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CPA REVIEW
Accounting Equation
The accounting system is an information system that uses accounts to record and classify the financial
effects of an entity’ transactions and events, summarize these effects, and report the results in financial
statements. Accounts ordinarily are classified in accordance with the ff. equations:
Classification of Accounts
Permanent (real) accounts = asset, liability and equity accounts.
Temporary (nominal) accounts = revenues, expenses, gains, losses, and dividends.
Key terms
Journal entries = record the financial effects of transactions and events in the accounting system.
Adjusting entries= entries made as of the balance sheet date to record the effects on periodic revenue and
expense of prepayments (prepaid expenses and unearned revenues) and accruals (revenues earned but not
yet received in cash and expenses incurred but not yet paid in cash.).
Prepaid expenses – are items of goods or services purchased by the company for use in its operations but
not fully consumed or used up by the entity at the end of the accounting period. When goods or services are
initially purchased, the cost is recorded either as an asset (using the asset method) or as an expense (using
the expense method), as follows:
Journal entry upon payment for goods or Journal entry upon payment for goods or
services: services:
Asset (ex. Prepaid Insurance) xxx Expense (ex. Insurance Expense) xxx
Cash xxx Cash xxx
ASSET METHOD EXPENSE METHOD
Adjusting entry (end of the accounting Adjusting entry (end of the accounting
period): period):
Expense (ex. Insurance Expense) xxx Asset (ex. Prepaid Insurance) xxx
Asset (ex. Prepaid Insurance) xxx Expense(ex. Insurance Expense) xxx
To take up the used portion To take up the unused portion
of the item. of the item.
Unearned revenues (pre-collected or deferred revenues) = cash received in advance by the company for
the future sale of inventory or services to be performed in the future. The collection in advance is treated as a
liability ( using the liability method) or as an income (using the income method), as follows:
Adjusting entry (end of the accounting Adjusting entry (end of the accounting
period): period):
Liability (ex. Unearned Rent) xxx Income (ex. Rent Income) xxx
Income (ex. Rent Income) xxx Liability (ex. Unearned Rent) xxx
To take up the earned portion To take up the unearned portion
of the item. of the item.
Depreciation/amortization of assets
Depreciation expense xxx
Accumulated depreciation xxx
Reasonably estimable and probable losses due to past events (such as decline in value of investment
in marketable securities or those arising from pending lawsuits).
Estimated loss from pending lawsuit xxx
Estimated liability from pending lawsuit xxx
(NOTE: When perpetual inventory system is used, the ending inventory and the cost of goods sold
balances already appear in the ledger and therefore, no adjusting entry is necessary unless there are
discrepancies or errors eg. shortage or overage, in the inventory count vs. perpetual inventory records.)
Closing entries = transfer (close) temporary account balances to retained earnings. (assuming corporate
business) as follows:
Reversing entries = reverse the effects of adjusting entries to simplify the future recording of revenue and
expense transactions related to adjusting entries. These entries are made at the beginning of the subsequent
period to dispose some accrued and deferred items (assets and liabilities) that were entered in the balance sheet
accounts through adjusting entries. But, not all adjusting entries are reversed, only those adjustments that affect
asset or liability accounts that are normally used during an accounting period are reversed. Preparation of
reversing entries is optional.
(Note: Adjusting, closing, and reversing entries must affect at least one temporary account and at least
one real account.)
Beg. Bal. xxx xxx Rvrse entry Beg. Bal. xxx xxx Adj entry
(to record used
Adj entry xxx Ending Bal. Pre-payments xxx portion)
(to record
unused portion) xxx xxx Ending Bal.
Revrse entry xxx xxx Beg. Bal. Adj entry xxx Beg. Bal.
(to record
Ending Bal. xxx xxx Adj entry earned xxx Pre- collections
(to record portion) xxx
unearned
Ending bal. xxx
portion.)
Inventory Inventory
Beg. Bal. xxx xxx Closing entry Beg. Bal xxx xxx Cost of
of the Beg. Bal. Purchases xxx goods sold
to CGS or to Returns xxx Returns to
Income Summary from suppliers
customers xxx xxx Ending invtry
MULTIPLE CHOICE
6. After physical counting, the Merchandise Inventory on hand as of December 31 were valued at P85,000. The
adjusting entry to record ending inventory is:
a. Debit Merchandise Inventory, P85,000; credit Sales, P85,000.
b. Debit Merchandise Inventory, P85,000; credit Owner, Capital, P85,000.
c. Debit Merchandise Inventory, P85,000; credit Income Summary, P85,000.
d. Debit Income Summary, P85,000; credit Merchandise Inventory, P85,000.
9. What is the correct order of the following steps in the accounting cycle?
(1) Adjusting entries (4) Financial statements
(2) Adjusted trial balance (5) Post-closing trial balance
(3) Closing entries (6) Trial balance
a. 3, 5, 4, 3, 1, 2.
b. 6, 1, 2, 4, 3, 5
c. 6, 1, 2, 3, 5, 4
d. 6, 1, 2, 3, 4, 5
10. Which of the following accounts should be closed to the Income Summary account at the end of the accounting
period?
a. Accumulated Depreciation b. Prepaid Insurance c. Depreciation Expense d. Unearned Revenues
11. Closing entries:
a. Affect only statement of financial position account.
b. Is an optional step in the accounting cycle.
c. Would allow a company to analyze and record routine, repetitive transactions in the same manner all the
time.
d. Would bring to zero the balances of a company’s temporary accounts.
18. A system of bookkeeping whereby transactions are not analyzed in terms of debits and credits. Only a cash book
summarizing receipts and disbursements is used. This is known as:
a. Double-entry bookkeeping c. Modified-accrual basis
b. Single-entry bookkeeping d. Voucher system
19. The manner in which the accounting records are organized and employed within a business is known as:
a. Accounting system c. Voucher system
b. Business document d. Special journals
20. The recording phase of financial accounting covers the following steps, except:
a. Business documents are received and prepared.
b. Transactions are journalized
c. Transactions are posted to the ledger
d. Financial statements are prepared.
c. Purchase invoice
d. Purchase order
29. Journals are likewise regarded as the
a. Book of Genesis
b. Book of final entry
c. Book of original entry
d. Book of secondary entry
30. One of the following is a valid statement:
a. Income accounts are decreased by credits and increased by debits
b. Asset accounts are decreased by debits and increased by credits
c. Liability accounts are decreased by credits and increase by debits
d. Expense accounts are increased by debits and decreased by credits
31. Which of the following accounts normally has a credit balance?
a. Treasury shares
b. Shares returns and allowances
c. Allowance for doubtful accounts
d. Discount on bonds payable
32. Which of the following special journals is used to facilitate recording of cash sale transaction?
a. Sales journal
b. Purchase journal
c. Cash receipts journal
d. Cash disbursement
33. A check register may be used in lieu of an
a. Cash disbursement journal b. Purchases journal c. Cash receipts journal d. Sales journal
34. A voucher system is used in connection with transactions that involve only
a. The payment of cash
b. The receipt of cash
c. The purchase and sale of merchandise
d. Revenue and expense
35. When special journals are used, adjusting and closing entries are generally recorded in the
a. Cash disbursement journal b. Cash receipts journal c. General journal d. Purchases journal
36. A subsidiary ledger is
a. A backup system to protect against unexpected destruction of records
b. A listing of accounts of a subsidiary company owned by a parent company
c. A listing of accounts balance just before closing entries are prepared
d. A system that relieves the general ledger of details that so bookkeeping work may be divided
37. A chart of accounts
a. A flowchart of all transactions c. A journal
b. An accounting procedure manual d. A list of names of all account titles
61. In order to show detailed information about the composition of an account balance, most companies use
a. Special journals b. Subsidiary ledgers c. A general ledger d. A trial balance
62. The first step in the accounting cycle is to
a. Prepare an adjusted trial balance
b. Prepare adjusting entries
c. Report transaction journal
d. Post to ledger accounts
63. All of the following characteristics are common to accounting and reporting systems, regardless of complexity of
the entity, except for the
a. Type of economic events identified as recordable events
b. Accounting process used to collect and report data
c. Length of time used to define the entity’s operating cycle
d. Accounting model used to express the consequence of economic events
64. On an asset ledger account, decreases are recorded on
a. The left side
b. The right side
c. Both
d. Sides
e. Neither side
65. Which is false concerning use of special journals?
a. Only sales of merchandise on account are recorded in the sales journal
b. Purchases of any item on account are recorded in the purchases journal. Acquisition of any item for cash
are recorded in the cash disbursements journal
c. Transactions that cannot be appropriately recorded in a special journal are recorded in the general journal
d. Only cash purchases are recorded in the cash disbursement journal
66. To credit a ledger account means to make an entry on
a. The left side b. The right side c. Both sides d. Neither sides
67. Asset accounts would be expected to have
a. Debit balances b. Credit balances c. Zero balances d. Indeterminate balances
68. On an equity ledger account, increases are recorded on
a. The left side b. The right side c. Both sides d. Neither sides
69. Accounting periods can be
a. Weekly b. monthly c. yearly d. all of the these
70. Entering a transaction from the journal to the ledger is called
a. Journalizing b. Footing c. Posting d. Referencing
71. A voucher system is used in connection with transactions that involve only
a. Receipt of cash c. Purchase and sale of merchandise
b. Payment cash d. Revenue and expense
72. In a journal entry, debits are listed
a. `first b. Last c. Anywhere d. Not in a journal e. Entry
73. Posting can take place
a. Instantly b. daily c. monthly d. all of the these
74. Liability accounts would be expected to have
a. Debit balances b. Credit balances c. Zero balances d. Indeterminate balances
75. The account credited for a receipt of cash on account is
a. Accounts payable b. Service revenue c. Cash d. Accounts receivable
76. Sales total P440, 000, cost of goods sold is P210, 000, and operating expenses are P160, 000. How much is
gross margin?
a. P440, 000 b. P230, 000 c. 70, 000 d. P210, 000
77. Special journals help most by
a. Easing the preparation of the financial statements
b. Limiting the number of transactions that have to be recorded
c. Reducing the cost of operating the accounting system
d. Improving accuracy in posting to subsidiary ledgers
78. Entries prepared, as a step in the accounting process, to bring the books and accounts to date, is known as:
a. Closing entries b. Adjusting entries c. Opening entries d. Reversing entries
79. Adjusting entries
a. Help to property measure the period’s net income or net loss
b. Bring asset and liability accounts to correct balances
c. Assign revenues to the period in which they are earned
d. All of these
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80. Balancing the ledgers at the end of the period is most closely related to
a. Control b. Favorable cost/benefit relationship c. Flexibility d. Compatibility
81. The account number 211031 most likely refers to
a. Accounts payable b. An individual vendor c. Liabilities d. Current liabilities
82. When a firm generate revenues
a. Net assets increase b. Retained earnings decrease c. Liabilities increase d. Net assets decrease
83. Accounts fro the balance sheet elements are called
a. Real accounts b. Temporary accounts c. Nominal accounts d. Both b and c
84. Which of the following financial statements uses a date which represents one point in time?
a.Income statement b. Retained earnings statement Statement of financial position d. Statement of cash flows
85. A payment on account was recorded by debiting inventory and crediting cash. This entry was posted. The
correcting entry is
a. Accounts payable X
Inventory X
b. Inventory X
Accounts payable X
c. Cash X
Inventory X
d. Cash X
Accounts X
86. Which type of account would be used to record the investment made by the stockholders of a
corporation?
a. Liability b. Revenue c. Retained earnings d.. Contributed capital
87. The adjusting entry which many companies make to record interest incurred but not paid is classified as
a. A prepayment b. An estimated item c. An accrual d. A reversal
88. An unadjusted trial balance provides assurance that
a. All transactions fro the period have been recorded
b. Transactions have been correctly analyzed
c. Transactions have been posted to the correct accounts
d. Each account’s debit or credit balance has been correctly calculated
89. Cash dividends were declared on December 31, 1999 to be paid on January 15, 2000. Which journal would be
used to record the declaration of the cash dividend?
a. Sales journal b. Purchases journal c. General journal d. Cash disbursement journal
90. The work sheet is a
a. Financial statement b. Ledger c.Convenient device for completing the accounting cycle d. Journal
91. Reversing entries are
a.Not mandatory b. Mandatory for all companies c. Required by the IFRS d.Required only in certain industries
92. A transaction is an event that
a. Changes a firm’s financial position
b. Can be measured objectively
c. Must involve outside parties
d. Both a and b
93. The accounting process can be classified into two parts, namely recording phase and summarizing phase. The
recording phase includes all, except
a. Analyzing the business documents or transactions
b. Recording the transactions in the journals
c. Posting the journal entries to the general accounts
d. Preparing the unadjusted trial balance
94. The book of original entry is called
a. Journal
b. General ledger
c. Subsidiary ledger
d. An account
95. A reversing entry would be recommended for an adjusting entry which
a. Allocated the expired insurance cost from the prepaid insurance account to the insurance expense account
b. Estimated the uncollectible accounts expense
c. Recorded the portion of interest revenue which was earned but not received by year end
d. Allocated the portion of rent revenue earned from the unearned rent account to the rent revenue account
96. Premium on bonds payable is an example of
a. Nominal and adjunct account
b. Real and adjunct account
c. Nominal and contra account
d. Real and contra account
97. An example of a nominal and contra account is
a. Allowance for doubtful accounts b.Deficit c. Freight in d. Sales discount
98. A simple journal entry
a. Consist of one debit and one credit
b. Consist of two debits and one credit
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TOA-9-01-ACCOUNTING PROCESS