Adjusting Entries and Reconciliations Flashcards

A company pays $12,000 for a 12-month insurance policy on October 1. What is the adjusting entry on December 31?

Answer: Debit Insurance Expense $3,000; Credit Prepaid Insurance $3,000

Three months (Oct, Nov, Dec) of the 12-month policy have expired, so $12,000 × 3/12 = $3,000 must be recognized as expense.

Which of the following is an example of an accrued liability requiring an adjusting entry?

Answer: Wages earned by employees but not yet paid

Accrued liabilities are expenses incurred but not yet paid, such as wages owed to employees at period end.

At year-end, $500 of interest has accrued on a note receivable. What is the correct adjusting entry?

Answer: Debit Interest Receivable $500; Credit Interest Revenue $500

Accrued interest earned is recorded by debiting Interest Receivable (asset) and crediting Interest Revenue.

When reconciling a bank statement, a deposit in transit should be:

Answer: Added to the bank balance

Deposits in transit have been recorded in the books but not yet processed by the bank, so they are added to the bank balance in the reconciliation.

A bank reconciliation shows a bank service charge of $25 not yet recorded in the books. What entry should the bookkeeper make?

Answer: Debit Bank Charges Expense $25; Credit Cash $25

Bank service charges reduce the account balance and must be recorded as an expense with a credit to Cash.

Straight-line depreciation on equipment costing $10,000 with a $1,000 salvage value over 5 years results in what annual adjusting entry amount?

Answer: $1,800

Annual depreciation = ($10,000 − $1,000) / 5 = $1,800 per year.

Which account is credited when recording the adjusting entry for depreciation?

Answer: Accumulated Depreciation

Depreciation is recorded by debiting Depreciation Expense and crediting Accumulated Depreciation, a contra-asset account.