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Quizzes > Business & Finance

Accounting Chapter 4 Quiz: Adjusting Entries and Deferrals

Quick adjusting entries practice on revenue and expense deferrals. Instant results.

Editorial: Review CompletedCreated By: Shaylyn MagnussonUpdated Aug 26, 2025
Difficulty: Moderate
2-5mins
Learning OutcomesCheat Sheet
Paper art illustration of accounting charts answer sheet pencil and chapter four review quiz on sky blue background

This accounting chapter 4 quiz helps you practice adjusting entries, deferrals, and prepaid expense adjustments so you can catch gaps fast. For more review, try our accounting principles test and a focused financial accounting online quiz, or do a quick accounting quiz to brush up on the cycle.

Which of the following is an example of a prepaid expense?
Prepaid Insurance
Depreciation Expense
Accounts Payable
Unearned Revenue
Prepaid insurance represents payments made in advance for coverage which will be expensed over time as the insurance benefits are consumed. It is reported as an asset until the related portion of coverage has been used. Adjusting entries transfer the appropriate amount from the asset to expense.
What is the primary purpose of adjusting entries?
To record transactions during the period
To close temporary accounts
To update accounts before financial statements are prepared
To calculate taxes payable
Adjusting entries ensure that revenues and expenses are recognized in the period when they occur, matching the accrual basis of accounting. These entries update asset, liability, revenue, and expense balances for accurate financial reporting. Without adjustments, the financial statements could misstate a company's financial position.
At the end of the accounting period, which account would require an adjustment for accrued revenue?
Accumulated Depreciation
Accounts Receivable
Prepaid Expenses
Unearned Revenue
Accrued revenue arises when services have been performed but cash has not yet been received. An adjusting entry increases Accounts Receivable and records Revenue. This matches revenue to the period in which it was earned.
Depreciation expense is classified as what type of adjusting entry?
Accrual of an expense
Deferral of a revenue
Deferral of an expense
Accrual of a revenue
Depreciation spreads the cost of a fixed asset over its useful life and is a deferral of expense, moving cost from the asset account to expense gradually. It does not involve any cash flow at the time of adjustment. The contra-asset Accumulated Depreciation is credited.
Which account balance does a deferral adjustment decrease?
Revenue
Equity
Asset
Liability
Deferral adjustments move amounts from assets or liabilities to expenses or revenues; for prepaid expenses, an asset account is decreased. This recognizes that the asset's future economic benefits have been partially used. The corresponding expense account increases.
Unearned revenue appears on which financial statement?
Income Statement
Statement of Owner's Equity
Balance Sheet
Statement of Cash Flows
Unearned revenue is a liability representing cash received before services are performed or goods delivered. It appears on the balance sheet until the revenue is earned. Once the obligation is satisfied, it is adjusted to revenue on the income statement.
Supplies on hand at year-end must be adjusted to reflect which concept?
Matching principle
Historical cost
Economic entity assumption
Full disclosure
The matching principle requires that expenses be recognized in the period they help generate revenue. Year-end supplies on hand must be inventoried and the unused portion reported as an asset, with the used portion expensed. This prevents understating expenses and overstating assets.
Which concept requires revenues to be recorded when earned, regardless of cash receipt?
Going concern
Cost principle
Revenue recognition principle
Monetary unit assumption
The revenue recognition principle under accrual accounting dictates that revenue is recognized when it is earned, not necessarily when cash is received. This ensures that income statements reflect the timing of performance obligations being fulfilled. It provides more accurate reporting of a company's performance.
The accrual basis of accounting recognizes expenses when what occurs?
Equity is received
Cash is paid
Revenue is earned
Resources are consumed
Under accrual accounting, expenses are recognized when they contribute to revenue generation, even if cash has not been paid yet. This matches expenses to the same period as the related revenues. It provides a more realistic view of profitability.
Which adjusting entry would decrease an asset and increase an expense?
Deferring revenue
Recording accrued revenue
Recording depreciation expense
Accruing salaries payable
Recording depreciation expense reduces the carrying amount of the asset via Accumulated Depreciation (a contra-asset) and increases Depreciation Expense. This reflects the allocation of the asset's cost over its useful life. It matches expense recognition to the period of asset use.
What is the effect of failing to record accrued expenses at period end?
Expenses understated and liabilities understated
Revenues overstated and equity overstated
Revenues understated and assets understated
Expenses overstated and liabilities overstated
If accrued expenses aren't recorded, expenses for the period are understated and liabilities are understated on the balance sheet. This overstates net income and equity. Accurate financial statements require accruals for incurred but unpaid expenses.
How is interest expense calculated for an accrual?
Principal × Time ÷ Rate
Principal ÷ Rate × Time
Principal × Rate × Time
Rate ÷ Principal × Time
Interest expense accrual is computed by multiplying the principal amount by the annual interest rate and the fraction of the year elapsed. This matches the cost of borrowing to the period it applies. The adjusting entry records accrued interest payable and interest expense.
A company pays $1,200 for a one-year insurance policy on July 1. What is the adjusting entry on Dec 31?
Prepaid Insurance $600; Insurance Expense $600
Insurance Expense $300; Prepaid Insurance $300
Insurance Expense $600; Prepaid Insurance $600
Insurance Expense $1,200; Cash $1,200
From July 1 to December 31 is six months, so $1,200 × 6/12 = $600 of the prepaid insurance has been used. The adjusting entry debits Insurance Expense for $600 and credits Prepaid Insurance for $600. This allocates the expense to the period benefited.
Which adjusting entry affects both the balance sheet and income statement?
Closing revenue accounts
Recording cash sales
Paying dividends
Accruing utilities expense
Accruing utilities expense increases utilities expense (income statement) and increases utilities payable (liability on the balance sheet). This reflects the expense incurred but not yet paid. It ensures both statements report the correct period-end balances.
If supplies purchased for $500 have $200 remaining, what is the adjusting entry?
Supplies Expense $500; Supplies $500
Supplies Expense $300; Supplies $300
Supplies $300; Supplies Expense $300
Supplies $200; Supplies Expense $200
Used supplies are $500 ? $200 = $300. The adjusting entry debits Supplies Expense $300 and credits Supplies (asset) $300. This matches expense recognition to consumption.
Depreciation on equipment is recorded with which debit and credit?
Equipment; Depreciation Expense
Depreciation Expense; Accumulated Depreciation
Depreciation Expense; Equipment
Accumulated Depreciation; Cash
You debit Depreciation Expense to record the cost allocation and credit Accumulated Depreciation, a contra-asset account. This reduces the net book value of the equipment over time. No cash is involved in this noncash expense.
Accrued salaries payable appears under which account classification?
Current Liability
Equity
Expense
Current Asset
Accrued salaries payable is a current liability representing wages earned by employees that have not yet been paid. It is reported on the balance sheet. Recording it matches expense to the period incurred.
An electric bill for $300 is received and unpaid at year-end. What is the adjusting entry?
Utilities Payable $300; Cash $300
Utilities Expense $300; Utilities Payable $300
Utilities Expense $0; Utilities Payable $300
Utilities Expense $300; Cash $300
Since the bill is unpaid, record an accrued expense: debit Utilities Expense and credit Utilities Payable for $300. This properly matches the cost to the period in which electricity was used.
What is the adjusting entry for unearned service revenue when services are performed?
Unearned Revenue; Cash
Unearned Revenue; Service Revenue
Service Revenue; Accounts Receivable
Cash; Service Revenue
To recognize revenue earned from previously unearned amounts, debit Unearned Revenue and credit Service Revenue. This reduces the liability and records the earned revenue on the income statement.
What impact does an adjusting entry for prepaid rent have on total assets?
Transfers assets to liabilities
No change to total assets
Decreases total assets
Increases total assets
Recording a portion of prepaid rent as rent expense decreases the Prepaid Rent asset and increases rent expense. The net effect is a decrease in total assets by the amount expensed. This matches rent cost to the period benefited.
A note payable of $10,000 bearing interest at 6% due June 30; what is the interest accrual on Dec 31?
$500
$300
$600
$150
Interest = $10,000 × 6% × 6/12 (from July to December) = $300. The adjusting entry debits Interest Expense and credits Interest Payable for $300. This records the cost of borrowing for the half-year.
How does the matching principle relate to adjusting entries?
It matches assets to liabilities
It ensures expenses are recorded in the period they help generate revenue
It matches cash inflows to cash outflows
It requires all assets to be matched to equity
The matching principle dictates that expenses should be recognized in the same period as the revenues they help produce. Adjusting entries implement this principle by recording expenses and revenues in the correct period. This yields accurate net income figures.
Explain the effect on the accounting equation when recording depreciation expense.
Liabilities decrease and equity increases
Assets increase and liabilities increase
Assets decrease and equity decreases
Assets decrease and liabilities increase
Recording depreciation expense credits Accumulated Depreciation (reducing net assets) and debits Depreciation Expense (reducing equity via retained earnings). Thus, assets decrease and equity decreases, keeping the equation balanced.
A company accrues revenue of $5,000 but later finds revenue should have been $4,800. What adjusting entry corrects this?
Debit Accounts Receivable $200; Credit Service Revenue $200
Debit Service Revenue $4,800; Credit Accounts Receivable $4,800
Debit Retained Earnings $200; Credit Service Revenue $200
Debit Service Revenue $200; Credit Accounts Receivable $200
The original accrual overstated revenue by $200. To correct, debit Service Revenue for $200 (reducing it) and credit Accounts Receivable for $200. This adjusts both the income statement and balance sheet.
How would failure to adjust for unearned revenue affect the financial statements?
Liabilities understated and revenues understated
Equity understated and expenses overstated
Liabilities overstated and revenues overstated
Assets understated and expenses understated
Without adjusting, unearned revenue remains on the balance sheet overstating liabilities until revenue is earned, and revenues on the income statement are understated. This misrepresents both financial position and performance. Adjusting entries correct this timing difference.
How is book value of an asset computed after depreciation?
Original cost times remaining life
Cost plus accumulated depreciation
Original cost divided by useful life
Cost minus accumulated depreciation
Book value is the net carrying amount on the balance sheet, calculated as the asset's historical cost minus its accumulated depreciation. This reflects the remaining unexpired cost of the asset.
When closing entries are prepared, which accounts are closed into Income Summary?
Revenue and expense accounts
Dividends and capital
Assets and liabilities
Retained earnings only
Closing entries transfer balances of temporary accounts (revenues and expenses) to Income Summary, which is then closed to Retained Earnings. This resets revenues and expenses to zero for the next period.
What is the impact on retained earnings if closing entries are omitted?
Retained earnings will be correct
Retained earnings will be understated
Retained earnings will be incorrect and overstated
No impact on retained earnings
If closing entries are omitted, revenues and expenses remain in their accounts and are not transferred to Retained Earnings. This causes retained earnings to not reflect the period's net income, usually overstating it if revenues exceed expenses.
Explain why adjusting entries for accruals often involve reversing entries in the next period.
To adjust depreciation estimates
To record cash transactions
To simplify record-keeping and avoid double counting
To permanently remove the accrual
Reversing entries reverse accrual adjustments at the start of the next period, simplifying the recording of future cash transactions. This prevents double counting when cash is paid or received. It streamlines bookkeeping.
What adjusting entry records amortization of a patent?
Patent; Accumulated Amortization
Amortization Expense; Accumulated Amortization
Patent Expense; Patent
Accumulated Amortization; Cash
Amortization of an intangible asset is recorded by debiting Amortization Expense and crediting Accumulated Amortization (contra-asset). This allocates the patent cost over its useful life.
A business has a prepaid rent of $2,400 for six months. How is the rent expense recognized monthly?
$800 monthly
$200 monthly
$400 monthly
$2,400 monthly
$2,400 prepaid rent covers six months, so $2,400 ÷ 6 = $400 rent expense per month. Each month, Prepaid Rent is credited and Rent Expense is debited for $400.
How is an accrued liability different from a prepaid asset?
Liability paid in advance vs. asset incurred but unpaid
Liability now incurred but not paid vs. asset paid but not yet incurred
Both are never adjusted
Both represent cash paid in advance
An accrued liability is an expense incurred but not yet paid, creating a payable. A prepaid asset is cash paid for a future expense, creating an asset. Both require adjusting entries but in opposite directions.
Under IFRS, how are changes in estimated useful lives of assets handled in adjusting entries?
Prospectively, adjusting future depreciation expense
Record a gain or loss immediately
Retrospectively, restating prior years
No change, leave estimates unchanged
IFRS requires changes in estimate to be applied prospectively, adjusting depreciation expense for the current and future periods only. Prior periods are not restated. This approach reflects the revised estimate without altering past financial statements.
Discuss the conceptual difference between deferrals and accruals and give an example where both occur for the same transaction.
Both delay recognition; e.g., inventory
Both hasten recognition; e.g., depreciation
Deferrals delay recognition; accruals hasten it; e.g., prepaid rent and accrued rent receivable
Neither concept applies to revenue
Deferrals postpone recognition of revenues or expenses until a later period, while accruals recognize them earlier. For example, a company may prepay rent (deferral) and also earn interest that is not yet received (accrual) on the same cash payment. Both adjusting entries are needed to align timing.
A company issues bonds at a discount. How is the amortization of bond discount recorded in adjusting entries?
Debit Interest Expense; Credit Discount on Bonds Payable
Debit Discount on Bonds Payable; Credit Interest Expense
Debit Cash; Credit Discount on Bonds Payable
Debit Bonds Payable; Credit Cash
Amortizing a bond discount increases interest expense and reduces the contra-liability Discount on Bonds Payable. The adjusting entry debits Interest Expense and credits Discount on Bonds Payable. This allocates the discount over the bond's life.
For a long-term warranty, how is the liability estimated and recorded at period end?
Record actual claims only; debit Warranty Liability, credit Cash
Estimate warranty expense based on sales; debit Warranty Expense, credit Warranty Liability
Debit Sales Revenue; credit Warranty Liability
No entry until claims occur
Companies estimate warranty costs based on historical claim rates and recognize an expense in the period of sale. The adjusting entry debits Warranty Expense and credits Warranty Liability for the estimated amount. Actual claims reduce the liability when paid.
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Study Outcomes

  1. Understand Core Financial Statement Rules -

    Grasp the fundamental accounting principles in Chapter 4, including how assets, liabilities, and equity interrelate on financial statements.

  2. Apply Adjusting Entries and Deferrals -

    Demonstrate proper use of accrual accounting by recording adjusting entries for deferrals and accruals in line with accounting chapter 4 test answers.

  3. Analyze Transaction Classification -

    Identify and categorize business transactions accurately, ensuring they appear in the correct section of the financial statements.

  4. Evaluate Chapter 4 Review Answers -

    Assess your responses against the chapter 4 review test answers to detect strengths and pinpoint areas needing more study.

  5. Interpret Cash vs. Accrual Methods -

    Compare and contrast cash-basis and accrual-basis accounting to determine their impact on financial reporting.

  6. Leverage Quiz Feedback for Improvement -

    Use detailed feedback from this chapter 4 review/test quiz to create a targeted study plan and boost your accounting confidence.

Cheat Sheet

  1. Accrual vs. Cash Basis & Matching Principle -

    When tackling chapter 4 review test answers, distinguish between cash and accrual accounting: revenues and expenses are recorded when earned or incurred, not when cash changes hands. The matching principle ensures expenses are matched to revenues in the same period, summarized by the phrase "Match to catch."

  2. Deferrals: Prepaid Expenses & Unearned Revenue -

    Deferrals postpone recognition for transactions paid or received in advance; adjusting entries convert prepaid expenses into expenses (e.g., insurance) and unearned revenue into earned revenue as services are delivered. Remember to debit expense and credit asset for prepaid uses, and debit liability and credit revenue when earning unearned revenue.

  3. Accruals: Accrued Revenues & Expenses -

    Accrual adjusting entries record revenues earned but not yet received (debit receivable, credit revenue) and expenses incurred but not yet paid (debit expense, credit payable). For interest accruals, use the formula Interest = Principal × Rate × Time (e.g., $10,000 × 6% × 3/12).

  4. Depreciation & Cost Allocation -

    Straight-line depreciation divides an asset's depreciable cost (cost minus salvage value) evenly over its useful life: (Cost - Salvage)/Life. This fundamental formula appears often in accounting chapter 4 test answers and helps in accurately reporting expense and book value each period.

  5. Adjusted Trial Balance & Financial Statement Prep -

    After posting adjustments, an adjusted trial balance ensures debits equal credits before preparing financial statements; it integrates all updated balances of assets, liabilities, equity, revenues, and expenses. This step is crucial for reliable chapter 4 review answers and a smooth transition to the income statement and balance sheet.

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