Deck 3: The Accounting Cycle: Capturing Economic Events

Question 1

Increases in equity are recorded by credits; increases in assets and in liabilities are recorded by debits.

Answer 1

False

Question 2

Accounts are usually arranged in the ledger in financial statement order, that is, assets first, followed by liabilities, equity, expenses, and revenues.

Answer 2

False

Question 3

A business that is profitable and liquid will have more accounts with credit balances than with debit balances.

Answer 3

False

Question 4

A credit to a ledger account refers to the entry of an amount on the right side of an account.

Question 5

Dividends are an expense of a corporation and reduce both total assets and liabilities.

Question 6

A trial balance cannot be distributed to stockholders in lieu of a balance sheet.

Question 7

The credit side of an account is the right side while the debit side is the left side.

Question 8

Every transaction affects equal numbers of ledger accounts and is recorded by equal dollar amounts of debits and credits.

Question 9

The general ledger is sometimes called the book of original entry because it is the accounting record where transactions are first recorded.

Question 10

Dividends increase equity and therefore should be added to retained earnings.

Question 11

Earning revenue increases equity and expenses reduce equity, therefore revenues are recorded with debit entries and expenses are recorded with credit entries.

Question 12

When making a general journal entry, there can only be one debit and one credit.

Question 13

If ledger accounts are maintained in three-column, running balance form, the journal should be maintained in the same format.

Question 14

The left-hand side of an account is used for recording debits and the right-hand side for recording credits.

Question 15

Every business transaction is recorded by a debit to a balance sheet account and a credit to an income statement account.

Question 16

Liability accounts should only be debited and never credited.

Question 17

When a company uses the double-entry method, the total dollar amount of debits recorded must equal the total dollar amount of credits, but the number of debit and credit entries may differ.

Question 18

The running balance form or the T account form is typically used in the trial balance to display the accounts and their amounts.

Question 19

In a computerized accounting system posting may be done automatically but journalizing must be done by someone with an understanding of recording transactions.

Question 20

If the number of debit entries in an account is greater than the number of credit entries, the account will have a debit balance.

Question 21

A trial balance proves that equal amounts of debits and credits were posted to the ledger.

Question 22

A CEO or CFO associated with fraudulent financial reporting could be fined but not imprisoned under the Sarbanes Oxley act.

Question 23

Dividends are an expense of a corporation and appear on the income statement.

Question 24

Recognizing revenue when it is earned and not when cash is received and recognizing expenses when the related goods or services are used rather than when they are paid for is called:

A) Revenue recognition
B) Accrual accounting
C) Conservatism
D) Matching

Question 25

Each business transaction is initially recorded in a journal and later transferred to the appropriate accounts in a general ledger.

Question 26

The collection of accounts receivable is recorded by a:

A) Debit to Cash and a debit to Accounts Receivable.
B) Credit to Cash and a credit to Accounts Receivable.
C) Debit to Cash and a credit to Accounts Receivable.
D) Credit to Cash and a debit to Accounts Receivable.

Question 27

The purchase of equipment on credit is recorded by a:

A) Debit to Equipment and a credit to Accounts Payable.
B) Debit to Accounts Payable and a credit to Equipment.
C) Debit to Equipment and a debit to Accounts Payable.
D) Credit to Equipment and a credit to Accounts Payable.

Question 28

The agreement of the debit and credit totals of the trial balance gives assurance that

A) All transactions were posted correctly
B) No transactions were omitted
C) The number of accounts with debit balances equals the number of accounts with credit balances
D) The total debits equal the total credits

Question 29

Revenues increase equity and are, therefore, recorded by crediting the revenues account.

Question 30

The accrual basis of accounting recognizes expenses only when they are paid.

Question 31

An increase in a liability is recorded by a credit; an increase in equity by a debit.

Question 32

The price of the goods sold or services rendered during a given accounting period is called:

A) Net income
B) Profit
C) Revenue
D) Equity

Question 33

The sequence of accounting procedures used to record, classify and summarize accounting information is called the:

A) Accounting cycle
B) Accounting period
C) Accrual accounting
D) Double entry bookkeeping

Question 34

"I was just following orders" is an acceptable defense if you committed an unethical action during an audit.

Question 35

Every transaction which affects an income statement account also affects a balance sheet account.

Question 36

The matching concept refers to the relationship between revenues and expenses.

Question 37

The principle that states revenue should be recognized at the time goods are sold or services rendered is called:

A) Adequate disclosure
B) Conservatism
C) Matching
D) Revenue recognition

Question 38

Sally Smith had expenses of $800 in June which she paid in July. She declared these expenses on her June income statement. By doing this she is following the accounting principle of:

A) Revenue recognition
B) Adequate disclosure
C) Matching
D) Conservatism

Question 39

Which of the following accounts normally has a debit balance?

A) Accounts payable.
B) Retained earnings.
C) Accounts receivable.
D) Service revenue.

Question 40

A trial balance that balances provides proof that all transactions were correctly journalized and posted to the ledger.

Question 41

The process of originally recording a business transaction in the accounting records is termed:

A) Journalizing.
B) Footing.
C) Posting.
D) Balancing.

Question 42

The manager of Grande Home Improvements purchased several cash registers for the business on June 10 but does not remember whether he paid cash for the full price or still owes a balance to the vendor. Where is the best place for the manager to get the information about this transaction?

A) A trial balance prepared at the end of June.
B) The general journal.
C) A balance sheet prepared at the end of June.
D) The ledger account for equipment.

Question 43

A transaction is first recorded in which of the following accounting records?

A) Trial balance.
B) Ledger.
C) General journal.
D) Balance sheet.

Question 44

Double-entry accounting is characterized by which of the following?

A) Every transaction affects both an asset account and either a liability account or an equity account.
B) The number of ledger accounts with debit balances is equal to the number with credit balances.
C) The total dollar amount of debit entries posted to the ledger is equal to the dollar amount of the credit entries.
D) The number of debit entries posted to the ledger equals the number of credit entries.

Question 45

Which of the following accounts normally has a credit balance?

A) Cash.
B) Service revenue.
C) Accounts receivable.
D) Utilities.

Question 46

Sue Costa, owner of A-1 Cleaning Services, invested an additional $75,000 in the company. Which of the following would be a part of the correct journal entry to record this transaction?

A) A debit to the Cash account.
B) A debit to the Equity account.
C) A debit to the Share Capital account.
D) A debit to the Cash Received account.

Question 47

Which of the following is not true regarding the ledger account for Cash?

A) The balance of the account indicates the amount of cash owned by the business on a particular date.
B) Each debit entry in the Cash account represents a cash receipt.
C) Debit entries are made before credit entries.
D) Credit entries in the Cash account represent cash payments.

Question 48

In accounting, the terms debit and credit indicate, respectively:

A) Increase and decrease.
B) Left and right.
C) Decrease and increase.
D) Right and left.

Question 49

The rules of debit and credit may be summarized as follows:

A) Accounts on the left side of the balance sheet are increased by debits, whereas accounts on the right side of the balance sheet are increased by credits.
B) The balance of a ledger account is increased by debit entries and is decreased by credit entries.
C) Accounts on the left side of the balance sheet are increased by credits, whereas accounts on the right side of the balance sheet are increased by debits.
D) The balance of a ledger account is increased by credit entries and is decreased by debit entries.

Question 50

Transactions are recorded in the general journal in:

A) Numerical order.
B) Chronological order.
C) Account number order.
D) Financial statement order.

Question 51

Preparing a journal entry in proper form involves all the following except:

A) Listing all accounts debited before any credits.
B) Computing the balances in accounts involved in the transaction.
C) Indicating the date of transaction.
D) Providing a brief written explanation of the transaction.

Question 52

The essential point of double-entry system of accounting is that every transaction:

A) Affects accounts on both sides of the balance sheet.
B) Is recorded in both the journal and the ledger.
C) Increases one ledger account and decreases another.
D) Affects two or more ledger accounts and is recorded by an equal dollar amount of debits and credits.

Question 53

What type of account will normally contain a debit balance?

A) Asset.
B) Liability.
C) Equity.
D) Revenue.

Question 54

If your trial balance has a smaller debit balance than credit balance, it signifies:

A) Assets are more than liabilities.
B) A profit.
C) A loss.
D) An error has been made.

Question 55

Which of the following accounting procedures requires the greatest knowledge of generally accepted accounting principles?

A) Journalizing business transactions.
B) Posting journal entries to ledger accounts.
C) Preparing a trial balance.
D) Locating errors in a trial balance.

Question 56

In a ledger, a separate "account" is maintained for each:

A) Type of asset and liability and for each element of equity.
B) Business transaction.
C) Business day.
D) Journal entry.

Question 57

In a ledger, debit entries cause:

A) Increases in equity, decreases in liabilities, and increases in assets.
B) Decreases in liabilities, increases in assets, and decreases in equity.
C) Decreases in assets, decreases in liabilities, and increases in equity.
D) Decreases in assets, increases in liabilities, and increases in equity.

Question 58

Brett Tarek, a manager at D & J Landscaping Limited, needs information regarding the amount of accounts payable currently owed by the company. This information would most easily be found in the:

A) General ledger.
B) General journal.
C) Income Statement.
D) Notes to the financial statements.

Question 59

If your trial balance has a higher debit balance than credit balance, it signifies:

A) Assets are more than liabilities.
B) A profit.
C) A loss.
D) An error has been made.

Question 60

If a company purchases equipment on account:

A) Assets will increase and equity will also increase.
B) Assets will increase and equity will decrease.
C) Assets will increase and equity will remain unchanged.
D) Assets will increase and liabilities will decrease.

Question 61

Clinton prepares monthly financial statements. Which of the following violates the matching principle?

A) A portion of the salary payments made this month are not recognized as expense because some of the work was done by employees last month.
B) The premium on a six-month insurance policy is charged immediately to expense.
C) Expenses for the period exceed revenues.
D) The cost of advertising done during the month is charged to expense even though no payment is due for 60 days.

Question 62

Which of the following errors would not be disclosed by preparation of a trial balance?

A) An error was made in computing the balance of the Cash account.
B) A journal entry included a debit to the Equipment account for $3,200, but this amount was erroneously posted as $2,300.
C) During the posting process, a $1,700 debit to Cash was accidentally entered in the credit side of the Cash account.
D) The journal entries recorded on the last day of the year have never been posted to the ledger.

Question 63

The term revenue can best be described as:

A) The selling price of goods and services rendered to customers during a given accounting period.
B) The cash received from selling goods and serving customers during a given accounting period.
C) The net increase in equity during a given period.
D) The "bottom line" in the income statement.

Question 64

The collection of an account receivable is recorded by a debit to Cash and a credit to Accounts Payable. If this error is not corrected:

A) Total liabilities are understated.
B) Total assets are understated.
C) Total liabilities are overstated.
D) Equity is overstated.

Question 65

A trial balance that is out of balance indicates that:

A) The number of ledger accounts with debit balances is not equal to the number of accounts with credit balances.
B) A debit has been posted to the wrong account.
C) There is not an equality of debit and credit amounts in the ledger.
D) A journal entry has been completely omitted from the posting process.

Question 66

If a company purchases equipment for cash:

A) Assets will increase and equity will also increase.
B) Assets will increase and equity will decrease.
C) Assets will increase and equity will remain unchanged.
D) Total assets and equity will remain unchanged.

Question 67

The journal entry to record a particular business transaction includes a credit to the Cash account. This transaction is most likely also to include:

A) Issuance of new share capital.
B) The purchase of an asset on account.
C) Payment of an outstanding note payable.
D) A credit to Accounts Receivable.

Question 68

Which statement is true about credits?

A) Credits always indicate a benefit to the company.
B) Credits always indicate a detriment to the company.
C) Credits always increase the net worth of a company.
D) None of the above statements are true.

Question 69

Profit is:

A) The excess of debits over credits.
B) The increase in equity resulting from the profitable operations of the business.
C) The excess of credits over debits.
D) The increase in assets of a company during a year.

Question 70

The recognition principle indicates that revenue usually should be recognized and recorded in the accounting records:

A) When goods are sold or services are rendered to customers.
B) When cash is collected from customers.
C) At the end of the accounting period.
D) Only when the revenue can be matched by an equal dollar amount of expenses.

Question 71

Which of the following errors would be disclosed by preparation of a trial balance?

A) The collection of an account receivable was recorded by a debit to the Land account rather than to the Cash account.
B) The collection of an account receivable for $219 was recorded by a $291 debit to Cash and a $291 credit to Accounts Receivable.
C) The collection of a $365 account receivable was not recorded at all.
D) The collection of a $325 account receivable was recorded by a $325 debit to Cash and a $325 debit to Accounts Receivable.

Question 72

The statement "This business produces profit of $520,000" is unclear because it fails to specify:

A) The accounting method, that is, accrual or cash basis.
B) Whether the amount earned is before or after expenses.
C) The time period.
D) The amount of cash withdrawn from the business by the owner.

Question 73

The journal entry to record a particular business transaction includes a credit to a liability account. This transaction is most likely also to include:

A) Issuance of new share capital.
B) The purchase of an asset on account.
C) A cash payment.
D) A credit to Accounts Receivable.

Question 74

In February of each year, the Carlton Hotel holds a very popular wine tasting event. Tickets must be ordered and paid for in advance, and are typically sold out by November of the preceding year. The recognition principle indicates that the revenue from these ticket sales should be recognized in the period in which the:

A) Order is placed.
B) Wine tasting is held.
C) Payments are received.
D) Expenses associated with the wine tasting are paid in full.

Question 75

Collection of an accounts receivable:

A) Increases the total assets of a company.
B) Decreases the total assets of a company.
C) Does not change the total assets of a company.
D) Reduces a company's total liabilities.

Question 76

Posting is the process of:

A) Transferring debit and credit entries from the journal into the appropriate ledger accounts.
B) Determining that the dollar amount of debit entries recorded in the ledger is equal to the dollar amount of credit entries.
C) Entering information into a computerized data base.
D) Preparing journal entries to describe each business transaction.

Question 77

The matching principle:

A) Applies only to situations in which a cash payment occurs before an expense is recognized.
B) Applies only to situations in which a cash receipt occurs before revenue is recognized.
C) Is used in accrual accounting to determine the proper period in which to recognize revenue.
D) Is used in accrual accounting to determine the proper period for recognition of expenses.

Question 78

Which statement is true about debits?

A) Debits always indicate a benefit to the company.
B) Debits always indicate a detriment to the company.
C) Debits always increase the net worth of a company.
D) None of the above statements are true.

Question 79

The matching principle is best demonstrated by:

A) Using debits to record decreases in equity and credits to record increases.
B) The equation Assets = Liabilities + Equity.
C) Allocating the cost of an asset to expense over the periods during which benefits are derived from ownership of the asset.
D) Offsetting the cash receipts of the period with the cash payments made during the period.

Question 80

A trial balance consists of:

A) A two-column schedule of all debit and credit entries posted to ledger accounts.
B) A two-column financial statement intended for distribution to interested parties outside the business.
C) A two-column schedule showing the totals of all debits and of all credits made in journal entries.
D) A two-column schedule listing names and balances of all ledger accounts.