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    Adjusting entries and financial statements

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    2. State two generally accepted accounting principles that relate to adjusting the accounts.

    18. For each of the following items before adjustment, indicate the type of adjusting entry (prepaid expense, unearned revenue, accrued revenue, and accrued expense) that is needed to correct the misstatement. If an item could result in more than one type of adjusting entry, indicate each of the types.
    (a) Assets are understated.
    (b) Liabilities are overstated.
    (c) Liabilities are understated.
    (d) Expenses are understated.
    (e) Assets are overstated.
    (f) Revenue is understated.

    21. Why is it possible to prepare financial statements directly from an adjusted trial balance?

    3. What is the relationship, if any, between the amount shown in the adjusted trial balance column for an account and that account's ledger balance?

    13. How do correcting entries differ from adjusting entries?

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    Solution Preview

    1a. Matching Concept - The expenses should be matched with the revenues. This is most commonly used in depreciation. The assets are recorded at cost and at each accounting period, depreciation is recorded to match the use of the asset in the period.
    b. Accounting period concept - Accounting period measures activities for a specified interval of time, called the accounting period. Adjusting entries ensure that all figures relate to a particular accounting period.

    2. Assets are understated - Some assets have been reported as expense and the ...

    Solution Summary

    The solution explains the relationship between adjusting entries and preparing the financial statements