Accounting Principles: Debits & Credits

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Questions and Answers

What is the effect on an asset account when a debit is recorded?

Equity increases

Liabilities increase

Asset account increases (correct)

Asset account decreases

What happens to liabilities when a debit transaction is recorded?

Liabilities increase

Liabilities decrease (correct)

Liabilities remain unchanged

Equity decreases

Which journal entry reflects receiving cash from a credited customer?

Debit Accounts Receivable, Credit Cash

Debit Revenue, Credit Cash

Debit Cash, Credit Accounts Receivable (correct)

Debit Cash, Credit Equity

How would you classify the transaction of paying dividends?

Debit Equity, Credit Cash Signup and view all the answers

What type of adjustment is made for an expense that has been incurred but not yet paid?

Accrued Expense Signup and view all the answers

What is the appropriate journal entry for unearned revenue when cash is received for a service not yet provided?

Debit Cash, Credit Unearned Revenue Signup and view all the answers

When a business pays for an insurance policy in advance, what is the correct journal entry?

Debit Prepaid Insurance, Credit Cash Signup and view all the answers

Which effect occurs when recording a credit to common stock?

Increases equity Signup and view all the answers

What is the correct adjusting entry for Smokey Company's insurance policy on December 31?

debit Insurance Expense, $1,800; credit Prepaid Insurance, $1,800 Signup and view all the answers

What is the primary purpose of closing entries in accounting?

To transfer temporary account balances to permanent accounts Signup and view all the answers

Which of the following accounts is NOT impacted by closing entries?

Assets Signup and view all the answers

If an asset increases while a liability decreases in a business transaction, which of the following accounts is also likely affected?

Equity Signup and view all the answers

What happens to the accounting equation during a transaction that involves paying a creditor?

Assets decrease and liabilities decrease Signup and view all the answers

In which scenario is the accounting equation not balanced?

Accumulating expenses without incurring a liability Signup and view all the answers

Which type of accounting focuses on providing information for managerial decision-making?

Managerial accounting Signup and view all the answers

General-purpose financial statements are designed to meet the needs of which group?

Various external users Signup and view all the answers

What is the correct journal entry to close revenues and expenses?

A debit to Fees Earned and credits to the expense accounts and Retained Earnings Signup and view all the answers

Which entry is correct to close Dividends?

Debit Dividends, $3,000; credit Retained Earnings, $3,000 Signup and view all the answers

What are the correct components of a T account?

Title, debit side, credit side Signup and view all the answers

Which types of accounts have a normal credit balance?

Revenues and common stock Signup and view all the answers

Are financial statements prepared from the unadjusted trial balance?

False Signup and view all the answers

In what order should the balance sheet be prepared relative to other financial statements?

After the income statement and the statement of stockholders' equity Signup and view all the answers

Using accrual accounting, when are revenues recorded?

When a service has been performed or products have been delivered, regardless of cash receipt Signup and view all the answers

Under accrual accounting, when are expenses recorded and reported?

When they are incurred, whether or not cash is paid Signup and view all the answers

Study Notes

Debits & Credits

Every transaction has debits and credits that must balance
Assets: Increase with a debit and decrease with a credit
Liabilities: Increase with a credit and decrease with a debit
Equity: Increase with a credit and decrease with a debit
Revenues: Increase with a credit
Expenses and Dividends: Increase with a debit

Journal Entry Transactions

Pay a creditor on account: Debit Accounts Payable and Credit Cash
Purchase land: Debit Land and Credit Cash
Receive cash from a credit customer: Debit Cash and Credit Accounts Receivable
Start a business by exchanging cash for stock: Debit Cash and Credit Common Stock
Pay dividends: Debit Dividends and Credit Cash

Adjusting Journal Entries

Made at the end of the accounting period to update accounts
Accruals: Record revenue or expenses before cash is received/paid
- Accrued Revenue: Earned revenue but not yet paid (Debit Accounts Receivable, Credit Revenue)
- Accrued Expense: Owe an expense but not yet paid (Debit Expense, Credit Accounts Payable)
Deferrals: Receive or pay cash before revenue or expense is recognized
- Prepaid Expense: Paid in advance (Debit Prepaid Expense, Credit Cash)
- Unearned Revenue: Received cash for service not yet provided (Debit Cash, Credit Unearned Revenue)

Closing Entries

Made at the end of an accounting period to reset temporary accounts (revenues, expenses, and dividends) to zero to start fresh for the next period
Transfer balances from temporary accounts into Retained Earnings, a permanent account tracking overall equity
Impact temporary accounts: Revenues, Expenses, and Dividends
Do not impact permanent accounts: Assets, Liabilities, and Equity
Recorded at the end of the accounting period, typically the month, quarter, or year

Accounting Equation

Assets = Liabilities + Equity
Business transactions impact one or more of these categories
Every transaction must keep the equation balanced

T-Account

Title, debit side, credit side are the three parts of a T-account
Liabilities, revenues, and common stock typically have a normal credit balance

Financial Statements

The financial statements are not prepared from the unadjusted trial balance
The balance sheet is prepared before the income statement and the statement of stockholders' equity
Assets (like supplies or prepaid insurance) used up or consumed while earning revenue are called expenses
Revenue is recorded when a service is performed or products are delivered to customers, regardless of when cash is received
Expenses are recorded and reported when they are incurred, whether cash is paid or not

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Description

Test your understanding of the foundational concepts of debits and credits in accounting. This quiz covers journal entries, the impact on assets, liabilities, equity, revenues, and expenses, as well as adjusting entries for accruals. Perfect for students learning about financial transactions.