Accountancy MCQs
Topic Notes: Accountancy
General Description
Plato
- Biography: Ancient Greek philosopher (427–347 BCE), student of Socrates and teacher of Aristotle, founder of the Academy in Athens.
- Important Ideas:
- Theory of Forms
- Philosopher-King
- Ideal State
31
What is the impact of an adjusting entry for prepaid expenses on the financial statements?
Answer:
Assets and expenses
An adjusting entry for prepaid expenses involves debiting an expense account and crediting an asset account. This process recognizes the portion of the asset that has been consumed during the period, thereby increasing expenses and decreasing the asset value.
32
How should an insurance premium paid in advance be classified in the financial statements?
Answer:
Current asset
An insurance premium paid in advance is classified as a current asset, specifically a prepaid expense. It represents a future economic benefit because the business has paid for coverage that has not yet been utilized. Since this benefit is expected to be consumed within the standard operating cycle or one year, it qualifies as a current asset on the balance sheet.
33
How is an advance payment of tax classified in accounting?
Answer:
Prepaid Expense
An advance payment of tax is classified as a prepaid expense because the benefit of the payment will be realized in a future period. It represents a claim against the tax authorities, effectively functioning as a current asset until the tax liability is formally assessed and settled.
34
How should a non-profit organization classify rent expense that has been paid in advance?
Answer:
Asset
Prepaid rent represents a future economic benefit because the organization has paid for the right to occupy a space in a future period. According to the accrual basis of accounting, any payment made in advance for services not yet received is classified as a current asset on the balance sheet until the service is consumed.
35
What is the standard accounting procedure for adjusting prepaid expenses at the end of an accounting period?
Answer:
Deduct prepaid expenses from respective expenses and show it as an asset
In accounting, prepaid expenses represent payments made for goods or services not yet received or consumed. To adhere to the matching principle, the portion of the expense not yet incurred must be deducted from the expense account and recorded as a current asset on the balance sheet, as it provides a future economic benefit to the entity.