Double Entry Accounting Quiz
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Questions and Answers

What does the 'Dr' entry signify in the double entry accounting system?

  • Increase in assets (correct)
  • Increase in income
  • Decrease in expenses
  • Increase in liabilities

Which of the following is NOT a step in recording journal entries?

  • Classify the accounts according to AEDLIC
  • Apply AEDLIC for the Dr and Cr entry
  • Determine the type of business transaction (correct)
  • Identify the accounts affected

How are expenses classified in the double entry rules?

  • Expenses increase with a Dr and decrease with a Cr (correct)
  • Income decreases with a Dr and increases with a Cr
  • Expenses increase with a Cr and decrease with a Dr
  • Liabilities increase with a Dr and decrease with a Cr

In the context of the AEDLIC rule, how is Drawings treated?

<p>Increase with a Debit (B)</p> Signup and view all the answers

What is the primary purpose of a ledger account?

<p>To consolidate all transactions relating to a specific asset, liability, equity, income, or expense item (A)</p> Signup and view all the answers

What is the main purpose of a trade discount?

<p>To encourage customers to buy in bulk and foster loyalty (D)</p> Signup and view all the answers

How is the amount paid calculated after applying a cash discount?

<p>Amount paid = Invoiced price - Cash discount (D)</p> Signup and view all the answers

In which scenario is a cash discount recorded in the ledger?

<p>When customers pay early on credit transactions (C)</p> Signup and view all the answers

Which of the following journal entries represents a payment to credit suppliers?

<p>Dr trade payable, Cr cash at bank (A)</p> Signup and view all the answers

What effect does a trade payable have on liabilities when an inventory purchase is made on credit?

<p>Liabilities increase when inventory is purchased on credit (D)</p> Signup and view all the answers

What is a characteristic of a sole proprietorship regarding capital contributions?

<p>Only one person contributes capital. (C)</p> Signup and view all the answers

In which type of business structure is it less likely for banks to lend money?

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

Which statement is true regarding the liability of partners in an LLP?

<p>Partners have limited personal liability for the debts of the LLP. (D)</p> Signup and view all the answers

How can a company raise funds compared to an SP?

<p>By issuing shares to more people. (C)</p> Signup and view all the answers

What is a benefit of an LLP over an SP in terms of collateral availability?

<p>LLPs can leverage personal assets from multiple partners. (A)</p> Signup and view all the answers

In general, what differentiates the extent of liability in a company compared to an SP?

<p>The sole owner of an SP risks personal assets for debts. (D)</p> Signup and view all the answers

What is the primary factor that enables LLPs to secure more funding than SPs?

<p>The presence of multiple partners provides collateral. (C)</p> Signup and view all the answers

What is an implication of having limited personal assets in a sole proprietorship?

<p>It increases the risk for banks and lenders. (D)</p> Signup and view all the answers

What does integrity in professional ethics specifically require?

<p>Straightforward and honest relationships (C)</p> Signup and view all the answers

Which accounting theory dictates that only transactions measurable in monetary terms are recorded?

<p>Monetary theory (B)</p> Signup and view all the answers

What is required according to the objectivity theory in accounting?

<p>Support from reliable evidence (A)</p> Signup and view all the answers

According to the historical cost theory, how should transactions be recorded?

<p>At their original cost (B)</p> Signup and view all the answers

What does the accounting entity theory state about business transactions?

<p>They are separate from the owner's actions (A)</p> Signup and view all the answers

What assumption does the going concern theory make about the life of a business?

<p>It has an indefinite economic life (B)</p> Signup and view all the answers

Under the accounting period theory, how often are financial statements prepared?

<p>Every 12 months (A)</p> Signup and view all the answers

When is revenue recognized according to accounting principles?

<p>When goods are delivered (D)</p> Signup and view all the answers

What is included in the service fee revenue for a service business?

<p>Income generated from providing services (A)</p> Signup and view all the answers

Which of the following items is NOT subtracted in calculating profit for the year?

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

How should a loss for the year be presented in the financial statements?

<p>As a loss in brackets (D)</p> Signup and view all the answers

What is the purpose of the statement of financial position?

<p>To list the assets, liabilities, and equity of a business (D)</p> Signup and view all the answers

In a service business, what distinguishes the statement of financial performance from a trading business?

<p>It has no trading portion (B)</p> Signup and view all the answers

What does the net claim by the owner on the net assets of the business represent?

<p>Owner's equity (C)</p> Signup and view all the answers

Which of the following is considered other income in the statement of financial performance?

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

What is the sequence of calculations used to determine the profit for the year?

<p>Total service fee revenue + total other income - total other expenses (C)</p> Signup and view all the answers

What is the primary reason for a business to recognize impairment loss on trade receivables?

<p>To ensure profits are not overstated (B)</p> Signup and view all the answers

What is the impact of the allowance for impairment of trade receivables on financial statements?

<p>It serves as a deduction from trade receivables (C)</p> Signup and view all the answers

If a business estimates that 5% of its trade receivables are uncollectible, how is this amount calculated for the year ended 31 December 2020?

<p>5% of the trade receivables amount (C)</p> Signup and view all the answers

What should Jerabelle Ltd do when ZhenHong Textile repays only a partial amount of its debt?

<p>Write off the remaining unpaid amount as an impairment loss (A)</p> Signup and view all the answers

What specific accounting entry is made when a trade receivable is written off due to bankruptcy?

<p>Debit Impairment Loss and Credit Trade Receivables (A)</p> Signup and view all the answers

What journal entry would be appropriate for recording the write-off of Erica Crafts' outstanding amount?

<p>Debit Impairment Loss and Credit Trade Receivables (B)</p> Signup and view all the answers

What would be reflected in the statement of financial performance for Jerabelle Ltd due to impairment loss?

<p>Decrease in total profit (D)</p> Signup and view all the answers

Which of the following reflects the proper treatment of trade receivables at year-end regarding uncollectible amounts?

<p>Trade receivables are listed with an allowance for uncollectibles (C)</p> Signup and view all the answers

Flashcards

Single Proprietorship (SP) Ownership

Owned and operated by one person, who contributes capital, with total control and liability.

Limited Liability Partnership (LLP) Ownership

Owned and operated by two or more partners, each contributing capital, with limited liability for partners.

Company Ownership

Owned by shareholders, each contributing capital (shares), with limited liability for shareholders.

Single Proprietorship Funding

Funding is limited to the owner's personal funds. Banks are less likely to lend.

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Limited Liability Partnership Funding

More likely to secure funding from banks due to partners' personal assets serving as collateral. Funds increase with more partners.

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Company Funding

Companies can raise funds by issuing more shares and secure funding from banks easily because of high-value business assets.

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Single Proprietorship Liability

The owner is fully liable for the business's debts, using personal assets to pay off debts or losses.

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Limited Liability Partnership Liability

Individual partners are not personally responsible for the LLP's debts; liability is limited to invested capital.

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Monetary Unit Accounting Theory

Only transactions with a measurable monetary value should be recorded in accounting.

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Objectivity Accounting Theory

Financial records must be unbiased and supported by verifiable evidence.

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Historical Cost Principle

Record transactions at their original cost.

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Accounting Entity Theory

A business is separate from its owners; business transactions are recorded from the business's perspective.

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Going Concern Assumption

A company is expected to continue operations indefinitely unless there's clear evidence otherwise.

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Accounting Period Theory

A company's activities are reported over a specific period, e.g., a year.

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Integrity (Professional Ethics)

Being honest and straightforward in professional relationships.

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Objectivity (Professional Ethics)

Avoid letting personal biases affect professional judgment; impartiality.

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Double-entry bookkeeping rule (AEDLIC)

A system where every transaction affects at least two accounts – one account increases (debit) and the other account decreases (credit) – keeping the accounting equation balanced.

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Double-entry bookkeeping rule (DEAD COIL)

Another way to remember double-entry bookkeeping; where increases and decreases are tracked using debit and credit

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Journal Entry Steps

A process with four sequential steps for recording transactions: 1) Identify the accounts affected. 2) Determine the increase or decrease. 3) Classify the accounts. 4) Apply debit and credit entries based on classification.

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Ledger Account

A record of all transactions related to a specific account (asset, liability, equity, income, or expense items), showing debit and credit balances over time.

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Debit

An accounting entry that increases assets, expenses, and dividends, or decreases liabilities, owner's equity, and revenues. It is typically recorded on the left side of an accounting equation.

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Trade Discount

A reduction from the list price of goods offered by a seller to encourage bulk purchases, customer loyalty, or to reward patronage.

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Cash Discount

A reduction from the invoiced price of goods offered by a seller to encourage prompt payment.

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Trade Payables

The amount owed to a credit supplier for goods purchased on credit.

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Inventory Purchase on Credit

Recording the purchase of goods on credit involves increasing the inventory account and increasing the trade payables account.

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Goods Return to Credit Supplier

Recording the return of goods to a credit supplier involves decreasing the trade payables account and decreasing the inventory account.

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Statement of Financial Performance

A financial report that shows a business's revenue, expenses, and profit (or loss) over a specific period.

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Service Revenue

Income earned from providing services to customers, like haircuts or consulting.

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Other Income

Extra sources of income for a business besides the main service offerings.

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Other Expenses

Costs incurred by a business that are not directly related to its main services.

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Profit for the Year

The amount of money a business makes after deducting all its expenses from its income.

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Statement of Financial Position

A financial report that shows a business's assets, liabilities, and equity at a specific point in time.

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Assets

What a business owns, like cash, equipment, and buildings.

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Liabilities

What a business owes to others, like loans and unpaid bills.

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Prudence Theory

This accounting principle dictates that when a business anticipates uncollectible debts, it should immediately recognize the potential loss in asset value as an expense (impairment loss) to prevent overstating profits. It also involves adjusting the asset value (trade receivables) by creating a contra asset (allowance for impairment) to accurately reflect the potential loss.

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Allowance for Impairment of Trade Receivables

A contra asset account that represents the estimated amount of trade receivables that are expected to be uncollectible. It is deducted from the 'Trade Receivables' account on the balance sheet to present a realistic view of the value of the receivables that are likely to be collected.

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Impairment Loss

An expense recognized when there is a reduction in the value of an asset due to factors like uncollectible receivables. This loss reflects the decrease in the asset's worth and is reported on the income statement.

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How to determine the impairment loss?

A business estimates the impairment loss by considering factors like the likelihood of collecting outstanding receivables, the history of past bad debts, and the current economic conditions. For instance, a company might estimate a percentage of total receivables that are deemed unlikely to be collected, thus calculating the impairment loss.

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Impact of Impairment on the Balance Sheet

The impairment loss is reflected in the Balance Sheet by reducing the 'Trade Receivables' asset account and increasing the 'Allowance for Impairment of Trade Receivables' contra asset account. This ensures that the 'Trade Receivables' amount presented on the Balance Sheet accurately reflects the value of the receivables that are likely to be collected.

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Impact of Impairment on the Income Statement

The impairment loss is recognized as an expense on the Income Statement. This reduces the company's profit for the period, providing a more realistic portrayal of the business's financial performance. The expense is recorded within the 'Operating Expenses' section.

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Trade Receivables

Money owed to a business by its customers for goods or services sold on credit. These are listed as an asset on the balance sheet.

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Journal Entry for Writing Off a Receivable

When an account receivable is deemed uncollectible, a journal entry is created to remove the receivable from the books. The journal entry will debit the 'Allowance for Impairment of Trade Receivables' account and credit the 'Trade Receivables' account for the amount being written off.

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Description

Test your knowledge on the double entry accounting system with this quiz. It covers essential concepts such as journal entries, ledger accounts, and different types of discounts. Perfect for students or professionals looking to strengthen their accounting skills.

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