Accounting Exams Online Practice Test

To close expense accounts, you debit Income Summary (to record total expenses) and credit each expense account (to zero them). Income Summary acts as a temporary clearing account.

The unit of measurement concept dictates that all financial transactions must be recorded in a single, common monetary unit, such as the dollar.

An expense is a cost incurred in the ordinary course of business that does not result in the acquisition of a long-term asset. Assets are resources owned, while revenue is income generated.

Owner's equity represents the residual interest in the assets of the entity after deducting liabilities. It is the claim the owners have on the company's assets.

Temporary accounts, such as revenue, expenses, and drawing, are closed at the end of an accounting period to reset their balances to zero for the next period. Permanent accounts, like assets and liabilities, carry their balances forward.

The income statement reports a company's financial performance over a specific period by showing revenues and expenses. It demonstrates whether the business is profitable.

Revenue is a temporary account that is closed out at the end of the period. Therefore, it will have a zero balance and will not appear on the post-closing trial balance, which only contains permanent accounts.

A postdated check is one that bears a date later than the date on which it is actually written. This prevents the recipient from cashing it until that future date.

A restrictive endorsement limits the further negotiability of a check. Adding 'For Deposit Only' ensures the funds can only be deposited into the account of the payee.

Bank service charges are typically small, infrequent costs that do not warrant a specific dedicated account, so they are recorded under Miscellaneous Expense.

Petty cash is a small fund of cash kept on hand for minor, incidental expenses. It allows for quick, small payments without writing a formal check.

In the standard four-step closing process, the owner's drawing account is the final account to be closed to the capital account.

If there is a net income, the Income Summary account will have a credit balance before it is closed to the Capital account. This reflects that revenues exceeded expenses.

The Income Summary account is a temporary account used only during the closing process. It does not have a normal balance because it is cleared to zero at the end of every period.

Financial statement headings typically follow the format: Who (Company Name), What (Statement Name), and When (Date). The date is the final component.

Special columns in a journal are used for frequently occurring transactions. These are totaled at the end of the page or period and posted as a single total to the ledger.

The trial balance is a list of all general ledger account balances. It is prepared to ensure that total debits equal total credits.

Posting is the process of transferring information from the journal (where transactions are recorded chronologically) to the ledger (where they are organized by account).

Double-entry accounting is the system where every transaction affects at least two accounts, with total debits always equaling total credits.

Net income is calculated by subtracting total expenses from total revenue for a specific period.

A terminal summary is a report generated by a point-of-sale system that provides the total cash sales for a given period, serving as the source document for recording those sales.

The balance sheet reports the financial position (condition) of a business at a specific point in time by listing assets, liabilities, and owner's equity.

The accounting cycle concludes with the post-closing trial balance, which verifies that the ledger is in balance after all closing entries have been made.

When posting to the ledger, the first step is to record the date of the transaction as it appears in the journal.

The first step in the closing process is to close revenue accounts (like Sales) to the Income Summary account.

The Adequate Disclosure concept requires that all information necessary for a reader to understand the financial condition of a business be included in the financial statements.

Sales is a revenue account, which is a temporary account. It appears on the income statement, not the balance sheet, which only contains permanent accounts (assets, liabilities, and equity).

Permanent accounts are balance sheet accounts that carry their balances into the next accounting period. Revenue is a temporary account because it is closed to the income summary at the end of each period.

Temporary accounts are those that are closed at the end of the period, such as sales, income summary, and rent expense. Accounts Receivable is a permanent asset account that remains on the balance sheet.

In double-entry bookkeeping, the left side of any T-account is designated as the debit side. The right side is designated as the credit side.

In standard chart of accounts numbering, assets typically start with 100, liabilities with 200, owner's equity with 300, revenue with 400, and expenses with 500.

A blank endorsement consists only of the payee's signature on the back of a check. This makes the check payable to anyone who holds it.

The going concern concept assumes that a business will continue to operate indefinitely. This allows for the deferral of expenses and the capitalization of assets.

The business entity concept requires that the financial affairs of the business be kept separate from the personal financial affairs of the owner.

A sales invoice is the primary source document used to record a sale made on credit (on account). It provides evidence of the transaction terms and amount.

An asset is defined as a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit.

The normal balance of an account is the side (debit or credit) on which increases are recorded. For example, assets have a normal debit balance because they increase with debits.

Accounts Payable is a liability account used to record amounts owed to suppliers or creditors for goods or services purchased on credit.

The fundamental accounting equation is Assets = Liabilities + Owner's Equity. This equation must always remain in balance for every transaction.