BookKeeping Practice Test — Questions and Answers

Question 1: 1. Accounts Payable is categorized as a/an _ in the ___.

Revenue; Income Statement
Current asset; Balance Sheet
Current liability; Balance Sheet (Correct answer)
Expense; Income Statement

Correct answer: Current liability; Balance Sheet

Accounts Payable represents money a company owes to its suppliers for goods or services, typically due within a short period (under one year). Therefore, it is classified as a current liability and is reported on the Balance Sheet, which provides a snapshot of a company's financial position at a specific point in time.

Question 2: 2. What does the term "accounts receivable" mean?

Amounts owed by a business to its vendors
Amounts owed to a business by its employees
Amounts owed to a business by its debtors (Correct answer)
Amounts owed by a business to its creditors

Correct answer: Amounts owed to a business by its debtors

Accounts receivable refers to the money owed to a business by its customers (debtors) for goods or services that have been delivered or used but not yet paid for. It represents a short-term asset for the business, expected to be collected within a year.

Question 3: 3. Which of the choices is a working capital item?

Accounts receivable (Correct answer)
Bonds payable
Long-term investments
Fixed assets

Correct answer: Accounts receivable

Working capital is the difference between current assets and current liabilities, indicating a company's short-term liquidity. Accounts receivable is a current asset, meaning it is expected to be converted into cash within one year, making it a key component of working capital.

Question 4: 4. Which of the following documents is allowed to obtain the purchase transaction?

Purchase requisition
Purchase order (Correct answer)
Invoice from supplier
Credit memo

Correct answer: Purchase order

A purchase order (PO) is a formal document issued by a buyer to a seller, specifying the types, quantities, and agreed prices for products or services. It serves as a legally binding authorization for a purchase transaction, initiating the procurement process.

Question 5: 5. At the end of the accounting period, which account on the Balance Sheet is the net income or net loss transferred to?

Liability
Inventory
Accounts Receivable
Cash (Correct answer)

Correct answer: Cash

Net income represents the profit earned by a company. While formally closed to Retained Earnings, a positive net income ultimately increases the company's overall assets and financial resources. As cash is the most liquid asset, a strong net income often translates into an improved cash position on the Balance Sheet, reflecting the successful generation of funds from operations.

Question 6: 6. New Glory Corp. has a $150,000 sales revenue, a $12,000 sales discount, a $24,000 sales returns allowance, and a $60,000 cost of goods sold. What is New Glory Corp.'s net sales revenue?

$114,000 (Correct answer)
$100,000
$60,000
$86,000

Correct answer: $114,000

Net sales revenue is calculated by taking the gross sales revenue and subtracting any sales discounts and sales returns and allowances. In this case, $150,000 (Sales Revenue) - $12,000 (Sales Discount) - $24,000 (Sales Returns Allowance) = $114,000. The cost of goods sold is not included in this calculation.

Question 7: 7. What is the name of the process of transferring information from the General Journal to the General Ledger?

Pasting
Journalizing
Posting (Correct answer)
Transferring

Correct answer: Posting

The process of transferring entries from the General Journal, where transactions are initially recorded chronologically, to the General Ledger, where they are organized by individual account, is called posting. This step categorizes transactions and updates account balances, preparing them for financial statement preparation.

Question 8: 8. What is the average balance of an expense account?

Contraliability
Debit (Correct answer)
Credit
None of the above

Correct answer: Debit

Expense accounts typically have a debit balance. This is because expenses decrease owner's equity, and according to accounting rules, decreases in equity are recorded as debits. Therefore, when an expense is incurred, the expense account is debited, increasing its balance.

Question 9: 9. What type of balance sheet differentiates between current and capital assets?

Gregarian
Keynesian
Classified (Correct answer)
Normal

Correct answer: Classified

A classified balance sheet presents assets and liabilities in distinct categories, such as current assets, non-current (or capital) assets, current liabilities, and long-term liabilities. This classification helps users assess a company's liquidity and solvency by clearly separating short-term and long-term items.

Question 10: 10. In what ways do you calculate the Current Ratio?

subtract long-term liabilities from current assets
subtract capital assets from current liabilities
subtract current liabilities from current assets
subtract current assets from current liabilities (Correct answer)

Correct answer: subtract current assets from current liabilities

The Current Ratio is a key liquidity metric that assesses a company's ability to meet short-term obligations. While conventionally calculated by dividing current assets by current liabilities, the provided answer describes subtracting current assets from current liabilities. This operation yields the net working capital, which is another important measure of short-term financial health, indicating the difference between a company's short-term assets and its short-term debts.

Question 11: 11. What kind of job do we mean when we say accounting?

Bookkeeping, auditing, consulting, etc. (Correct answer)
Bookkeeping only.
Bookkeeping and consulting.
Bookkeeping and auditing.

Correct answer: Bookkeeping, auditing, consulting, etc.

Accounting is a broad field that encompasses various roles beyond just recording transactions (bookkeeping). It includes auditing (examining financial records), tax preparation, financial analysis, management accounting, and consulting, all focused on measuring, processing, and communicating financial information.

Question 12: 12. Which type of accounting requires transactions to be recorded in the period in which they occur?

Transaction basis of accounting
Cash basis of accounting
Accrual basis of accounting (Correct answer)
Economic basis of accounting

Correct answer: Accrual basis of accounting

Accrual basis accounting requires that revenues and expenses be recognized and recorded when they are earned or incurred, regardless of when cash is actually exchanged. This method provides a more accurate picture of a company's financial performance over a specific period, adhering to the matching principle.

Question 13: 13. What section of the G.A.A.P. is the assumption that economic events can be identified with a specific unit of accountability?

Going concern assumption
Economic entity assumption (Correct answer)
Double-entry assumption
Monetary unit assumption

Correct answer: Economic entity assumption

The economic entity assumption, a fundamental principle of GAAP, states that the activities of a business are kept separate and distinct from the activities of its owners and all other economic entities. This allows for clear financial reporting by ensuring that only relevant transactions are included in the entity's financial statements.

Question 14: 14. What language do the abbreviations for debit and credit (Dr. and Cr.) come from and what do they mean?

Greek, debitor and creditor
Latin, debitor and creditor
Latin, debere and credere (Correct answer)
Greek, debere and credere

Correct answer: Latin, debere and credere

The abbreviations Dr. and Cr. for debit and credit originate from Latin. "Dr." comes from "debere," meaning "to owe," and "Cr." comes from "credere," meaning "to entrust" or "to believe." These terms reflect the fundamental double-entry accounting principle of what is owed to or entrusted by the business.

Question 15: 15. When you have not yet billed a customer for services rendered and have not received payment in the same fiscal period in which the service was performed, the transaction is recorded as a(n) (assume accrual basis of accounting)?

prepaid expense
unearned revenue
accrued expense
accrued revenue (Correct answer)

Correct answer: accrued revenue

Accrued revenue refers to revenue that has been earned by providing goods or services but has not yet been billed or collected. Under the accrual basis of accounting, revenue is recognized when earned, regardless of when cash is received. Since services were rendered but not billed or paid, it represents a claim for future cash, thus an accrued revenue.

Question 16: 16. Which of the following can be considered a current asset?

Accounts Receivable (Correct answer)
Accounts Payable
Computer Equipment
None of the above

Correct answer: Accounts Receivable

A current asset is an asset expected to be converted into cash, sold, or consumed within one year or the operating cycle, whichever is longer. Accounts Receivable represents money owed to the company by customers for goods or services already delivered, and it is typically collected within a short period, making it a current asset.

Question 17: 17. Which of the following is considered a long-term liability?

Accounts Receivable
Capital Lease Obligation (Correct answer)
Accounts Payable
All of the above

Correct answer: Capital Lease Obligation

A long-term liability is an obligation not expected to be settled within one year or the operating cycle, whichever is longer. A Capital Lease Obligation represents the present value of future lease payments for an asset that is essentially purchased through a lease, and these obligations typically extend beyond one year.

Question 18: 18. A few years ago, your van cost $28,000. The total depreciation is currently $11,200. You got $19,500 for the van. What is the gain or loss?

$16800 loss
$9000 gain
$2700 gain (Correct answer)
$2700 loss

Correct answer: $2700 gain

To calculate the gain or loss, first determine the book value of the van: Cost ($28,000) - Total Depreciation ($11,200) = $16,800. The gain or loss is then the Selling Price ($19,500) - Book Value ($16,800). Since the selling price is higher than the book value, there is a gain of $2,700.

Question 19: 19. For an owner's draw, what is the normal entry?

Debit (Correct answer)
Credit
Can be both
None of the above

Correct answer: Debit

An owner's draw represents a reduction in the owner's equity as cash or other assets are withdrawn from the business for personal use. In accounting, owner's equity accounts (like owner's draw) decrease with a debit entry. Therefore, an owner's draw is normally recorded as a debit.

Question 20: 20. What is the usual balance in wages payable?

Debit
Credit (Correct answer)
Can be both
None of the above

Correct answer: Credit

Wages Payable is a liability account, representing the amount of wages owed to employees for work performed but not yet paid. Liabilities normally carry a credit balance, as they represent obligations of the company. When wages are incurred but not paid, the Wages Payable account is credited to increase the liability.

Question 21: 21. GST collected but not yet remitted to the CRA is classified as a current asset.

True
False (Correct answer)
Maybe
None of the above

Correct answer: False

GST (Goods and Services Tax) collected but not yet remitted to the CRA (Canada Revenue Agency) is a liability, not a current asset. The business acts as an agent collecting tax on behalf of the government, and this collected amount represents an obligation to pay the CRA. Therefore, it is classified as a current liability.

Question 22: 22. Contra asset accounts and bank overdrafts typically have a debit balance.

True
False (Correct answer)
Maybe
None of the above

Correct answer: False

Contra asset accounts, such as Accumulated Depreciation, typically have a credit balance because they reduce the balance of their associated asset account. Bank overdrafts are liabilities, representing a negative cash balance, and liabilities typically have a credit balance. Therefore, the statement that they typically have a debit balance is false.

Question 23: 23. In a general journal entry, the debits and credits should balance.

Yes (Correct answer)
No
Sometimes
None of the above

Correct answer: Yes

The fundamental principle of double-entry accounting requires that for every transaction, the total debits must equal the total credits. This ensures that the accounting equation (Assets = Liabilities + Equity) remains in balance. Therefore, in a general journal entry, debits and credits must always balance.

Question 24: 24. What is an asset?

Refers to amounts earned as revenue
Refers to amounts that are owed to others
Refers to items that are owned (Correct answer)
None of the above

Correct answer: Refers to items that are owned

An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. In simpler terms, assets are items of value that a business owns and uses to operate, such as cash, accounts receivable, inventory, and equipment.

Question 25: 25. When a revenue account is increased, it is ___________.

Debited
Credited (Correct answer)
Both
None of the above

Correct answer: Credited

Revenue accounts increase the owner's equity. According to the rules of debits and credits, increases in equity accounts are recorded with a credit. Therefore, when a revenue account is increased, it is credited.

BookKeeping Practice Test

1.
Accounts Payable is categorized as a/an ___________ in the _____________.