Fundamental Accounting Principles Quiz

Study Notes

Fundamental Accounting Equation

Assets = Liabilities + Owner's Equity
This equation forms the basis of accounting.

Double-Entry Accounting System

Every transaction has equal debits and credits.
Total debits always equal total credits.
This ensures the equation above remains balanced.

Accounting Standards (GAAP Principles)

Cost Principle

Items are recorded and remain at their original cost.

Consistency Principle

Consistent application of accounting rules is important.

Objectivity Principle

Accounting is based on verifiable evidence.

Going Concern

Businesses are assumed to continue operations indefinitely.

Monetary Unit

Only data expressed in a stable monetary unit is recorded.

Economic Entity

A business is distinct from its owner(s) and other businesses.

Time Period Assumption

The life of a business is divided into reporting periods.

Balance Sheet

Order of Assets (Classified Balance Sheet)

Cash, Accounts Receivable, Supplies, Inventory, Equipment, Building.
This order is common but not a strict requirement.
Assets = Liabilities + Owner's Equity

Income Statement

Structure

Revenue - Cost of Goods Sold (COGS) = Gross Profit.
Gross Profit - Expenses = Net Income.
Example heading: "Year Ended December 31, 20XX".

Cash Flow Statement

Focuses on cash inflows and outflows
No formula given in the text.

Effects of Errors (Inventory)

Overstated Ending Inventory: COGS understated, Gross Profit overstated, Net Income overstated.
Understated Ending Inventory: COGS overstated, Gross Profit understated, Net Income understated.

Merchandise Inventory

Items ready for sale.

Adjustments

NSF Cheques: Deduct from book balance.
Outstanding Cheques: Deduct from bank statement balance.
Bank Service Charges: Deduct from book balance.
Late Deposits: Add to bank statement balance.
Correct any errors in recording cheques or deposits.

Common Transactions/Examples

Services performed for cash: Debit Cash, Credit Fees Earned.
Petty Cash replenishment: Debit Expenses, Credit Bank.
Purchases of merchandise: Debit Purchases, Credit Bank or Accounts Payable.

Errors

Correcting entries are required for wrong postings.

Owner's Equity Formula

Beginning Capital + Net Income - Drawings = Ending Capital

Liquidation Example

Assets sold below book value, liabilities paid, remaining amount in Capital adjusted.

Core Accounting Definitions

Asset: Resources owned (cash, accounts receivable, inventory).
Liability: Obligations owed (loans, accounts payable).
Equity: Owner's claim (capital, retained earnings).
Revenue: Income (credit balance).
Expenses: Costs (debit balance).

Amortization

Allocation of an intangible asset's cost over its useful life (patents, trademarks).
Similar to depreciation, but for intangible assets.

Description

Test your knowledge on the fundamental accounting equation and the principles of double-entry accounting. This quiz covers key accounting standards, including GAAP principles and significant concepts like the consistency and objectivity principles. Perfect for students studying accounting fundamentals.

Fundamental Accounting Principles Quiz

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Questions and Answers

Which of the following equations represents the fundamental accounting equation?

According to the consistency principle, which of the following is required?

Which of the following is the correct order of assets in a classified balance sheet?

In the income statement, what is calculated by subtracting the cost of goods sold (COGS) from revenue?

If a company overstates its ending inventory, what is the effect on the cost of goods sold (COGS) and net income?

Which of the following is NOT an adjustment to the bank reconciliation?

A company performs services for cash, what is the correct accounting entry?

Calculate the ending capital, given Beginning Capital of $10,000, Net Income of $5,000, and Drawings of $2,000.