Basic Accounting Practice Quiz for Students

The accounting equation, Assets = Liabilities + Equity, reflects the fundamental relationship between a company's resources, obligations, and owners' interests. It forms the basis of the double-entry bookkeeping system.

Liabilities represent the obligations a company owes to creditors. Accounts Payable is a common liability that appears on the balance sheet.

Debits are used to increase asset and expense accounts in accounting, which is a fundamental concept in double-entry bookkeeping. Credits, on the other hand, typically decrease these accounts.

The balance sheet provides a snapshot of a company's assets, liabilities, and equity at a specific point in time. This statement is key for assessing the overall financial health of the business.

The journal is used for initially recording all transactions in chronological order before they are posted to the ledger. This systematic recording helps maintain accurate financial records.

Accrual accounting recognizes revenues and expenses when they are earned or incurred, not necessarily when cash is received or paid. This method provides a more accurate depiction of a company's financial performance over a period.

The ledger is a detailed record that contains all accounts of a company, grouping together historical transaction information by account. It serves as the central repository for transferring data from the journal.

Double-entry bookkeeping requires that every transaction has a dual effect: one account is debited and another is credited, ensuring that the total debits equal total credits. This system helps maintain the integrity of the accounting equation.

Revenue accounts normally carry a credit balance because increases in revenue are recorded as credits. This is a standard convention in accounting that distinguishes income from expense and asset accounts.

A trial balance is prepared to ensure that the sum of debits equals the sum of credits after all transactions have been posted to the ledger. This verification process helps identify posting errors before financial statements are generated.

When an owner invests cash into the business, it increases the owner's equity. This transaction directly contributes additional capital to the company rather than affecting assets or liabilities in a way that would reduce equity.

Depreciation spreads the cost of a fixed asset over its useful life, which helps match the expense with the revenue generated by the asset. This allocation not only reduces taxable income over time but also provides a realistic view of asset value on the balance sheet.

A contra account is created to offset the balance of a related account, such as accumulated depreciation offsetting the value of fixed assets. This approach helps present net values that are more informative on financial statements.

Cash accounting records transactions only when cash is exchanged, which makes it simpler and more straightforward. However, it may not accurately reflect a company's financial position compared to the accrual method.

Financial statements summarize a company's overall performance and its financial position, offering key insights to investors, creditors, and management. They condense complex records into clear, structured reports.

Using the straight-line method, depreciation is calculated by subtracting the salvage value from the cost and then dividing by the useful life. In this case, ($50,000 - $5,000) / 5 equals $9,000 per year.

Accrual accounting recognizes revenue when it is earned, regardless of when cash is received. Since the service was performed in December, that is when the revenue should be recorded.

Bank reconciliation is the process of comparing the cash balance on a company's books with the amount shown on the bank statement. This ensures that any discrepancies, such as outstanding checks or bank fees, are identified and corrected.

Adjusting entries ensure that the revenues earned and expenses incurred during a period are properly recorded, even if cash has not yet been exchanged. This aligns the financial statements with the accrual basis of accounting.

A post-closing trial balance is prepared after all temporary accounts have been closed, meaning only permanent (balance sheet) accounts remain. This ensures that only accounts with ongoing balances are carried into the next period.