PRINCIPLES OF ACCOUNTING
ACCT 101
ASSIGNMENT 3
Last due date for submission 31st October 2015
Essay Questions
1. Identify the differences between accrual accounting and cash basis accounting.
Accrual Basis:
Companies record transactions in the periods in which the events occur.
 Revenues are recognized when earned, rather than when cash is received.
 Expenses are recognized when incurred, rather than when paid.
 Medium and large companies use accrual base of accounting.
Cash Basis:
Companies record transactions in the periods in which Cash is received or paid.
 Revenues are recognized when cash is received.
 Expenses are recognized when cash is paid.
2. How is the profit margin calculated? Discuss its use in analyzing a company's
performance.
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
Profit margin = 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
Profit margin is a useful ratio and can help provide insight about a variety of aspects of a
company’s financial performance.
This ration is interpreted as reflecting the percent of profit in each dollar of sales.
3. What is the purpose of closing entries? Describe the closing process.
The closing process is an important step at the end of an accounting period after financial
statements have been completed, the purpose of closing entries are:
1- It resets revenues, expenses, and dividends account balances to Zero at end of each
period. This is done so that these accounts can properly measure income and dividends
for the next period.
2- It helps in summarizing a period's revenues and expenses.
The closing process contains the following:
1- Identfy accounts for closing
2- Record and post the closing entries.
3- Prepare a post closing trial balance.
1
Short Answer Questions
1. On December 14 Bench Company received $3,700 cash for consulting services that will
be performed in January. Bench records all such prepayments in a liability account.
Prepare a general journal entry to record the $3,700 cash receipt.
Date
Dec 14
Accounts
Dr.
3,700
Cash
Unearned Consulting Services
Cr.
3,700
2. Complete the following by filling in the blanks:
The Prepaid Insurance account had a $455 debit balance at the beginning of the current
year; $650 of insurance premiums were paid during the year; and the year-end balance
sheet showed $420 of prepaid insurance; consequently, the income statement for the year
must have shown $685 of insurance expense.
3. Barnes Company has 20 employees who are each paid $80 per day for a 5-day
workweek. The employees are paid each Friday. This year the accounting period ends on
Tuesday. Prepare the December 31 year-end adjusting journal entry Barnes Company
should make to accrue salaries.
Date
Dec 14
Accounts
Salaries Expenses (20 × $80 × 2 Days )
Salaries Payable
2
Dr.
3,200
Cr.
3,200