Accounting Principles Quiz
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Questions and Answers

According to the accounting principles, which action violates the objectivity principle?

  • Recording minor transactions, such as the purchase of paper clips, as expenses.
  • Disclosing potential financial risks to stakeholders, like pending lawsuits.
  • Using estimated values for accounts payable and receivable instead of actual records. (correct)
  • Recording equipment at its original purchase price, despite a decrease in market value.

    • Which of the following scenarios best exemplifies the full disclosure principle in accounting?

  • A grocery store selling ready-made goods to customers.
  • A business reporting potential financial risks, such as a pending lawsuit, to its stakeholders. (correct)
  • An accountant using actual records instead of estimates for financial reports.
  • A car factory purchasing metal and parts to assemble cars.

    • How does a manufacturing business differ from a merchandising business?

  • A manufacturing business buys and sells ready-made items, while a merchandising business converts raw materials into products.
  • A manufacturing business converts raw materials into products, while a merchandising business buys and sells ready-made items. (correct)
  • A manufacturing business provides services, while a merchandising business produces goods.
  • A manufacturing business focuses on selling services, while a merchandising business focuses on selling goods.

    • Which of the following examples illustrates the application of the materiality principle?

    <p>A business records the purchase of office supplies as an expense rather than depreciating them as assets. (D)</p> Signup and view all the answers

    What is a primary disadvantage of running a car manufacturing factory compared to a merchandising business?

    <p>Higher investment in machinery and labor. (C)</p> Signup and view all the answers

    In a limited partnership, what distinguishes general partners from limited partners?

    <p>General partners share equal liability, while limited partners have limited liability. (C)</p> Signup and view all the answers

    Which of the following scenarios would most likely cause a company's financial statements to no longer accurately reflect the going concern assumption?

    <p>A government ban that prevents the company from continuing its primary operations. (B)</p> Signup and view all the answers

    A clothing store records its transactions in accordance with the time period concept. If the store chooses a fiscal year instead of a calendar year, which of the following periods could it select?

    <p>February 1 - January 31 (D)</p> Signup and view all the answers

    According to the monetary unit concept, which of the following assets should be recorded on a company's balance sheet?

    <p>Cash (D)</p> Signup and view all the answers

    A manufacturing company purchased raw materials for $50,000. Due to an oversupply in the market, the current replacement cost of these materials is $40,000. According to the cost principle, at what value should the raw materials be recorded on the company's balance sheet?

    <p>$50,000 (A)</p> Signup and view all the answers

    Which of the following best illustrates the concept of limited liability in a corporate structure?

    <p>A shareholder's personal assets are protected from being used to pay off the corporation's debts. (C)</p> Signup and view all the answers

    Which business structure is most likely to be negatively affected by the death of its owner?

    <p>Sole Proprietorship (A)</p> Signup and view all the answers

    A partnership is considering expansion but is hesitant due to potential personal liability. What type of partnership could mitigate this concern?

    <p>Limited Partnership (D)</p> Signup and view all the answers

    Why might a corporation be subject to 'double taxation'?

    <p>Because it pays taxes on its profits, and shareholders pay taxes on dividends received. (D)</p> Signup and view all the answers

    Which of the following is the LEAST likely advantage of a sole proprietorship?

    <p>Ability to raise large amounts of capital (C)</p> Signup and view all the answers

    A new law firm is formed by three partners. All partners will share in profits, losses, and management responsibilities. Which type of business organization is this?

    <p>General Partnership (A)</p> Signup and view all the answers

    Which of the following sequences accurately depicts the steps in a service business?

    <p>Start with cash, pay employees, perform service, receive payment. (A)</p> Signup and view all the answers

    What is a key distinction between a service business and other types of businesses?

    <p>Service businesses sell intangible services instead of physical goods. (A)</p> Signup and view all the answers

    Which of the following best describes the fundamental principle of double-entry bookkeeping introduced by Luca Pacioli?

    <p>Ensuring that every transaction affects at least two accounts to maintain the accounting equation. (D)</p> Signup and view all the answers

    In the context of accounting, the debit side of a transaction represents what?

    <p>Increase in assets or decrease in liabilities/equity. (B)</p> Signup and view all the answers

    If a store buys $500 worth of supplies on credit, what is the correct double-entry bookkeeping entry?

    <p>Debit Supplies $500, Credit Accounts Payable $500 (B)</p> Signup and view all the answers

    Which of the following is the primary role of auditors in accounting?

    <p>To review and verify the accuracy of financial statements. (B)</p> Signup and view all the answers

    How can a creditor primarily use accounting information?

    <p>To assess the company's ability to repay debts. (A)</p> Signup and view all the answers

    In a joint venture, what is the primary characteristic that defines this type of business arrangement?

    <p>A temporary partnership created for a specific project. (C)</p> Signup and view all the answers

    What is the key distinction between a general partner and a limited partner in a partnership?

    <p>A general partner has unlimited liability and manages daily operations, while a limited partner has limited liability and involvement. (C)</p> Signup and view all the answers

    How do investors primarily utilize accounting information when considering investing in a company?

    <p>To analyze the financial health and potential profitability of the company. (D)</p> Signup and view all the answers

    Twirlie Company purchased office supplies on credit. Which of the following journal entries correctly reflects this transaction?

    <p>Debit: Office Supplies; Credit: Accounts Payable (A)</p> Signup and view all the answers

    Why is it important for companies to maintain accurate books of accounts?

    <p>To ensure accuracy and provide insights for decision-making. (B)</p> Signup and view all the answers

    How does the journal contribute to the accounting cycle?

    <p>It is where transactions are initially recorded in chronological order. (C)</p> Signup and view all the answers

    How do special journals enhance the efficiency of the accounting process?

    <p>They categorize similar, repetitive transactions to streamline recording. (D)</p> Signup and view all the answers

    What is the fundamental accounting equation, and why is it important?

    <p>Assets = Liabilities + Equity; it provides a framework for recording and summarizing financial data. (C)</p> Signup and view all the answers

    Which of the following is the correct journal entry when a business uses cash to purchase unused office supplies?

    <p>Debit: Supplies; Credit: Cash (C)</p> Signup and view all the answers

    A business provides consulting services and receives payment immediately. Which accounts are affected, and how are they affected?

    <p>Debit: Cash; Credit: Service Revenue (D)</p> Signup and view all the answers

    What is the purpose of a subsidiary ledger?

    <p>To provide detailed records for specific general ledger accounts with high transaction volume. (B)</p> Signup and view all the answers

    Which of the following accounts would be classified as a non-current asset?

    <p>Equipment (C)</p> Signup and view all the answers

    A company pays for a two-year insurance policy in advance. How should this be recorded?

    <p>As a prepaid expense. (C)</p> Signup and view all the answers

    Which scenario best represents the correct application of the 'Drawings' account?

    <p>The owner withdraws cash from the business for personal use. (B)</p> Signup and view all the answers

    A business purchases a printer for Php 15,000 on credit. Which of the following is the correct entry in the ledger?

    <p>Equipment Account: Increases by Php 15,000; Accounts Payable Account: Increases by Php 15,000 (C)</p> Signup and view all the answers

    Which of the following is an example of revenue?

    <p>Service Revenue (D)</p> Signup and view all the answers

    Flashcards

    Ancient Accounting

    The origins of accounting trace back to ancient civilizations like Mesopotamia (2500 BCE) and China (423 BCE).

    Luca Pacioli

    Known as the Father of Accounting, he introduced double-entry bookkeeping in 1493 CE.

    Double-Entry Bookkeeping

    A system where every transaction affects two accounts, keeping the equation balanced (debit = credit).

    Internal Users of Accounting

    People within a business, such as management and employees, using financial reports for decision-making.

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    External Users of Accounting

    Entities outside a business, like investors and creditors, who analyze financial statements to make decisions.

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    GAAP

    Generally Accepted Accounting Principles, guidelines developed from the 1920s to present to ensure consistency in accounting.

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    Auditing

    The process of reviewing and verifying the accuracy of financial statements, ensuring compliance and integrity.

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    Joint Venture

    A temporary partnership between entities for a specific project, combining resources and expertise.

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    Corporation

    A separate legal entity where ownership is represented by shares.

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    Sole Proprietorship

    A business owned by one person who has full control.

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    Limited Liability

    Owners are not personally responsible for company debts.

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    Partnership

    A business owned by two or more people sharing control.

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    Double Taxation

    Company pays tax, and shareholders pay tax on dividends.

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    Perpetual Existence

    A company continues even if an owner leaves or dies.

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    Service Business

    A business that sells services instead of goods.

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    Shared Financial Burden

    Partners share the financial responsibilities of a business.

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    General Partnership

    A partnership where all partners share equal liability for business debts.

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    Limited Partnership

    A partnership with at least one general partner and others with limited liability.

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    Limited Liability Partnership

    A partnership where all partners have limited liabilities.

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    Monetary Unit Concept

    Only transactions measurable in monetary terms are recorded.

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    Cost Principle

    Assets are recorded at their original purchase price, not current value.

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    Full Disclosure Principle

    Businesses must report all relevant financial information to stakeholders.

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    Objectivity Principle

    Financial reports must be based on verifiable evidence, not estimates.

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    Materiality Principle

    Minor transactions that do not impact financial decisions can be ignored.

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    Manufacturing Business

    A business that produces goods, converting raw materials into products.

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    Books of Accounts

    Records of financial transactions like accounts receivable and payable.

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    Journal Entry

    The initial recording of a transaction in the accounting system.

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    General Journal

    Used to record transactions that don’t fit specialized journals.

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    Special Journal

    Designed for recording repetitive transactions efficiently.

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    Ledger

    Final book where transactions from the journal are posted and balanced.

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    Service Revenue

    Earnings generated from providing services to clients.

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    Sales Revenue

    Income earned from selling goods or products.

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    Prepaid Expenses

    Payments made for future benefits like rent or insurance.

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    Expenses

    Costs incurred to earn revenue, such as salaries and utilities.

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    Advertising Expense

    Costs incurred for marketing and promotions.

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    General Ledger

    A comprehensive record that summarizes all accounts and transactions.

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    Subsidiary Ledger

    Detailed records for specific accounts within the general ledger.

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    Non-Current Assets

    Long-term assets with a useful life of over one year.

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    Study Notes

    Introduction to Accounting

    • Accounting is an information system that collects, processes, and presents financial data for decision-making
    • It's the language of business, helping businesses communicate financial health to stakeholders.
    • Accounting has a systematic process including identifying, classifying, recording, summarizing, and communicating financial transactions.

    Nature of Accounting

    • Identifying: Recognizing transactions affecting finances
    • Classifying: Grouping similar transactions
    • Recording: Writing transactions in a structured way
    • Summarizing: Organizing data into financial reports
    • Communicating: Sharing financial reports with stakeholders

    History of Accounting

    • Accounting practices date back to ancient Mesopotamia (2500 BCE)
    • Early records found in ancient civilizations, including China (423 BCE) with early income tax.
    • Luca Pacioli (1493 CE) introduced double-entry bookkeeping (debits and credits must balance).

    Branches of Accounting

    • Financial Accounting: Prepares financial statements for external users (investors, creditors)
    • Management Accounting: Helps internal users (business owners) make decisions (e.g., budgeting, cost analysis)
    • Tax Accounting: Ensures businesses comply with tax laws, filing returns
    • Cost Accounting: Tracks production costs and price setting
    • Government Accounting: Manages public funds and budgets
    • Auditing: Reviews and verifies financial statements for accuracy
    • Academic Accounting: Teaches accounting principles in education
    • Research Accounting: Studies new trends and improvements in accounting

    Users of Accounting Information

    • Internal Users: Management (decision-making), Employees (job security), Owners (performance monitoring).
    • External Users: Investors (stability), Creditors (lending decisions), Customers (product/service continuity), Government agencies (tax compliance), General public (research, analysis).

    Business Environment

    • Forms of Business Organizations: Businesses categorized based on ownership (sole proprietorship, partnership, corporation)
    • Sole Proprietorship: Owned by one person; owner is personally liable for debts
    • Partnership: Owned by two or more people; shared skills, resources, and liabilities; conflicts can arise
    • Corporation: A separate legal entity; limited liability for owners; more complex management and taxation

    Types of Business According to Activities

    • Service Business: Sells services (e.g., salon, law firm)
    • Merchandising Business: Buys and resells goods (e.g., supermarket, clothing store)
    • Manufacturing Business: Creates products from raw materials (e.g., car factory, furniture manufacturer)

    Accounting Foundations

    • Accounting Concepts and Principles: Fundamental guidelines for consistent accounting practices
    • Business Entity Concept: Treats business separate from its owner
    • Going Concern Concept: Assumes continuous operation
    • Time Period Concept: Records activities in specified accounting periods (e.g., calendar year, fiscal year)
    • Monetary Unit Concept: Records transactions measurable in money
    • Cost Principle: Records assets at their purchase price
    • Full Disclosure Principle: Reports all relevant financial information
    • Objectivity Principle: Uses verifiable evidence for financial reporting
    • Materiality Principle: Ignores insignificant transactions
    • Accrual Principle (Revenue Recognition): Recognizes revenue when earned, not when received
    • Matching Principle: Matches expenses with related revenues

    Books of Accounts

    • Journal (Book of Original Entry): First records transactions using debit-credit format
    • Ledger (Book of Final Entry): Contains the chart of accounts; transactions are posted here to establish account balances
    • General Journal: Records various transactions
    • Special Journals: Records repetitive transactions efficiently
    • General Ledger: Summarizes all accounts
    • Subsidiary Ledger: Detailed records for specific accounts in the general ledger

    Types of Accounts

    • Permanent (Real) Accounts: Carry forward balances to the next period (e.g., assets, liabilities, equity)
    • Temporary (Nominal) Accounts: Balances are closed at the end of the period (e.g., revenues, expenses)
    • Personal Accounts: Related to individuals

    Assets, Liabilities, Equity

    • Assets: Resources owned by a business (current and non-current assets)
    • Liabilities: Obligations a business owes to others (current and non-current liabilities)
    • Equity: Owner's claim to the business's resources

    Revenue and Expenses

    • Revenue: Income earned by a business from its operations
    • Expenses: Costs incurred in generating revenue

    Professional Fees, Expenses

    • Professional Fees: Fees for expertise
    • Expenses: Costs incurred to earn revenue (e.g., salaries, utilities, rent)

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    Description

    Test your knowledge on essential accounting principles with this quiz. Questions cover various concepts such as objectivity, disclosure, and the differences between types of businesses. Challenge yourself to see how well you understand the foundational elements of accounting.

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