Monetary Current Assets and Liabilities: Comprehensive Guide for CPA Preparation

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When preparing for the CPA exam, understanding Monetary Current Assets and Monetary Current Liabilities is vital, as these are fundamental concepts in financial accounting. The classification of assets and liabilities into current categories reflects a company’s short-term financial health and liquidity. This guide will provide detailed explanations, simplified examples, journal entries, and practical CPA exam tips to help you excel. Monetary Current Assets: Deep Dive Monetary current assets are assets that are expected to be converted into cash or used up within one year or within a company's normal operating cycle, whichever is longer. These assets are considered liquid since they are easily convertible into cash. The key types include: 1. Cash and Cash Equivalents Cash and cash equivalents refer to all money available immediately, such as cash on hand, checking accounts, and short-term, highly liquid investments. These are considered the most liquid of all assets. Exampl...
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Matching of Revenues and Expenses: A CPA Goldmine Concept

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 Understanding the Matching Principle is your secret weapon for acing CPA questions on revenue and expense recognition. This comprehensive guide breaks it down simply, takes you from cash to accrual, covers all CPA-tested revenue topics, walks through journal entries and financial impacts, and finishes with 30 high-value CPA-style MCQs — each with 4 answer options and detailed explanations.

🌟 1. Expense Recognition: The Matching Principle

🎯 What is the Matching Principle?

The Matching Principle states:
“Record expenses in the same period as the revenues they help generate.”

✅ Real-Life Corporate Example: Amazon

Amazon pays ₹5,00,000 in salaries in December for its operations that generate revenue in the same month. Even if the payment is made in January, the expense must be recorded in December.

Journal Entry – December:

AccountDebitCredit
Salaries Expense₹5,00,000
Salaries Payable₹5,00,000

Impact:

  • Income Statement: ₹5,00,000 expense in December

  • Balance Sheet: ₹5,00,000 liability

✅ Easy Tip:

Think of expenses as the "sidekicks" of revenue. They must appear in the same movie (accounting period).

⏳ 2. Accruals and Deferrals in Detail

🔄 Accruals

  • Accrued Revenue: Revenue earned but not yet received (e.g., consulting fees earned in December but billed in January)

  • Accrued Expense: Expense incurred but not yet paid (e.g., interest payable)

🔁 Deferrals

  • Deferred Revenue: Cash received before revenue is earned (e.g., advance payments)

  • Deferred Expense (Prepaid): Cash paid before the expense is incurred (e.g., prepaid insurance)

✅ Example: Netflix

Netflix receives ₹12,00,000 in December for a 12-month subscription (₹1,00,000/month). Only ₹1,00,000 is earned in December.

Journal Entry – December:

AccountDebitCredit
Cash₹12,00,000
Deferred Revenue₹11,00,000
Subscription Revenue₹1,00,000

Impact:

  • Income Statement: ₹1,00,000 revenue

  • Balance Sheet: ₹11,00,000 liability

🛠️ 3. Adjusting Journal Entries (AJEs)

Adjusting journal entries are made at the end of the accounting period to ensure accurate accrual-based financial reporting.

🧾 3a. From Cash Basis to Accrual Basis

Example:

Rent of ₹1,20,000 is paid on October 1 for 12 months.

  • Cash Basis: Expense ₹1,20,000 in October

  • Accrual Basis: Recognize only ₹30,000 (Oct–Dec); the remaining ₹90,000 is Prepaid Rent

Adjusting Entry – December:

AccountDebitCredit
Prepaid Rent₹90,000
Rent Expense₹90,000

Impact:

  • Balance Sheet: ₹90,000 Prepaid Rent (Asset)

  • Income Statement: ₹30,000 Rent Expense

🧾 3b. Error Corrections

Example:

A company mistakenly expensed a ₹10,00,000 computer purchase instead of capitalizing it.

Correcting Entry:

AccountDebitCredit
Computer (Asset)₹10,00,000
Retained Earnings₹10,00,000

Impact:

  • Corrects prior period net income

  • Properly reflects the capital asset on the balance sheet

✅ Quick Tips to Crack Matching Principle in CPA Exams

  • 📌 Match expenses with the revenues they support, not when cash is paid.

  • 📌 Prepaids and accruals require year-end adjusting entries.

  • 📌 Understand what impacts the Income Statement vs. Balance Sheet.

  • 📌 Know that error corrections often affect Retained Earnings.

  • 📌 Use adjusting entries to convert from cash basis to accrual accounting.

🎯 30 CPA-Style MCQs – 4 Options Each, With Answers & Explanations

Q1. Under the matching principle, when should expenses be recognized?

A. When paid
B. When incurred
C. When budgeted
D. When the invoice is received

Answer: B. When incurred
Explanation: Expenses are recorded in the same period as the revenues they support, not based on when cash is paid or invoices are received.

Q2. Which of the following is an example of an accrued expense?

A. Prepaid rent
B. Salaries payable
C. Unearned revenue
D. Cash dividends

Answer: B. Salaries payable
Explanation: Salaries payable represent expenses that have been incurred but not yet paid—classic accrued expense.

Q3. Netflix receives ₹24,00,000 on Jan 1 for a 12-month subscription. How much revenue is recognized by Mar 31?

A. ₹24,00,000
B. ₹6,00,000
C. ₹18,00,000
D. ₹2,00,000

Answer: B. ₹6,00,000
Explanation: ₹2,00,000/month × 3 months = ₹6,00,000 revenue recognized by March 31.

Follow next post for practice question on this topic. STAY Tuned!

🔁 Final Exam Revision Points

  • Revenue ≠ cash. Recognize revenue when earned, expenses when incurred

  • Memorize journal entries for prepaids, accruals, deferrals, and error corrections

  • Watch out for cash ≠ revenue trick questions

  • Understand account classification: what affects P&L, Balance Sheet, and Cash Flow statements

📘 Ace your CPA exam by mastering these core concepts. Share this with your study group and revisit before your FAR exam for a quick review!




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