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FINANCIAL ACCOUNTING - ADJUSTING ENTRIES 2026–2027
COMPLETE STUDY GUIDE: 100 QUESTIONS WITH DETAILED
RATIONALES
Financial Accounting / Financial Reporting
Exam coverage:
❖ Section 1 (Q1–20): Foundations of adjusting entries, accrual
vs. cash basis, matching principle, revenue recognition, time
period concept.
❖ Section 2 (Q21–40): Deferrals – prepaid expenses (insurance,
rent, supplies) and their adjusting entries.
❖ Section 3 (Q41–55): Deferrals – unearned revenues and the
recognition of revenue as services are performed.
❖ Section 4 (Q56–70): Depreciation using the straight-line
method, accumulated depreciation, and book value.
❖ Section 5 (Q71–90): Accrued revenues and accrued
expenses, including interest, salaries, utilities, and
commissions.
❖ Section 6 (Q91–100): The adjusted trial balance and the
impact of adjusting entries on financial statements.
Section 1: Foundations of Adjusting Entries & Accrual
Accounting (Questions 1–20)
Question 1
A new staff accountant is learning about the fundamental
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differences between cash basis and accrual basis accounting.
The accountant must understand why adjusting entries are
necessary under accrual accounting. Which of the following
best describes the accrual basis of accounting?
A. Revenues are recorded when cash is received, and expenses
are recorded when cash is paid.
B. Revenues are recorded when earned, and expenses are
recorded when incurred, regardless of when cash is exchanged.
C. Revenues are recorded when cash is received, and expenses
are recorded when incurred.
D. Revenues are recorded when earned, and expenses are
recorded when cash is paid.
CORRECT ANSWER: B
RATIONALE: Accrual basis accounting records revenues when
earned and expenses when incurred, regardless of when cash is
exchanged. This method is required by GAAP. Option A
describes cash basis accounting. Options C and D are
inconsistent mixtures of the two methods.
Question 2
A company uses accrual basis accounting and must prepare
financial statements at year-end. The accountant needs to
understand why adjusting entries are necessary. Which of the
following best describes the primary purpose of adjusting
entries?
A. To record cash transactions that have not yet been
journalized.
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B. To ensure revenues and expenses are recorded in the correct
accounting period and to update asset and liability accounts.
C. To correct errors made during the accounting period.
D. To transfer balances from temporary accounts to permanent
accounts.
CORRECT ANSWER: B
RATIONALE: Adjusting entries are made at the end of the
accounting period to ensure revenues and expenses are
recorded in the correct period and to update asset and liability
accounts to reflect accurate balances. Option A is incorrect
because adjusting entries never involve cash. Option C
describes correcting entries. Option D describes closing entries.
Question 3
An accountant is reviewing the accounting cycle and the role of
adjusting entries. The accountant must identify the correct
sequence of steps in the accounting cycle. At which point are
adjusting entries prepared?
A. Before the unadjusted trial balance is prepared.
B. After the unadjusted trial balance is prepared but before the
adjusted trial balance.
C. After the adjusted trial balance is prepared but before
financial statements.
D. After financial statements are prepared.
CORRECT ANSWER: B
RATIONALE: The accounting cycle sequence is: identify and
analyze transactions, record to journal, post to ledger, prepare
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unadjusted trial balance, record adjusting entries, prepare
adjusted trial balance, prepare financial statements. Adjusting
entries occur after the unadjusted trial balance and before the
adjusted trial balance.
Question 4
A company uses accrual accounting and prepares monthly
financial statements. The accountant needs to understand the
matching principle and its relationship to adjusting entries.
Which of the following best describes the matching principle?
A. Revenue should be recorded when cash is received.
B. Expenses should be recorded in the same period as the
revenues they help generate.
C. Assets should equal liabilities plus equity.
D. Adjusting entries should only be made at year-end.
CORRECT ANSWER: B
RATIONALE: The matching principle requires expenses to be
recorded in the same period as the revenues they help generate,
ensuring accurate measurement of net income. Option A
describes cash basis accounting. Option C is the accounting
equation. Option D is incorrect because adjusting entries are
made whenever financial statements are prepared.
Question 5
A company receives $1,200 on May 1 for six months of
insurance coverage. Under accrual basis accounting, the
accountant needs to determine how much expense should be
recognized at the end of May. What is the correct amount of
FINANCIAL ACCOUNTING - ADJUSTING ENTRIES 2026–2027
COMPLETE STUDY GUIDE: 100 QUESTIONS WITH DETAILED
RATIONALES
Financial Accounting / Financial Reporting
Exam coverage:
❖ Section 1 (Q1–20): Foundations of adjusting entries, accrual
vs. cash basis, matching principle, revenue recognition, time
period concept.
❖ Section 2 (Q21–40): Deferrals – prepaid expenses (insurance,
rent, supplies) and their adjusting entries.
❖ Section 3 (Q41–55): Deferrals – unearned revenues and the
recognition of revenue as services are performed.
❖ Section 4 (Q56–70): Depreciation using the straight-line
method, accumulated depreciation, and book value.
❖ Section 5 (Q71–90): Accrued revenues and accrued
expenses, including interest, salaries, utilities, and
commissions.
❖ Section 6 (Q91–100): The adjusted trial balance and the
impact of adjusting entries on financial statements.
Section 1: Foundations of Adjusting Entries & Accrual
Accounting (Questions 1–20)
Question 1
A new staff accountant is learning about the fundamental
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differences between cash basis and accrual basis accounting.
The accountant must understand why adjusting entries are
necessary under accrual accounting. Which of the following
best describes the accrual basis of accounting?
A. Revenues are recorded when cash is received, and expenses
are recorded when cash is paid.
B. Revenues are recorded when earned, and expenses are
recorded when incurred, regardless of when cash is exchanged.
C. Revenues are recorded when cash is received, and expenses
are recorded when incurred.
D. Revenues are recorded when earned, and expenses are
recorded when cash is paid.
CORRECT ANSWER: B
RATIONALE: Accrual basis accounting records revenues when
earned and expenses when incurred, regardless of when cash is
exchanged. This method is required by GAAP. Option A
describes cash basis accounting. Options C and D are
inconsistent mixtures of the two methods.
Question 2
A company uses accrual basis accounting and must prepare
financial statements at year-end. The accountant needs to
understand why adjusting entries are necessary. Which of the
following best describes the primary purpose of adjusting
entries?
A. To record cash transactions that have not yet been
journalized.
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B. To ensure revenues and expenses are recorded in the correct
accounting period and to update asset and liability accounts.
C. To correct errors made during the accounting period.
D. To transfer balances from temporary accounts to permanent
accounts.
CORRECT ANSWER: B
RATIONALE: Adjusting entries are made at the end of the
accounting period to ensure revenues and expenses are
recorded in the correct period and to update asset and liability
accounts to reflect accurate balances. Option A is incorrect
because adjusting entries never involve cash. Option C
describes correcting entries. Option D describes closing entries.
Question 3
An accountant is reviewing the accounting cycle and the role of
adjusting entries. The accountant must identify the correct
sequence of steps in the accounting cycle. At which point are
adjusting entries prepared?
A. Before the unadjusted trial balance is prepared.
B. After the unadjusted trial balance is prepared but before the
adjusted trial balance.
C. After the adjusted trial balance is prepared but before
financial statements.
D. After financial statements are prepared.
CORRECT ANSWER: B
RATIONALE: The accounting cycle sequence is: identify and
analyze transactions, record to journal, post to ledger, prepare
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unadjusted trial balance, record adjusting entries, prepare
adjusted trial balance, prepare financial statements. Adjusting
entries occur after the unadjusted trial balance and before the
adjusted trial balance.
Question 4
A company uses accrual accounting and prepares monthly
financial statements. The accountant needs to understand the
matching principle and its relationship to adjusting entries.
Which of the following best describes the matching principle?
A. Revenue should be recorded when cash is received.
B. Expenses should be recorded in the same period as the
revenues they help generate.
C. Assets should equal liabilities plus equity.
D. Adjusting entries should only be made at year-end.
CORRECT ANSWER: B
RATIONALE: The matching principle requires expenses to be
recorded in the same period as the revenues they help generate,
ensuring accurate measurement of net income. Option A
describes cash basis accounting. Option C is the accounting
equation. Option D is incorrect because adjusting entries are
made whenever financial statements are prepared.
Question 5
A company receives $1,200 on May 1 for six months of
insurance coverage. Under accrual basis accounting, the
accountant needs to determine how much expense should be
recognized at the end of May. What is the correct amount of
