CPB / BookKeeping Bookkeeping Cycle 4 — Questions and Answers
Question 1: What is the effect on the accounting equation when a business pays a liability in cash?
- Assets decrease and liabilities decrease (Correct answer)
- Assets decrease and equity decreases
- Assets decrease and liabilities increase
- Liabilities decrease and equity increases
Correct answer: Assets decrease and liabilities decrease
Paying a liability reduces Cash (asset) and reduces the corresponding liability, keeping the equation balanced.
Question 2: Which of the following is an example of an accrued revenue adjusting entry?
- Debit Accounts Receivable; Credit Service Revenue (Correct answer)
- Debit Service Revenue; Credit Accounts Receivable
- Debit Cash; Credit Unearned Revenue
- Debit Unearned Revenue; Credit Service Revenue
Correct answer: Debit Accounts Receivable; Credit Service Revenue
Accrued revenue records earnings that have been earned but not yet billed or collected by debiting a receivable and crediting revenue.
Question 3: The Income Summary account is used during which phase of the bookkeeping cycle?
- Closing entries (Correct answer)
- Adjusting entries
- Posting
- Journalizing
Correct answer: Closing entries
Income Summary is a temporary account used during closing entries to transfer net income or loss to Retained Earnings.
Question 4: A worksheet is used in the bookkeeping cycle primarily to:
- Organize data before preparing formal financial statements (Correct answer)
- Replace the general ledger
- Record adjusting entries permanently
- Post transactions to accounts
Correct answer: Organize data before preparing formal financial statements
A worksheet is an informal working document that helps bookkeepers organize trial balance, adjustments, and financial statement columns before formal preparation.
Question 5: Under accrual accounting, when is revenue recognized?
- When earned, regardless of when cash is received (Correct answer)
- When cash is collected from the customer
- When the invoice is sent to the customer
- When the fiscal year ends
Correct answer: When earned, regardless of when cash is received
The revenue recognition principle requires revenue to be recorded when it is earned, not necessarily when cash changes hands.
Question 6: Which entry closes the Dividends account at the end of the period?
- Debit Retained Earnings; Credit Dividends (Correct answer)
- Debit Dividends; Credit Retained Earnings
- Debit Income Summary; Credit Dividends
- Debit Dividends; Credit Income Summary
Correct answer: Debit Retained Earnings; Credit Dividends
Dividends reduce retained earnings, so closing requires debiting Retained Earnings and crediting the Dividends account to bring it to zero.
Question 7: A business has $800 in Unearned Revenue. By year-end, $500 of services have been performed. The adjusting entry is:
- Debit Unearned Revenue $500; Credit Service Revenue $500 (Correct answer)
- Debit Service Revenue $500; Credit Unearned Revenue $500
- Debit Cash $500; Credit Service Revenue $500
- Debit Unearned Revenue $800; Credit Service Revenue $800
Correct answer: Debit Unearned Revenue $500; Credit Service Revenue $500
The portion of unearned revenue that has been earned ($500) is recognized by debiting the liability and crediting revenue.
CPB / BookKeeping Bookkeeping Cycle 4
What is the effect on the accounting equation when a business pays a liability in cash?