ACCT1101 ACCOUNTING FOR DECISION MAKING

Tutorial 4: Recording Transactions III and Accrual

Please prepare your answers before class.

The following questions have been adapted from Attrill, Peter, McLaney, E. J., and Harvey, David
"Accounting: Information for Business Students", 1st edition, Pearson Australia

Pretutorial questions
1 Accounting transactions can be recognised on a ‘cash’ basis or an ‘accrual’ basis. Discuss
these two terms.

2. Why are adjustments necessary at the end of period under Accrual Accounting?What
adjustments may need to be made?

Multiple Choice Questions

1. XYZ limited has supplies on hand of $2 000 at the start of the period. By the end of the period,
there were only $500 supplies left. There were no purchases of supplies in the period. Which of
the following statements is true?

A) Supplies expense for the period is $500

2. Toby Ltd has a depreciation expense of $5 000 for the period. Which of the following is the correct
adjustment for the period?
A) Depreciation expense decreases by $5 000 and Accumulated Depreciation increases by
$5 000
B) Depreciation expense decreases by $5 000 and Accumulated Depreciation decreases by
$5 000
C) Depreciation expense increases by $5 000 and Accumulated Depreciation increases by
$5 000
D) Depreciation expense increase by $5 000 and Accumulated Depreciation decreases by $5000

3. A client paid $2 000 in April to ABC Ltd. for services to be rendered in May and June. ABC
provided services of $1 500 in May and $500 in June. What is the correct adjustment for the
month of June.
A) Service revenue decreases by $1 500 and unearned revenue increases by $1 500
B) Service revenue increases by $500 and unearned revenue decreases by $500
C) Service revenue increases by $1 500 and unearned revenue decreases by $1 500
D) Service revenue decreases by $500 and unearned revenue decreases by $500
 ACCT1101 ACCOUNTING FOR DECISION MAKING

4. A client ordered 2000 units of inventory worth $5 500 in June 2020 from EXP Ltd (to be delivered
in July 2020). For the year ended 30 June 2020, EXP Ltd will record:
A) Inventory of $5 500
B) An expense of $5 500
C) A sale of $5 500
D) Will not record a transaction

5. Howdie Ltd had a Prepaid asset account of $2 000 on 1 July 2019 which represented a payment of
a two-year insurance premium. For the year ending 30 June 2021, what will be the closing
balance of the prepaid account assuming no other prepayments were made since 1 July 2019?

A) $ 0
B) $ 1 500
C) $ 2 000
D) $ 500
 ACCT1101 ACCOUNTING FOR DECISION MAKING

Tutorial 4: Recording Transactions III and Accrual

Please prepare your answers before class.

The following questions have been adapted from Attrill, Peter, McLaney, E. J., and Harvey, David
"Accounting: Information for Business Students", 1st edition, Pearson Australia

Pretutorial questions
1 Accounting transactions can be recognised on a ‘cash’ basis or an ‘accrual’ basis. Discuss
these two terms.

Solution: Cash Accounting recognises revenue when cash is received and expenses
when cash payment is made. Accrual Accounting recognises revenue on the basis that
they have been earned (goods or services provided) and expenses on the basis that they
have been incurred (benefits used up). Under Accrual Accounting, revenue can be earned
without cash receipt, and cash can be received without delivery of goods or services and
hence no revenue recognised. Similarly, expenses can be incurred without the cash
disbursement, and payment of cash does not necessarily result in the recognition
expenses, depending on if the consumption of benefits takes place.

3. Why are adjustments necessary at the end of period under Accrual Accounting?What
adjustments may need to be made?

Solution: There is often a timing difference between the recognition of Income / Expenses and
the occurrence of cash inflows / outflows. This timing difference is the reason why certain
adjustments are necessary at the end of period to recognise Income and Expenses correctly
under Accrual Accounting. Adjustments are required in relation to:
• Income earned but not received (Accrued Revenue)
• Expenses incurred but not yet paid (Accrued Expenses)
• Income received in advance (Unearned Revenue)
• Prepayments (Expenses paid in advance)
• Depreciation
 ACCT1101 ACCOUNTING FOR DECISION MAKING

Multiple Choice Questions

1. XYZ limited has supplies on hand of $2 000 at the start of the period. By the end of the period,
there were only $500 supplies left. There were no purchases of supplies in the period. Which of
the following statements is true?

A) Supplies expense for the period is $500

2. Toby Ltd has a depreciation expense of $5 000 for the period. Which of the following is the correct
adjustment for the period?
A) Depreciation expense decreases by $5 000 and Accumulated Depreciation increases by
$5 000
B) Depreciation expense decreases by $5 000 and Accumulated Depreciation decreases by
$5 000
C) Depreciation expense increases by $5 000 and Accumulated Depreciation increases by
$5 000
D) Depreciation expense increase by $5 000 and Accumulated Depreciation decreases by $5000
Answer: C

3. A client paid $2 000 in April to ABC Ltd. for services to be rendered in May and June. ABC
provided services of $1 500 in May and $500 in June. What is the correct adjustment for the
month of June.
A) Service revenue decreases by $1 500 and unearned revenue increases by $1 500
B) Service revenue increases by $500 and unearned revenue decreases by $500
C) Service revenue increases by $1 500 and unearned revenue decreases by $1 500
D) Service revenue decreases by $500 and unearned revenue decreases by $500
Answer: B

4. A client ordered 2000 units of inventory worth $5 500 in June 2020 from EXP Ltd (to be delivered
in July 2020). For the year ended 30 June 2020, EXP Ltd will record:
A) Inventory of $5 500
B) An expense of $5 500
C) A sale of $5 500
D) Will not record a transaction
Answer: D

5. Howdie Ltd had a Prepaid asset account of $2 000 on 1 July 2019 which represented a payment of
a two-year insurance premium. For the year ending 30 June 2021, what will be the closing
balance of the prepaid account assuming no other prepayments were made since 1 July 2019?

A) $ 0
B) $ 1 500
C) $ 2 000
D) $ 500
Answer: A