Recording Transactions and Adjustments: Master the Basics of Financial Accounting

Question 1

To record an accrued expense, which journal entry is correct?

Accepted Answer

Debit Expense, Credit Liability

Answer

Credit Expense, Debit Liability

Answer

Debit Liability, Credit Expense

Answer

Credit Asset, Debit Liability

Question 2

In double-entry accounting, which principle ensures that the total debits in a transaction equal the total credits?

Accepted Answer

Principle of Debit and Credit

Answer

Principle of Double-Entry

Answer

Principle of Account Balancing

Answer

Principle of Trial Balance

Question 3

Which step in the accounting cycle updates and verifies the accuracy of accounting records?

Accepted Answer

Preparing adjusting entries

Answer

Recording transactions in the journal

Answer

Posting to ledger accounts

Answer

Preparing financial statements

Question 4

Which of the following transactions necessitates an adjusting entry at the conclusion of the accounting period?

Accepted Answer

Utilizing equipment acquired in a previous period

Answer

Acquiring supplies on credit

Answer

Receiving payment for services rendered

Answer

Paying a utility bill

Question 5

Which of the following is NOT an adjusting entry?

Accepted Answer

Recording cash received for services rendered

Answer

Recording depreciation expense

Answer

Recording accrued interest revenue

Answer

Adjusting the Allowance for Bad Debts

Question 6

Which of the following is an adjusting entry?

Accepted Answer

Recording depreciation expense for the period

Answer

Recording a sale of inventory on account

Answer

Receiving cash from a customer on account

Answer

Paying rent for the month

Question 7

Which of the following is an example of an adjusting entry made at the end of an accounting period?

Accepted Answer

Updating the Allowance for Doubtful Accounts based on the aging of accounts receivable

Answer

Recording a sale of inventory to a customer

Answer

Closing the Revenue account at the end of the accounting period

Answer

Reversing an accrued expense at the beginning of the next accounting period

Question 8

Compared to a cash accounting system, an accrual accounting system:

Accepted Answer

Provides a more accurate view of a company's financial performance.

Accepted Answer

Is generally more complex to implement.

Answer

Records transactions only when cash is exchanged.

Answer

Tracks both cash and accrual transactions for tax purposes.

Question 9

Which transaction requires a debit to the Cash account and a credit to the Service Revenue account?

Accepted Answer

Receiving cash for services rendered

Answer

Purchasing equipment with cash

Answer

Providing services on credit

Answer

Paying rent in cash

Question 10

To record accrued interest revenue, which journal entry is appropriate?

Accepted Answer

Debit Interest Revenue, Credit Interest Payable

Answer

Debit Interest Payable, Credit Interest Revenue

Answer

Debit Cash, Credit Interest Revenue

Answer

Debit Interest Expense, Credit Interest Payable

Question 11

Which step is NOT part of the accounting cycle?

Accepted Answer

Analyzing financial statements for decision-making

Answer

Recording transactions in a journal

Answer

Posting journal entries to ledger accounts

Answer

Preparing a trial balance to verify account balances

Question 12

What is NOT a primary objective of making adjusting entries?

Accepted Answer

Reverse errors in recording transactions.

Answer

Update account balances to reflect actual amounts at the end of the period.

Answer

Prepare accurate financial statements.

Answer

Distribute expenses and revenues across accounting periods.

Question 13

Which of the following is not an adjusting entry?

Accepted Answer

Closing entries

Answer

Accrued revenue

Answer

Prepaid expenses

Answer

Deferred revenue

Question 14

Within an income statement, which account is considered a contra-revenue account?

Accepted Answer

Sales Returns and Allowances

Answer

Salaries Expense

Answer

Inventory

Answer

Notes Payable

Question 15

What is the primary purpose of adjusting entries in the accounting cycle?

Accepted Answer

Update account balances to reflect current conditions

Answer

Correct errors in transaction recording

Answer

Close temporary accounts

Answer

Reverse previous period transactions

Question 16

Which of the following transactions necessitates an adjusting entry at the conclusion of an accounting period?

Accepted Answer

Accumulating interest expense on a loan

Answer

Issuing an invoice for sales to a customer

Answer

Paying rent for the current month

Answer

Acquiring equipment with cash

Question 17

Which transaction leads to a debit in Accounts Receivable and a credit in Sales Revenue?

Accepted Answer

Sale of merchandise on account

Answer

Receipt of cash for services

Answer

Purchase of office supplies on account

Answer

Payment of rent expense

Question 18

What is the primary purpose of closing entries in accounting?

Accepted Answer

To move balances from temporary to permanent accounts.

Answer

To rectify errors from the accounting period.

Answer

To create financial statements.

Question 19

What is a defining characteristic of adjusting entries?

Accepted Answer

Recorded during the accounting period, typically at month or year-end.

Answer

Used to correct errors in the current period.

Answer

Not recorded in any accounting journal.

Answer

Only used in cash basis accounting systems.

Question 20

In an adjusting entry for accrued interest on a note receivable, which account is debited?

Accepted Answer

Interest Receivable

Answer

Notes Receivable

Answer

Interest Revenue

Answer

Cash

Question 21

In the accounting cycle, which step involves organizing and presenting financial data into formal statements like the income statement and balance sheet?

Accepted Answer

Preparing financial statements

Answer

Posting to ledger accounts

Answer

Recording transactions

Answer

Adjusting entries

Question 22

Under the cash basis method of accounting, revenue is recognized:

Accepted Answer

At the point of cash collection from the customer

Answer

Upon delivery of goods or services to the customer

Answer

When the invoice is issued to the customer

Answer

When the customer places an order

Question 23

In the context of adjusting entries, why do we debit an expense account?

Accepted Answer

To recognize an expense that has occurred but has not yet been recorded.

Answer

To correct an overstated expense.

Answer

To record payment for the expense.

Answer

To transfer the expense to a different account.

Question 24

What is the main reason for making adjusting entries?

Accepted Answer

To make sure the accounting records accurately show the company's financial status at the end of the accounting period.

Answer

To fix mistakes made when recording transactions during the accounting period.

Answer

To spread expenses equally over all accounting periods.

Question 25

According to the accrual basis of accounting, when should revenue from services be recorded?

Accepted Answer

When the services are performed

Answer

When cash is received for the services

Answer

When an invoice is sent to the customer for the services

Question 26

Which financial statement offers a snapshot of a company's financial health at a particular moment?

Accepted Answer

Balance sheet

Answer

Income statement

Answer

Cash flow statement

Answer

Statement of retained earnings

Question 27

To record depreciation expense for a period, which journal entry should be used?

Accepted Answer

Debit Depreciation Expense, Credit Accumulated Depreciation

Answer

Debit Accumulated Depreciation, Credit Depreciation Expense

Answer

Debit Depreciation Expense, Credit Cash

Question 28

Which of the following is NOT a primary activity category in the statement of cash flows?

Accepted Answer

Non-operating activities

Answer

Operating activities

Answer

Investing activities

Answer

Financing activities

Question 29

Which of the following transactions typically requires an adjusting entry at the end of an accounting period to ensure accurate financial statements?

Accepted Answer

Expense incurred but not yet paid

Accepted Answer

Revenue earned but not yet invoiced

Answer

Payment received for services already rendered

Answer

Purchase of office equipment with cash

Question 30

Which of the following is a disadvantage of using an accrual accounting system?

Accepted Answer

Complicates the accounting process

Answer

Provides a more accurate picture of a company's financial performance

Answer

Improves cash flow management

Question 31

How do adjusting entries ensure adherence to the matching principle in accounting?

Accepted Answer

Adjusting entries match expenses to revenues earned in the same period.

Answer

Adjusting entries correct errors in transaction recording.

Answer

Adjusting entries only affect balance sheet accounts.

Answer

Adjusting entries are optional and can be omitted if immaterial.

Question 32

What is the purpose of closing entries in the accounting cycle?

Accepted Answer

To transfer balances from temporary accounts to permanent accounts, reset revenue and expense accounts to zero, and prepare financial statements.

Answer

To adjust errors made during the accounting period.

Answer

To close the accounting books for the period.

Question 33

A company declares a cash dividend of $0.50 per share to its common shareholders. If there are 100,000 shares outstanding, what is the total amount of dividends payable?

Accepted Answer

$50,000

Answer

$5,000

Answer

$100,000

Answer

$200,000

Question 34

How does the cash basis of accounting differ from the accrual basis of accounting in terms of recognizing expenses and revenues?

Accepted Answer

Under the cash basis, expenses are recognized when paid and revenues when received.

Answer

Accrual basis accounting generally leads to higher expenses and lower revenues in the initial year of a transaction compared to cash basis accounting.

Answer

Both cash and accrual basis accounting provide an accurate representation of a company's financial performance.

Question 35

Define depreciation and describe the various methods used to allocate the cost of a fixed asset over its useful life.

Accepted Answer

Depreciation is the systematic allocation of a fixed asset's cost over its useful life, reducing its book value. Common methods include straight-line, declining-balance, and units-of-production.

Answer

Depreciation is the recognition of a gain on the sale of a fixed asset, increasing its book value.

Answer

Depreciation applies solely to intangible assets, not fixed assets.

Answer

The choice of depreciation method does not affect the total depreciation expense recognized over the asset's useful life.

Question 36

Which of the following accurately describes payroll taxes and their implications?

Accepted Answer

Payroll taxes include federal income tax, Social Security tax, Medicare tax, and potentially state and local taxes.

Accepted Answer

Payroll taxes increase labor costs for businesses, impacting their expenses.

Accepted Answer

Payroll taxes provide benefits to employees by supporting government programs like Social Security and Medicare.

Answer

Payroll taxes are solely borne by employers, with no impact on employees.

Question 37

Internal controls are essential for safeguarding financial information. How do internal controls contribute to preventing errors and fraud in the accounting cycle?

Accepted Answer

Internal controls encompass policies and procedures to protect assets, prevent errors, and detect fraud.

Answer

Internal controls are only effective in large multinational corporations.

Answer

Internal controls are solely designed to detect and prevent fraud.

Answer

Internal controls are unnecessary in automated accounting systems.

Question 38

Which of the following is **not** a payroll tax?

Accepted Answer

Sales tax

Answer

Social Security tax

Answer

Medicare tax

Answer

Unemployment insurance tax

Question 39

Which accounting equation reflects the relationship between assets, liabilities, and equity?

Accepted Answer

Assets = Liabilities + Equity

Answer

Liabilities = Assets - Equity

Answer

Equity = Assets - Liabilities

Answer

Assets + Liabilities = Equity

Question 40

What is the first step in the accounting cycle after a business transaction occurs?

Accepted Answer

Recording the transaction in a journal

Answer

Posting the transaction to the ledger

Answer

Preparing a trial balance

Answer

Adjusting the accounts

Question 41

Which of the following accounts is typically closed to the Income Summary account at the end of an accounting period?

Accepted Answer

Revenue

Answer

Cash

Answer

Accounts Receivable

Answer

Supplies

Question 42

What is the primary purpose of a trial balance?

Accepted Answer

To check the equality of total debits and total credits

Answer

To summarize account balances at a specific point in time

Answer

To prepare the financial statements

Answer

To close the books

Question 43

What is the purpose of recording adjusting entries in the accounting cycle?

Accepted Answer

To update account balances to reflect actual financial events

Answer

To correct errors made in previous transactions

Answer

To prepare the financial statements

Answer

To close the books

Question 44

Which of the following is not a major purpose of the trial balance?

Accepted Answer

Preparing the financial statements directly

Answer

Verifying the mathematical accuracy of journal entries

Answer

Identifying errors or omissions in recording transactions

Answer

Providing a summary of the ledger accounts at a specific point in time

Question 45

When recording depreciation expense, which account is credited?

Accepted Answer

Accumulated Depreciation

Answer

Depreciation Expense

Answer

Cash

Answer

Equipment

Question 46

What is the first step in the accounting cycle?

Accepted Answer

Journalizing transactions

Answer

Posting to the ledger

Answer

Preparing a trial balance

Answer

Making adjustments

Question 47

Which adjustment would result in a decrease in net income?

Accepted Answer

Recording depreciation expense

Answer

Accruing interest expense

Answer

Recognizing unearned revenue

Answer

Reversing an accrued expense

Question 48

In the context of ledger posting, which side of the T-account is used to record debits?

Accepted Answer

Left side

Answer

Right side

Answer

Both sides

Answer

Neither side

Question 49

When recording the issuance of common stock, which account is credited?

Accepted Answer

Common Stock

Answer

Paid-in Capital in Excess of Par

Answer

Cash

Answer

Retained Earnings

Question 50

Which account is classified as a contra asset account?

Accepted Answer

Accumulated Depreciation

Answer

Prepaid Rent

Answer

Accounts Payable

Answer

Unearned Revenue

Question 51

The purpose of a trial balance is to:

Accepted Answer

Determine the equality of debits and credits

Answer

Verify the accuracy of postings

Answer

Prepare the financial statements

Answer

Adjust the accounts

Question 52

The accounting equation is expressed as:

Accepted Answer

Assets = Liabilities + Equity

Answer

Liabilities + Equity = Revenues - Expenses

Answer

Assets - Liabilities = Net Income

Answer

Equity + Expenses = Revenues

Question 53

Which of the following is an **example of an adjusting entry**?

Accepted Answer

Recording depreciation expense for the period

Answer

Recording the payment of rent

Answer

Recording the issuance of stock

Answer

Recording the sale of inventory

Question 54

What is the **primary purpose of posting transactions**?

Accepted Answer

To transfer data from the journal to the ledger

Answer

To calculate the net income

Answer

To update the trial balance

Answer

To prepare the financial statements

Question 55

Which of the following is classified as a **deferred expense**?

Accepted Answer

Rent paid in advance

Answer

Supplies on hand

Answer

Depreciation expense

Answer

Interest receivable

Question 56

What is the **key concept** behind the dual aspect concept in accounting?

Accepted Answer

Every transaction has two effects on the accounting equation

Answer

Every account has a debit and credit side

Answer

The trial balance must always balance

Answer

Financial statements are prepared monthly

Question 57

In accounting, which principle requires the recording of transactions based on when events occur, regardless of when cash is exchanged?

Accepted Answer

Accrual Basis Accounting

Answer

Cash Basis Accounting

Answer

Matching Principle

Answer

Going Concern Principle

Question 58

Which of the following does NOT represent a standard journal entry format?

Accepted Answer

Debit/Description/Credit

Answer

Debit/Credit

Answer

Date/Description/Folio

Answer

Amount/Explanation

Question 59

What is the primary purpose of posting transactions to the general ledger?

Accepted Answer

To categorize and summarize transactions by account

Answer

To maintain a chronological record of events

Answer

To determine account balances

Answer

To prepare financial statements

Question 60

Which type of adjustment is used to record expenses that have been incurred but not yet paid?

Accepted Answer

Accrued Expense

Answer

Deferred Expense

Answer

Prepaid Expense

Answer

Unearned Revenue

Question 61

What is the formula to calculate the balance of an equity account?

Accepted Answer

Beginning Balance + Credits - Debits

Answer

Beginning Balance + Debits - Credits

Answer

Debits - Credits - Beginning Balance

Answer

Credits - Debits - Beginning Balance

Question 62

What accounting term refers to the process of adjusting an asset account to reflect its reduced value due to wear and tear?

Accepted Answer

Depreciation

Answer

Amortization

Answer

Accrual

Answer

Deferral

Question 63

State the fundamental accounting equation.

Accepted Answer

Assets = Liabilities + Owner's Equity

Answer

Assets - Liabilities = Owner's Equity

Answer

Liabilities = Assets - Owner's Equity

Answer

Owner's Equity = Assets + Liabilities

Question 64

Which of the following transactions does NOT require an adjusting entry at the end of an accounting period?

Accepted Answer

Payment of a utility bill

Answer

Accrued interest revenue on a loan receivable

Answer

Depreciation expense on equipment

Answer

Unrecorded sales revenue