Chapter 3

1. What does the accounting equation state?

o A) Assets = Revenue + Expenses
o B) Assets = Liabilities + Capital
o C) Liabilities = Assets - Capital
o D) Capital = Assets + Liabilities
2. If a business has assets worth 25,000andliabilitiesof25,000 and liabilities of
25,000andliabilitiesof15,000, what is the capital?
o A) $10,000
o B) $15,000
o C) $25,000
o D) $40,000
3. In the accounting equation, what is the relationship between assets and capital?
o A) Assets are always greater than capital
o B) Assets minus liabilities equal capital
o C) Assets equal liabilities plus revenue
o D) Capital is independent of assets
4. What effect does every transaction have on a business?
o A) It only increases assets
o B) It increases or decreases assets, liabilities, or capital
o C) It only affects liabilities
o D) It does not affect capital
5. What is the duality concept in accounting?
o A) Every transaction has a single effect
o B) Every transaction has a dual effect recorded in two accounts
o C) Only cash transactions are recorded
o D) All transactions are recorded in one account
6. When a sole trader introduces capital into their business, which accounts are
affected?
o A) Cash and Expenses
o B) Cash and Capital
o C) Capital and Liabilities
o D) Expenses and Liabilities
7. If a business buys inventory for cash, what is the effect on the accounting equation?
o A) Total assets increase
o B) Total assets remain unchanged
o C) Total liabilities increase
o D) Total capital decreases
8. What happens when a business sells inventory for a profit?
o A) Assets decrease
o B) Capital decreases
o C) Assets and capital both increase
o D) Liabilities increase
9. In the transaction where the owner puts $20,000 into the business, what is the effect
on the bank account?
 o A) Decreases
o B) Increases
o C) Remains the same
o D) Becomes a liability
10. What is the impact of purchasing furniture for $1,500 on the accounting equation?
o A) Total assets increase by $1,500
o B) Total assets remain unchanged
o C) Total liabilities increase by $1,500
o D) Capital decreases by $1,500
11. When a business purchases inventory on credit, what happens to liabilities?
o A) They decrease
o B) They increase
o C) They remain unchanged
o D) They become assets
12. What does the expanded accounting equation include?
o A) Only assets and liabilities
o B) Assets, liabilities, and expenses only
o C) Assets, drawings, expenditures, capital, liabilities, and income
o D) Only capital and income
13. How is an increase in an asset recorded in a T-account?
o A) Credit entry
o B) Debit entry
o C) Drawings entry
o D) Liability entry
14. Which of the following accounts is increased by a debit entry?
o A) Capital
o B) Liabilities
o C) Income
o D) Expenses
15. What is the effect of a cash sale on the bank account?
o A) It decreases the bank account
o B) It increases the bank account
o C) It has no effect
o D) It creates a liability
16. What must be true about the total debits and credits in double-entry bookkeeping?
o A) They can be unequal
o B) They must always equal
o C) Debits must exceed credits
o D) Credits must exceed debits
17. What is the purpose of journal entries?
o A) To summarize accounts
o B) To specify which accounts are debited and credited
o C) To calculate profits
o D) To prepare financial statements
18. In the journal entry for a cash purchase, which account is credited?
o A) Expenses
 o B) Cash
o C) Sales
o D) Inventory
19. What happens to the capital account when drawings are taken by the owner?
o A) It increases
o B) It decreases
o C) It remains unchanged
o D) It becomes a liability
20. Which of the following is a characteristic of a liability?
o A) It represents ownership
o B) It is an obligation to transfer economic resources
o C) It is always short-term
o D) It is an asset
21. What is the formula for calculating profits?
o A) Profits = Income + Expenditure
o B) Profits = Income - Expenditure
o C) Profits = Assets - Liabilities
o D) Profits = Capital + Drawings
22. What type of account is "Drawings"?
o A) Asset
o B) Liability
o C) Expense
o D) Capital
23. What does the mnemonic DEAD CLIC help remember?
o A) Types of financial statements
o B) Rules for journal entries
o C) Which accounts to debit and credit
o D) Accounting equation components
24. How is the total of a T-account determined?
o A) By averaging the debits and credits
o B) By summing debits and credits separately
o C) By listing all transactions
o D) By balancing the account against liabilities
25. When balancing an account, what is the first step?
o A) Insert the balancing figure
o B) Cast the debit side
o C) Write the account total
o D) Sum the credit side
26. What happens when expenses exceed income?
o A) The business makes a profit
o B) The business incurs a loss
o C) Capital increases
o D) Liabilities decrease
27. Which journal entry reflects a cash sale?
o A) Dr. Sales, Cr. Cash
o B) Dr. Cash, Cr. Sales
 o C) Dr. Inventory, Cr. Cash
o D) Dr. Cash, Cr. Expenses
28. What does the term "balancing figure" refer to?
o A) The total assets of a business
o B) The difference needed to equalize debits and credits
o C) The total liabilities of a business
o D) The amount of capital invested
29. What is the purpose of the general ledger?
o A) To summarize income
o B) To record all transactions
o C) To calculate tax obligations
o D) To prepare financial forecasts
30. Which of the following accounts is classified as a non-current asset?
o A) Inventory
o B) Cash at bank
o C) Equipment
o D) Accounts receivable
31. What happens to the cash account when a business pays rent?
o A) It increases
o B) It decreases
o C) It remains the same
o D) It becomes a liability
32. What is the accounting equation?
o A) Assets = Capital + Liabilities
o B) Assets = Liabilities + Capital
o C) Capital = Assets - Liabilities
o D) Liabilities = Assets + Capital
33. In double-entry bookkeeping, what does a credit entry in an expense account
indicate?
o A) Increase in expenses
o B) Decrease in expenses
o C) Increase in revenue
o D) Decrease in liabilities
34. What does a profit represent in financial terms?
o A) Total revenue
o B) Income after deducting expenses
o C) Total assets owned
o D) Cash available for distribution
35. Which type of account is "Sales" classified as?
o A) Asset
o B) Liability
o C) Income
o D) Expense
36. What is the effect on the accounting equation when capital is introduced into the
business?
o A) Assets increase; Capital increases
 o B) Assets decrease; Capital decreases
o C) Liabilities increase; Assets decrease
o D) Liabilities decrease; Capital increases
37. How is the cost of goods sold presented in the statement of profit or loss?
o A) As a separate line item from revenue
o B) Included with total assets
o C) Summarized under liabilities
o D) Combined with capital accounts
38. What is the impact of taking inventory out for personal use?
o A) Increases capital
o B) Decreases assets
o C) Increases liabilities
o D) Increases income
39. What is the result of a cash purchase of inventory?
o A) Assets remain unchanged
o B) Assets decrease
o C) Liabilities increase
o D) Capital decreases
40. What does the term "closing inventory" refer to?
o A) Goods sold during the year
o B) Unsold goods at the financial year-end
o C) Total revenue earned
o D) Cash reserves at year-end
41. Which of the following is a key characteristic of a non-current asset?
o A) Used within one year
o B) Sold to customers
o C) Provides benefits over several years
o D) Easily converted to cash
42. What is recorded when a liability is paid off?
o A) Decrease in assets
o B) Increase in income
o C) Decrease in liabilities
o D) Increase in capital
43. What type of account is "Trade Payables"?
o A) Asset
o B) Capital
o C) Liability
o D) Income
44. What does the total of debits equal in double-entry bookkeeping?
o A) Total assets
o B) Total liabilities
o C) Total equity
o D) Total credits
45. When a business sells goods for cash, which account is debited?
o A) Sales
o B) Cash
 o C) Inventory
o D) Accounts Receivable
46. What is the key feature of the T-account structure?
o A) Only one side for entries
o B) Two sides for debit and credit entries
o C) No balance required
o D) Single entry accounting
47. Which transaction would increase an expense account?
o A) Selling goods
o B) Paying rent
o C) Introducing capital
o D) Borrowing funds
48. What does "balancing the accounts" mean in bookkeeping?
o A) Ignoring discrepancies
o B) Summing up all transactions for a period
o C) Only recording new transactions
o D) Closing accounts permanently
49. What does the term "drawings" signify in accounting?
o A) Funds invested by owners
o B) Profits retained in the business
o C) Withdrawals made by owners for personal use
o D) Assets purchased for the business
50. What is the effect of a bank loan on the accounting equation?
o A) Increase in assets and liabilities
o B) Decrease in assets and liabilities
o C) Increase in capital only
o D) No effect on the equation