Cost vs. Expense, Adjusting Entries, Fraud Triangle
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14. What is the difference between a cost and an expense? When does a cost become an expense? Do all costs become expenses? Explain.
15. Why are adjusting entries necessary in an accrual accounting system? What are some common examples?
16. Describe the difference between temporary and permanent accounts, and state which ones are closed. Describe the purpose of the closing process.
18. What is meant by the "fraud triangle"?
19. Indicate how each of the following transactions affect assets by entering + for increase, - for decrease, or NA if total assets are not affected. _______ 1) Issued stock to investors._______ 2) Borrowed cash from the bank._______ 3) Provided services for cash._______ 4) Purchased land for cash._______ 5) Paid operating expenses._______ 6) Paid cash dividend to the stockholders._______ 7) Repaid the bank loan.
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14. What is the difference between a cost and an expense? When does a cost become an expense? Do all costs become expenses? Explain.
A cost is an expenditure for something that isn't used up (yet). Paying for an annual insurance policy is a cost but it isn't "insurance expense" until the month expire. It is "Prepaid Insurance," an asset.
Costs become an expense when they are used, expire or no longer have future value. Not all costs eventually become expenses, although many do. When you depreciate a long term asset, you don't depreciate the salvage value. That portion of the cost of the asset is never expensed. When the firm buys an investment, that has a cost but unless the investment becomes worthless and is written off (expensed), it remains the cost of the purchase until sold and then it is compared to the proceeds in determined the gain or loss.
15. Why are adjusting entries necessary ...
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