Question

Which of the following statements is true? [1 mark]

1. Closing entries are required at the end of each accounting period to close all ledger accounts

2. Closing entries are designed to transfer the end-of-period balances in the revenue accounts, the expense accounts, and the withdrawals account to owner's capital.  

3. Asset, liability, and revenue accounts are not closed while a company continues in business.

4. The income summary account is used during the adjusting process to hold revenue, expenses, and withdrawals, before the net difference is added to or subtracted from the owner’s capital.

5. The 4 steps in closing are, close; (1) credit balances in revenue accounts to Income Summary; (2) credit balances in expense accounts to Income Summary; (3) Income Summary to Owner's Capital; (4) Withdrawals to Owner's Capital.

Which of the following is true? [1 mark]

1. Matching principle requires expenses to be recorded in the same accounting period as they are incurred.
2. Closing entries are necessary so that owner's capital will begin each period with a zero balance.
3. When total debits equal the total credits in a trial balance it guarantees no errors were made.
4. The last 4 steps in the accounting cycle include analyzing, journalizing, posting, and preparing a trial balance.
5. Temporary accounts accumulate financial data related to one period. Temporary accounts include revenue, expenses, accumulated depreciation, and withdrawals.

. Which of the following statements is false? [1 mark]

1. The cash basis of accounting recognizes revenues when cash is received from customers.
2. The accrual basis of accounting recognizes expenses when they are incurred.
3. The cash basis of accounting recognizes expenses when cash is paid.
4. The accrual basis of accounting recognizes revenue when it is earned.
5. The cash basis of accounting requires adjustments to match expenses with revenues.

Answer 1

Answer :

1.

Correct answer is the second option = closing entries are designed to transfer the end of period balances in the revenue accounts the expense accounts and the withdrawl account to owner's capital.

Reason :

• second statement is true as closing entries are done to transfer the balances of all the temporary accounts to the permanent accounts in balance sheet.
• First statement is incorrect as closing entries are required at the end of each accounting period to close only temporary account balances and not all ledger accounts.
• Third Statement is incorrect as Asset, liability are not closed while a company continues in business but revenue acounts are closed every year.
• Forth statement is incorrect as The income summary account is used during the adjusting process to hold revenue, expenses, before the net difference is added to or subtracted from the owner’s capital. but Withdrawls are not shown in income summary.
• Fifth statement is incorrect because Debit balances in expense accounts are transferred to Income Summary, not credit balances.

2.

Correct answer is option A = matching principle requires expenses to be recorded in the same accounting period as they are incurred.

Reason :

• option A is correct as matching principle requires expenses to be recognised in the same period when income is recognised.
• statement mentioned in option B is incorrect as owner's capital will begin will begin with some opening balance each period.
• statement mentioned in option C is incorrect as When total debits equal the total credits in a trial balance it does not guarantees no errors were made. for example when any debit and credit both are omitted due to some missing entry. trial balance still matches.
• statement mentioned in option D is incorrect as The last 4 steps in the accounting cycle include posting, and preparing a trial balance. Income statement, Balance Sheet.
• statement mentioned in option E is incorrect as accumulated depreciation is permanent account , not a temporary a/c.

3.

Correct answer is option E = cash basis of accounting requires adjustments to match the revenues with expenses.

Reason :

• the above statement given in option B is false. As in cash basis of accounting no adjustments are made. only those transaction which involves cash are considered.
• All the below statements mentioned in other options are true.
• The cash basis of accounting recognizes revenues when cash is received from customers.
• The accrual basis of accounting recognizes expenses when they are incurred.
• The cash basis of accounting recognizes expenses when cash is paid.
• The accrual basis of accounting recognizes revenue when it is earned.

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