Accounting Principles Online Quiz

The Income Statement reports revenues and expenses over a period of time. Earned Revenue is a revenue account, whereas Owner's Capital and Withdrawals appear on the Statement of Owner's Equity, and Unearned Revenue is a liability on the Balance Sheet.

Rent Expense is a temporary account that appears on the Income Statement, not the Balance Sheet. Land, Notes Payable, and Unearned Revenue are all permanent accounts that appear on the Balance Sheet.

In accounting journals, PR stands for Posting Reference. It is used to indicate that a transaction has been posted to the ledger or to provide a cross-reference between the journal and the ledger.

Liabilities are obligations to pay. Unearned revenue is a liability because the business owes a service or product, and payables are debts owed to creditors.

A General Journal is a book of original entry where transactions are recorded, but it is not a source document itself. Source documents are the evidence used to create the journal entries.

The Statement of Owner's Equity uses the Net Income (or Net Loss) from the Income Statement to calculate the ending capital balance. The Balance Sheet then uses the ending capital balance.

Unearned Revenue represents cash received for services or goods that have not yet been provided. It is a liability until the revenue is earned.

The Statement of Cash Flows is prepared using information from various sources, including the Income Statement and changes in Balance Sheet accounts, but it is not directly derived from the Trial Balance in the same way the other three statements are.

The debt ratio is calculated by dividing total liabilities by total assets. It measures the proportion of a company's assets that are financed by debt.

A lower debt ratio indicates that a company has less debt relative to its assets, which generally signifies lower financial risk and greater stability.

The Financial Accounting Standards Board (FASB) is the private, non-profit organization responsible for establishing and improving Generally Accepted Accounting Principles (GAAP) in the United States.

GAAP stands for Generally Accepted Accounting Principles, which are the standard framework of guidelines for financial accounting used in the United States.

The fundamental rule of double-entry accounting is that for every transaction, the total debits must equal the total credits to keep the accounting equation in balance.

Capital accounts have a normal credit balance. Therefore, a credit to a capital account increases the balance, while a debit decreases it.

Liability accounts have a normal credit balance. A debit to a liability account reduces the amount owed, effectively decreasing the liability.

Assets are on the left side of the accounting equation. Therefore, an increase in an asset is recorded as a debit.

Account numbers starting with 1 are reserved for assets. These are the most liquid accounts and are listed first in the chart of accounts.

A trial balance follows the order of the chart of accounts. Assets are listed first, followed by liabilities, equity, revenues, and expenses.

When a business borrows money, it receives cash (an asset) and incurs a liability. Increasing a liability requires a credit entry.

Paying on account reduces a liability. Since liabilities have a normal credit balance, a decrease is recorded as a debit.

When an owner invests in the business, the business receives cash (debit) and the owner's equity increases. Increases in equity are recorded as credits.

When a customer buys on account, the business gains an asset called Accounts Receivable. Increases in assets are recorded as debits.

Accounts Payable is a liability account, not an equity account. Capital, Revenue, and Expenses all directly or indirectly impact the owner's equity.

A trial balance is a report that lists all ledger accounts and their current debit or credit balances to ensure total debits equal total credits.

Accounts Receivable is an asset. Assets have a normal debit balance.

Withdrawals represent a reduction in owner's equity. Since equity normally has a credit balance, withdrawals (a contra-equity account) have a normal debit balance.

Revenue increases owner's equity. Increases in equity are recorded as credits.

Expenses decrease owner's equity. Since equity normally has a credit balance, expenses have a normal debit balance.

Accounts Payable is a liability. Liabilities have a normal credit balance.

Capital represents the owner's claim on the business assets. Equity accounts have a normal credit balance.

Cash is an asset. Assets have a normal debit balance.

Revenues and Capital are both equity-related accounts that increase equity, thus they carry a normal credit balance.

Assets and expenses both have a normal debit balance, as they represent resources owned or resources consumed.

The chart of accounts is the master list of all accounts used by a business, organized by their assigned account numbers.

Posting is the specific accounting step where information is transferred from the chronological journal to the individual accounts in the ledger.

The journal is the book of original entry where transactions are recorded in chronological order as they occur.

After journalizing, the debits and credits are posted to the ledger, which organizes the transactions by account.

The ledger is the collection of all accounts and their balances, providing a summary of the financial position of each account.

A journal is known as the book of original entry because it records transactions in the order they happen, day by day.

An account is the basic storage unit for financial data, used to record increases and decreases in specific assets, liabilities, or equity items. A journal is a book of original entry, while a ledger is a collection of accounts.

In the standard T-account format used in double-entry bookkeeping, the credit side is always the right side. It does not inherently mean increase or decrease, as that depends on the account type.

Double-entry accounting is the system where every financial transaction affects at least two accounts to keep the accounting equation in balance. The other terms are either incorrect or descriptive of specific entry types rather than the system itself.

In the standard T-account format used in double-entry bookkeeping, the debit side is always the left side. Like credits, whether a debit increases or decreases an account depends on the account type.