The Accounting Equation (Q1-20## Section
1: Foundational Concepts &)
**Q1: What is the primary purpose of accounting?**
A) To prepare tax documents
B) To provide financial information for decision-making
C) To manage company payroll
D) To conduct financial audits
**Answer: B) To provide financial information for decision-making**
*Rationale: Accounting's core function is to identify, record, and
communicate financial information useful to internal and external
stakeholders for making informed economic decisions .*
---
**Q2: Which accounting principle dictates that expenses should be
recorded in the same period as the revenues they helped
generate?**
A) Revenue Recognition Principle
B) Cost Principle
C) Matching Principle
,D) Full Disclosure Principle
**Answer: C) Matching Principle**
*Rationale: The matching principle is a cornerstone of accrual
accounting. It requires expenses to be "matched" with the revenues
they produce to calculate accurate net income for the period .*
---
**Q3: What is the accounting equation?**
A) Assets = Liabilities + Revenue
B) Assets = Liabilities + Owner's Equity
C) Assets = Expenses + Owner's Equity
D) Assets + Liabilities = Owner's Equity
**Answer: B) Assets = Liabilities + Owner's Equity**
*Rationale: The accounting equation is the foundation of double-
entry bookkeeping: Assets = Liabilities + Owner's Equity. This
equation must always remain balanced .*
---
,**Q4: Which of the following accounts has a normal debit
balance?**
A) Accounts Payable
B) Common Stock
C) Accounts Receivable
D) Service Revenue
**Answer: C) Accounts Receivable**
*Rationale: Assets and expenses have normal debit balances.
Accounts Receivable is an asset account .*
---
**Q5: Which account has a normal credit balance?**
A) Cash
B) Salaries Expense
C) Accounts Payable
D) Dividends
**Answer: C) Accounts Payable**
*Rationale: Liabilities, equity, and revenue accounts have normal
credit balances. Accounts Payable is a liability .*
, ---
**Q6: Which of the following is a liability account?**
A) Prepaid Insurance
B) Service Revenue
C) Common Stock
D) Notes Payable
**Answer: D) Notes Payable**
*Rationale: Notes Payable represents a formal written promise to pay
a specific amount on a future date, making it a liability .*
---
**Q7: What is the effect of a company receiving cash from a bank
loan?**
A) Increase assets, increase liabilities
B) Increase assets, decrease liabilities
C) Decrease assets, increase liabilities
D) No effect on total assets
**Answer: A) Increase assets, increase liabilities**
1: Foundational Concepts &)
**Q1: What is the primary purpose of accounting?**
A) To prepare tax documents
B) To provide financial information for decision-making
C) To manage company payroll
D) To conduct financial audits
**Answer: B) To provide financial information for decision-making**
*Rationale: Accounting's core function is to identify, record, and
communicate financial information useful to internal and external
stakeholders for making informed economic decisions .*
---
**Q2: Which accounting principle dictates that expenses should be
recorded in the same period as the revenues they helped
generate?**
A) Revenue Recognition Principle
B) Cost Principle
C) Matching Principle
,D) Full Disclosure Principle
**Answer: C) Matching Principle**
*Rationale: The matching principle is a cornerstone of accrual
accounting. It requires expenses to be "matched" with the revenues
they produce to calculate accurate net income for the period .*
---
**Q3: What is the accounting equation?**
A) Assets = Liabilities + Revenue
B) Assets = Liabilities + Owner's Equity
C) Assets = Expenses + Owner's Equity
D) Assets + Liabilities = Owner's Equity
**Answer: B) Assets = Liabilities + Owner's Equity**
*Rationale: The accounting equation is the foundation of double-
entry bookkeeping: Assets = Liabilities + Owner's Equity. This
equation must always remain balanced .*
---
,**Q4: Which of the following accounts has a normal debit
balance?**
A) Accounts Payable
B) Common Stock
C) Accounts Receivable
D) Service Revenue
**Answer: C) Accounts Receivable**
*Rationale: Assets and expenses have normal debit balances.
Accounts Receivable is an asset account .*
---
**Q5: Which account has a normal credit balance?**
A) Cash
B) Salaries Expense
C) Accounts Payable
D) Dividends
**Answer: C) Accounts Payable**
*Rationale: Liabilities, equity, and revenue accounts have normal
credit balances. Accounts Payable is a liability .*
, ---
**Q6: Which of the following is a liability account?**
A) Prepaid Insurance
B) Service Revenue
C) Common Stock
D) Notes Payable
**Answer: D) Notes Payable**
*Rationale: Notes Payable represents a formal written promise to pay
a specific amount on a future date, making it a liability .*
---
**Q7: What is the effect of a company receiving cash from a bank
loan?**
A) Increase assets, increase liabilities
B) Increase assets, decrease liabilities
C) Decrease assets, increase liabilities
D) No effect on total assets
**Answer: A) Increase assets, increase liabilities**
