ABA Bookkeeping & General Ledger 3 — Questions and Answers
Question 1: Which of the following is an example of a reversing entry?
- Closing dividends to retained earnings at year-end
- Reversing an accrued expense entry at the start of the next period (Correct answer)
- Correcting a posting error in the general ledger
- Recording depreciation at the end of a period
Correct answer: Reversing an accrued expense entry at the start of the next period
Reversing entries are made at the beginning of a new period to cancel out accruals recorded in the prior period, simplifying subsequent cash entries.
Question 2: In a perpetual inventory system, when merchandise is sold, the bookkeeper records:
- Only a sales entry
- Only a cost of goods sold entry
- Both a sales entry and a cost of goods sold entry simultaneously (Correct answer)
- An inventory adjustment entry at year-end only
Correct answer: Both a sales entry and a cost of goods sold entry simultaneously
A perpetual system updates inventory and records cost of goods sold at each sale, unlike the periodic system which updates only at period-end.
Question 3: What does a credit balance in Accounts Receivable typically indicate?
- The customer owes additional money
- An overpayment or advance payment by the customer (Correct answer)
- The account is past due
- A discount has been applied
Correct answer: An overpayment or advance payment by the customer
A credit balance in Accounts Receivable usually means a customer has overpaid or paid in advance, creating a liability to the company.
Question 4: Bank reconciliation adjustments for deposits in transit should be:
- Added to the bank statement balance (Correct answer)
- Subtracted from the bank statement balance
- Added to the book balance
- Subtracted from the book balance
Correct answer: Added to the bank statement balance
Deposits in transit have been recorded in the books but not yet processed by the bank, so they are added to the bank statement balance.
Question 5: Which of the following accounts is NOT closed at the end of the accounting period?
- Service Revenue
- Wages Expense
- Dividends
- Prepaid Insurance (Correct answer)
Correct answer: Prepaid Insurance
Prepaid Insurance is a permanent (real) asset account that carries its balance forward to the next period and is not closed.
Question 6: The double-entry bookkeeping principle requires that:
- Every transaction is recorded twice in the same account
- Every transaction affects at least two accounts keeping the equation balanced (Correct answer)
- Debits must always exceed credits
- All entries must be approved by two bookkeepers
Correct answer: Every transaction affects at least two accounts keeping the equation balanced
Double-entry bookkeeping records each transaction in two or more accounts so that total debits always equal total credits.
Question 7: A purchase return of $200 merchandise (originally bought on credit) is recorded as:
- Debit Accounts Payable $200, Credit Purchases Returns & Allowances $200 (Correct answer)
- Debit Purchases $200, Credit Accounts Payable $200
- Debit Accounts Receivable $200, Credit Sales Returns $200
- Debit Cash $200, Credit Accounts Payable $200
Correct answer: Debit Accounts Payable $200, Credit Purchases Returns & Allowances $200
Returning goods purchased on credit reduces the liability (debit Accounts Payable) and records the reduction in net purchases (credit Purchase Returns & Allowances).
ABA Bookkeeping & General Ledger 3
Which of the following is an example of a reversing entry?