Accounting Basics Quiz

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Questions and Answers

What is the usual accounting period in financial reporting?

Six months

Five years

One year (correct)

Two years

What distinguishes a fiscal year from a calendar year?

It is not used by businesses

It can start on any month of the year (correct)

It must last more than twelve months

It always starts on January 1

Which of the following is NOT considered an external user?

Employees (correct)

Shareholders

Customers

Creditors/Suppliers

Which user group includes potential investors?

General Public Signup and view all the answers

Which statement best describes external users?

They have current or potential financial interest in the entity. Signup and view all the answers

Which of the following is a characteristic of the accounting period concept?

It enables timely information for decision-making. Signup and view all the answers

What type of account period does a business that runs from May 1 to April 30 utilize?

Fiscal year Signup and view all the answers

Who among the following is considered an internal auditor?

An employee within the organization Signup and view all the answers

What is the definition of intangible assets?

Identifiable, non-monetary assets without physical substance. Signup and view all the answers

Which account is considered a contra asset account?

Accumulated Depreciation Signup and view all the answers

How is equity increased?

By the amount of profit earned during the year. Signup and view all the answers

What represents liabilities in a business?

Present obligations to transfer economic resources. Signup and view all the answers

What is the relationship between accounts payable and accounts receivable?

Accounts payable is a liability, while accounts receivable is an asset. Signup and view all the answers

What are revenues also described as?

Inflow of money or other assets resulting from sales. Signup and view all the answers

What type of income is classified as service income?

Revenues from performing services for a customer. Signup and view all the answers

What does a drawing account represent?

Withdrawals made by the owner for personal use. Signup and view all the answers

What is an accounting event?

An economic occurrence causing changes in assets, liabilities, and/or equity Signup and view all the answers

How does an increase in an asset affect liabilities based on the accounting equation?

It may result in a decrease in liabilities Signup and view all the answers

Which of the following best describes accounts receivable?

Amounts due from customers arising from credit sales or services Signup and view all the answers

What does an increase in owner's equity typically indicate?

Increase in the overall financial value of a business Signup and view all the answers

Which of the following is NOT considered a current asset?

Land owned for long-term appreciation Signup and view all the answers

How does a decrease in liability affect owner's equity?

It may lead to an increase in owner's equity Signup and view all the answers

What is the relation between assets, liabilities, and owner's equity known as?

The Accounting Equation Signup and view all the answers

Which statement is true about economic resources?

They have the potential to produce economic benefits in the future Signup and view all the answers

What must be done to the account number in the posting reference column of the journal after figures have been posted to the ledger?

It should be updated with new balances. Signup and view all the answers

Which of the following best describes the purpose of the trial balance?

It ensures that debits and credits are equal in the ledger. Signup and view all the answers

What is the significance of the equality of the accounting equation?

It is essential for maintaining balanced books. Signup and view all the answers

What does posting refer to in the context of accounting?

Transferring amounts from the journal to the ledger. Signup and view all the answers

What should a debit entry in the journal lead to in the ledger?

A debit entry. Signup and view all the answers

Why is it important to maintain a trial balance?

To ensure accurate record-keeping. Signup and view all the answers

What is indicated when the trial balance is in balance?

Debits equal credits in the ledger. Signup and view all the answers

Which of the following is NOT a component of the accounting equation?

Expenses Signup and view all the answers

What is the primary purpose of special journals?

To record typical and similar types of transactions. Signup and view all the answers

What is a characteristic of a subsidiary ledger?

It contains individual accounts related to a specific general ledger account. Signup and view all the answers

Which of the following is NOT included in special journals?

General ledger. Signup and view all the answers

What does the chart of accounts represent?

A listing of all accounts and their account numbers. Signup and view all the answers

Which step is NOT part of the posting process from a special journal to the ledger?

Post the credit amount back to the journal. Signup and view all the answers

The general ledger serves primarily as what?

A reference book for individual accounts and transactions. Signup and view all the answers

What distinguishes the general ledger from the subsidiary ledger?

The general ledger summarizes specific accounts from the subsidiary ledger. Signup and view all the answers

Which journal would you use to record cash sales transactions?

Sales journal. Signup and view all the answers

Study Notes

Periodicity

Businesses divide their financial lives into equal time periods to provide users with timely information for decision-making.
The most common accounting period is one year.
A calendar year runs from January 1st to December 31st.
A fiscal year can start on any month and ends twelve months later.

Internal and External Users

Internal users are individuals or departments within a company involved in daily operations.
External users are individuals or entities outside the company with a financial interest in the business.
Examples of internal users include top management, employees, internal auditors, and supervisors.
Examples of external users include government agencies, customers, creditors, suppliers, potential/current investors, and the general public.

Accounting Equation and 5 Major Accounts

Accounting Equation: Assets = Liabilities + Owner’s Equity
Assets: Resources owned by the business that have the potential to produce future economic benefits.
- Examples: Cash, Accounts Receivable, Intangible Assets, Property, Plant, and Equipment.
Liabilities: Obligations of the business to transfer economic resources to others as a result of past events.
- Examples: Accounts Payable.
Owner’s Equity: The owner’s investment in the business.
- Increases with profit and decreases with losses.
- Examples: Capital, Drawing.
Revenues/Income: Inflow of money or other assets from selling goods or services or from the use of money or property.
- Examples: Service Income, Sales.
Expenses: Costs incurred in generating revenue.

Transactions and Events

Accounting Event: An economic occurrence that causes changes in an enterprise’s assets, liabilities, and/or equity.
Transaction: A specific accounting event involving the transfer of something of value between two entities

Accounting Equation Effects

Decrease in liability = Decrease in Asset or Increase in Another Liability or Increase in Owner’s Equity
Increase in Owner’s Equity = Increase in Asset or Decrease in Liability
Decrease in Owner's Equity = Decrease in Asset or Increase in Liability

Contra-Asset Accounts

Accounts deducted from the related asset accounts.
Examples: Accumulated Depreciation, Allowance for Bad Debts.

Book of Original Entry (Journal)

A record of every business transaction in chronological order.
May be a General Journal or Special Journal.

Special Journals

Used to record typical and similar types of transactions.
Examples: Sales Journal, Cash Receipts Journal, Purchases Journal, Cash Payments Journal.

Ledger - Book of Final Entry

A summary of all accounts with their outstanding balances.
May be a General Ledger or Subsidiary Ledger.

Posting Process

Transferring information from the journal to the ledger.
Involves transferring the amount, page number, debit/credit, and account number.

General Ledger

The primary accounting record which classifies and summarizes transactions.
Used to prepare financial statements.

Subsidiary Ledger

An expansion of the General Ledger account providing detailed information about individual transactions.

Chart of Accounts

A listing of all accounts and their account numbers.
Categories include Assets, Liabilities, Owner’s Equity, Income, and Expenses.

Journalizing Business Transactions

Recording transactions in the journal.
Two or more accounts are affected by each transaction.
Debits must equal Credits to maintain the accounting equation balance.

Trial Balance

A list of all accounts with their debit or credit balances.
Prepared to verify the equality of debit and credit balances.
Serves as a control device to minimize accounting errors.
A balanced trial balance indicates equal debits and credits but does not guarantee the absence of errors.

Posting

Transfers the amounts from the journal to the ledger.
Debits in the journal are posted as debits in the ledger and credits as credits.

Unadjusted Trial Balance

An interim proof of the accuracy of accounting records.
Lists accounts in numerical order based on the Chart of Accounts.
Obtains balances from the ledger.
Used to prepare financial statements.

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Description

Test your knowledge on essential accounting concepts including periodicity, internal and external users, and the accounting equation. This quiz covers key terms and principles that are fundamental for understanding financial decision-making in businesses.