Accounting Equation & Double-Entry Basics
Q1. The accounting equation states that:
- (a) Assets = Liabilities – Equity
- (b) Assets = Liabilities + Equity
- (c) Liabilities = Assets + Equity
- (d) Equity = Assets – Liabilities
Answer: (b)
Explanation: The fundamental accounting equation is Assets = Liabilities + Owner’s Equity. It shows that what a business owns (assets) is financed by what it owes (liabilities) plus the owners’ claim (equity).
Q2. Which of the following increases with a debit entry?
- (a) Revenue
- (b) Liability
- (c) Expense
- (d) Owner’s Capital
Answer: (c)
Explanation: Expenses increase on the debit side. Revenues, liabilities, and owner’s capital increase on the credit side.
Q3. When a business receives cash from a customer for services rendered, the journal entry is:
- (a) Debit Cash; Credit Service Revenue
- (b) Debit Service Revenue; Credit Cash
- (c) Debit Accounts Receivable; Credit Cash
- (d) Debit Cash; Credit Accounts Payable
Answer: (a)
Explanation: Cash (an asset) increases → debit Cash. Service Revenue (revenue) increases → credit Service Revenue.
Transactions & Their Impact
Q4. Payment of salaries to employees affects the accounting equation by:
- (a) Increasing assets and increasing equity
- (b) Decreasing assets and decreasing equity
- (c) Increasing liabilities and decreasing equity
- (d) Decreasing assets and increasing liabilities
Answer: (b)
Explanation: Salary paid reduces Cash (asset decreases). Salary Expense reduces net income, thus decreasing Owner’s Equity. Both sides of the equation decrease equally.
Q5. Purchasing office supplies on account (credit) will:
- (a) Increase assets and increase liabilities
- (b) Increase assets and decrease liabilities
- (c) Decrease assets and increase liabilities
- (d) Decrease assets and decrease liabilities
Answer: (a)
Explanation: Office Supplies (asset) increase. Accounts Payable (liability) increase. Both assets and liabilities rise.
Q6. Which transaction will not affect the accounting equation?
- (a) Owner invests cash in the business
- (b) Payment of a previously recorded accounts payable
- (c) Recording depreciation expense
- (d) Transfer of cash from the petty cash fund to the bank account
Answer: (d)
Explanation: Moving cash from petty cash to bank is an internal transfer of one asset to another. Total assets remain unchanged, so the equation stays balanced.
Q9. Which of the following transactions will increase both an asset and a liability?
- (a) Paying cash for equipment
- (b) Borrowing money from a bank
- (c) Receiving cash from a customer for services performed
- (d) Paying dividends to shareholders
Answer: (b)
Explanation: Borrowing increases Cash (asset) and creates a Loan Payable (liability). Both sides of the equation increase equally.
Q18. Payment of a previously recorded accounts payable of $3,000 will:
- (a) Increase assets and increase liabilities
- (b) Decrease assets and decrease liabilities
- (c) Increase assets and decrease liabilities
- (d) Decrease assets and increase liabilities
Answer: (b)
Explanation: Cash (asset) decreases and Accounts Payable (liability) decreases. Both sides fall equally.
Q21. The purchase of inventory for cash affects the accounting equation by:
- (a) Increasing assets and increasing equity
- (b) Increasing one asset and decreasing another asset
- (c) Increasing assets and increasing liabilities
- (d) Decreasing assets and increasing equity
Answer: (b)
Explanation: Inventory (asset) increases and Cash (asset) decreases. Total assets are unchanged; liabilities and equity are unaffected.
Account Types & Normal Balances
Q7. The normal balance of the Accounts Receivable account is:
- (a) Debit
- (b) Credit
- (c) Either debit or credit depending on the transaction
- (d) Zero
Answer: (a)
Explanation: Accounts Receivable is an asset; assets normally have a debit balance.
Q11. Which side of the T‑account is used to record an increase in Owner’s Capital?
- (a) Debit
- (b) Credit
- (c) Either side, depending on the transaction
- (d) Neither; capital accounts have no normal balance
Answer: (b)
Explanation: Owner’s Capital is an equity account; equity increases are recorded on the credit side.
Q16. Which account is not a nominal (temporary) account?
- (a) Service Revenue
- (b) Salaries Expense
- (c) Accumulated Depreciation
- (d) Dividends
Answer: (c)
Explanation: Accumulated Depreciation is a contra‑asset account (real/permanent). Revenues, expenses, and dividends are nominal accounts closed at period end.
Q24. The equity section of the balance sheet includes which of the following?
- (a) Accounts Payable
- (b) Common Stock and Retained Earnings
- (c) Prepaid Insurance
- (d) Accumulated Depreciation
Answer: (b)
Explanation: Equity comprises contributed capital (Common Stock) and retained earnings. Accounts Payable is a liability; Prepaid Insurance is an asset; Accumulated Depreciation is a contra‑asset.
Journal Entries & Adjustments
Q8. When a company declares dividends, the journal entry includes:
- (a) Debit Retained Earnings; Credit Cash
- (b) Debit Dividends; Credit Retained Earnings
- (c) Debit Cash; Credit Dividends Payable
- (d) Debit Dividends Payable; Credit Retained Earnings
Answer: (b)
Explanation: Declaring dividends creates a liability (Dividends Payable) and reduces retained earnings. The entry is: Debit Retained Earnings; Credit Dividends Payable.
Q12. A business pays $2,000 rent for the month. The correct journal entry is:
- (a) Debit Rent Expense $2,000; Credit Cash $2,000
- (b) Debit Cash $2,000; Credit Rent Expense $2,000
- (c) Debit Rent Payable $2,000; Credit Cash $2,000
- (d) Debit Prepaid Rent $2,000; Credit Cash $2,000
Answer: (a)
Explanation: Rent Expense increases (debit) and Cash decreases (credit).
Q14. Which of the following best describes a compound journal entry?
- (a) An entry that affects only one account
- (b) An entry that has more than one debit or more than one credit
- (c) An entry that is made at the end of the accounting period
- (d) An entry that reverses a previous entry
Answer: (b)
Explanation: A compound entry involves two or more debits and/or two or more credits in a single journal entry.
Q17. If a business receives $5,000 cash from a customer as an advance for future services, the entry is:
- (a) Debit Cash $5,000; Credit Service Revenue $5,000
- (b) Debit Cash $5,000; Credit Unearned Revenue $5,000
- (c) Debit Unearned Revenue $5,000; Credit Cash $5,000
- (d) Debit Accounts Receivable $5,000; Credit Cash $5,000
Answer: (b)
Explanation: Cash increases (debit) and the obligation to perform services (Unearned Revenue, a liability) increases (credit).
Q23. If a company incurs utility expense of $800 and will pay it next month, the journal entry is:
- (a) Debit Utilities Expense $800; Credit Cash $800
- (b) Debit Utilities Expense $800; Credit Utilities Payable $800
- (c) Debit Utilities Payable $800; Credit Utilities Expense $800
- (d) Debit Cash $800; Credit Utilities Expense $800
Answer: (b)
Explanation: Expense increases (debit) and a liability (Utilities Payable) increases (credit) because payment is deferred.
Equity, Closing, & The Accounting Cycle
Q13. When a company issues common stock for cash, the accounting equation is affected by:
- (a) Increase in assets and increase in liabilities
- (b) Increase in assets and increase in equity
- (c) Decrease in assets and increase in equity
- (d) Increase in liabilities and decrease in equity
Answer: (b)
Explanation: Cash (asset) rises and Common Stock (equity) rises; liabilities are unchanged.
Q19. Which of the following transactions will increase Owner’s Equity?
- (a) Payment of dividends
- (b) Recording an expense
- (c) Owner contributes equipment to the business
- (d) Taking out a loan
Answer: (c)
Explanation: Owner’s contribution of equipment increases assets (Equipment) and increases Owner’s Capital (equity). Loans increase liabilities, not equity. Expenses and dividends decrease equity.
Q20. The closing entry for revenue accounts includes:
- (a) Debit Revenue; Credit Income Summary
- (b) Debit Income Summary; Credit Revenue
- (c) Debit Revenue; Credit Retained Earnings
- (d) Debit Income Summary; Credit Retained Earnings
Answer: (b)
Explanation: To close revenue, we debit the revenue accounts (to zero them out) and credit Income Summary.
Q22. Which of the following is not a step in the accounting cycle?
- (a) Journalizing transactions
- (b) Preparing a post‑closing trial balance
- (c) Preparing a cash flow statement
- (d) Posting to the ledger
Answer: (c)
Explanation: Preparing a cash flow statement is part of financial reporting, not a core step of the basic accounting cycle (journalize, post, trial balance, adjust, close, post‑closing trial balance).
Advanced Concepts & Problem Solving
Q10. The entry to record the acquisition of a building for $150,000 cash and the remainder financed by a mortgage is:
- (a) Debit Building $150,000; Credit Cash $150,000
- (b) Debit Building $150,000; Credit Mortgage Payable $150,000
- (c) Debit Building $150,000; Credit Cash $75,000; Credit Mortgage Payable $75,000
- (d) Debit Building $150,000; Credit Cash $150,000; Credit Mortgage Payable $0
Answer: (c) (assuming half cash, half mortgage; if full cash, answer a)
Explanation: If part is paid in cash and part financed, both Cash (decrease) and Mortgage Payable (increase) are credited, while Building (asset increase) is debited. Option c reflects a 50/50 split as an example.
Q15. The trial balance shows that total debits do not equal total credits. Which error could cause this?
- (a) Recording a transaction twice
- (b) Posting a debit as a credit
- (c) Omitting a transaction entirely
- (d) Both (a) and (c)
Answer: (b)
Explanation: Posting a debit as a credit (or vice versa) changes the equality of debits and credits. Recording a transaction twice or omitting it entirely keeps debits
