THEORY OF ACCOUNTS

ACCOUNTING PROCESS

1. An optional step in the accounting cycle is the preparation of

a. Adjusting entries
b. Closing entries
c. Financial statements
d. A postclosing trial balance
2. The accounting equation must remain in balance
a. Throughout each step in accounting cycle
b. Only when journal entries are recorded.
c. Only at the time the trial balance is prepared.
d. Only when formal financial statements are prepared
3. A general journal
a. Chronologically lists transactions and other events expressed in terms of debits and credits.
b. Contains one record for each of the asset, liability, equity, revenue and expense accounts.
c. Lists all the increases and decreases in each account in one place.
d. Contains only adjusting entries.
4. Accumulated depreciation is an example of
a. Nominal and adjunct account
b. Real and adjunct account
c. Nominal and contra account
d. Real and contra account
5. Which is an example of a nominal and contra account?
a. Freight in
b. Sales discount
c. Purchases
d. Allowance for doubtful accounts
6. The normal balance of an account is on the
a. Debit side of the account
b. Credit side on the account
c. Side represented by increase in the account balance
d. Side represented by decrease in the account balance
7. The debit and credit analysis of a transaction normally takes place
a. Before an entry is recorded in a journal.
b. When the entry is posted to the ledger
c. When trial balance is prepared.
d. At some other point in the accounting cycle.
8. The double entry accounting system means
a. Each transaction is recorded with two journal entries.
b. Each item is recorded in a journal entry and then in a general ledger account.
c. The dual effect of each transaction is recorded with debit and a credit.
d. More than of the above.
9. What function do accounting journals serve in the accounting process?
a. Recording
b. Classifying
c. Summarizing
 d. Interpreting
10. A simple journal entry
a. Consists of one debit and one credit
b. Consists of two debits and one credit
c. Consists of one debit and two credits
d. Is only a memorandum entry.
11. A journal entry that contains more than two accounts is called
a. An adjusting entry
b. A compound journal entry
c. An incorrect journal entry
d. A correcting entry
12. Which of the following is not a possible combination of a journal entry?
a. Increase in asset and increase in liability
b. Decrease in equity and increase in liability
c. Decrease in liability and decrease in asset
d. Increase in asset and decrease in equity
13. When special journals are used, which of the following statement is true?
a. A general journal is not used.
b. All sales transactions should be recorded in the sales journal.
c. All cash receipts should be recorded in the cash receipts journal.
d. All purchase transactions should be recorded in the purchase journal.
14. It defined as the entire group of accounts for an entity
a. General ledger
b. Subsidiary ledger
c. Trial balance
d. Financial statements
15. Posting
a. Accumulates the effects of ledger entries and transfers them to the general journal.
b. Is done only for income statement activity because activity related to the statement of financial
position does not require posting.
c. Is done once every year.
d. Transfers journal entries to the ledger accounts.
16. What function do general ledgers serve in the accounting process?
a. Reporting
b. Summarizing
c. Classifying
d. Recording
17. Which of the following is not a principal purpose of an unadjusted trial balance?
a. It proves that debits and credits of equal amounts are in the ledger.
b. It is the basis for any adjustments to the account balances.
c. It supplies a listing of open accounts and their balances.
d. It proves that debits and credits were properly entered in the ledger accounts.
18. Which of the following errors will cause an imbalance in the trial balance?
a. Omission of a transaction in the journal.
b. Posting an entire journal entry twice to the ledger.
c. Posting a credit to accounts payable as a credit to accounts receivable.
d. Listing the balance of an account with a debit balance in the credit column of the trial balance.
19. Why are adjusting entries necessary?
a. Transactions take place over more than one accounting period.
b. To make debits equal credits
c. To close nominal accounts at year-end
d. To correct erroneous balances in accounts
20. Adjusting entries affect
a. One nominal account and one real account
b. Two nominal accounts
c. Two real accounts
d. No particular combination of nominal and real accounts
21. Which of the following would not be correct for an adjusting entry?
a. A debit to revenue and a credit to liability
b. A debit to an expense and a credit to a liability
c. A debit to a liability and accredit to a revenue
d. A debit to an asset and a credit to a liability
22. Adjustments are often prepared
a. After the statement of financial position date, but dated as of that date.
b. After the statement of financial position date, and dated after that date.
c. Before the statement of financial position date, but dated as of that date.
d. Before the statement of financial position date, and dated after that date.
23. Which of the following properly describes a deferral?
a. Cash is received after revenue is earned.
b. Cash is received before revenue is earned.
c. Cash is paid after expense is incurred.
d. Cash is paid at the same time period that an expense is incurred.
24. An adjusting entry in which revenue is recognized before the related cash receipt occurs is
a. Deferral
b. Nominal
c. Accrual
d. Special item
25. Which of the following best defines an accrual?
a. Adjusting entries where cash flow precedes revenue or expense recognition
b. Adjusting entries where revenue or expense recognition precedes cash flow
c. Adjusting entries where cash flow and revenue or expense recognition are simultaneous
d. Adjusting entries where revenue and expenses are recognized in the absence of cash flow
26. An accrued expense can best be described as an amount
a. Paid and currently matched with earnings
b. Paid and not currently matched with earnings
c. Not paid and not currently matched with earnings
d. Not paid and currently matched with earnings
27. A prepaid expense can best described as an amount
a. Paid and currently matched with earnings
b. Paid and not currently matched with earnings
c. Not paid and currently matched with earnings
d. Not paid and not currently matched with earnings
28. An accrued income can best described as an amount
a. Collected and currently matched with expenses
b. Collected and not currently matched with expenses
c. Not collected and currently matched with expenses
d. Not collected and not currently matched with expenses
29. An unearned income can best be described as an amount
a. Collected and currently matched with expenses
b. Collected and not currently matched with expenses
c. Not collected and currently matched with expenses
d. Not collected and not currently matched with expenses
30. An adjusted trial balance
a. Is prepared after the financial statements are completed.
b. Proves the quality of the total debit balances and total credit balances of ledger accounts after
all adjustments have been made.
c. Is a required financial statement under international financial reporting standards.
d. Cannot be used to prepare financial statements.
31. An entity is preparing the annual financial statements based in the adjusted trial balance.
Which financial statement shall be prepared first?
a. Statement of financial position
b. Income statement
c. Retained earnings statement
d. There is no particular order because any financial statement may be prepared first once the
adjusted trial balance is prepared
32. Which of the following statements best describes the purpose of closing entries?
a. To facilitate posting and taking a trial balance.
b. To determine the amount of net income or net loss for the period.
c. To reduce the balances of temporary accounts to zero so that may be used to accumulate the
revenue, expenses, and dividends of the next period.
d. To complete the record of various transactions that were started in a prior period.
33. Which type of account is always debited during the closing process?
a. Dividends
b. Expense
c. Revenue
d. Retained earnings
34. The dividends declared account is a nominal account and
a. Carried forward to the next accounting period
b. Closed directly to retained earnings
c. Closed directly to income
d. Closed directly to share capital
35. The post closing trial balance
a. Consists if statements of financial position accounts only.
b. Will balance if a transaction is not journalized and posted, or if a transaction is journalized and
posted twice.
c. Shows that the accounting equation is in balance at the end of accounting period.
d. All of the choices are correct regarding the postclosing trial balance.
36. The postclosing trial balance
a. Provides a convenient listing of account balances that can be used to prepare the financial
statements.
b. Does not include nominal accounts.
c. Is identical to the statement of financial position
d. Proves that accounts have been closed properly.
37. Reversing entries
a. Are normally prepared for accrued, prepared and estimated items.
b. Are necessary to achieve a proper matching of revenue and expense
c. Are desirable to exercise consistency and establish standardized procedures.
d. Must be made at year-end
38. Adjusting entries that should be reversed include
a. All accrued revenue
b. All accrued expenses
c. Those that debit an asset or credit a liability
d. All of these
39. A reversing entry should never be made for an adjusting entry that
a. Accrues unrecorded revenue.
b. Adjusts expired costs from an asset account to an expense account.
c. Accrues unrecorded expenses
d. Adjusts unexpired costs from an expense account to an asset account.
40. Reversing entries apply to
a. All adjusting entries
b. All deferrals
c. All accruals
d. All closing entries