Answer Key & Explanations
Basic Accounting Cycle (1-10)
1. C - The first step is collecting source documents, as they provide evidence of financial
transactions.
2. B - An unadjusted trial balance ensures that total debits equal total credits before
adjustments.
3. A - Posting is the process of transferring transactions from the journal to the ledger.
4. B - The income statement reports revenues and expenses to determine profit or loss.
5. C - Adjusting entries ensure revenues and expenses are recorded in the correct period.
6. B - After preparing financial statements, closing entries are made to reset temporary
accounts.
7. C - The last step is making reversing entries, which simplify future transactions.
8. A - Closing entries transfer temporary account balances to permanent accounts.
9. B - A trial balance checks that total debits equal total credits.
10. C - A cash budget is a management tool, not a financial statement.
Rules of Debit and Credit (11-20)
11. B - A transaction is any event that changes the financial position of a business.
12. A - Assets normally have a debit balance because they increase on the left side.
13. B - In a T-account, credits appear on the right side.
14. B - An increase in liabilities is recorded as a credit.
15. B - Revenue accounts typically have a credit balance.
16. B - Owner's withdrawals are recorded in the drawings account.
17. B - A decrease in owner’s equity is recorded as a debit.
18. B - The accounting equation is Assets = Liabilities + Owner’s Equity.
19. B - Accounts receivable records revenue earned but not yet received.
20. B - A credit increases liabilities, such as accounts payable.
Journalizing and Posting Transactions (21-30)
21. B - Accounts receivable is an asset account because it represents money owed to the
business.
22. C - A journal entry is a formal record of a transaction.
23. A - A debit to cash increases cash.
24. C - Buying equipment on credit increases equipment (debit) and accounts payable
(credit).
25. C - Prepaid expenses need adjusting entries as they are initially recorded as assets.
26. A - Accrued expenses are incurred but not yet paid.
27. C - When a customer pays, accounts receivable decreases (credit), and cash increases
(debit).
28. C - Depreciation is an expense that reduces net income over time.
29. B - Prepaid rent is recorded as an asset because it is paid in advance.
30. C - When supplies are used, the supplies account decreases.
Advanced Accounting Concepts (31-40)
31. B - The balance sheet shows financial position at a specific date.
32. B - Expense accounts normally have debit balances.
33. B - A ledger contains a record of transactions for each account.
34. A - Accrued revenues are earned but not yet received.
35. A - Interest expense (debit) and cash (credit) are affected when paying loan interest.
36. B - If liabilities increase by P5,000 and equity decreases by P3,000, assets must increase
by P2,000 to balance.
37. C - Accounts payable is a liability, not an asset.
38. C - The matching principle ensures expenses are recorded in the same period as related
revenue.
39. B - Financial statements provide useful information to users, such as investors and
management.
40. B - The revenue recognition principle states that revenue is recorded when earned, not
when cash is received.
