Question

Which of the following is not a characteristic of adjusting entries? Multiple Choice Allow for proper recognition of revenues and expenses. Are recorded at the end of the accounting period. О O Reduce the balances of revenue, expense, and dividend accounts to zero. Are part of accrual-basis accounting.

Answer 1

Answer:

c. Reduce the balances of revenue, expense and dividend accounts to zero.

This is a feature of closing entries, not of adjustment entries. Closing entries are passed for closing revenue, expense and dividend accounts, which means their balances are reduced to zero. For example, expenses have debit balance. So, to close them(or, to make their balance zero), they are credited and a temporary account called income summary account is debited. Thus expense account will have a zero balance. Similarly, revenue accounts have credit balance, they are debited and income summary account is credited to close the revenue accounts and now they have zero balance. And for dividends, they are credited and retained earnings are debited to close dividend account.

Now let's look at the features of adjustment entries.

1.Salary due for the year $41,000, but not paid.

2.Services performed for the customer during the year and agreed to collect the amount in the next year $2,00,000. The entire transaction was not recorded.

The adjustment entries for the above transactions are:

Transaction	Account titles	Debit ($)	Credit ($)
1	Salary expense	41,000
	Outstanding salary expense		41,000
2	Accounts receivable	2,00,000
	Service revenue		2,00,000

See the adjustment entries,eventhough salary of this year is not paid, it is recognised at the end of the year.

And this is what we call accrual basis of accounting. For accrual basis of accounting, revenues and expenses for this year are recognised on the basis of their occurrence irrespective of their actual receipt or payment.

For, services performed during the year, it is recorded as revenue eventhough payment is not received since it has already earned(accrual accounting).