Double-Entry Bookkeeping: 25 Essential Questions & Answers
Master the fundamentals of double-entry accounting with this structured guide. Each question is designed to test and reinforce your understanding of core principles, from the accounting equation to journal entries and trial balances.
Fundamental Principles
Q1. In double‑entry bookkeeping, every transaction affects at least how many accounts?
Answer: (b)
Explanation: The core principle of double entry states that each transaction has equal and opposite effects on at least two accounts. This maintains the integrity of the accounting equation.
Q2. Which of the following represents the basic accounting equation?
Answer: (c)
Explanation: This is the fundamental equation of double‑entry accounting: Assets = Liabilities + Owner’s Equity (Capital).
Q7. Which principle ensures that total debits equal total credits in the ledger?
Answer: (c)
Explanation: The dual aspect concept, which states every transaction has two sides, guarantees that total debits will always equal total credits.
Q25. Which principle requires that expenses be recorded in the same period as the revenues they help generate?
Answer: (c)
Explanation: The matching principle dictates that expenses are recognized when the related revenues are earned. This ensures accurate profit measurement for the period.
Debits, Credits & Account Types
Q4. In the double‑entry system, an increase in a liability is recorded as:
Answer: (b)
Explanation: Liabilities increase on the credit side and decrease on the debit side.
Q5. Which of the following accounts normally has a debit balance?
Answer: (d)
Explanation: Asset accounts, like Equipment, normally carry debit balances.
Q6. The left side of a T‑account is used for:
Answer: (b)
Explanation: By convention, the left side is the debit side. It records increases in assets and expenses, and decreases in liabilities, equity, and revenue.
Q10. Which of the following is a nominal account?
Answer: (c)
Explanation: Nominal accounts record revenues, expenses, gains, and losses. Salaries Expense is an expense account, making it a nominal account.
Q11. A personal account relates to:
Answer: (c)
Explanation: Personal accounts deal with natural persons, artificial persons (like companies), and representative persons.
Q14. The rule “Debit the receiver, Credit the giver” applies to which type of account?
Answer: (c)
Explanation: This golden rule is specifically for personal accounts.
Q21. The account “Prepaid Insurance” is classified as:
Answer: (c)
Explanation: Prepaid Insurance is a current asset. It represents a future economic benefit (insurance coverage) paid for in advance.
Q22. Which of the following statements is true about a contra‑asset account?
Answer: (a)
Explanation: Contra‑asset accounts, like Accumulated Depreciation, have normal credit balances. They are subtracted from the related asset account on the balance sheet.
Recording Transactions & Journal Entries
Q3. When a business purchases furniture for cash, which accounts are debited and credited?
Answer: (a)
Explanation: Furniture (an asset) increases, so it is debited. Cash (an asset) decreases, so it is credited.
Q8. Recording a transaction first in a chronological record is done in the:
Answer: (c)
Explanation: The journal, or book of original entry, records transactions in date order before they are posted to ledger accounts.
Q12. When revenue is earned but cash is not yet received, which account is debited?
Answer: (c)
Explanation: Accounts Receivable (an asset representing money owed) increases, so it is debited. Revenue increases and is credited.
Q13. Payment of an outstanding expense is recorded by:
Answer: (d)
Explanation: Paying off a liability (Accounts Payable) decreases it, so it is debited. Cash decreases, so it is credited.
Q15. Which of the following transactions will increase both an asset and a liability?
Answer: (c)
Explanation: Buying inventory on credit raises Inventory (asset increases) and creates an obligation to pay, raising Accounts Payable (liability increases).
Q16. Depreciation expense is recorded by debiting:
Answer: (c)
Explanation: Depreciation Expense (a nominal account) increases, so it is debited. Accumulated Depreciation (a contra‑asset account) increases and is credited.
Q17. Which account is credited when a business receives cash from a customer for services rendered?
Answer: (b)
Explanation: Cash (asset) increases and is debited. The revenue earned (Service Revenue) increases and is credited.
Q20. When a proprietor invests cash into the business, the capital account is:
Answer: (b)
Explanation: Owner’s equity (capital) increases, so it is credited. Cash (asset) increases and is debited.
The Accounting Cycle & Trial Balance
Q9. After posting all journal entries, the statement that lists all ledger balances to check equality of debits and credits is called:
Answer: (b)
Explanation: A trial balance summarizes all debit and credit balances from the ledger. Its primary purpose is to check the arithmetic equality of debits and credits after posting.
Q18. In the accounting cycle, the step that follows journalizing is:
Answer: (b)
Explanation: After recording transactions in the journal (journalizing), the next step is to post the debits and credits to their respective accounts in the general ledger.
Q23. If a trial balance shows total debits of ₹5,00,000 and total credits of ₹4,80,000, the difference indicates:
Answer: (c)
Explanation: Since debits exceed credits by ₹20,000, it suggests a credit entry of that amount is missing, understated, or a debit entry is overstated by the same amount.
Q24. Closing entries are made to:
- (a) Adjust asset values
- (b) Transfer balances of nominal accounts to capital account
- (c) Record rectifying entries
- (d) Prepare the cash flow statement
