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
1
Which of the following items represents an example of unearned income?
Answer:
Both A & B
Unearned income, or deferred revenue, occurs when a business receives payment for goods or services before they have been delivered or performed. Both insurance premiums and rent received in advance represent liabilities because the business has an obligation to provide the service in the future.
2
Which of the following journal entries correctly records the adjustment for unearned income?
Answer:
DEBIT= Income, CREDIT= Unearned income
Unearned income represents a liability because the service or product has not yet been provided. To adjust for this, the income account is debited to reduce the revenue previously recorded, and the unearned income liability account is credited to reflect the obligation owed to the customer.
3
How is unearned income categorized in accounting?
Answer:
Liability
Unearned income represents revenue received in advance for goods or services that have not yet been provided. Because the business has an obligation to deliver these goods or services in the future, it is classified as a liability on the balance sheet until the performance obligation is satisfied.
4
How is the credit balance of income received in advance classified on the balance sheet?
Answer:
A liability
Income received in advance represents an obligation for the business to provide goods or services in the future. Because the entity has received payment but has not yet earned the revenue, it is classified as a current liability on the balance sheet.
5
Which accounts are impacted by the adjusting entry for unearned income?
Answer:
Income and liabilities
An adjusting entry for unearned income involves reducing the liability account (Unearned Revenue) and increasing the revenue account (Income) as the service is performed. This reflects the accrual basis of accounting, ensuring that income is recognized only when it is earned, regardless of when the cash was initially received.
6
How should subscription income that has been received in advance be classified in the financial statements?
Answer:
Liability
Subscription received in advance represents an obligation to provide services or goods in the future. According to the accrual basis of accounting, income is only recognized when it is earned. Since the service has not yet been provided, the amount received is considered unearned income, which is classified as a current liability on the balance sheet until the obligation is fulfilled.
7
How is a subscription received in advance classified in accounting?
Answer:
A Liability
Subscriptions received in advance represent money collected for services that have not yet been provided. Therefore, it creates an obligation for the entity, classifying it as a liability until the service period is completed.
8
How should income received in advance be treated in the final accounts?
Answer:
Deduct income received in advance from respective income and show it as a liability
Income received in advance is considered unearned revenue. According to the accrual basis of accounting, it must be deducted from the current period's income because it does not belong to the current period. It is then recorded as a current liability on the Balance Sheet until the service or product is provided to the customer.
9
How should commission received in advance be classified in accounting?
Answer:
Unearned Income
Commission received in advance is classified as unearned income (or deferred revenue). Because the service associated with the commission has not yet been performed, the business has a liability to provide the service in the future, making it a liability on the balance sheet until earned.
10
If a company receives cash in advance for services not yet performed and fails to record the adjusting entry, what is the impact on the financial statements?
Answer:
Total liabilities to be understated
Cash received in advance for services is a liability (unearned revenue). If the company fails to record this as a liability, the total liabilities on the balance sheet will be understated. The revenue should only be recognized when earned, so failing to adjust results in an omission of a liability.