. When there is no direct connection between revenues and costs, the costs are systematically
allocated among the periods benefited.
18. Revenue results from collection of services earned.
19. Revenue cannot be recognized unless delivery of goods has occurred or services have been
rendered.
20. Adjusting entries are useful in apportioning costs among one accounting periods.
21. Recording incurred but unpaid expenses is an example of an accrual.
22. Revenue is equal to the services rendered by a company during an accounting period.
23. A companys fiscal year must not necessarily correspond to the calendar year.
24. If all transactions were original recorded in conformity with GAAP, there would be a need for
adjusting entries at the end of the period.
25. The adjustment to record depreciation of property and equipment consists of a debit to depreciation
expense and a credit to accumulated depreciation.
26. When services are not paid for until after they have been performed, the accrued expense is
recorded by an adjusting entry at the end of the accounting period.
27. The adjusting to recognize earned commission revenues not previous recorded or billed will not
cause total assets to change.
28. When the reduction in prepaid expenses is not properly recorded, this causes the asset accounts and
expense accounts to be overstated.
29. Accumulated depreciation accounts may be referred to as contra-asset accounts.
30. Accounts that are partly income statement amounts and partly balance sheet amounts are called
hybrid or mixed accounts
31. An assets book value represents the true market value of the asset.
32. If the adjustment for accrued salaries is omitted, liabilities and expenses will be understated.
33. The adjusting entry to recognize an expense which is unrecorded and unpaid will not affect total
assets.
34. Every adjusting entry must change both an income statement account and a balance sheet account.
35. Failure to record the adjusting entry for depreciation results in assets and owners equity being
overstated on the balance sheet.
36. A calendar period or any day must begin on January 1.
37. In recording the adjusting entries for depreciation, both accounts involved are increased.
38. The amount of accrued revenues is recorded by debiting an asset account and crediting an income
account.
39. Deferred revenue is a term used to describe revenue that has been received but not yet earned.
40. Book value is the original cost of a building less depreciation for the year.
41. The adjusting entry to recognize earned revenues which was received in advance will cause total
liabilities to increase.
Matching type:
A. Accrued expense
B. Accrued revenue
C. Deferred expense
D. Deferred revenue

1. Revenue not yet earned; collected in advance. D

2. Office supplies on hand; used next accounting period. C
3. Rent revenue collected; not yet earned. D
4. Rent not yet collected; already earned. B
5. An expense incurred; not yet paid or recorded. A
6. Revenue earned; not yet collected. B
7. An expense not yet incurred; paid in advance. C
8. Property taxes incurred; not yet paid. A
9. At the end of the year, salaries payable of P3, 600 had not been recorded or paid. A
10. Supplies for office use were purchased during the year for P500, and P100 of the
office supplies remained on hand (unused) at year-end. C
11. Interest of P250 on a note receivable was earned at year-end, although collection
of the interest is not due until the following year. B
12. At the end of the year, service revenues of P2, 000 was collected in cash but was
not yet earned. D

PROBLEM:
1. Helena Ruiz invested P 240,000 in the business (increase cash, increase Ruiz, Capital)
2. Bought two used delivery vans from The Van Lot for P 200,000 and paid P50,000 as a down
payment ( increase delivery equipment, P 200,000 ; decrease cash, P 50,000 ; increase Accounts
Payable, P 150,000)
3. Received P 25,000 in cash for delivery services ( increase cash; increase delivery revenues)
4. Received bill from Bicol News for Advertising, P 3,500 (increase advertising expense; decrease
cash)
5. Billed Naga Surgical Supply for delivery services provided, P 6,200 (increase Accounts
Receivable; increase delivery revenues)
6. Received and paid telephone bill, P 1,000 (decrease cash; decrease telephone expense)
7. Ruiz invested in his business office equipment having a fair market value of P 9,600 (increase
office equipment; decrease cash)
8. Received and paid bill for gas and oil P 1,500 (decrease cash; increase maintenance expense)
9. Paid P 3,500 to Bicol News to pay account in full (increase advertising expense; increase cash)
10. Received P 29,000 cash for delivery services performed (increase cash; increase delivery revenues)
11. Ruiz withdrew P 11,000 for personal use (decrease cash; increase salaries expense)
12. Received P 4,000 from Naga Surgical Supply to apply on account (increase cash; increase delivery
revenues)
13. Paid salaries to part time employees, P 8,000 (increase salaries expense; decrease cash)
14. Acquired office equipment for P 100,000. Ruiz paid P 20,000 in cash and promised to pay the
balance equally every end of the month (increase in Capital; increase in office equipment expense)
15. Borrowed cash from the bank by signing a note payable, P 50,000 (increase in cash; increase in
bank loan payable)
16. Paid transportation allowances for the month P 15,000 (increase cash; increase delivery revenues)
17. Paid cash on account in full for the office equipment purchased in #14 transaction (increase in
office equipment; decrease in bank loan payable)
18. Paid rent for December P 5,000 (increase in prepaid rent; increase in accounts payable)
19. Bought a computer equipment for office use, P 48,000 cash (increase in cash; increase in computer
equipment)
20. Paid electricity bill, P 6,000 (increase in utilities expense; decrease in accounts payable)