Financial Accounting Exam 1 Study Guide: Key Concepts
& Terms (2026/2027)
Foundations of Financial Accounting | Key Domains: The Accounting Equation & Financial
Statements, Transaction Analysis & Double-Entry Accounting, The Accounting Cycle (Journalizing,
Posting, Trial Balance), Adjusting Entries & Accrual Basis Accounting, and Closing the Books |
Expert-Aligned Structure | Comprehensive Study Guide Format
Introduction
This structured Financial Accounting Exam 1 Study Guide for 2026/2027 provides a focused review
of foundational accounting concepts and terminology. It emphasizes the mechanics of the
accounting cycle, the principles of accrual accounting, and the preparation of core financial
statements, establishing the essential framework for all subsequent financial accounting topics.
Guide Structure:
● Key Concepts & Terms Review: (FOUNDATIONAL ACCOUNTING DOMAINS)
● Integrated Practice Items: (80 TERM IDENTIFICATION & CYCLE PROBLEMS)
Answer Format
All correct terms and accounting cycle steps must appear in bold and cyan blue, accompanied by
concise rationales explaining the definition of the accounting term (e.g., "Debit," "Revenue," "Trial
Balance"), its role in the accounting equation or financial statement, the correct application of a rule
(e.g., debit/credit rules for a specific transaction), and why alternative definitions or applications
violate fundamental accounting principles.
1. The fundamental accounting equation is:
● A. Assets + Liabilities = Equity
● B. Assets = Liabilities – Equity
● C. Assets = Liabilities + Equity
● D. Equity = Assets + Liabilities
C. Assets = Liabilities + Equity
This equation is the foundation of double-entry accounting. It states that a company’s resources
(assets) are financed either by creditors (liabilities) or owners (equity). Every transaction must keep
this equation in balance.
2. A debit entry will increase which of the following accounts?
, ● A. Accounts Payable
● B. Common Stock
● C. Cash
● D. Service Revenue
C. Cash
Cash is an asset account. Asset accounts increase with a debit and decrease with a credit. Liabilities,
equity, and revenue accounts increase with credits, not debits.
3. Which financial statement reports a company’s financial position at a specific point in
time?
● A. Income Statement
● B. Statement of Cash Flows
● C. Balance Sheet
● D. Statement of Retained Earnings
C. Balance Sheet
The balance sheet (or statement of financial position) shows assets, liabilities, and equity as of a
specific date (e.g., December 31). The income statement and statement of retained earnings cover a
period of time.
4. The process of recording a transaction in the journal is called:
● A. Posting
● B. Journalizing
● C. Balancing
● D. Classifying
B. Journalizing
Journalizing is the first step in the accounting cycle, where transactions are recorded chronologically
in the general journal with debits and credits. Posting transfers these entries to the ledger accounts.
5. A trial balance is prepared to:
● A. Ensure total debits equal total credits
● B. Prepare financial statements
● C. Close temporary accounts
● D. Reconcile bank statements
A. Ensure total debits equal total credits
, The trial balance lists all ledger account balances to verify that the sum of debit balances equals the
sum of credit balances. While it helps detect some errors, it does not catch all (e.g., omitted
transactions or incorrect accounts).
6. Under accrual accounting, revenue is recognized when:
● A. Cash is received
● B. A contract is signed
● C. The earnings process is complete and collectibility is reasonably assured
● D. Goods are shipped
C. The earnings process is complete and collectibility is reasonably assured
The revenue recognition principle requires that revenue be recorded when it is earned (performance
obligation satisfied), not when cash is received. This is a cornerstone of accrual accounting under
GAAP.
7. An adjusting entry for accrued salaries would include a:
● A. Debit to Salaries Expense and a credit to Salaries Payable
● B. Debit to Salaries Payable and a credit to Salaries Expense
● C. Debit to Cash and a credit to Salaries Expense
● D. Debit to Salaries Expense and a credit to Cash
A. Debit to Salaries Expense and a credit to Salaries Payable
Accrued salaries represent wages earned by employees but not yet paid. The adjusting entry recognizes
the expense (debit Salaries Expense) and the liability (credit Salaries Payable) to match the cost with
the period benefited.
8. Which of the following is a temporary account?
● A. Cash
● B. Accounts Receivable
● C. Rent Expense
● D. Common Stock
C. Rent Expense
Temporary accounts (revenues, expenses, dividends) are closed at the end of the accounting period to
zero their balances. Permanent accounts (assets, liabilities, equity except retained earnings) carry
forward to the next period.
9. The closing process involves transferring the balances of temporary accounts to:
● A. Cash
& Terms (2026/2027)
Foundations of Financial Accounting | Key Domains: The Accounting Equation & Financial
Statements, Transaction Analysis & Double-Entry Accounting, The Accounting Cycle (Journalizing,
Posting, Trial Balance), Adjusting Entries & Accrual Basis Accounting, and Closing the Books |
Expert-Aligned Structure | Comprehensive Study Guide Format
Introduction
This structured Financial Accounting Exam 1 Study Guide for 2026/2027 provides a focused review
of foundational accounting concepts and terminology. It emphasizes the mechanics of the
accounting cycle, the principles of accrual accounting, and the preparation of core financial
statements, establishing the essential framework for all subsequent financial accounting topics.
Guide Structure:
● Key Concepts & Terms Review: (FOUNDATIONAL ACCOUNTING DOMAINS)
● Integrated Practice Items: (80 TERM IDENTIFICATION & CYCLE PROBLEMS)
Answer Format
All correct terms and accounting cycle steps must appear in bold and cyan blue, accompanied by
concise rationales explaining the definition of the accounting term (e.g., "Debit," "Revenue," "Trial
Balance"), its role in the accounting equation or financial statement, the correct application of a rule
(e.g., debit/credit rules for a specific transaction), and why alternative definitions or applications
violate fundamental accounting principles.
1. The fundamental accounting equation is:
● A. Assets + Liabilities = Equity
● B. Assets = Liabilities – Equity
● C. Assets = Liabilities + Equity
● D. Equity = Assets + Liabilities
C. Assets = Liabilities + Equity
This equation is the foundation of double-entry accounting. It states that a company’s resources
(assets) are financed either by creditors (liabilities) or owners (equity). Every transaction must keep
this equation in balance.
2. A debit entry will increase which of the following accounts?
, ● A. Accounts Payable
● B. Common Stock
● C. Cash
● D. Service Revenue
C. Cash
Cash is an asset account. Asset accounts increase with a debit and decrease with a credit. Liabilities,
equity, and revenue accounts increase with credits, not debits.
3. Which financial statement reports a company’s financial position at a specific point in
time?
● A. Income Statement
● B. Statement of Cash Flows
● C. Balance Sheet
● D. Statement of Retained Earnings
C. Balance Sheet
The balance sheet (or statement of financial position) shows assets, liabilities, and equity as of a
specific date (e.g., December 31). The income statement and statement of retained earnings cover a
period of time.
4. The process of recording a transaction in the journal is called:
● A. Posting
● B. Journalizing
● C. Balancing
● D. Classifying
B. Journalizing
Journalizing is the first step in the accounting cycle, where transactions are recorded chronologically
in the general journal with debits and credits. Posting transfers these entries to the ledger accounts.
5. A trial balance is prepared to:
● A. Ensure total debits equal total credits
● B. Prepare financial statements
● C. Close temporary accounts
● D. Reconcile bank statements
A. Ensure total debits equal total credits
, The trial balance lists all ledger account balances to verify that the sum of debit balances equals the
sum of credit balances. While it helps detect some errors, it does not catch all (e.g., omitted
transactions or incorrect accounts).
6. Under accrual accounting, revenue is recognized when:
● A. Cash is received
● B. A contract is signed
● C. The earnings process is complete and collectibility is reasonably assured
● D. Goods are shipped
C. The earnings process is complete and collectibility is reasonably assured
The revenue recognition principle requires that revenue be recorded when it is earned (performance
obligation satisfied), not when cash is received. This is a cornerstone of accrual accounting under
GAAP.
7. An adjusting entry for accrued salaries would include a:
● A. Debit to Salaries Expense and a credit to Salaries Payable
● B. Debit to Salaries Payable and a credit to Salaries Expense
● C. Debit to Cash and a credit to Salaries Expense
● D. Debit to Salaries Expense and a credit to Cash
A. Debit to Salaries Expense and a credit to Salaries Payable
Accrued salaries represent wages earned by employees but not yet paid. The adjusting entry recognizes
the expense (debit Salaries Expense) and the liability (credit Salaries Payable) to match the cost with
the period benefited.
8. Which of the following is a temporary account?
● A. Cash
● B. Accounts Receivable
● C. Rent Expense
● D. Common Stock
C. Rent Expense
Temporary accounts (revenues, expenses, dividends) are closed at the end of the accounting period to
zero their balances. Permanent accounts (assets, liabilities, equity except retained earnings) carry
forward to the next period.
9. The closing process involves transferring the balances of temporary accounts to:
● A. Cash
