Debits and Credits in Accounting: A Comprehensive Guide for MBA Students

Question 1

What is the primary purpose of closing entries?

Accepted Answer

To remove temporary accounts from the ledger

Answer

To prepare financial statements

Answer

To adjust account balances for inflation

Answer

To record transactions that occur after the fiscal year-end

Question 2

What is the fundamental accounting equation?

Accepted Answer

Assets = Liabilities + Owner's Equity

Answer

Assets - Liabilities = Owner's Equity

Answer

Liabilities + Owner's Equity = Assets

Answer

Owner's Equity = Assets - Liabilities

Question 3

Which type of account is used to record income earned?

Accepted Answer

Revenue

Answer

Asset

Answer

Liability

Answer

Expense

Question 4

What is the main objective of a trial balance?

Accepted Answer

To verify the accuracy of the ledger

Answer

To prepare financial statements

Answer

To close the accounting books at the fiscal year-end

Answer

To adjust account balances for depreciation

Question 5

What is the effect of debiting the Depreciation Expense account?

Accepted Answer

Decreases the asset's book value

Answer

Increases the asset's book value

Answer

Increases owner's equity

Answer

Decreases liabilities

Question 6

Which journal entry accurately reflects the issuance of common stock?

Accepted Answer

Debit Common Stock, Credit Cash

Answer

Debit Cash, Credit Common Stock

Answer

Debit Retained Earnings, Credit Common Stock

Answer

Debit Common Stock, Credit Accounts Receivable

Question 7

When a business declares a dividend, which account is credited?

Accepted Answer

Retained Earnings

Answer

Cash

Answer

Dividends

Answer

Accounts Receivable

Question 8

Which transaction results in a decrease in a liability?

Accepted Answer

Paying off a loan

Answer

Borrowing money

Answer

Issuing a bond

Answer

Receiving a payment on accounts receivable

Question 9

In an accounting system, what is the standard convention for recording debits and credits?

Accepted Answer

Debits on the left, credits on the right

Answer

Debits on the right, credits on the left

Answer

Credits on the left, debits on the right

Answer

Credits on the right, debits on the left

Question 10

What is the effect of a credit to a liability account?

Accepted Answer

Decreases liability

Answer

Increases liability

Answer

Increases owners' equity

Answer

Decreases revenue

Question 11

In accounting, is it essential that total debits always equal total credits?

Accepted Answer

Yes, for the accounting equation to balance

Answer

No, only in specific financial statements

Question 12

What is the primary purpose of using debits and credits in financial accounting?

Accepted Answer

To track financial flows and ensure accuracy

Answer

To simplify financial statement preparation

Answer

To categorize financial transactions

Answer

To enhance the readability of financial reports

Question 13

What is the accounting impact of debiting an expense account?

Accepted Answer

Increase in expense

Answer

Decrease in expense

Answer

Increase in revenue

Answer

Decrease in owners' equity

Question 14

Which transaction would result in a credit to equity and a debit to cash?

Accepted Answer

Issuing shares of common stock

Answer

Declaring a cash dividend

Answer

Purchasing equipment with cash

Answer

Paying salaries with cash

Question 15

Is the use of debits and credits crucial for maintaining the balance of the accounting equation?

Accepted Answer

Yes, it ensures the equality of debits and credits

Answer

No, other methods can be used to balance the equation

Question 16

When recording transactions, which side of the corresponding account will increase according to the double-entry system's rules?

Accepted Answer

Debit for assets and expenses, credit for liabilities and equity

Answer

Credit for assets and expenses, debit for liabilities and equity

Answer

Debit for assets and liabilities, credit for expenses and equity

Answer

Credit for assets and liabilities, debit for expenses and equity

Question 17

In the context of recording transactions, which of the following scenarios would require a debit to Accounts Payable?

Accepted Answer

Receiving goods from a vendor

Answer

Making a payment to a vendor for an invoice

Answer

Issuing a purchase order

Answer

Returning purchased goods to a vendor

Question 18

Which financial statement provides a comprehensive snapshot of a company's financial position at a specific point in time?

Accepted Answer

Balance Sheet

Answer

Income Statement

Answer

Statement of Cash Flows

Answer

Statement of Owner's Equity

Question 19

Which type of account balance is closed out at the end of each accounting period and its balance is transferred to Retained Earnings?

Accepted Answer

Temporary Accounts

Answer

Assets

Answer

Permanent Accounts

Answer

Contra Accounts

Question 20

Which of the following is not a common type of adjusting entry?

Accepted Answer

Reversal

Answer

Accrual

Answer

Deferral

Answer

Correction

Question 21

What is the primary purpose of closing entries?

Accepted Answer

To transfer temporary account balances to permanent accounts, preparing the company's books for the next accounting period

Answer

To update the balances of all accounts on the trial balance

Answer

To correct errors in the financial statements

Answer

To prepare the company for an audit

Question 22

Explain the fundamental difference between a debit and a credit.

Accepted Answer

Debits increase assets and expenses, while credits increase liabilities and equity

Answer

Credits increase assets and expenses, while debits increase liabilities and equity

Answer

Debits increase liabilities and equity, while credits increase assets and expenses

Answer

Credits increase liabilities and equity, while debits increase assets and expenses

Question 23

According to accounting rules, when an account experiences an increase, it is recorded as a:

Accepted Answer

Debit

Answer

Credit

Answer

Adjustment

Answer

Closure

Question 24

When an expense occurs, which type of account is debited?

Accepted Answer

Expense account

Answer

Asset account

Answer

Liability account

Answer

Equity account

Question 25

The process of transferring balances from temporary to permanent accounts is known as:

Accepted Answer

Closing process

Answer

Reversing process

Answer

Adjusting process

Answer

Posting process

Question 26

What is another name for a statement of financial position?

Accepted Answer

Balance sheet

Answer

Income statement

Answer

Statement of cash flows

Answer

Statement of changes in equity

Question 27

In financial reporting, which factor is paramount for accountants when using debits and credits?

Accepted Answer

Established accounting principles

Answer

Personal preferences

Answer

Company's financial performance

Answer

Shareholders' expectations

Question 28

When debiting an account, which of the following actions is being made?

Accepted Answer

Decrease in an asset OR Increase in an expense

Answer

Decrease in revenue

Answer

Increase in liability

Answer

Increase in equity

Question 29

What is the effect of crediting the Cash account?

Accepted Answer

Increase in Cash balance

Answer

Decrease in Cash balance

Answer

Decrease in Accounts Payable balance

Question 30

What is the primary purpose of recording a journal entry?

Accepted Answer

To provide a chronological record of financial transactions

Answer

To prepare financial statements

Answer

To summarize financial data for a specific period

Question 31

Which of the following is a type of adjusting entry?

Accepted Answer

Depreciation expense

Answer

Sales revenue

Answer

Cash payment to creditors

Answer

Purchase of inventory

Question 32

What is the Trial Balance used for?

Accepted Answer

To check the equality of debits and credits in the ledger

Answer

To prepare the Balance Sheet

Answer

To prepare the Income Statement

Question 33

Which of the following financial statements summarizes the financial performance of a company over a period of time?

Accepted Answer

Income Statement

Answer

Statement of Cash Flows

Answer

Statement of Owner's Equity

Answer

Balance Sheet

Question 34

What is the fundamental difference between an asset and a liability?

Accepted Answer

Assets are owned by the company, while liabilities are owed to others

Answer

Assets are used in operations, while liabilities are not

Answer

Assets increase with credits, while liabilities increase with debits

Question 35

What is the purpose of closing entries?

Accepted Answer

To transfer temporary account balances to permanent accounts

Answer

To create a Trial Balance

Answer

To prepare financial statements

Question 36

Which of the following is a defining characteristic of the double-entry accounting system?

Accepted Answer

Each transaction affects at least two accounts

Answer

The Trial Balance must balance before adjusting entries

Answer

Transactions are recorded in chronological order

Answer

Financial statements are prepared monthly

Question 37

What is the effect of a credit to a liability account?

Accepted Answer

Reduces liability

Answer

Increases liability

Answer

No change

Answer

Reverses the balance

Question 38

The accounting equation is defined as:

Accepted Answer

Assets = Liabilities + Owner's Equity

Answer

Liabilities - Equity = Assets

Answer

Equity + Liabilities = Assets

Answer

Assets - Liabilities = Equity

Question 39

Which of the following is a contra-asset account?

Accepted Answer

Accumulated Depreciation

Answer

Cash

Answer

Equity

Answer

Accounts Receivable

Question 40

What is the primary purpose of debits and credits in financial accounting?

Accepted Answer

To record transactions accurately and maintain balance in the accounting equation

Answer

To facilitate financial statement preparation

Answer

To categorize and summarize financial data

Question 41

What is the impact of a debit to a revenue account?

Accepted Answer

Increases revenue

Answer

Reverses the balance

Answer

Decreases revenue

Answer

No change

Question 42

Differentiate debits from credits in terms of their impact on financial accounts.

Accepted Answer

Debits increase assets and expenses, while credits increase liabilities, equity, and revenues.

Answer

Debits decrease assets and expenses, while credits decrease liabilities, equity, and revenues.