# Accounting Knowledge question bank Original scenario questions with answers and explanations, from Questiva Consultants' open skills assessments. Version 2, authored 2026-08-23. Take it interactively: https://www.questivaconsultants.com/quickbooks-skills-test ## The accounting equation, account types & normal balances ### Q1. A lawn-care company receives $1,800 on January 2 for six months of weekly service that begins February 1. On the January 31 balance sheet, how is the $1,800 shown? - a) As Service Income, because the cash was received and is the company's to keep - b) As Accounts Receivable, because the company has not yet done the work it was paid for - **✓ c) As Unearned Revenue, a liability, because the service is still owed to the customer** - d) As Owner's Equity, because the payment increased what the business is worth > Cash received before the work is done is an obligation, not income: the company must deliver the service or refund the money. It sits in Unearned Revenue (a liability) and moves to income month by month as the service is performed. Recording it as income in January overstates revenue — the revenue recognition principle. ### Q2. Maria is the sole owner of a design studio. On May 15 she moves $2,000 from the business checking account to her personal account to cover her apartment rent. How should the bookkeeper record it? - **✓ a) Debit Owner's Draws 2,000 / Credit Checking 2,000** - b) Debit Salaries Expense 2,000 / Credit Checking 2,000 - c) Debit Checking 2,000 / Credit Owner's Draws 2,000 - d) Debit Rent Expense 2,000 / Credit Checking 2,000 > Money an owner takes for personal use is a draw: it reduces equity and never touches the profit and loss. Calling it salary or rent would overstate business expenses and understate profit. A draw is the owner taking back part of their investment, not a cost of running the business — the business entity principle. ### Q3. A $1,000 monthly payment on the company's equipment loan is made up of $850 principal and $150 interest. After the payment is recorded correctly, what has changed? - a) Liabilities down 1,000; cash down 1,000; nothing on the profit and loss - **✓ b) Liabilities down 850; interest expense up 150; cash down 1,000** - c) Interest expense up 1,000; cash down 1,000; liabilities unchanged - d) Liabilities down 150; interest expense up 850; cash down 1,000 > Only the interest is a cost of doing business; the principal repays what was borrowed and reduces the loan balance on the balance sheet. Posting the whole payment to the loan hides the interest cost; expensing the whole payment overstates expenses and leaves the loan balance too high — the difference between paying down a liability and incurring an expense. ### Q4. While reviewing a trial balance you see four accounts, each showing a credit balance. Which one is correctly a credit balance? - a) Accounts Receivable - b) Prepaid Insurance - c) Cost of Goods Sold - **✓ d) Accumulated Depreciation** > Accumulated Depreciation is a contra asset: it sits in the asset section but carries a credit balance that reduces the cost of the equipment it relates to. Receivables, prepaids and cost of goods sold all normally carry debit balances, so a credit there signals an error such as an over-applied payment or a reversed entry — normal balances. ### Q5. On June 9 a company bought $500 of office supplies on account; the bill is unpaid. The bookkeeper recorded Debit Supplies Expense 500 / Credit Checking 500. The entry balances. What is wrong with the June 30 balance sheet? - a) Nothing — the debits equal the credits, so the statements are correct - **✓ b) Checking and Accounts Payable are each understated by $500** - c) Assets are overstated by $500 and equity is overstated by $500 - d) Accounts Payable is overstated by $500 and Checking is correct > A balanced entry can still be wrong. Crediting Checking says cash left the bank, but it did not; the company owes the vendor, so Accounts Payable should have been credited. Cash is $500 too low and liabilities are $500 too low — both sides off by the same amount, which is why the equation still balances. Balancing proves arithmetic, not accuracy. ### Q6. A bakery buys $600 of flour and sugar that go into the cakes it sells, and $120 of cleaning supplies for the kitchen floor. How should the two purchases be classified on the profit and loss? - a) Classify both purchases as Cost of Goods Sold, since both were used in the kitchen - **✓ b) Flour and sugar as Cost of Goods Sold; cleaning supplies as an operating expense** - c) Classify both purchases as operating expenses, since the bakery does not track inventory - d) Flour and sugar as an operating expense; cleaning supplies as Cost of Goods Sold > Cost of Goods Sold holds the direct cost of what is sold — the ingredients that become the product. Cleaning supplies keep the shop running but are not part of any cake, so they are an operating expense below gross profit. Putting the cleaning supplies in COGS understates gross margin — the direct-cost definition of cost of goods sold. ### Q7. On March 3 a consultant finishes a project and invoices the client $3,000, due in 30 days. No cash has been received. What happens to the accounting equation on March 3? - **✓ a) Assets increase $3,000 and equity increases $3,000** - b) Assets increase $3,000 and liabilities increase $3,000 - c) Nothing changes until the client actually pays the invoice - d) Equity increases $3,000 and liabilities decrease $3,000 > The invoice creates a receivable (an asset) and income, and income increases equity. Waiting for cash is cash-basis thinking; under accrual accounting the sale is recorded when earned. The client's unpaid balance is the business's asset, not its liability — the accounting equation, Assets = Liabilities + Equity. ### Q8. The Accounts Payable T-account for May shows: Debits: 5/12 $2,400 · 5/27 $1,100 Credits: 5/1 opening balance $3,000 · 5/8 $2,400 · 5/20 $1,900 What is the May 31 balance, and what does it tell you? - a) $800 credit — bills received this month exceeded bills paid by $800 - b) $3,800 debit — vendors owe the company $3,800 at month end - c) $7,300 credit — the total of every bill the company has received - **✓ d) $3,800 credit — the company owes its vendors $3,800 at month end** > Credits (3,000 + 2,400 + 1,900 = 7,300) less debits (2,400 + 1,100 = 3,500) leave a $3,800 credit balance, the normal side for a liability: that is what the company still owes. The $800 answer ignores the opening balance; a debit balance would mean vendors owe the company, which is not what Accounts Payable measures — reading a T-account. ### Q9. The balance sheet shows Equipment $40,000 (debit) and Accumulated Depreciation $12,000 (credit). How should you read these two lines? - a) The equipment is worth $52,000 in total, and $12,000 of it was bought during the current year - b) The equipment cost $40,000 and the company still owes $12,000 of the purchase price - **✓ c) The equipment cost $40,000 and, after $12,000 of depreciation to date, carries at $28,000** - d) The equipment cost $40,000 and the $12,000 is this year's depreciation expense only > Accumulated Depreciation is a contra asset: it collects every year's depreciation since purchase and is subtracted from cost to give the carrying (book) value, here $28,000. It is not a debt and not this year's expense alone — the current-year charge is on the profit and loss as Depreciation Expense. Carrying value, not market value — the cost principle. ### Q10. On October 1 the company pays $2,400 for a 12-month liability insurance policy. Immediately after the payment is recorded, and before any month-end adjustment, what does the balance sheet show? - **✓ a) Prepaid Insurance (an asset) up $2,400 and Checking down $2,400** - b) Insurance Expense up $2,400 and Checking down $2,400 - c) Insurance Payable (a liability) up $2,400 and Checking down $2,400 - d) Owner's Equity down $2,400 and Checking down $2,400 > Paying a year in advance buys a right to coverage the business has not used yet, which is an asset. Each month $200 moves from Prepaid Insurance to Insurance Expense. Expensing the whole $2,400 in October would overstate that month's costs by $2,200 and understate the next eleven — the matching principle. ### Q11. A hardware store sells $500 of goods to a walk-in customer and collects 8% sales tax, receiving $540 in cash. How is the $540 recorded? - a) Sales Income $540, since that is what the customer paid - b) Sales Income $500 and Sales Tax Expense $40, a cost of making the sale - c) Sales Income $540 now, with a $40 expense when the tax is remitted to the state - **✓ d) Sales Income $500 and Sales Tax Payable $40, a liability owed to the state** > The $40 was never the store's money; it was collected on behalf of the state and must be paid over, so it is a liability from the moment it is collected. Booking it as income overstates sales and then needs an expense to fix it; it is not an expense of the store at all — the definition of a liability. ### Q12. The owner puts $10,000 of personal savings into the business checking account. The bookkeeper debits Checking and credits Loan Payable – Owner for 10,000, but the owner says it never has to be repaid. What should change? - a) Nothing. Money that comes from an owner is always recorded as a loan to the business - b) The credit should go to Sales Income, because the business can spend the money - **✓ c) The credit should go to Owner's Capital, because a contribution that need not be repaid is equity** - d) The credit should go to Owner's Draws, because that account tracks everything the owner moves in or out > Owner money is a liability only if it must be repaid. A contribution with no repayment obligation is Owner's Capital. Leaving it as a loan overstates liabilities and understates equity, and it is not income because nothing was sold. ### Q13. A new bookkeeper is building a chart of accounts and must place each of these in the right section. Which two belong in the Assets section? Choose two. - **✓ a) Accounts Receivable** - b) Accounts Payable - **✓ c) Inventory** - d) Retained Earnings > Receivables (money customers owe) and inventory (goods held for sale) are resources the business controls, so they are assets. Accounts Payable is what the business owes vendors — a liability — and Retained Earnings is accumulated profit kept in the business — equity. Mixing these up puts whole balance sheet sections out of order — account classification. ### Q14. At December 31 total assets are $85,000 and total liabilities are $32,000. During the year the owner contributed $5,000, took draws of $18,000, and the business earned net income of $26,000. What was owner's equity on January 1? - a) $53,000 - b) $56,000 - c) $66,000 - **✓ d) $40,000** > Closing equity is assets less liabilities: $85,000 − $32,000 = $53,000. Work the year backwards: $53,000 − $5,000 contributed + $18,000 draws − $26,000 income = $40,000 opening equity. $53,000 is the ending figure, not the start; the other answers get a sign wrong on draws or contributions — the statement of owner's equity roll-forward. ### Q15. A June 30 general ledger entry reads Debit Equipment 3,000 / Credit Repairs Expense 3,000, memo 'reclass new compressor'. The $3,000 compressor was bought in June and will be used for several years; the purchase was first posted to Repairs Expense. Was the reclass correct? - **✓ a) Yes — a multi-year asset was expensed in error, and the reclass puts it on the balance sheet** - b) No — equipment should be expensed in full in the month it is paid for, like any other purchase - c) No — the credit should have gone to Checking, because that is where the $3,000 came from - d) Yes, but the debit should have gone to Accumulated Depreciation rather than to Equipment > A purchase that will serve the business for years is capitalised as an asset and expensed gradually through depreciation, not charged to one month. The original entry already credited Checking when the compressor was paid for; the reclass only moves the debit from expense to asset. Accumulated Depreciation is credited later as the asset is used — the matching principle. ### Q16. In April the electric company refunds $200 because it overcharged on the March bill, which was already recorded as Utilities Expense and paid. The refund check is deposited. How should the deposit be recorded? - a) Debit Checking 200 / Credit Other Income 200 - b) Debit Checking 200 / Credit Accounts Payable 200 - **✓ c) Debit Checking 200 / Credit Utilities Expense 200** - d) Debit Utilities Expense 200 / Credit Checking 200 > The refund reverses part of a cost already recorded, so it reduces Utilities Expense — a credit to an expense account lowers it. Recording it as income overstates both revenue and expenses by $200; there is no payable, because nothing is owed to the utility. Expenses show the net cost of what was actually consumed — the expense recognition principle. ### Q17. Riverbend Cleaning charges $420 of cleaning supplies to the company credit card on July 8 and the crew uses them on jobs that same week. The card statement is paid from checking on August 5. On the July 31 accrual-basis statements, how does the July 8 purchase appear? - a) Nothing in July — the purchase is recorded on August 5, when the card is paid and cash leaves the bank - **✓ b) Supplies Expense up $420 and the credit card liability up $420, with cash untouched** - c) Supplies Expense up $420 and Checking down $420, because the card is a business payment method - d) Prepaid Supplies, an asset, up $420 and the credit card liability up $420 until the card is paid > A company credit card is a liability account, not a bank account. Charging it records the expense — the supplies were used in July — and increases what the company owes the issuer; no cash moves until August, and that payment reduces the liability, not expenses. Waiting for the statement pushes July costs into August — the matching principle. ### Q18. Four things happened at a print shop during July. Which one left total assets unchanged? - **✓ a) Paid $4,000 from checking for a used laminator delivered the same day** - b) Paid a $1,500 vendor bill that was already sitting in Accounts Payable - c) Bought $900 of paper stock on account from the shop's paper supplier - d) Recorded $700 of depreciation on the shop's three-year-old delivery van > Buying equipment with cash swaps one asset for another: checking down $4,000, equipment up $4,000. Paying a bill lowers assets and liabilities, buying on account raises both, and depreciation lowers assets and equity. ### Q19. Two employees worked December 26 through December 31 and earned $2,600, which will be paid in the January 3 payroll run. The company is on the accrual basis. What belongs on the December 31 books? - a) Nothing — the wages belong to January, because that is when the payroll is processed and paid - b) Wages Expense $2,600 in December and Prepaid Wages, an asset, of $2,600 until payday - **✓ c) Wages Expense $2,600 in December and Wages Payable, a liability, of $2,600** - d) Wages Payable $2,600 in December, with the expense recorded in January when the wages are paid > The work was done in December, so December carries the cost, and the money is still owed, which makes it a liability until payday. Leaving it out understates December expenses and overstates profit. Nothing has been paid, so it is not prepaid, and an expense cannot sit in a later month than the work that caused it — the matching principle. ### Q20. On March 1 a business signs a shop lease and pays $3,600: $1,800 for March rent and a $1,800 security deposit that the landlord returns at the end of the lease. How is the payment recorded? - a) Rent Expense $3,600, because the whole payment went to the landlord under the lease - b) Rent Expense $1,800 and Prepaid Rent $1,800, since the deposit covers the final month - c) Prepaid Rent $3,600, with $1,800 moved to Rent Expense at the end of March - **✓ d) Rent Expense $1,800 and a $1,800 security deposit asset held until the lease ends** > The deposit is refundable, so the business still has a claim on it. That makes it an asset until the landlord returns it, not a cost. Only March rent is an expense. Calling the deposit prepaid rent assumes it offsets rent, which this lease does not promise. ### Q21. Kestrel Supply's December trial balance shows Sales $80,000 credit and Sales Returns and Allowances $2,400 debit, both in the income section. The owner says the $2,400 must be a posting error because income accounts carry credits. How should the $2,400 be read? - a) An error — returned merchandise belongs in Cost of Goods Sold, where the goods were charged out - **✓ b) Correct — a contra revenue account subtracted from Sales, giving net sales of $77,600** - c) An error — the $2,400 belongs in Bad Debt Expense, because that revenue was never collected - d) Correct, but it is a cost of making sales and belongs with the operating expenses > Sales Returns and Allowances collects credits given back to customers and carries a debit balance on purpose, the mirror of the Sales account it offsets: $80,000 less $2,400 is $77,600 of net sales. A return is revenue given back, not an expense and not a bad debt — the customer returned goods rather than failing to pay — contra accounts. ### Q22. A client's June 30 balance sheet shows Vehicle Loan Payable with a $4,500 debit balance. The company bought a $28,000 truck in January with dealer financing and has made five $900 payments from checking. What is the most likely cause? - a) The truck loan was paid off early, and the $4,500 debit is what the lender now owes back - b) Each payment was posted twice, and reversing one set of five entries clears the balance - c) Interest inside each payment went to the loan account instead of Interest Expense - **✓ d) The financing was never entered as a liability, so the five payments hit an account that started at zero** > Five $900 payments debited to a liability that was never credited when the truck was financed leave a $4,500 debit, the opposite of a liability's normal balance. Entering the truck as an asset against a $28,000 note fixes it. Doubled payments would still leave a credit. ### Q23. At December 31 a bakery owes $30,000 on a five-year equipment loan. The amortization schedule shows $6,000 of principal falling due during the coming twelve months. How should the loan appear on the December 31 balance sheet? - a) $30,000 in long-term liabilities, because the loan does not mature for five years - b) $30,000 in current liabilities, because a payment comes due within the next month - **✓ c) $6,000 in current liabilities and $24,000 in long-term liabilities** - d) $6,000 in current liabilities and $24,000 netted against the cost of the equipment > A balance sheet sorts debt by when it comes due: the next twelve months of principal is current, the remainder is long-term. That split is what makes working capital and the current ratio mean anything. Leaving the whole loan long-term flatters liquidity, calling it all current does the opposite, and debt is never netted against the asset it bought. ### Q24. On February 6 a landscaper buys a $9,000 trailer, paying $2,000 from checking and signing a $7,000 note with the dealer for the balance. What is the effect on the accounting equation that day? - **✓ a) Assets up $7,000 net of the cash paid, and liabilities up $7,000** - b) Assets up $9,000 and liabilities up $9,000, the trailer's full price - c) Assets down $2,000 and equity down $2,000, with the note recorded as it is paid - d) Assets up $2,000, liabilities up $7,000 and equity down $5,000 > The trailer adds $9,000 of assets while checking falls $2,000, a net increase of $7,000, matched by the $7,000 note. The equation stays in balance. Buying an asset on credit is not an expense, so equity does not move, and the note is a liability from the day it is signed rather than when the first payment is made — Assets = Liabilities + Equity. ### Q25. A garden center owner takes six patio chairs home for her own deck. They cost the business $540 and are tagged at $900. The business uses perpetual inventory. How is this recorded? - a) Debit Owner's Draws 900 / Credit Sales Income 900, at the price a customer would have paid - **✓ b) Debit Owner's Draws 540 / Credit Inventory 540, at what the business paid for the chairs** - c) Debit Cost of Goods Sold 540 / Credit Inventory 540, since the chairs left the sales floor - d) No entry. Nothing was sold, so the books stay as they are until the next inventory count > The owner took an asset out of the business, so inventory falls and equity falls through draws, at cost: $540. No customer bought anything, so there is no revenue and no cost of goods sold. With no entry, inventory stays overstated until the next count. ### Q26. On December 20 a corporation's board declares a $15,000 dividend payable January 10. The company is on the accrual basis with a December 31 year end. What do the December 31 statements show? - a) Nothing yet. A dividend reaches the books on January 10, when the cash actually goes out - b) Dividend Expense of $15,000 on the December profit and loss, reducing the year's net income - **✓ c) Dividends Payable, a current liability, of $15,000 and equity lower by the same amount** - d) Retained Earnings down $15,000 and cash down $15,000, with the transfer clearing in January > Declaring a dividend creates a legal obligation, so December 31 shows a $15,000 current liability and $15,000 less equity. Cash stays in the bank until January 10. A dividend distributes profit already earned, so it is not an expense and net income does not change. ### Q27. On August 12 the owner of a small consultancy buys $340 of software for the business on her personal credit card and tells the bookkeeper she does not want to be reimbursed. How should it be recorded? - **✓ a) Debit Software Expense 340 / Credit Owner's Capital 340, an owner contribution** - b) No entry — the business never paid anything, so nothing belongs in its books - c) Debit Software Expense 340 / Credit Checking 340, to keep the cost in the month of purchase - d) Debit Software Expense 340 / Credit Accounts Payable 340, leaving the owner as a vendor to pay > The business received the software, so it carries the expense; the money came from the owner personally with no repayment expected, which makes it a contribution to equity. Skipping the entry understates costs and overstates profit. Crediting checking claims cash left an account it never left, and a payable records a debt the owner has already waived — the business entity principle. ### Q28. A bookkeeper is typing a manual journal entry for an unpaid $500 rent bill, which must increase Accounts Payable by $500 and increase Rent Expense by $500. Which sides does the entry use? - a) Debit Accounts Payable and debit Rent Expense - b) Credit Accounts Payable and credit Rent Expense - c) Debit Accounts Payable and credit Rent Expense - **✓ d) Credit Accounts Payable and debit Rent Expense** > Liabilities increase on the credit side and expenses increase on the debit side, so an unpaid bill debits the expense and credits the payable. Debiting the payable and crediting the expense is the mirror image — the pair of moves that records paying a bill off, not receiving one — and two debits or two credits cannot balance — the rules of debit and credit. ### Q29. A bookkeeper is sorting a December 31 balance sheet into current and long-term sections. Which of these accounts belongs in Current Assets? - a) The delivery van, which the company expects to keep driving for another four years - **✓ b) Prepaid Insurance, covering the eight months of coverage left on the policy** - c) Accumulated Depreciation on the building, which grows a little larger every month - d) Owner's Capital, on the grounds that the owner could withdraw the balance at any time > Current assets are resources that will be used up or turned into cash within twelve months, and eight months of unexpired coverage qualifies. The van is used over four years, so it is long-term. Accumulated Depreciation is a contra asset that reduces the building it belongs to, and Owner's Capital is equity, not something the business owns — the current and long-term split. ### Q30. A delivery van that cost $24,000 and carries $24,000 of accumulated depreciation is hauled away for scrap in May. The scrap yard pays nothing for it. What does the disposal require? - **✓ a) Debit Accumulated Depreciation 24,000 / Credit Vehicles 24,000, with no gain or loss** - b) Debit Loss on Disposal 24,000 / Credit Vehicles 24,000, writing off the van's cost - c) No entry — a fully depreciated van has already dropped off the balance sheet - d) Debit Depreciation Expense 24,000 / Credit Vehicles 24,000, finishing the van off in May > Cost less accumulated depreciation makes the van's carrying value zero, so clearing both lines removes it and touches nothing on the profit and loss. There is no loss, because nothing of value was given up, and no further depreciation, because the $24,000 was expensed over earlier years. Both accounts stay on the books until disposal is recorded — carrying value on disposal. ## Transactions, journal entries & the accounting cycle ### Q1. On April 4 a plumbing company finishes a $1,250 repair and gives the customer an invoice due in 30 days. Which entry records the job on April 4? - a) Debit Checking 1,250 / Credit Service Income 1,250 - b) Debit Service Income 1,250 / Credit Accounts Receivable 1,250 - c) No entry — the sale is recorded when the customer pays - **✓ d) Debit Accounts Receivable 1,250 / Credit Service Income 1,250** > Under accrual accounting the income is earned when the work is done, and the customer's promise to pay is a receivable. Debiting Checking pretends cash arrived; waiting for payment is cash basis and leaves April's income understated. When the customer pays, the entry is Debit Checking / Credit Accounts Receivable — the revenue recognition principle. ### Q2. On March 20 an $800 bill from a parts supplier was entered as Debit Parts Expense 800 / Credit Accounts Payable 800. On April 10 the bill is paid by check. What is the April 10 entry? - a) Debit Parts Expense 800 / Credit Checking 800 - **✓ b) Debit Accounts Payable 800 / Credit Checking 800** - c) Debit Checking 800 / Credit Accounts Payable 800 - d) Debit Parts Expense 800 / Credit Accounts Payable 800 > The expense was recognised in March when the bill was recorded; paying it settles the liability. Debiting the expense again would count the $800 cost twice and leave an $800 payable that is no longer owed. The payment only moves cash out and takes the bill off Accounts Payable — the two-step bill-then-pay cycle. ### Q3. A marketing agency does $6,000 of work in December, sends the invoice on December 28, and is paid on January 15. In which month is the $6,000 revenue recognised under accrual accounting, and under the cash basis? - a) December under both, because the invoice was issued in December - b) January under both, because that is when the money actually arrived - **✓ c) December under accrual; January under cash basis** - d) January under accrual; December under cash basis > Accrual accounting records revenue when it is earned — the work was done in December — regardless of when the cash comes. Cash basis records it when the money is received, in January. This is why a cash-basis profit and loss can show a quiet December and a busy January for the same work — the accrual versus cash basis distinction. ### Q4. On September 1 the company paid $3,600 for a 12-month insurance policy and debited Prepaid Insurance. No adjustments have been made since. What adjusting entry is needed at December 31? - **✓ a) Debit Insurance Expense 1,200 / Credit Prepaid Insurance 1,200** - b) Debit Insurance Expense 3,600 / Credit Prepaid Insurance 3,600 - c) Debit Prepaid Insurance 1,200 / Credit Insurance Expense 1,200 - d) Debit Insurance Expense 2,400 / Credit Prepaid Insurance 2,400 > Four months of coverage (September through December) have been used: $3,600 ÷ 12 × 4 = $1,200 becomes expense, and $2,400 stays as an asset for the remaining eight months. Expensing all $3,600 charges next year's coverage to this year; reversing the debit and credit would increase the asset instead of using it up — the matching principle. ### Q5. A gym received $1,200 on November 1 for a six-month membership and credited Unearned Revenue. What adjusting entry is needed at December 31? - a) Debit Checking 400 / Credit Membership Income 400 - **✓ b) Debit Unearned Revenue 400 / Credit Membership Income 400** - c) Debit Unearned Revenue 1,200 / Credit Membership Income 1,200 - d) Debit Membership Income 400 / Credit Unearned Revenue 400 > Two of the six months have been delivered, so $1,200 ÷ 6 × 2 = $400 has been earned and moves from the liability to income; $800 remains owed as service. Recognising all $1,200 claims income for months not yet delivered, and cash is not involved — it was received and recorded in November — the revenue recognition principle. ### Q6. A $24,000 delivery van was bought on January 1. It has a five-year useful life, no salvage value, and is depreciated straight-line. What is the monthly adjusting entry? - a) Debit Depreciation Expense 400 / Credit Vehicles 400 - b) Debit Accumulated Depreciation 400 / Credit Depreciation Expense 400 - **✓ c) Debit Depreciation Expense 400 / Credit Accumulated Depreciation 400** - d) Debit Depreciation Expense 4,800 / Credit Checking 4,800 > $24,000 ÷ 60 months = $400 per month. The expense is debited and the credit goes to Accumulated Depreciation, a contra asset, so the van stays on the books at its original cost with the accumulated amount shown against it. Crediting Vehicles directly destroys the cost record; cash is never part of depreciation — systematic allocation of cost over useful life. ### Q7. A bookkeeping firm finished $900 of work for a client on June 28 but will not send the invoice until July 3, after the June books close. What should be recorded at June 30? - **✓ a) Debit Accounts Receivable 900 / Credit Service Income 900** - b) Nothing — income is recorded when the invoice is issued in July - c) Debit Checking 900 / Credit Service Income 900, dated June 30 - d) Debit Unearned Revenue 900 / Credit Service Income 900, dated June 30 > The work was completed in June, so June earned the income whether or not the invoice has gone out. An accrued-revenue entry records the receivable and the income; when the July invoice is posted, the accrual is reversed so the income is not doubled. No cash has moved, and nothing was received in advance — the revenue recognition principle. ### Q8. The Office Supplies asset account shows: Debits: 1/1 opening balance $300 · 3/15 $700 · 9/2 $500 Credits: none A physical count on December 31 finds $400 of supplies on hand. What is the adjusting entry? - a) Debit Supplies Expense 400 / Credit Office Supplies 400 - b) Debit Office Supplies 1,100 / Credit Supplies Expense 1,100 - c) Debit Supplies Expense 1,500 / Credit Office Supplies 1,500 - **✓ d) Debit Supplies Expense 1,100 / Credit Office Supplies 1,100** > The account holds $1,500 of purchases, but only $400 is left, so $1,100 was used during the year and becomes expense; the asset is written down to what is actually on the shelf. Expensing only the $400 on hand reverses the logic; expensing all $1,500 ignores the count — the supplies-used adjustment. ### Q9. The year-end trial balance balances — total debits equal total credits — and the bookkeeper concludes the ledger is free of errors. Which of these errors could still be in the books? - a) A journal entry where only the debit side was posted to the ledger accounts - **✓ b) A $700 payment posted to Advertising Expense instead of Rent Expense** - c) A $1,000 credit keyed as $100 while its debit was posted correctly - d) A $250 debit that was posted to the credit side of the account > A trial balance only proves that total debits equal total credits. An entry posted to the wrong account in the right amount still balances, so it slips through; it is found by reviewing account detail, not the totals. The other three errors all leave debits and credits unequal and would show up immediately — the limits of the trial balance. ### Q10. A $350 telephone bill was recorded as Debit Office Supplies Expense 350 / Credit Accounts Payable 350. The bill is still unpaid and the error is found before month end. What is the correcting entry? - **✓ a) Debit Telephone Expense 350 / Credit Office Supplies Expense 350** - b) Debit Telephone Expense 350 / Credit Accounts Payable 350 - c) Debit Office Supplies Expense 350 / Credit Telephone Expense 350 - d) Debit Telephone Expense 350 / Credit Checking 350 > Only the expense account was wrong; the payable is right and the bill is still owed. The fix moves the $350 out of Office Supplies and into Telephone with no effect on liabilities or cash. Crediting Accounts Payable again would record the bill twice; touching Checking invents a payment that has not happened — correcting entries fix only the wrong half. ### Q11. At the end of the fiscal year the bookkeeper posts closing entries. Which accounts are closed out so they start the new year at zero? - a) Cash, Accounts Receivable and Inventory, the liquid assets - b) Every account that appears on the balance sheet - **✓ c) Income, expense and owner's draws (or dividends) accounts** - d) Only the expense accounts, so that next year's costs start fresh > Income, expense and draws are temporary accounts that measure one period; closing moves their net result into Retained Earnings or Owner's Capital. Balance sheet accounts are permanent — cash you hold on December 31 is still cash on January 1. Closing only expenses would leave income accounts accumulating year after year — the closing process. ### Q12. A December 31 ledger excerpt, before adjustments: Prepaid Rent — debit balance $6,000 (paid October 1 for six months of rent) Rent Expense — $0 Which statement about the year-to-date profit and loss is true before the adjusting entry is made? - a) Rent expense is understated by $6,000, the full amount that was paid - b) Rent expense is overstated, because the whole payment was recorded on October 1 - c) The profit and loss is correct; rent stays an asset until the lease ends - **✓ d) Rent expense is understated by $3,000 and Prepaid Rent is overstated by $3,000** > Six months of rent at $1,000 a month were paid in advance; October, November and December have been used, so $3,000 should have moved to expense and $3,000 should remain prepaid for January through March. Expensing all $6,000 charges next year's rent to this year; leaving it all as an asset overstates profit — the matching principle. ### Q13. On July 1 the company receives a $20,000 bank loan, deposited into its checking account. How is the deposit recorded? - **✓ a) Debit Checking 20,000 / Credit Notes Payable 20,000** - b) Debit Checking 20,000 / Credit Loan Income 20,000 - c) Debit Notes Payable 20,000 / Credit Checking 20,000 - d) Debit Checking 20,000 / Credit Owner's Capital 20,000 > Borrowed money is an obligation to the bank, so the credit is to a liability; nothing was earned, so it is not income, and the bank is a lender, not an owner. Reversing the entry would show the loan being repaid. Interest, when it accrues, is the only part of a loan that reaches the profit and loss — liabilities versus income. ### Q14. On December 31 the bookkeeper accrued $2,000 of interest: debit Interest Expense 2,000, credit Interest Payable 2,000. A reversing entry is posted January 1, and the $2,000 is paid January 10. What does the reversal accomplish? - a) It cancels the December accrual, so December's profit and loss no longer shows the $2,000 of interest expense - b) It records the January 10 payment itself, so no entry is needed when the $2,000 check is written - c) It moves the $2,000 liability permanently into January's expenses, where the payment is made - **✓ d) It lets the January 10 payment be booked as ordinary Interest Expense without counting the $2,000 twice** > The January 1 entry (debit Interest Payable, credit Interest Expense) clears the payable and leaves a temporary credit in expense. The routine payment entry on January 10 then nets January's interest expense to zero, which is right because December already carried the cost. December's books stay untouched. ### Q15. A gift shop using perpetual inventory sells a lamp for $90 cash. The lamp cost the shop $40. Which entries record the sale? - a) Debit Checking 90 / Credit Sales 90, and nothing else until inventory is counted - b) Debit Checking 90 / Credit Sales 50 / Credit Inventory 40, netting the cost against the sale - **✓ c) Debit Checking 90 / Credit Sales 90; and Debit Cost of Goods Sold 40 / Credit Inventory 40** - d) Debit Checking 90 / Credit Inventory 90, since the lamp left inventory > A sale under perpetual inventory is two entries: the revenue at the selling price, and the cost moving from Inventory (asset) to Cost of Goods Sold (expense) so the $50 gross profit appears on the profit and loss. Netting the cost against sales hides revenue; crediting inventory for $90 removes more than the lamp cost — the perpetual inventory method. ### Q16. A bookkeeper has recorded the month's transactions, posted them to the ledger, and entered the adjusting entries. What is the next step in the accounting cycle? - a) Post the reversing entries for the following month - **✓ b) Prepare the adjusted trial balance and the financial statements** - c) Record the month's transactions in the journal again to check them - d) Close the income and expense accounts to Retained Earnings > Once adjustments are posted, the adjusted trial balance proves the ledger still balances and is the source for the profit and loss and balance sheet. Closing entries come after the statements are prepared, and only at year end; reversing entries belong to the first day of the next period — the order of the accounting cycle. ### Q17. Harbor Signs pays its crew every Friday. The last payday of the year is Friday December 26, which covers work through that day. The crew then works Monday December 29, Tuesday 30 and Wednesday 31 at $700 a day and will be paid on Friday January 2. What is the December 31 adjusting entry? - a) Debit Wages Expense 2,100 / Credit Checking 2,100 - **✓ b) Debit Wages Expense 2,100 / Credit Wages Payable 2,100** - c) No entry — the wages are recorded on January 2 when the crew is paid - d) Debit Wages Payable 2,100 / Credit Wages Expense 2,100 > Three days of work at $700 belong to December even though the check goes out January 2, so the unpaid cost is accrued as a liability. No money has left the bank, so Checking is untouched, and reversing the debit and credit would cancel December's cost. Waiting for payday moves $2,100 of December's labor into January — the matching principle. ### Q18. On August 12 a landscaping company buys an $18,000 mini excavator, paying $4,000 from checking and signing a note with the dealer for the remaining $14,000. Which entry records the purchase? - a) Debit Equipment 4,000 / Credit Checking 4,000, with the $14,000 note recorded as it is paid off - b) Debit Equipment 18,000 / Credit Notes Payable 18,000, treating the $4,000 as the first note payment - **✓ c) Debit Equipment 18,000 / Credit Checking 4,000 / Credit Notes Payable 14,000** - d) Debit Equipment Expense 18,000 / Credit Checking 4,000 / Credit Notes Payable 14,000 > The asset goes on the books at its full $18,000 cost, and the two credits show where the money came from: $4,000 of cash and $14,000 borrowed. One entry may carry several debits or credits as long as the totals agree. Recording only the cash hides the debt, financing the whole price overstates the note, and equipment used for years is capitalised — a compound journal entry. ### Q19. At March 31 the trial balance shows debits of $184,320 and credits of $184,050, so debits exceed credits by $270. Every journal entry was posted to both sides. What explains the difference? - **✓ a) A transposition in posting, with a $1,740 credit entered as $1,470** - b) A $270 credit that was posted to the ledger twice on the same day - c) A $135 debit posted to the credit side of its ledger account - d) A $270 vendor bill that was never entered in the books at all > A difference divisible by 9 points to transposed digits. A $1,740 credit keyed as $1,470 leaves credits $270 short. A credit posted twice or a $135 debit posted as a credit would leave credits too high, and an unrecorded entry keeps both columns equal. ### Q20. A bike shop using perpetual inventory receives 12 helmets costing $35 each from its supplier on May 6, with the bill due in 30 days. None have been sold yet. Which entry records the delivery? - a) Debit Cost of Goods Sold 420 / Credit Accounts Payable 420 - b) Debit Inventory 420 / Credit Checking 420 - c) No entry until the helmets are sold or the bill is paid - **✓ d) Debit Inventory 420 / Credit Accounts Payable 420** > Goods bought for resale are an asset until a customer buys them, and the bill is unpaid, so the credit is to Accounts Payable. Charging Cost of Goods Sold now reports the cost before the sale it belongs to, and crediting Checking pretends the bill was paid on delivery. The $35 moves to Cost of Goods Sold as each helmet sells — the perpetual inventory method. ### Q21. On the last day of the month an owner moves $5,000 from the company's checking account into the company's own savings account so the idle cash earns interest. How should the bookkeeper record the transfer? - a) Debit Checking 5,000 / Credit Savings 5,000 - **✓ b) Debit Savings 5,000 / Credit Checking 5,000** - c) Debit Owner's Draw 5,000 / Credit Checking 5,000 - d) Record a $5,000 expense in checking and a $5,000 deposit in savings > Both accounts belong to the business, so the money only changes place: savings rises and checking falls, and neither total assets nor the profit and loss moves. Reversing the debit and credit drains the account the cash went into; nothing left the business, so it is not a draw; and an expense with a matching deposit would understate profit by $5,000 — a balance sheet transfer. ### Q22. A business reports on the accrual basis and closes its December books on January 10. Which of these items belongs in December's expenses? - **✓ a) A $640 bill for December electricity, received January 6 and paid January 20** - b) A $1,200 insurance premium paid December 28 for coverage running January 1 through June 30 - c) $900 of office chairs ordered December 29, delivered January 5 and invoiced on delivery - d) The January office rent, paid with a check written and mailed on December 30 > The electricity was used in December, so December bears the cost, and the $640 is accrued as a payable. The date the bill arrives does not decide the period. The premium and the rent cover next year, so they sit in prepaid assets. The chairs arrived in January, so December owes nothing. ### Q23. Coastal Supply invoices a customer $4,000 on June 2 with terms 2/10 net 30. The customer pays on June 11, takes the discount, and sends a check for $3,920. How is the payment recorded? - a) Debit Checking 3,920 / Credit Accounts Receivable 3,920, leaving $80 open on the invoice - b) Debit Checking 4,000 / Credit Accounts Receivable 3,920 / Credit Sales Discounts 80 - **✓ c) Debit Checking 3,920 / Debit Sales Discounts 80 / Credit Accounts Receivable 4,000** - d) Debit Checking 3,920 / Debit Bad Debt Expense 80 / Credit Accounts Receivable 4,000 > The customer paid inside the ten-day window, so the $80 discount was earned and the full $4,000 receivable is settled. Sales Discounts is contra revenue, so it takes the debit. Only $3,920 reached the bank; leaving $80 open shows a balance nobody owes; and a discount the terms granted is not an uncollectible account — early payment terms. ### Q24. On November 1 a company signs an $18,000 note payable at 8% annual interest. No interest or principal is due until the note matures next June. What does the December 31 adjusting entry record? - a) $1,440 — Debit Interest Expense 1,440 / Credit Interest Payable 1,440 - b) Nothing — interest is recorded next June, when it is actually paid - c) $240 — Debit Interest Expense 240 / Credit Checking 240 - **✓ d) $240 — Debit Interest Expense 240 / Credit Interest Payable 240** > Two months of interest have accrued: $18,000 × 8% × 2/12 = $240, owed but unpaid, so the credit is a liability. A full year's $1,440 charges ten months the company has not yet borrowed through; waiting until June leaves this year's borrowing cost off this year's profit and loss; and no cash has moved, so Checking is untouched — accrued expense recognition. ### Q25. Draft year-end statements show net income of $52,000 and total assets of $310,000. The accountant then finds no depreciation was recorded on a $30,000 machine bought January 2, with a five-year life and no salvage value. What do the corrected figures show? - a) Net income $46,000 and total assets $310,000, because depreciation never touches the asset side - **✓ b) Net income $46,000 and total assets $304,000, because both fall by the year's depreciation** - c) Net income $52,000 and total assets $304,000, because the write-down is charged against equity - d) Net income $22,000 and total assets $280,000, because the machine's cost belongs in this year > Straight-line depreciation is $30,000 ÷ 5 = $6,000 a year. Net income falls to $46,000, and the credit to Accumulated Depreciation brings assets down to $304,000. Expensing the whole $30,000 would charge four future years to this one. ### Q26. At year end a sole proprietor's Owner's Draws account has an $18,000 debit balance. Income and expenses have already been closed into Owner's Capital. What entry closes the draws account? - **✓ a) Debit Owner's Capital 18,000 / Credit Owner's Draws 18,000** - b) Debit Owner's Draws 18,000 / Credit Owner's Capital 18,000 - c) Debit Wage Expense 18,000 / Credit Owner's Draws 18,000 - d) No entry. Draws is a permanent account and carries forward to next year > Draws is a temporary equity account that tracks one year's withdrawals, so it closes into capital. Debit Capital and credit Draws to bring it to zero. Reversing the entry would raise equity, and an owner's withdrawal is never wages. ### Q27. A new bookkeeper writes a March 8 journal entry for a $600 equipment repair in the general journal and stops there, asking why the entry still has to be posted. What does posting do? - a) It copies the entry into the general journal a second time so the two sides can be compared - b) It sends the entry to the bank so that the $600 payment clears the checking account - **✓ c) It records the debit and the credit in each account's own ledger, changing those balances** - d) It carries the $600 straight onto the profit and loss, which is built from the journal > The journal is the chronological record of what happened; the ledger keeps a running balance for every account. Posting carries each debit and credit from the journal into the accounts it names, and the trial balance and the statements are drawn from those ledger balances, never from the journal itself. Posting moves no money and makes no second copy — journal versus ledger. ### Q28. A bookkeeper is told to use the everyday sales, bill and payment forms wherever they fit, and to reserve manual journal entries for what those forms cannot record. Which task needs a manual journal entry? - a) Billing a customer $1,500 for a completed job, due in 30 days - b) Entering a $340 vendor bill for the month's phone service - c) Applying a customer's $900 check to the two invoices it pays - **✓ d) Recording the month's $1,250 depreciation on the delivery vans** > Depreciation has no vendor, no customer and no cash, so no everyday form produces it: the bookkeeper debits Depreciation Expense and credits Accumulated Depreciation. Invoicing, entering a bill and applying a payment each have a purpose-built form that keeps the customer and vendor detail behind the ledger, and forcing them through a journal entry breaks the aging reports — when a journal entry is the right tool. ### Q29. A new bookkeeper buys $400 of stamps with the company debit card and records a single $400 debit to Postage Expense, with nothing on the credit side. Why will that entry not stand? - a) Nothing is wrong — the bank feed supplies the other half once the charge clears the account - **✓ b) Every entry needs a credit too: the $400 must credit Checking to show where the money came from** - c) The debit belongs in Accounts Payable, because the stamps were bought without a vendor bill - d) The $400 must be entered twice, as a debit and a credit to Postage Expense, so it nets out > Double entry records every transaction in at least two accounts, with debits equal to credits: the stamps cost $400 and the money came out of the bank. A bank feed proposes transactions but never completes a hand-written entry. Nothing is owed to a vendor here, and debiting and crediting the same account leaves the ledger with no record of the purchase — the double-entry rule. ### Q30. A hardware store's perpetual Inventory account shows $46,200 at December 31. The physical count values the goods actually on the shelves at $44,900, and no purchase or sale is unrecorded. What should the bookkeeper do? - **✓ a) Debit Cost of Goods Sold 1,300 / Credit Inventory 1,300 to bring the ledger down to the count** - b) Debit Inventory 1,300 / Credit Cost of Goods Sold 1,300, because the count is the lower figure - c) Leave the ledger at $46,200 — a perpetual system updates itself, so the count is the estimate - d) Debit Shrinkage Expense 1,300 / Credit Accounts Payable 1,300 and claim a credit from the supplier > The count is the evidence of what is really there: $1,300 of goods were broken, taken or mis-shipped, so the cost lands in Cost of Goods Sold and the asset is written down to $44,900. Adjusting upward would inflate an asset the shelves do not support, and no vendor owes anything, so nothing is payable — the physical inventory adjustment. ## Receivables, payables & cash application ### Q1. On the June 30 A/R Aging Summary, Harbor Cafe shows a balance of −$150.00. What does that mean, and what do you check first? - a) Harbor Cafe owes $150 that is not yet due. Next month it moves to the 1–30 days column and turns positive. - b) A $150 Harbor Cafe invoice was written off as bad debt, and write-offs show as negatives until the period closes. - c) A $150 Harbor Cafe invoice was deleted after it was sent, so the aging shows a negative until it is re-entered. - **✓ d) Harbor Cafe has been credited $150 more than it was billed. Look for an overpayment, an unapplied payment or an unapplied credit memo.** > A negative A/R balance is a credit: the customer paid or was credited more than billed. Typical causes are an overpayment, an unapplied payment or an unapplied credit memo. A write-off or deleted invoice lowers what is owed but never creates a customer credit. ### Q2. A $5,000 vendor bill is dated March 1, terms 2/10 net 30. The client has no cash until March 31. They could pay $4,900 on March 11 by drawing on a credit line that charges 1.5% a month (18% a year) for the 20 days. What should they pay, and is it worth it? - **✓ a) $4,900 on March 11. Yes, the $100 discount is more than the $49 of interest for 20 days.** - b) $5,000 on March 31. No, a 2% discount is smaller than an 18% interest rate, so borrowing to pay early loses money. - c) $4,900 on March 11. No, a business should never borrow to pay a bill early, whatever the discount. - d) $4,500 on March 11. Yes, 2/10 means 10% off if paid within 2 weeks, which beats any interest the line could charge. > 2/10 net 30 means 2% off if paid within 10 days. Paying early saves $100. Borrowing $4,900 for 20 days costs $49, which is two-thirds of a month at 1.5%. Comparing 2% with 18% ignores time: 2% for 20 days is about 36% a year. ### Q3. A customer mails a $1,200 check with a remittance slip for invoices 201 ($700) and 205 ($500). The bookkeeper records it as a new $1,200 cash sale instead of a payment on the invoices. What is the effect on the accrual-basis books? - a) Cash is overstated by $1,200, because a payment on account should not be recorded in the bank until the invoices are closed. - b) There is no effect: cash and revenue both increase by $1,200 either way, and the open invoices will close at the month-end reconciliation. - c) A/R is understated by $1,200, because the cash sale credited the receivable without an invoice for the payment to be applied to. - **✓ d) Revenue and A/R are each overstated by $1,200: the sale was already recognised when invoiced, and the two invoices stay open.** > Invoices 201 and 205 recorded the revenue and the receivable when issued. The check collects that receivable: Debit Cash / Credit A/R. Recording it as a sale counts the revenue twice and leaves $1,200 of paid invoices open on the aging, so the customer is chased for money already received. Cash itself is correct — the deposit is real — the revenue recognition principle. ### Q4. Pinewood Landscaping invoiced a customer $800 on April 2. On April 9 the customer returned $200 of plants, and Pinewood issued a credit memo. What entry records the credit memo, and what does the customer now owe? - **✓ a) Debit Sales Returns 200 / Credit Accounts Receivable 200; the customer now owes $600.** - b) Debit Accounts Receivable 200 / Credit Sales Returns 200; the customer now owes $1,000. - c) Debit Cash 200 / Credit Accounts Receivable 200; the customer now owes $600. - d) No entry until the customer pays; the $200 is deducted from the payment when it arrives. > A credit memo reduces what the customer owes and reverses the revenue on the returned goods: Debit Sales Returns (or Sales) / Credit A/R, leaving $600 open. Cash is not involved — nothing was paid or refunded. Waiting until payment leaves A/R and revenue overstated by $200 in the meantime and makes the aging wrong — revenue must match what was actually sold. ### Q5. A review finds $3,000 of customer payments posted to Accounts Receivable but never applied to the invoices they paid. Those invoices still show open. What is the effect on the A/R Aging? - a) Total A/R is overstated by $3,000, because an unapplied payment does not count against receivables. - b) Revenue is understated by $3,000, because an unapplied payment reduces sales until it is applied. - c) Cash is understated by $3,000, because a payment is not cash until it is applied to an invoice. - **✓ d) Total A/R is right, but paid invoices show as open next to $3,000 of unapplied credits.** > The payments already credited A/R when received, so the total is right. The detail is wrong: paid invoices look open, offset by unapplied credits, so customers may get statements for money they sent. Apply each payment to its invoice. Cash and revenue are fine. ### Q6. At December 31, Accounts Receivable is $40,000 and the company estimates 3 % will prove uncollectible. Before adjustment, Allowance for Doubtful Accounts has a $200 credit balance. Which adjusting entry is correct? - a) Debit Bad Debt Expense 1,200 / Credit Allowance for Doubtful Accounts 1,200 - b) Debit Bad Debt Expense 1,000 / Credit Accounts Receivable 1,000 - c) Debit Allowance for Doubtful Accounts 1,200 / Credit Accounts Receivable 1,200 - **✓ d) Debit Bad Debt Expense 1,000 / Credit Allowance for Doubtful Accounts 1,000** > Under the percentage-of-receivables approach the allowance must END at 3 % of $40,000 = $1,200. It already holds $200, so the adjustment is $1,000. The credit goes to the allowance, a contra-asset, never directly to A/R — specific customer balances are only reduced when an individual account is written off. Booking the full $1,200 ignores the existing balance and overstates the expense. ### Q7. A company uses the allowance method. On May 14 it learns that customer Delta Signs has gone out of business and its $600 balance will never be collected. What entry writes the account off? - a) Debit Bad Debt Expense 600 / Credit Accounts Receivable 600 - **✓ b) Debit Allowance for Doubtful Accounts 600 / Credit Accounts Receivable 600** - c) Debit Sales Returns and Allowances 600 / Credit Accounts Receivable 600 - d) Debit Accounts Receivable 600 / Credit Allowance for Doubtful Accounts 600 > Under the allowance method the expense was already recognised when the allowance was estimated. Writing off a specific account simply uses that allowance: Debit Allowance / Credit A/R. Net receivables do not change. Debiting Bad Debt Expense again would count the loss twice; a sales return is for goods coming back, not for a customer who cannot pay — the matching principle. ### Q8. A consulting firm has no allowance account. In March it gives up on a $250 invoice from an October sale and records Debit Bad Debt Expense 250 / Credit Accounts Receivable 250. Which statement is correct? - **✓ a) It is the direct write-off method. It is simple, but the expense lands after the sale period, so GAAP prefers an allowance when bad debts are material.** - b) It is the allowance method. The expense is recognized when the specific account is written off, which GAAP requires for all receivables. - c) It is wrong under any method. An uncollectible invoice must be reversed against Sales Revenue in the period of the sale. - d) It is the direct write-off method, and GAAP prefers it because the loss is recorded only once it is certain, not estimated. > Expensing a specific invoice when it is given up is the direct write-off method. It is acceptable when bad debts are immaterial, but an October sale produces a March expense, which breaks matching. GAAP prefers an allowance estimated in the sale period. ### Q9. Last year a company wrote off Ridge Bakery's $400 balance under the allowance method. This year Ridge Bakery pays the $400 in full. Which entries record the recovery? - a) Debit Cash 400 / Credit Bad Debt Expense 400, then Debit Allowance for Doubtful Accounts 400 / Credit Accounts Receivable 400 - b) Debit Cash 400 / Credit Other Income 400, then Debit Allowance for Doubtful Accounts 400 / Credit Bad Debt Expense 400 - **✓ c) Debit Accounts Receivable 400 / Credit Allowance for Doubtful Accounts 400, then Debit Cash 400 / Credit Accounts Receivable 400** - d) Debit Accounts Receivable 400 / Credit Sales Revenue 400, then Debit Cash 400 / Credit Accounts Receivable 400 > Reverse the write-off first, which reinstates the receivable and restores the allowance, then record the collection like any payment. Crediting an expense, income or sales account would treat money from an earlier sale as new profit. ### Q10. A $2,000 bill from a lumber supplier was entered in Accounts Payable on June 3. On June 10 the supplier issues a $300 credit for boards that arrived damaged. How is the credit recorded, and what is now owed? - a) Debit Accounts Payable 300 / Credit Cash 300; the company now owes $1,700 and has received a $300 refund in cash. - **✓ b) Debit Accounts Payable 300 / Credit Inventory (or the expense on the bill) 300; the company now owes $1,700.** - c) Debit Cash 300 / Credit Accounts Payable 300; the company now owes $2,300, the original bill plus the refund. - d) Debit Inventory (or the expense on the bill) 300 / Credit Accounts Payable 300; the company now owes $2,300. > A vendor credit reduces the liability and reverses the cost of the damaged goods: Debit A/P / Credit Inventory (or the expense the bill hit). No money moves, so Cash is untouched — crediting Cash would record a payment that never happened. Debiting Inventory and crediting A/P would add to the bill instead of reducing it — the liability must reflect what is actually owed. ### Q11. The June 30 A/P Aging Summary totals $4,000, with $2,800 over 60 days. The owner insists they pay every vendor on time. What is the most likely explanation, and what should you check? - a) The report is on the wrong basis. Re-run the aging on the cash basis and the old balances will disappear, because cash-basis reports ignore unpaid bills. - b) The vendors issued $2,800 of credits that were entered as bills instead of vendor credits. Reverse each one and the over-60 column clears. - **✓ c) Bills were paid by check or expense without being applied, so they stay open. Look for a paid check and an open bill for the same vendor and amount.** - d) The old bills are leftovers from a prior bookkeeper. Delete anything over 60 days so the aging matches what the owner says. > Old open bills at a company that pays on time usually mean a payment was recorded as a stand-alone check or expense instead of against the bill. That counts the expense twice and overstates A/P. Apply each paid check to its bill. Deleting bills leaves the duplicate expense. ### Q12. A vendor statement lists invoices 3311 and 3320, both already entered in June and unpaid, with a balance of $1,450. The bookkeeper enters the statement as a new $1,450 bill. What has happened? - a) Nothing is wrong. A statement is a bill for the account balance, and entering it monthly keeps the vendor's balance current. - **✓ b) Expense and Accounts Payable are both overstated by $1,450, because the statement summarizes invoices already recorded.** - c) Accounts Payable is understated by $1,450, because the individual invoices should have been removed once the statement was entered. - d) Only Cash is affected, because entering a statement records a payment of the balance forward. > A statement summarizes invoices, payments and the running balance. It is not a new obligation. Entering it as a bill records the same invoices twice, doubling the expense and the liability, and the vendor could be paid twice. Reconcile statements to the A/P detail instead. ### Q13. A $750 customer check deposited on May 2 is returned by the bank on May 6 marked NSF, and the bank charges a $25 returned-item fee. Which treatment is correct? - **✓ a) Debit Accounts Receivable 750 / Credit Cash 750, and Debit Bank Charges 25 / Credit Cash 25 (or charge the $25 to the customer's account).** - b) Debit Bad Debt Expense 750 / Credit Cash 750, and Debit Bank Charges 25 / Credit Cash 25, because a bounced check is an uncollectible sale. - c) Delete the original payment and its deposit so the invoice reopens, then record the $25 fee as a bank charge when the statement is reconciled. - d) Debit Sales Returns 750 / Credit Cash 750, and Debit Bank Charges 25 / Credit Cash 25, because the bank has effectively reversed the sale. > When a check bounces the customer owes the money again: reinstate the receivable and reduce cash by what the bank took back. The fee is a bank charge, or goes on the customer's balance if passed on. It is not a bad debt yet — the customer may still pay — and deleting the payment destroys the audit trail and the deposit match — A/R must show what is owed. ### Q14. At month end the Accounts Receivable control account in the general ledger shows $12,400, but the customer balances in the subsidiary ledger add up to $11,900. What does this tell you? - a) The $500 difference is a normal timing difference that will clear when next month's customer payments are applied to their invoices. - b) Customers have overpaid by $500 in total; issue refunds or credits until the customer balances agree with the control account total. - **✓ c) An entry hit the control account without a customer — such as a journal entry to A/R — or a customer entry never posted; find it.** - d) $500 of bad debt should be written off against the allowance so the control account comes down to agree with the customer total. > Every receivable entry must post both to the control account and to a specific customer, so the subsidiary ledger always totals the control balance. A difference means an entry hit one without the other — typically a general-journal entry to A/R with no customer attached. Forcing agreement with a write-off or refund hides a posting error instead of correcting it — the subsidiary ledger must reconcile to the control. ### Q15. Brookline Industrial ages its receivables at December 31: current $50,000 (1 % estimated uncollectible), 1–30 days $20,000 (5 %), 31–60 days $8,000 (10 %), over 60 days $5,000 (30 %). Write-offs during the year ran ahead of the estimate, so Allowance for Doubtful Accounts carries a $400 debit balance before adjustment. What is the adjusting entry? - a) Debit Bad Debt Expense 3,800 / Credit Allowance for Doubtful Accounts 3,800 - b) Debit Bad Debt Expense 3,400 / Credit Allowance for Doubtful Accounts 3,400 - **✓ c) Debit Bad Debt Expense 4,200 / Credit Allowance for Doubtful Accounts 4,200** - d) Debit Bad Debt Expense 4,200 / Credit Accounts Receivable 4,200 > The aging schedule sets the ending allowance: 500 + 1,000 + 800 + 1,500 = $3,800. A debit balance means earlier write-offs used up more allowance than was estimated, so the entry has to cover that too: 3,800 + 400 = $4,200. Booking $3,800 leaves the allowance $400 short, and $3,400 treats the debit balance as a credit. The credit belongs to the contra-asset, never to A/R. ### Q16. Granite Peak Outfitters ships $7,500 of goods to a customer on December 29, FOB shipping point. The carrier delivers on January 4. The company's fiscal year ends December 31. When does the sale belong in the books? - a) In January, when the customer takes delivery and can inspect the goods; nothing is recorded while a shipment is still in transit. - **✓ b) In December: title passes to the buyer at the shipping dock, so December carries the $7,500 of revenue and the receivable.** - c) In January, when the invoice is dated and mailed to the customer, because the invoice is the document that creates a receivable. - d) In December, but only as unearned revenue, because the customer cannot be billed until the goods have actually arrived at its door. > FOB shipping point means ownership and the risk of loss pass to the buyer when the carrier takes the goods, so the sale is complete on December 29: revenue and the receivable fall in the closing year and the goods leave inventory. Waiting for delivery or for the invoice date pushes an earned sale into the next year. Nothing is unearned — the seller has already performed. ### Q17. A company invoices a customer $1,000 on July 1, terms 2/10 net 30. The customer pays on July 9 with a check for $980. What entry records the receipt and closes the invoice? - a) Debit Cash 980 / Credit Accounts Receivable 980, leaving $20 open until the customer is billed for the shortfall. - **✓ b) Debit Cash 980 / Debit Sales Discounts 20 / Credit Accounts Receivable 1,000, closing the invoice.** - c) Debit Cash 980 / Debit Bad Debt Expense 20 / Credit Accounts Receivable 1,000, writing off the shortfall. - d) Debit Cash 980 / Credit Sales Revenue 980, and issue a $20 credit memo against the customer's next invoice. > The customer paid inside the 10-day window, so the $20 is an earned discount, not a shortfall. Debit Cash 980 and Sales Discounts 20 (a contra-revenue account), and clear the full $1,000 receivable. The $20 is not a bad debt. ### Q18. A customer of Coastal Prints sent $1,500 against a $1,350 invoice and has asked for the $150 difference back. The invoice is fully paid and the extra $150 sits on the customer's account as an unapplied credit. What records the refund check? - a) Debit Miscellaneous Expense 150 / Credit Cash 150; money leaving the business with no product received is an expense of the period. - b) Debit Sales Revenue 150 / Credit Cash 150; refunding a customer reverses that part of the revenue recorded on the original sale. - **✓ c) Debit Accounts Receivable 150 / Credit Cash 150, applying the refund to the credit so the customer's balance comes to zero.** - d) Issue a $150 credit memo against the customer's account instead, which clears the credit balance without any cash leaving the bank. > The overpayment already sits in Accounts Receivable as a credit; the refund pays it back, so the entry debits A/R and credits Cash and the customer nets to zero. It is not an expense — the business is returning money it never earned — and revenue is untouched, because the $1,350 sale still stands. A credit memo would double the credit the customer holds. ### Q19. A company sells on net 30. Net credit sales for the year were $500,000 and average Accounts Receivable was $50,000. What do those figures say about collections? - a) Days sales outstanding is 10, because receivables turned over ten times, so collections beat the terms. - b) Days sales outstanding is 30, because the terms are net 30 and the balance is a tenth of the year's credit sales. - c) Days sales outstanding cannot be judged; a receivables balance says nothing about speed without an aging report. - **✓ d) Days sales outstanding is about 37, so invoices are collected roughly a week past the net-30 due date.** > Turnover is 500,000 ÷ 50,000 = 10 times. 365 ÷ 10 gives about 37 days sales outstanding, a week past net 30, so collections are slipping. Ten is the turnover, not the days. Terms say when invoices are due, not when they get paid. ### Q20. A store's fiscal year ends December 31. A repair crew finished work on the cooler on December 22. The $1,800 invoice is dated January 5 and arrives January 8, while the books are still open. On the accrual basis, which period carries the $1,800? - **✓ a) December. The service was received in December, so accrue Debit Repairs Expense 1,800 / Credit Accounts Payable 1,800.** - b) January. An expense belongs to the period of the invoice date, when the vendor recorded the sale. - c) January. An expense belongs to the month the bill is paid, when the cash leaves the account. - d) December, but as Debit Accounts Payable 1,800 / Credit Repairs Expense 1,800, reversed when the January bill is entered. > Accrual accounting records an expense when the service is received. The cooler was repaired in December, so December carries the $1,800 and a year-end payable. Dating it by invoice or payment puts it in the wrong year. Option d reverses the entry. ### Q21. A purchase order was for 100 faucets at $32 each. The receiving report shows 92 delivered, none back-ordered, but the vendor's bill is for 100 at $32, or $3,200. What should Accounts Payable do? - a) Enter the bill for $3,200 as billed and sort out the shortage at the year-end inventory count. - b) Enter and pay the $3,200 bill, coding the $256 for undelivered faucets to a shortage expense. - **✓ c) Enter the bill for $2,944, the 92 units received, and ask the vendor for a corrected invoice or credit memo.** - d) Hold the bill unentered until the vendor ships the 8 missing faucets, so the order, receipt and invoice agree. > A three-way match compares the purchase order, receiving report and vendor bill. The company owes only for what it received: 92 × $32 = $2,944. Paying as billed pays $256 for faucets never delivered. Holding the bill keeps a real liability off the books. ### Q22. On August 3 a company issues a $9,000 purchase order for gym equipment that ships in September. Nothing has been received and there is no vendor bill. How does the purchase order affect the August financial statements? - a) It adds $9,000 to Accounts Payable in August, because the company is committed to pay for the order. - b) It records Debit Equipment 9,000 / Credit Accounts Payable 9,000, because the asset is on order. - c) It records Debit Prepaid Expenses 9,000 / Credit Accounts Payable 9,000 until the equipment arrives. - **✓ d) It does not affect them. A purchase order is a commitment, not a transaction, so nothing posts until goods or a bill arrive.** > A purchase order is an offer to buy. Nothing has been delivered and no obligation exists yet, so no entry is made and A/P is unchanged. Large commitments are disclosed, not accrued. Posting it would record a liability that does not exist. ### Q23. Cedar Lane Veterinary has a $640 vendor bill for supplies sitting open in Accounts Payable. On May 20 the office manager pays that bill with the practice's business credit card. What does the payment record? - **✓ a) Debit Accounts Payable 640 / Credit Credit Card Payable 640; the bill closes and the debt moves to the card.** - b) Debit Supplies Expense 640 / Credit Credit Card Payable 640; the bill stays open until the card statement itself is paid. - c) Debit Accounts Payable 640 / Credit Cash 640; a card charge is treated as cash because the vendor is paid immediately. - d) No entry until the card statement is paid; the expense and the payment are recorded together when the bank clears it. > Paying a bill with a card settles the vendor and creates a new liability to the card issuer: Debit A/P, Credit the credit card account. The expense was recorded when the bill was entered, so charging Supplies Expense again counts it twice and leaves the bill open. Crediting Cash shows money leaving a bank account that never moved, and waiting understates liabilities until the statement is paid. ### Q24. A vendor's $2,150 invoice for shop supplies was entered twice, as invoice 4471 and 4471-A, and both bills were paid in June. The vendor has said nothing. What is true of the books now, and what fixes it? - a) Nothing is overstated. The two payments net against each other on the A/P aging, so the vendor shows a zero balance. - **✓ b) Expense and cash paid are each overstated by $2,150. Ask the vendor for a refund or credit and apply it to a future bill.** - c) Only Accounts Payable is overstated. Delete the second bill and its payment so the June reconciliation clears the extra amount. - d) Cash is overstated by $2,150. Enter a third bill for the same invoice so the duplicate payment has a bill to apply to. > Both payments cleared, so supplies hit expense twice and $2,150 of real cash left the bank. A/P is fine because both bills were paid, and book cash matches the bank. Get a refund or vendor credit. Deleting a cleared payment breaks the reconciliation. ### Q25. A company pays a $4,000 deposit on April 3, half the price of custom cabinets to be built and delivered in June. Nothing has been received. How should the April payment be recorded? - a) Debit Cost of Goods Sold 4,000 / Credit Cash 4,000. The money is spent, so April carries the cost. - b) Debit Accounts Payable 4,000 / Credit Cash 4,000. The deposit sits as a negative liability until the final bill. - c) No entry until the cabinets arrive in June with the vendor's bill for the remaining $4,000. - **✓ d) Debit Vendor Deposits (an asset) 4,000 / Credit Cash 4,000. The cost moves to inventory or expense on delivery.** > Nothing has been received, so no cost exists yet. The $4,000 is an asset, a claim on the vendor, until delivery, when it moves to inventory or expense. Charging COGS overstates April. Debiting A/P leaves a negative liability. No entry leaves cash off the books. ### Q26. A customer has an open $2,400 invoice and a $150 credit memo issued last week for a short shipment. The customer's check arrives for $2,250. How should it be handled? - a) Apply the $2,250 to the invoice, leave $150 open and write it off as bad debt at quarter end. - b) Apply the $2,250 to the invoice and record the $150 credit memo as a new invoice so the balance returns to zero. - **✓ c) Apply the $2,250 and the $150 credit memo to the invoice together, closing it and clearing the credit.** - d) Deposit the $2,250 as a payment on account without applying it, so the invoice and credit memo offset on the aging. > The customer netted the credit against the invoice, so both belong on it: $2,250 cash plus the $150 credit equals the $2,400 balance. Leaving $150 open makes a paid invoice look overdue and creates a false bad debt. Invoicing the credit re-bills the short shipment. ### Q27. A $500 invoice from Lakeside Studio is paid by the customer's credit card. The processor deposits $485.50 into the bank and keeps a $14.50 processing fee. How is this recorded so the invoice closes? - **✓ a) Apply $500 to the invoice, record the deposit as $485.50 net, and charge the $14.50 to Merchant Fees expense.** - b) Apply $485.50 to the invoice and leave the $14.50 open, since that is all the customer's card actually delivered. - c) Apply $485.50 to the invoice and issue a $14.50 credit memo so the balance clears with no expense being recorded. - d) Apply $500 to the invoice and record a $500 deposit, adjusting the difference at the next bank reconciliation. > The customer paid the whole $500, so the invoice is settled for $500; the $14.50 the processor keeps is the studio's cost of accepting cards and belongs in an expense account. Applying only the net leaves a paid invoice showing $14.50 overdue, and a credit memo hides a real expense. Recording a $500 deposit when $485.50 reached the bank will not reconcile. ### Q28. A catalog lists a display case at $900. The retailer buys on a wholesale account, so the vendor's bill shows $720, list less a 20% trade discount, terms net 30. What amount goes into the retailer's books? - a) $900 as the cost, with the $180 trade discount posted to Purchase Discounts when the bill is paid. - **✓ b) $720. A trade discount sets the invoice price, so the $180 is never recorded.** - c) $900 as the cost and $180 as other income, because the wholesale account earned that difference. - d) $720 now, but the $180 is added to cost if the bill is not paid within 30 days. > A trade discount is a price, not a payment term. The transaction price is $720 and neither side records the $180. Purchase Discounts is for cash discounts like 2/10 net 30, earned by paying early. Net 30 sets a due date, not a penalty. ### Q29. Trestle Machine Works holds a $6,000 receivable that is 90 days past due. On October 1 the customer signs a six-month promissory note for $6,000 at 8 % annual interest to replace the open invoice. What happens on October 1 and at the December 31 year end? - a) Debit Notes Receivable 6,000 / Credit Sales Revenue 6,000 on October 1; accrue $120 of interest receivable at December 31. - b) Debit Notes Receivable 6,000 / Credit Accounts Receivable 6,000 on October 1; record all $240 of interest when the note is paid in April. - c) No entry on October 1; the note is only a promise to collect, so nothing in the books changes until the customer pays in April. - **✓ d) Debit Notes Receivable 6,000 / Credit Accounts Receivable 6,000 on October 1; accrue $120 of interest receivable at December 31.** > The note replaces the open invoice, so the receivable only changes form — A/R is credited and no new revenue arises, because the sale was recorded when it was invoiced. Interest is earned with time, so three months at 8 % on $6,000, or $120, accrues at December 31 even though nothing is collected until April. Waiting for payment pushes earned interest into the wrong year. ### Q30. A customer disputes $200 of a $2,000 invoice and mails a check for $1,800 with 'paid in full' written on it. Nobody at the company has agreed to reduce the invoice, and company policy is that only a manager may approve a credit. What is the correct bookkeeping response? - a) Apply $1,800 and issue a $200 credit memo at once, because a check marked 'paid in full' settles the invoice once it is deposited. - b) Delete the $2,000 invoice and re-enter it for $1,800 so the customer's balance agrees with the amount that was actually paid. - **✓ c) Apply $1,800 to the invoice, leave $200 open, and refer the dispute to the manager who can approve a credit.** - d) Apply $1,800 and write the $200 off to Bad Debt Expense, since a customer who disputes a charge has effectively refused to pay. > Cash application records what arrived; it does not settle a dispute. Apply the $1,800, let the $200 stand on the aging, and route the disagreement to the manager who can approve a credit. Issuing the credit unasked gives away $200 without authority, deleting and re-entering the invoice destroys the record of what was billed, and a disputed charge is not a bad debt. ## Cash, bank reconciliation & internal controls ### Q1. While reconciling the March bank statement you list four reconciling items. Which one requires a journal entry in the company's books? - a) A $1,500 deposit made on March 31 that the bank shows on April 1. - b) Check 2208 for $640, written on March 28 and not yet cleared. - **✓ c) A $20 monthly service charge shown on the statement and not yet recorded.** - d) A $540 check that the bank cleared for $450 because it misread the amount. > Items the bank knows about but the books do not — service charges, interest, NSF returns — adjust the book balance and need an entry. Deposits in transit and outstanding checks are already in the books; they adjust the bank side and clear on their own. A bank error is corrected by the bank, not by an entry — reconciling items are classified by which side is missing them. ### Q2. The April bank statement ends at $8,200. Deposits in transit are $1,500, outstanding checks total $2,300, and a $15 bank fee on the statement has not been recorded. The book balance before adjustment is $7,415. What is the true cash balance at April 30? - a) $7,415 - b) $8,200 - c) $9,700 - **✓ d) $7,400** > Adjusted bank balance: $8,200 + $1,500 in transit − $2,300 outstanding = $7,400. Adjusted book balance: $7,415 − $15 fee = $7,400. The two sides agree, which is the point of the reconciliation. The statement balance alone ignores timing items, and the unadjusted book balance still carries the fee the bank has already taken — both sides are adjusted to the same true cash figure. ### Q3. The May bank statement shows a $300 customer check returned NSF. On the bank reconciliation, where does this item belong, and what entry does it require? - a) Added to the bank balance as a deposit in transit; no entry is needed until the customer pays again. - b) Deducted from the bank balance as an outstanding item; Debit Cash 300 / Credit Accounts Receivable 300. - c) Deducted from the book balance; Debit Bad Debt Expense 300 / Credit Cash 300. - **✓ d) Deducted from the book balance; Debit Accounts Receivable 300 / Credit Cash 300.** > The bank has already taken the $300 back, so the books are the side that is behind: deduct it from the book balance and record it. The customer owes the money again, so the debit goes to A/R, not Bad Debt Expense — it is unpaid, not uncollectible. Treating it as a bank-side item leaves the books showing cash the company no longer has — book-side items need entries. ### Q4. Check 2210 to a supplier was written for $486 but recorded in the books as $468. The bank cleared it at $486, and the reconciliation is out by $18. What is the correct fix? - a) Call the bank to reverse the $18 overcharge, since the books show $468 and the bank must pay what was recorded. - **✓ b) Correct the check in the books to $486, with an extra $18 Debit to expense and Credit to Cash. The bank is right.** - c) Record an $18 outstanding check so the bank side agrees this month, and let it clear next month. - d) Reduce the statement ending balance by $18 so the Difference is zero, then finish the reconciliation. > The bank paid what the check said, $486. The books recorded a transposition ($468), a difference divisible by 9. The books are wrong, so record an $18 entry bringing the check to its real amount. An invented outstanding check or edited statement balance hides the error. ### Q5. A $2,000 cash deposit made at 6 p.m. on March 31 is recorded in the books on March 31 but appears on the April bank statement. On the March bank reconciliation, what is this item? - **✓ a) A deposit in transit: added to the bank balance, with no entry in the books.** - b) An outstanding check: deducted from the bank balance, with no entry in the books. - c) A book error: the deposit must be moved to April with a journal entry. - d) A bank error: the bank must be asked to re-date the deposit to March. > The books already have the deposit; the bank simply had not processed it by the statement date. That is the definition of a deposit in transit — a timing item added to the bank balance so it catches up with the books. No entry is needed and nothing is wrong; it will appear on April's statement — timing differences are reconciled, not corrected. ### Q6. Check 1180 for $900, written 14 months ago to a former contractor, has never cleared and appears as outstanding on every monthly reconciliation. What should you do? - a) Delete the check from the books so it stops appearing on the outstanding list, and re-enter it only if the contractor ever turns up asking about it. - **✓ b) Contact the payee; if it will never be cashed, reverse it in the current period, and note that an uncashed check may be unclaimed property.** - c) Leave it on the list — an outstanding check is a normal reconciling item, and it will simply drop off once the contractor deposits it. - d) Record a $900 deposit to Other Income dated today, since the money stayed in the bank and the contractor has not claimed it in over a year. > A check that will never clear is no longer a reconciling item; it is an obligation never settled. Reverse it in the current period so cash and the original account are corrected without reopening a closed year, and remember an uncashed check may be unclaimed property under state law. Deleting it erases the audit trail; calling it income misstates what happened — stale items are resolved, not carried. ### Q7. A $200 imprest petty cash fund is replenished at month end. The box holds $38 in cash and receipts for office supplies ($90) and postage ($72). What is the replenishment entry? - a) Debit Petty Cash 162 / Credit Cash (checking) 162, to restore the fund to $200 - b) Debit Office Supplies 90, Debit Postage 72 / Credit Petty Cash 162 - **✓ c) Debit Office Supplies 90, Debit Postage 72 / Credit Cash (checking) 162** - d) Debit Cash (checking) 162 / Credit Petty Cash 162, to record the cash removed > Under the imprest system the Petty Cash account stays fixed at $200; it is only touched when the fund is created or its size changes. Replenishment records the expenses the receipts show and credits the checking account for the check that refills the box. Debiting or crediting Petty Cash at replenishment would make the fund balance drift away from the $200 actually authorised — the imprest system. ### Q8. In a three-person office, Dana opens the mail and lists the checks, Maria posts customer payments and prepares the deposit, and Sam signs checks and reviews the bank statement. Which change would most weaken internal control? - a) Sam compares Dana's list of checks to the deposit slip each week before the deposit goes to the bank. - b) Dana also lists the invoices each check pays, so Maria can apply the payments correctly. - **✓ c) While Dana is on leave, Maria opens the mail, posts the payments and prepares the deposit herself.** - d) The bank statement goes to Sam instead of Maria, and Sam reviews it before anyone reconciles. > Segregation of duties means no one person both handles cash and records it. If Maria receives the checks, posts them and makes the deposit, she could divert a check and cover it with a later payment. The other changes add checks, such as comparing the mail list to the deposit. ### Q9. A small business has one bookkeeper who records cash receipts and prepares checks. Who should perform the monthly bank reconciliation? - a) The bookkeeper, because she knows every transaction and can finish the reconciliation faster than anyone. - b) Whoever has time that month, since the reconciliation is a clerical task that any staff member can do. - c) The person who signs the checks, because they have already seen and approved every payment that went out. - **✓ d) Someone who neither records receipts nor prepares checks — the owner or an outside accountant.** > The reconciliation is the control that catches what the bookkeeper did, so it cannot be done by the bookkeeper. An independent person — the owner, a manager, or the outside accountant — compares what the bank says to what the books say. The check signer is better than the bookkeeper but is still inside the payment process; independence is what gives the reconciliation its value — segregation of duties. ### Q10. Reviewing vendor files, you see four situations. Which is the strongest red flag for a fictitious-vendor scheme? - **✓ a) A vendor set up last quarter with an employee's home address and invoices all just under the $1,000 approval limit.** - b) A long-standing vendor whose invoices come in the same amount on the same day each month, approved by the same manager. - c) A vendor that offers 2/10 net 30 terms and sends a monthly statement listing every open invoice. - d) A vendor that emails PDF invoices instead of mailing them, each with the company's purchase-order number. > A new vendor with an employee's address and invoices just under the approval limit fits a shell-vendor scheme: the employee bills the company and approves the invoices. Fixed monthly amounts, discount terms and emailed PDFs are ordinary. ### Q11. An owner tells you: 'Our bookkeeper is wonderful. She writes all the checks, reconciles the bank account, the statements go straight to her, and she hasn't taken a vacation in four years.' Which control should be added first? - **✓ a) Route the bank statement to the owner to review the check images before she reconciles, and require her to take vacation with cover.** - b) Give the bookkeeper a raise and a written job description so that her responsibilities, and the trust placed in her, are documented. - c) Switch every vendor payment from checks to ACH transfers so there are no paper checks that she could alter, forge or write to herself. - d) Ask the bookkeeper to reconcile twice a month instead of once, so that any error or missing item is found within two weeks rather than four. > One person writes the checks, is the only one who sees what cleared, and never leaves long enough for anyone else to look — every condition for undetected embezzlement. The cheapest fix is owner review of the unopened statement and mandatory vacation. More frequent reconciliations by the same person add nothing; ACH moves the risk rather than adding oversight — controls must be independent of the person controlled. ### Q12. The audit trail shows the bookkeeper voided 11 customer payments totaling $4,300 over three months, and on each of those days recorded a smaller cash sale from the same customer. What does this most likely indicate? - a) Routine correction of posting errors. Voiding and re-entering a payment at the right amount is how a mistake gets fixed. - **✓ b) Possible skimming. Payments were removed after receipt and partly re-entered. Compare voided receipts with bank deposits and remittances.** - c) The customers short-paid, and the bookkeeper recorded what arrived, voiding the originals to keep the aging accurate. - d) A software defect that duplicates payments, so the bookkeeper has to void them. Report it to the vendor's support. > A repeated void followed by a smaller re-entry for the same customer points to skimming. The full payment arrived, the record was removed, and a smaller amount was booked. Real corrections are occasional and net to the same total. Check deposits and customer records. ### Q13. Which control stops the bank from paying a forged or altered check, instead of catching it afterward? - a) Requiring two authorized signatures on every check over $5,000 before it leaves the office. - b) Doing the bank reconciliation within ten days of the statement date every month. - **✓ c) Positive pay, where the bank pays only checks that match the company's issued-check list.** - d) Keeping blank check stock in a locked cabinet with a log of every check number issued. > With positive pay, the bank compares each presented check to the company's issued list (number, payee, amount) and refuses mismatches, stopping a forged or altered item before it clears. Dual signatures and locked stock control what leaves the office. Reconciliation finds it afterward. ### Q14. A client on the cash basis shows a strong March profit. You know that $20,000 of the month's receipts were collections of January invoices, and that $9,000 of March vendor bills are still unpaid. What is the cash-basis P&L hiding? - a) Nothing; the cash basis is the more accurate picture of March because it shows only the money that actually moved during the month. - **✓ b) March looks better than it was: $20,000 of January's revenue landed in March, and $9,000 of March costs are missing until paid.** - c) March profit is understated, because the cash basis leaves out the $9,000 of bills and the $20,000 of collections alike. - d) The client owes sales tax on the $20,000 collected in March, which the cash-basis report does not track or show anywhere. > Cash-basis reports record revenue when collected and expenses when paid, so March is taking credit for January's work and postponing its own costs. An accrual P&L would move the $20,000 back to January and bring the $9,000 into March, showing a much thinner month. The cash basis is simpler, not more accurate, for judging a period's performance — the matching principle. ### Q15. A bookkeeper receives three customer checks on June 8, for $420, $1,150 and $680, and takes them to the bank in one trip. The bank will show a single $2,250 deposit. How should the receipts be recorded so one register line matches the deposit and each invoice still closes? - **✓ a) Record each payment against its invoice into Undeposited Funds, then make one $2,250 bank deposit that clears it.** - b) Record all three payments straight into checking on June 8, so each payment has its own register line. - c) Record one $2,250 deposit to checking and reduce A/R for the total with a journal entry. - d) Wait for the statement, record one $2,250 deposit on the date the bank posted it, and leave the invoices open until then. > The bank records the batch as one deposit. Routing payments through Undeposited Funds closes each invoice and gives one $2,250 deposit line to match. Straight to checking leaves three register lines, a journal entry to A/R leaves invoices open, and waiting only delays. ### Q16. The bank feed downloads a $312 payment to City Utilities that Priya already entered three days ago as a bill payment. What should she do with the downloaded transaction? - a) Add it as a new transaction, then delete her bill payment, because the downloaded copy carries the bank's own date and amount. - **✓ b) Match it to the bill payment already in the register, so one transaction is marked cleared instead of two being recorded.** - c) Add it as a new expense to City Utilities and let the reconciliation show which of the two entries is the duplicate to remove. - d) Exclude it from the feed, since the payment is already in the books and the downloaded copy is not needed for anything. > Matching links the downloaded line to the entry already in the books and marks it cleared, so the payment is recorded once and the bill stays paid. Adding it creates a second $312 expense, and deleting the bill payment reopens the vendor bill. Excluding removes the bank line but leaves the entry uncleared, so it lingers on every reconciliation — match what exists, add only what is new. ### Q17. Opening September's reconciliation, Tanya sees a beginning balance $1,265 lower than the ending balance she reconciled and signed off in August. Nothing at the bank has changed. What most likely happened? - a) Someone entered a new August-dated transaction after the reconciliation was finished, and it falls inside the reconciled period, so it moves the opening figure. - b) August's outstanding checks cleared in September, which pulls the beginning balance down by the amount still outstanding at August month end. - **✓ c) A transaction that had been reconciled in August was later deleted or edited, which takes it back out of the reconciled total carried forward.** - d) September's deposits in transit are counted twice — once inside August's ending balance and again at the start of September's reconciliation. > A beginning balance is not typed in; it is the sum of everything already marked reconciled. It moves only when a reconciled transaction moves — deleted, re-dated, or re-amounted. A new August entry that was never reconciled shows up in September's list instead, and outstanding checks and deposits in transit were never in that total, so clearing them changes nothing — reconciled history stays frozen. ### Q18. Luis has entered every line of the March statement and the reconciliation is still out by $124. The statement shows a $62 service charge, a $310 customer deposit and check 4102 for $1,240. Which error would leave him out by exactly $124? - a) The $62 service charge was never entered in the books, so the register sits higher than the bank by the amount of the fee. - b) The $310 deposit was entered twice, once from the bank feed and once by hand, so the register sits higher than the bank. - c) Check 4102 was recorded in the books as $1,204 rather than $1,240, a transposition that leaves the register above the bank by the difference. - **✓ d) The $62 service charge was entered as a deposit rather than a withdrawal, which moves the register the wrong way by that amount twice over.** > A difference that is exactly twice an amount on the statement points to a transaction posted on the wrong side: booking the $62 fee as money in instead of money out misses by $62 twice. A fee left out entirely is off by $62, a doubled deposit by $310, and a $1,204-for-$1,240 transposition by $36 — the size of the difference names the error. ### Q19. It is the last day of the close and Renee's checking reconciliation is still out by $312. The software offers to finish anyway and post the difference as an automatic adjustment. What should she do? - **✓ a) Stop and find the $312 first, because the automatic adjustment posts a plug entry that hides whatever is actually wrong in the ledger.** - b) Accept the adjustment so the account reconciles on time, then look for the $312 next month when the following statement gives more evidence. - c) Accept the adjustment and reverse it next month, so the account is reconciled now and the two plug entries net to zero across the two periods. - d) Undo the prior month's reconciliation and rebuild it from the last statement the owner signed off, since a difference means the earlier month was wrong. > The adjustment fixes nothing. It books $312 to a discrepancy account so the two sides tie, while the real cause — a duplicate, a missed fee, a wrong amount — stays in the ledger and in every report built from it. Reversing it next month only moves the plug, and undoing a signed-off month destroys good history — a reconciliation that balances by force proves nothing. ### Q20. A customer pays a $2,480 invoice by card on July 9. The processor keeps a $72 fee and deposits $2,408. The owner records a $2,408 payment against the invoice and nothing else. What is wrong with that? - a) Nothing. $2,408 is what the bank received, and recording the bank's amount lets the account reconcile. - b) The $72 should be added to the invoice as a surcharge, billing the customer $2,552 so the company still collects $2,480. - **✓ c) The invoice is left $72 short and the fee never reaches the books. Record the full $2,480 payment and $72 as fee expense.** - d) The $72 belongs on the invoice as a discount, since the customer paid less than the invoiced amount by using a card. > The customer paid the full $2,480, and the processor took $72 from the proceeds. Recording only the net leaves $72 owing on a settled invoice and keeps the fee off the profit and loss. Recorded gross, with the fee as expense, the deposit still nets to $2,408. ### Q21. Which of these items goes on the Cash and cash equivalents line of the December 31 balance sheet? - a) A 24-month certificate of deposit bought in November, cashable early with a penalty of three months' interest. - **✓ b) A Treasury bill bought December 15 that matures February 10, bought to cover January payroll.** - c) A $3,000 customer check dated January 20, received December 28 and still in the desk drawer. - d) A $9,000 overpayment a supplier has agreed to refund, expected in mid-February. > Cash equivalents are highly liquid investments within about three months of maturity when bought. A bill bought December 15 that matures February 10 qualifies. The 24-month CD is far too long. A postdated check can't be deposited yet, and the supplier hasn't paid the refund, so both stay receivables. ### Q22. Dev's register report shows $1,842.50 of cash sales for Friday. The drawer holds $1,986.50, including the $150.00 opening float. How is the day recorded? - **✓ a) Debit Cash 1,836.50 and Cash Short and Over 6.00; credit Sales 1,842.50. The $6.00 shortage gets its own account.** - b) Debit Cash 1,842.50; credit Sales 1,842.50. Take the missing $6.00 out of Monday's float. - c) Debit Cash 1,836.50; credit Sales 1,836.50. Record sales at what the drawer held so the entry matches the deposit. - d) Debit Cash 1,836.50 and Miscellaneous Expense 6.00; credit Sales 1,842.50. Ask the cashier to make up the shortage. > The register says sales are $1,842.50. The drawer less the $150.00 float is $1,836.50, so it is $6.00 short. Record the $6.00 in Cash Short and Over so the difference stays visible. Booking sales at the counted amount hides it. ### Q23. The printer smears the payee line on check 3407 in the middle of a batch of vendor checks. What should Ray do with that check? - a) Shred it and print the payment on the next check, since the register only needs checks that were actually issued. - **✓ b) Write VOID across it, keep it in the check file, and record 3407 as void so the sequence stays complete.** - c) Run check 3407 through again at the end of the batch once the printer is cleaned, so no number is wasted. - d) Set it aside blank in the check drawer for the next handwritten payment, and enter the number when it is used. > Every check number must be accounted for, spoiled ones included, or a forged check can hide in the gap. Void it, keep it and record the number. Reprinting or holding it blank puts live check stock back in use. ### Q24. A customer says her $2,900 check, mailed February 12 and cashed February 16, was posted to her account March 6. Three other customers' payments were also posted two to four weeks after the bank cashed them, all by the same clerk. What does this suggest? - **✓ a) Lapping: receipts taken on arrival and covered weeks later with another customer's money. Compare deposit dates to posting dates.** - b) Ordinary posting delays at a busy month end. The clerk applies remittances in batches, so a payment can wait a week or two. - c) The customers are misremembering when they paid. A payment is dated when the funds finally cleared the company's bank. - d) A statement formatting fault. The account prints the date the statement was produced instead of the date each payment was applied. > Money cashed February 16 but posted March 6 sat unrecorded for over two weeks. That fits lapping, where each customer's balance is covered by the next customer's payment. Ordinary batch posting doesn't run weeks late across four accounts under one clerk. ### Q25. A long-time supplier's contact emails that Friday's $18,400 wire should go to a new bank account because the old one was closed. What should Hector do before he releases it? - a) Reply asking for the request on company letterhead, and release the wire once the signed confirmation comes back. - b) Check that the sender's address and signature block match the contact's earlier emails, and release it if they do. - **✓ c) Call the supplier on the number already on file, not one from the email, and confirm the change with someone he can identify.** - d) Send a $1 test payment to the new account and release the $18,400 once the supplier emails that it arrived. > Payment diversion fraud starts with a real-looking email, often from a mailbox the attacker controls. A matching sender address proves nothing, and any confirmation sent back by email can be answered by the attacker. Call the number already on file. ### Q26. On January 4 the owner asks Bianca to date $28,000 of checks received January 2 and 3 as December 31 receipts, so the year closes with more cash. What happens if she does? - a) Little changes. The work behind those checks was done in December, so dating the receipts there matches them to the period that earned them. - b) Only the timing of revenue moves. The cash balance is untouched because the deposit still appears on the January bank statement. - c) It is acceptable if she reverses the receipts on January 1 and re-records them on their real dates, so annual totals stay correct. - **✓ d) December cash is overstated by $28,000 and December won't reconcile, because the bank holds no such deposit before year end.** > The bank didn't have the money on December 31, so backdating puts $28,000 of nonexistent cash on the balance sheet and a deposit in transit the bank never received. December can't reconcile without a plug, and reversing later leaves December's statements wrong. ### Q27. A $1,750 deposit in transit first showed up on Omar's July reconciliation and is still there in September. Every other deposit on the account clears in a day or two. What should he conclude? - a) Deposits made near a weekend or bank holiday can take several statement cycles to appear, so it will clear on its own. - b) The bank has mislaid the deposit and will credit the $1,750 once asked, so it can stay in transit until then. - c) Carry it forward, and write it off to bank charges if it still hasn't cleared by the end of the fiscal year. - **✓ d) The money never reached the bank. Trace the deposit slip and the receipts behind it before adjusting or writing off anything.** > A real deposit in transit clears in days. One that lingers was never taken to the bank, was recorded twice, or was diverted. Trace the slip, the bank's record and the payments behind it. A write-off to bank charges ends the investigation. ### Q28. Jenna reconciles the company credit card every month, then pays the balance from checking. For March she recorded the $4,310 card payment as an office-supplies expense paid out of checking. What is the result? - a) The card is right and only checking is wrong; the payment did clear the bank, so the expense only needs re-dating to the card statement date. - **✓ b) March expenses are overstated by $4,310 and the card balance never comes down; the payment is a transfer from checking to the card liability.** - c) The books are right, because paying the card is the point at which the charges on it become deductible expenses of the business. - d) Only the card is wrong; the checking side is fine because money really did leave the account and an expense records what happened. > Every purchase was expensed the day it was charged to the card. Paying the card moves money between two balance-sheet accounts: debit the card liability, credit checking. Recording an expense instead counts the same spending twice and leaves the card balance sitting on the balance sheet, growing each month. Money leaving the bank does not by itself create an expense — the expense happened at the charge. ### Q29. On May 14 an owner sees $14,200 in the bank app and wants to wire $9,000 today. Sofia's register shows $6,600, after $7,600 of checks mailed last week that haven't cleared. What should she tell him? - a) Send it. $14,200 is what the bank will honour today, and outstanding checks are a timing item, not a claim on the account. - b) Send it. The checks were recorded the day they were written, so the $7,600 is already out of the balance the bank shows. - **✓ c) Only $6,600 is free. The $7,600 of mailed checks is already spent, so a $9,000 wire overdraws the account as they arrive.** - d) Hold every payment until the checks clear and the account is reconciled, since no money should leave an unproved balance. > The bank balance doesn't know about checks it hasn't seen. Checks in the mail will clear within days, so the register's $6,600 is the real amount available. A $9,000 wire would overdraw the account as those checks arrive. ### Q30. At Ridgeline Supply the owner signs every check. Each Friday the bookkeeper brings him a stack of printed checks and he signs them so the mail can go out that afternoon. Which change would strengthen the payment process most? - a) Have the bookkeeper attach a schedule of every check number, payee and amount, so the owner sees the week's total before he starts signing. - b) Move the signing to Thursday, giving the bookkeeper a full day to catch and correct anything wrong before the checks go into the mail. - c) Order check stock requiring two signatures above $2,500, with the bookkeeper as second signer so payments are not held up when the owner travels. - **✓ d) Hand the owner the invoice behind each check as he signs, and stamp each invoice paid so the same bill cannot come back for a second payment.** > A signature is a control only if the signer sees what he is paying for. Reviewing the invoice at signing catches a payment with no support behind it, and cancelling the invoice stops the same bill being presented twice. A schedule shows totals, not documents, and a bookkeeper who is also a signer approves her own payments — approval means seeing the support. ## Financial statements & analysis ### Q1. The owner of a landscaping company asks, "How much do we owe everyone as of today, and what do we own?" Which financial statement answers that question? - a) The profit and loss, because it lists every expense the company has paid - b) The statement of cash flows, because it shows where the money went - **✓ c) The balance sheet, which reports assets, liabilities and equity at one date** - d) The general ledger, because it lists every transaction in account order by date > What a company owns and owes is a snapshot of assets and liabilities — the balance sheet, as of a date. The profit and loss covers a period and reports income and expenses, not balances; the cash-flow statement explains where cash went; the general ledger is the record the statements are built from, not a statement — the accounting equation, Assets = Liabilities + Equity. ### Q2. A bakery's profit and loss for June shows: Sales $50,000 Cost of goods sold $30,000 Rent $8,000 Wages $10,000 Interest expense $500 What is the bakery's gross profit for June? - **✓ a) $20,000** - b) $2,000 - c) $1,500 - d) $12,000 > Gross profit is sales minus cost of goods sold: 50,000 − 30,000 = 20,000. Subtracting rent and wages as well gives operating income of 2,000; taking interest off that gives net income of 1,500 — each a different line lower on the statement. Gross profit shows what is left to cover operating costs — the P&L structure: gross profit sits above operating expenses. ### Q3. A cabinet shop has been recording the wages of its shop workers as an operating expense. The owner's accountant asks that they be moved to cost of goods sold instead. After the change, what happens to the shop's profit and loss for the year? - a) Gross profit and net income both fall by the amount of the wages - b) Gross profit is unchanged and net income falls by the amount - c) Gross profit rises and net income is unchanged by the move - **✓ d) Gross profit falls and net income is unchanged by the move** > Moving a cost from operating expenses into cost of goods sold pulls it above the gross-profit line, so gross profit falls by the wages amount. Total expenses are the same, so net income does not move. The reclassification changes what gross margin tells the owner about production cost; it does not make the business more or less profitable — COGS sits above gross profit, operating expenses below. ### Q4. A bookkeeper keeps a small club's books in a spreadsheet. The year-end balance sheet, with this year's net income already in equity, shows: Total assets $120,000 Total liabilities $45,000 Total equity $70,000 What does the $5,000 difference tell you? - a) It is this year's net income, which has not yet been closed into equity at year end - **✓ b) An entry was posted on one side only. Double-entry books can't do this, so find it** - c) Liabilities are understated by $5,000, so a $5,000 loan is missing and should be added - d) Equity should be increased by $5,000 so that the statement balances and the books agree > Double-entry books post equal debits and credits, so a balance sheet that does not balance means an error. Net income is already in equity here. Plugging equity or inventing a loan only hides the mistake. Find the one-sided entry. ### Q5. On May 20 the owner of a sole proprietorship transfers $5,000 from the business checking account to her personal account to cover living expenses. How does this affect the May profit and loss? - **✓ a) It has no effect; it reduces cash and owner's equity, not profit** - b) It reduces net income by $5,000 as an owner's salary expense - c) It reduces revenue by $5,000 because less cash stayed in the business - d) It increases liabilities by $5,000 because the owner is owed the money > An owner's draw is a distribution of equity, not a cost of running the business, so it never appears on the profit and loss: cash goes down and owner's equity goes down. Recording it as salary understates profit (and a sole proprietor's draw is not a deductible wage); it is neither revenue nor a debt to the owner — expenses versus distributions. ### Q6. On March 3 a company receives $20,000 from the bank as a five-year term loan and deposits it in checking. Which is the correct effect on the financial statements? - a) Revenue rises $20,000 on the profit and loss and cash rises $20,000 - b) Cash rises $20,000 and owner's equity rises $20,000 on the balance sheet - c) Cash rises $20,000 and a $20,000 expense is recorded when it is repaid - **✓ d) Cash rises $20,000 and a $20,000 liability appears on the balance sheet** > Borrowed money is not earned, so it is never revenue: the company has more cash and owes the bank the same amount, so a loan payable appears under liabilities. Equity is unchanged because the bank, not the owner, supplied the money. Repayments reduce the liability; only the interest portion is ever an expense — the accounting equation, Assets = Liabilities + Equity. ### Q7. A consulting firm reports net income of $40,000, but its cash fell by $15,000 over the year. Which single change could explain the whole gap? - a) Depreciation expense of $12,000 was recorded during the year - b) Accounts payable increased by $20,000 over the year - **✓ c) Accounts receivable grew by $55,000 over the year** - d) Accrued wages payable increased by $9,000 at year end > Profit can sit in unpaid invoices. If receivables grew by $55,000, cash from operations is 40,000 − 55,000 = −15,000, which matches the drop in cash. The other three push cash the other way: depreciation is added back, and rising payables or accruals mean expenses not yet paid. ### Q8. A delivery company's net income for the year is $30,000, which includes $6,000 of depreciation on its vans. Receivables, payables and inventory did not change. Using the indirect method, what is cash provided by operating activities? - a) $24,000 - **✓ b) $36,000** - c) $30,000 - d) $6,000 > Depreciation reduces net income but no cash leaves the business, so the indirect method adds it back: 30,000 + 6,000 = 36,000. Subtracting it again double-counts a cost that was never paid in cash this year; leaving it alone ignores the adjustment. The cash paid for the vans appears under investing activities in the year they were bought — depreciation is a non-cash expense. ### Q9. A retail store's balance sheet as of June 30 shows: Total current assets $60,000 Total current liabilities $40,000 Long-term loan $30,000 What does this tell the owner about the store's short-term position? - a) Working capital is $100,000, so the store is in a position to expand - b) The current ratio is 0.67, so the store cannot meet its obligations - c) The store earned $20,000 of profit during June, since assets exceed liabilities - **✓ d) The current ratio is 1.5, or $1.50 of current assets per $1 due within a year** > The current ratio is current assets divided by current liabilities: 60,000 ÷ 40,000 = 1.5, and working capital is the difference, 20,000. Both measure short-term liquidity, not profit, and the long-term loan is outside both. Inverting the ratio reads the same numbers as a shortfall; adding the figures produces a number that means nothing — the current ratio as a liquidity measure. ### Q10. A coffee roaster's gross margin was 42% last year and is 35% this year on similar sales. Operating expenses did not change. What should the bookkeeper look at first? - **✓ a) COGS rose against sales, from bean costs, pricing, or expenses miscoded to COGS** - b) Rent and wages grew faster than sales, squeezing the margin over the year - c) The owner took larger draws from the business this year than last year - d) Interest on the equipment loan was higher this year than last year > Gross margin is (sales − COGS) ÷ sales, so only sales and COGS can move it. A seven-point drop on flat sales means COGS grew, from input costs, pricing, or purchases posted to COGS that belong in operating expenses. Rent, wages and interest sit below gross profit, and draws are not on the profit and loss. ### Q11. A balance sheet as of September 30 shows: Cash $8,400 Accounts Receivable −$2,300 Inventory $15,000 The company invoices its customers and has written off no bad debt this year. What most likely caused the negative receivable balance? - a) Bad debt expense was recorded for $2,300 more than the invoices that were actually open - **✓ b) Customer payments or credits exceed open invoices — an overpayment or a duplicate payment** - c) Sales tax collected on invoices was posted to Accounts Receivable instead of the liability - d) A credit balance in receivables is normal at the end of a quarter when invoicing is slow > Receivables carry a debit balance: what customers owe. A credit balance means more has been credited to the account than was invoiced — a customer paid twice or overpaid, a payment was applied to the wrong customer, or a deposit was posted straight to A/R. No bad debt was recorded, and a sales-tax posting error would move the liability, not push A/R negative — normal balances of asset accounts. ### Q12. An owner asks for "total revenue as of June 30." Before running anything, what should the bookkeeper clarify, and why? - a) Nothing — the balance sheet as of June 30 shows revenue earned to date - b) Whether to use cash or accrual basis, because revenue only exists on one of them - **✓ c) The period — revenue is measured over a span of time, not as of a date** - d) Which bank account the revenue was deposited into, because revenue is measured by deposits > Income and expenses are flows, reported for a period (the month, the quarter, the year to date); balances are stocks, reported as of a date. "Revenue as of June 30" needs a start date — June, the quarter, or the year? The balance sheet never shows revenue, both bases measure it, and deposits are not revenue — period versus point-in-time reporting. ### Q13. A corporation began the year with retained earnings of $50,000. During the year it earned net income of $12,000 and paid $3,000 of dividends to shareholders. What is retained earnings at year end? - a) $62,000 - b) $35,000 - **✓ c) $59,000** - d) $47,000 > Retained earnings accumulate profit that has not been distributed: 50,000 + 12,000 − 3,000 = 59,000. Dividends are a distribution of equity, not an expense, so they reduce retained earnings directly rather than net income. Forgetting them gives 62,000; subtracting income instead of adding it gives the other figures — the retained-earnings roll-forward. ### Q14. On April 10 a hardware store pays $10,000 cash for inventory it expects to sell over the next two months. How does the purchase affect the April profit and loss? - a) Cost of goods sold rises by $10,000 in April, which reduces net income - b) A purchases expense of $10,000 reduces April's net income - c) Revenue falls by $10,000 because that cash left the business - **✓ d) Not at all: cash became inventory; cost is recognised as goods sell** > Buying inventory swaps cash for another asset, so April's profit and loss is untouched. Cost of goods sold is recorded as each item is sold, matching the cost to the sale it produced. Expensing the whole purchase on delivery overstates April's costs and understates later months — the matching principle; inventory is an asset until sold. ### Q15. A café charges $1,400 of paper goods to the business credit card on March 22 and pays the card balance on April 15. How do the March financial statements show this? - a) Nothing in March; the expense belongs to April, when the card was actually paid - **✓ b) A $1,400 supplies expense in March and a $1,400 credit card balance in liabilities** - c) A $1,400 supplies expense in March and a $1,400 reduction of cash at March 31 - d) A $1,400 asset in March that becomes an expense in April when the card is paid > The expense is incurred when the goods are received, and the unpaid card balance is a current liability at March 31. No cash moves until April 15, so March cash is untouched. Paper goods bought for use are not an asset waiting to be expensed, and waiting for the payment date puts the cost in the wrong month — accrual basis: the expense follows the purchase, not the payment. ### Q16. A cabinet shop ends the year with an $18,000 net loss, yet its checking balance is $60,000 higher than in January. Which event would push cash up in a loss year? - **✓ a) The company drew $90,000 on an equipment loan during the year** - b) Depreciation of $12,000 was recorded on the shop's machinery - c) The company paid down $30,000 of its accounts payable balance - d) $40,000 of the year's sales are still sitting in accounts receivable > Cash can rise in a loss year when it comes from somewhere other than operations. A loan draw is a financing inflow, and $90,000 easily outruns an $18,000 loss. Depreciation moves no cash, and sales still in receivables never reached the bank. ### Q17. A restaurant group compares its two locations for the year: Downtown: sales $600,000, wages $150,000 Riverside: sales $1,200,000, wages $240,000 The owner says Riverside has the payroll problem because it spends $90,000 more on wages. How should the bookkeeper answer? - a) Riverside is the problem. $240,000 is plainly the larger payroll of the two - b) The two cannot be compared until both locations reach the same sales volume - **✓ c) As a share of sales, Downtown spends 25% on wages and Riverside 20%** - d) Compare each location's wages with its net income, not with its sales > Compare wages as a percentage of sales. Downtown spends 150,000 ÷ 600,000 = 25% and Riverside 240,000 ÷ 1,200,000 = 20%, so Downtown carries the heavier payroll. Dollar totals do not compare locations of different size. ### Q18. A print shop sells a delivery van on August 14 for $9,000 cash. The van cost $32,000 and has $26,000 of accumulated depreciation, so its book value is $6,000. How does the sale appear on the profit and loss? - a) Sales revenue of $9,000, with the van's $6,000 book value charged to cost of goods sold - **✓ b) A $3,000 gain reported below operating income; the $9,000 is not sales revenue** - c) A $3,000 gain included in sales revenue, since the shop sold something for cash - d) Nothing at all. The sale only swaps one asset for another on the balance sheet > Proceeds less book value is the gain: 9,000 − 6,000 = 3,000. It goes below operating income as other income, so sales keep showing only the shop's printing. Running the $9,000 through revenue would inflate sales and gross margin. ### Q19. An owner gets a profit and loss for the year and a balance sheet as of December 31. Which relationship shows the two came from the same books? - a) Cash on the balance sheet equals net income for the year on the profit and loss - b) Total equity on the balance sheet equals the year's net income on the profit and loss - **✓ c) Beginning equity plus net income, less draws, equals ending equity on the balance sheet** - d) Accounts receivable on the balance sheet equals the year's total sales on the profit and loss > Net income is closed into equity, so equity changes by the profit less what the owner took out. Cash moves with collections and payments, not profit. Equity also holds earlier years' profits and contributions, and receivables show only what customers still owe. ### Q20. On December 31 a bakery owes $60,000 on a five-year equipment loan. The amortization schedule shows $11,000 of principal falling due during the coming year. How should the loan appear on the December 31 balance sheet? - a) $60,000 under long-term liabilities, since the loan has five years to run - b) $60,000 under current liabilities, since the whole balance is owed to the bank - c) $11,000 under current liabilities and $60,000 under long-term liabilities - **✓ d) $11,000 under current liabilities and $49,000 under long-term liabilities** > The principal due within twelve months is a current liability; the rest stays long-term: 11,000 current and 60,000 − 11,000 = 49,000 long-term. Leaving the whole $60,000 long-term flatters working capital and the current ratio, calling it all current understates them, and showing $11,000 beside the full $60,000 counts the same principal twice — the current portion of long-term debt. ### Q21. A furniture store's December 31 balance sheet shows current assets of $240,000 — $180,000 of it inventory that has been slow to move, the remaining $60,000 cash and receivables — against current liabilities of $100,000. The current ratio is 2.4, yet the store could not make its January payroll. Which measure would have shown the risk? - a) Gross margin, which shows how much of each sale is left to cover the payroll - **✓ b) The quick ratio, cash and receivables over current liabilities: 60,000 ÷ 100,000 = 0.6** - c) Working capital, the $140,000 by which current assets exceed current liabilities - d) Debt to equity, which weighs what the store owes against what the owner has in it > The current ratio treats inventory as though it were nearly cash. The quick ratio strips it out: 60,000 of quick assets against 100,000 due, or 60 cents per dollar. Working capital leans on the same inflated $240,000, gross margin measures profit per sale, and debt to equity is a solvency measure, not a payroll one — liquidity ratios. ### Q22. A supply company sells only on account, on terms of net 30. Sales for the year were $730,000 and the December 31 Accounts Receivable balance is $120,000. What does that say about collections? - **✓ a) Receivables average about 60 days of sales, roughly twice the 30 days allowed** - b) Receivables are 16% of sales, which is normal for a company on net 30 - c) Collections are on schedule, since a net-30 company carries about one month of sales - d) $120,000 of the year's revenue is not yet earned and belongs off the profit and loss > Sales of 730,000 are about 2,000 a day, so a 120,000 balance is 60 days of sales. Customers are taking twice the terms. One month of sales here would be about 60,000, and an invoiced sale is earned whether or not it has been collected. ### Q23. A landscaping company's statement of cash flows for the year shows: Operating activities $40,000 Investing activities −$95,000 Financing activities $70,000 Cash on January 1 was $22,000. What must the December 31 balance sheet show for cash? - a) $15,000, the net of the three sections of the statement - b) $110,000, the operating and financing inflows added together - **✓ c) $37,000, the opening balance plus the net change of the three sections** - d) $132,000, the opening balance plus the inflows the company took in > The three sections net to 40,000 − 95,000 + 70,000 = 15,000. Add that change to the opening balance: 22,000 + 15,000 = 37,000, which is what the balance sheet shows. The $15,000 is the change, not the balance, and the larger figures ignore the $95,000 of investing outflow. ### Q24. A print shop pays its landlord a $4,500 security deposit in March. The lease runs four more years, and the deposit is refundable when the shop moves out. Where does the $4,500 belong on the balance sheet? - a) In current assets as prepaid rent, since it was paid to the landlord in advance - b) Nowhere; it is rent expense in March, when the money left the checking account - c) In current assets as a receivable, since the landlord will hand the money back - **✓ d) In other assets, below current assets, as it is not coming back within a year** > The deposit is an asset — money the landlord is holding — but it will not turn into cash for four years, so it sits outside current assets. It is not prepaid rent, because it buys no occupancy; it is not a current receivable, because nothing is collectible this year; and expensing it writes off money the shop still owns — current versus non-current classification. ### Q25. A banker reviewing a loan application asks whether the business generates enough cash from its day-to-day operations to cover a new monthly payment. Which statement answers that question most directly? - a) The profit and loss, because net income is what the business has available to pay - **✓ b) The statement of cash flows, and in particular its operating activities section** - c) The balance sheet, because the cash line shows what is on hand to make payments - d) The accounts receivable aging, because it shows the cash that is due to come in > Only the cash-flow statement separates cash produced by operations from cash raised by borrowing or spent on equipment, which is the banker's question. Net income can be earned and uncollected; the balance-sheet cash line is one moment's balance; an aging lists what customers owe, not what the business generates each month — the operating section of the statement of cash flows. ### Q26. A contractor's December 31 balance sheet shows liabilities of $260,000 and equity of $65,000. A supplier weighing credit terms asks what those figures say about how the company is financed. What should the bookkeeper tell him? - **✓ a) Creditors have put in about $4 for every $1 the owner has in the business** - b) The company is insolvent, because liabilities are larger than the owner's equity - c) The company holds $195,000 of assets, being the difference between the figures - d) Nothing, until the profit and loss for the year is read alongside the balance sheet > Debt to equity is 260,000 ÷ 65,000 = 4, so outside money funds four times what the owner has at risk. That is highly leveraged but not insolvent, which means unable to pay debts as they come due. Assets are the sum, $325,000, not the difference. ### Q27. A hardware store's December 31 balance sheet carries $22,000 of discontinued fittings that have not sold in three years, still at original cost. The owner expects to scrap them. What is the effect on the statements until the inventory is written down? - a) Only the balance sheet is affected; profit is untouched because nothing was sold - b) Cost of goods sold is overstated by $22,000 and the year's profit is understated - **✓ c) Total assets are overstated by $22,000, and so is the profit reported to date** - d) There is no effect; inventory stays at cost until it is sold or physically scrapped > Goods that will never sell are not worth their cost. The write-down moves $22,000 from inventory to expense, so until it is made, assets and cumulative profit are both too high by that amount. Cost of goods sold is understated, not overstated. ### Q28. A gift shop has sales of $480,000, cost of goods sold of $288,000, operating expenses of $168,000 and net income of $24,000. The owner says the shop "keeps 40 cents of every dollar." What should the bookkeeper point out? - **✓ a) 40% is the gross margin; after operating expenses the shop keeps 5% of each dollar** - b) 40% is the net margin, and the gross margin is 5% once the cost of goods is taken - c) The claim holds, since 480,000 − 288,000 leaves $192,000 for the owner to keep - d) Net margin is 24,000 ÷ 168,000, or 14 cents for every dollar the shop spends > Gross margin is (480,000 − 288,000) ÷ 480,000 = 40%. Net margin is 24,000 ÷ 480,000 = 5%. The owner quoted gross margin but meant what is left after everything. The $192,000 of gross profit still has to cover $168,000 of operating costs. ### Q29. An owner points at her balance sheet and says it is wrong: the building she bought for $300,000 eight years ago would sell today for $500,000, but the statement still shows the $300,000 less depreciation. How should the bookkeeper answer? - a) She is right, and the building should be written up to $500,000 with equity raised - b) She is right, but only a licensed appraiser may change the figure on the books - c) The building belongs at $500,000, with the $200,000 difference reported as income - **✓ d) Assets are carried at what was paid for them, less depreciation, not at market value** > Under the cost principle an asset stays on the books at what the company paid, reduced by depreciation. An unrealised rise in market value is not recorded and is certainly not income, whoever estimates it. That is why a balance sheet is not a valuation of the business; a buyer or a lender applies market values separately, outside the books — the historical cost principle. ### Q30. A bookkeeper is sorting this year's cash movements into the financing section of the statement of cash flows. Which two items belong there? Choose two. - **✓ a) The $50,000 the owner put in from her personal savings in April** - b) The $18,000 paid in June for a used forklift the warehouse will keep for years - **✓ c) The $9,000 of principal repaid on the equipment loan during the year** - d) The $31,000 collected in November on invoices issued in September > Financing covers cash moving between the business and its owners or lenders: money put in, money drawn out, loan proceeds and principal repaid. The forklift is investing, and collecting customer invoices is operating. The interest part of a loan payment is also operating. ## Payroll, sales tax, 1099s, fixed assets & period close ### Q1. An employee earns gross wages of $3,000 for the pay period. Federal income tax withheld is $300 and the employee's share of Social Security and Medicare is $229.50, so net pay is $2,470.50. Which entry records the payroll (ignoring the employer's own taxes)? - a) Debit Wages Expense 2,470.50; Debit Payroll Tax Expense 529.50; Credit Cash 3,000 on payday - **✓ b) Debit Wages Expense 3,000; Credit Payroll Liabilities 529.50; Credit Cash 2,470.50** - c) Debit Wages Expense 3,000; Credit Cash 3,000 on the payroll date - d) Debit Wages Expense 2,470.50; Credit Cash 2,470.50 on the payroll date > The company's cost is the gross wage, $3,000. The $529.50 withheld belongs to the employee and is owed to the government, so it is a liability until remitted — never the employer's expense. Booking only net pay understates wages and hides the amount owed; booking withholdings as tax expense charges the company for the employee's taxes — gross pay is the expense, withholdings are liabilities. ### Q2. For the same $3,000 payroll, the employer owes its own matching share of Social Security and Medicare, $229.50, which will be deposited with the IRS next month. How is the employer's share recorded on payday? - a) Nothing is recorded until the deposit is actually made to the IRS next month - b) Debit Payroll Tax Liabilities 229.50; Credit Cash 229.50 on payday - **✓ c) Debit Payroll Tax Expense 229.50; Credit Payroll Tax Liabilities 229.50** - d) Debit Wages Expense 229.50; Credit Cash 229.50 on the payroll date > The employer's share is a genuine cost of employing people, incurred when the wages are earned, so it is an expense on payday. Because it has not yet been deposited it is also a liability. Waiting for the deposit understates the period's expense and hides the debt; crediting cash now records a payment that has not happened — employer payroll taxes are an expense and a liability until deposited. ### Q3. On the 15th the bookkeeper sends the IRS a $759 deposit made up of last month's withheld income tax, the employee FICA, and the employer's matching FICA, all of which were recorded on the payroll dates. Which entry records the deposit? - **✓ a) Debit Payroll Tax Liabilities 759; Credit Cash 759** - b) Debit Payroll Tax Expense 759; Credit Cash 759 on the 15th - c) Debit Wages Expense 759; Credit Cash 759 - d) Debit Cash 759; Credit Payroll Tax Liabilities 759 > Every dollar in the deposit was already recognised on payday — the withholdings as liabilities and the employer's share as expense plus liability. Paying it simply settles the liability: debit the liability, credit cash. Charging the deposit to expense counts the employer's share twice and treats employee withholdings as company cost; the reversed entry would increase the debt — settling a recorded liability. ### Q4. A furniture store invoices a customer $1,000 for a table plus $80 of sales tax, total $1,080. How much revenue does the store record, and what is the $80? - a) Revenue $1,080; the $80 is income earned from collecting tax - b) Revenue $1,000; the $80 is a sales tax expense of the store - c) Revenue $920; the $80 is a deduction that reduces the sale - **✓ d) Revenue $1,000; the $80 is a liability owed to the state** > Sales tax is collected on behalf of the state, so it never belongs to the store. The sale is $1,000 of revenue; the $80 is a liability (Sales Tax Payable) until it is remitted. Including it in revenue overstates sales and income; calling it an expense charges the store for money that was never its own — sales tax collected is a liability, not income. ### Q5. A retailer's year-end reports show Sales Tax Expense of $9,600 on the profit and loss and a zero balance in Sales Tax Payable. The store collects tax on every sale and files quarterly. What most likely happened? - a) The store collected no tax this year because all its customers held exemption certificates - **✓ b) Tax collected went into sales and remittances into expense, overstating both revenue and expenses** - c) The remittances were recorded correctly, because sales tax is an ordinary expense of doing business - d) The payable was cleared because the store remitted the tax the same day it was collected > Tax collected should build a liability that each remittance draws down. A zero payable beside that expense means collections went into sales and payments into expense, so revenue and expenses are both overstated. Net income looks about right, but taxable sales are wrong. ### Q6. At year end a design studio reviews its vendor payments to decide who needs a Form 1099-NEC. Assume every payment is above the reporting threshold and all were paid by check. Which payee should receive one? - **✓ a) A freelance copywriter, a sole proprietor, paid $6,000 for writing services** - b) An office-supply company, paid $7,500 for paper, toner and a desk during the year - c) An IT firm organised as a C corporation, paid $9,000 for network support services - d) A part-time receptionist on the payroll, paid $8,000 in wages during the year > Form 1099-NEC reports payments for services to non-employees who are not incorporated — the freelance copywriter. Purchases of goods are not reportable, payments to corporations are generally exempt, and an employee's wages belong on a W-2. Missing a contractor or sending a 1099 to an employee both create filing problems — the 1099-NEC rule: services, non-employee, not a corporation. ### Q7. A landscaping company is about to hire an independent contractor for a six-week project. Before the first payment, the bookkeeper asks the contractor for a signed Form W-9. What is the W-9 for? - a) It is the contractor's written agreement to pay their own income taxes on the project fee - b) It authorises the company to withhold federal income tax from each of the contractor's payments - **✓ c) It gives the company the contractor's name, taxpayer ID and entity type for year-end reporting** - d) It registers the contractor with the state as a licensed vendor for the duration of the project > A W-9 is the payee's certification of name, address, taxpayer identification number and entity type. The company needs it to decide whether a 1099 is required and to file it accurately. It is not a withholding authorisation (that is an employee's W-4), not a tax agreement, and not a licence. Collecting it before the first payment avoids chasing it at year end — the W-9 supplies information, not withholding. ### Q8. In the same week a print shop buys a $3,200 laptop it expects to use for three years and pays $180 to repair a jammed printer. How should the two payments be recorded? - a) Both as expenses of the month in which the two payments were made - b) Both as fixed assets to be depreciated over three years - **✓ c) The laptop as a depreciated fixed asset; the repair as an expense** - d) The laptop as an expense; the repair as a depreciated fixed asset > A purchase that will be used beyond the current year is capitalised as an asset and its cost spread over its useful life through depreciation. A repair that merely keeps existing equipment working is an expense of the period. Expensing the laptop overstates this month's costs; capitalising a repair parks an expense on the balance sheet — the capitalise-versus-expense rule. ### Q9. On January 1 a café buys an espresso machine for $12,000. It expects to use it for five years and then sell it for $2,000. Using straight-line depreciation, which entry records the first full year? - **✓ a) Debit Depreciation Expense 2,000; Credit Accumulated Depreciation 2,000** - b) Debit Depreciation Expense 2,400; Credit Equipment 2,400 for the year - c) Debit Depreciation Expense 2,000; Credit Cash 2,000 for the year - d) Debit Accumulated Depreciation 2,000; Credit Depreciation Expense 2,000 for the year > Straight-line depreciation spreads cost less salvage evenly: (12,000 − 2,000) ÷ 5 = 2,000 a year. The credit goes to Accumulated Depreciation, a contra-asset shown under the equipment so the original cost stays visible; the equipment account itself is not reduced. No cash moves, and the reversed entry would add value to the machine — straight-line depreciation and the contra-asset account. ### Q10. It is April 8 and the owner wants the March financial statements by the end of the day. Which step must be done before the statements are reliable? - a) Pay every open vendor bill so that accounts payable is zero - b) Delete any bank transactions that have not yet been categorised - c) Run the April payroll so that wages are fully up to date - **✓ d) Reconcile every bank and card account to its March statement** > Reconciling proves that every transaction the bank processed is in the books and nothing is duplicated or missing; until then the cash balance, and everything it touches, is unproven. Paying bills changes March's position rather than verifying it, April payroll belongs to April, and deleting uncategorised transactions throws away real activity — the month-end close starts with reconciliation. ### Q11. In February a staff member edits a vendor bill dated last November, changing it from $1,400 to $1,800, after the prior year's statements and tax return were prepared. Which control would have prevented this, and what is the result now? - a) Deleting the bill and re-entering it in February; no consequence, since the expense has only moved - **✓ b) A closing date on the prior year; the ledger now disagrees with the statements and return already issued** - c) Making the bill a recurring template so it can't be edited; the return is unaffected because bills aren't on it - d) Restricting the staff member to view-only access; the change reverses itself at year end > A closing date locks the prior period, so any change needs a logged override. Without one, a casual edit rewrites last year's expenses and the statements and return on file no longer match the ledger. Re-dating still alters the prior year. ### Q12. A client's tax return has been filed and accepted. The owner asks whether the prior year's receipts, bank statements and invoices can now be shredded to save space. What should the bookkeeper advise? - a) Yes — once the return has been accepted the records have served their purpose - b) Yes for receipts and invoices, but bank statements must be kept forever - c) No — every record must be kept permanently for as long as the business exists and beyond - **✓ d) No — keep them for as long as the return can be examined, usually several years** > A filed return can be examined years after it is accepted, and it is only as defensible as the documents behind it. Receipts, invoices, payroll records and bank statements substantiate the figures and must be kept for the statutory period — in principle several years, longer for assets and payroll. Acceptance is not approval, and "forever" is neither required nor practical — records retention supports the return. ### Q13. A cleaning company pays Ramon as a 1099 contractor. The company sets his hours, he drives its van, uses its supplies, was trained in its methods, and can't take other clients. The owner says it's settled because Ramon signed a contractor agreement. What is the correct reading? - a) The signed agreement decides it, because worker status is whatever the two parties put in writing - b) He is a contractor as long as the company issues him a Form 1099-NEC each January - c) He is a contractor because he is paid by the job instead of through payroll each pay period - **✓ d) The facts of control point to an employee, and misclassification means back taxes and penalties** > Status depends on the facts of control, tools and freedom to take other clients. A contract, a 1099 or a payment method can't turn an employee into a contractor. If the facts say employee, the company owes withholding, employer taxes and penalties. ### Q14. Employees earned $4,200 of wages for work done between December 26 and December 31. Their paychecks are dated January 5. The company closes its books at December 31. What should the December books show for those wages? - a) Nothing in December; the wages belong to January, when the checks are dated and the cash leaves - **✓ b) Debit Wages Expense 4,200; Credit Accrued Wages Payable 4,200 as a December 31 adjusting entry** - c) Debit Accrued Wages Payable 4,200; Credit Wages Expense 4,200 dated December 31 for the year - d) Debit Prepaid Wages 4,200; Credit Cash 4,200 on December 31 so the cost lands in the right year > The work was done in December, so December carries the cost even though the cash leaves in January: debit the expense, credit a liability, and the January payroll clears it. Omitting it understates December wages and December liabilities. The reversed entry credits an expense that was genuinely incurred, and nothing was prepaid — wages follow the work, not the check date. ### Q15. A new bookkeeper is setting up payroll and asks which payroll costs the company pays out of its own pocket rather than holding back from the employee's check. Which item is charged entirely to the employer? - a) Federal income tax withheld according to the employee's Form W-4 - b) The employee's own share of Social Security and Medicare tax - **✓ c) Federal unemployment tax (FUTA) on the wages the employee earns** - d) The employee's voluntary contribution to the company retirement plan > Federal unemployment tax is levied on the employer and is never held back from a worker's pay, so it is payroll tax expense as soon as the wages are earned. Income tax withholding, the employee's FICA share and a retirement contribution are all the employee's money, kept back from gross pay and owed onward — employer taxes are a cost, withholdings are a liability. ### Q16. A client uses an outside payroll service. Each payday the bank feed shows one $9,470 withdrawal covering net pay and taxes, which the bookkeeper categorises to Payroll Expense; she also enters the payroll journal from the service's report. Wages Expense looks far too high and Payroll Liabilities keeps growing. What has gone wrong? - a) The payroll journal should not be entered at all; the bank withdrawal is the only record a payroll run needs - **✓ b) The bank withdrawal was coded as a second expense instead of clearing the liabilities the journal created** - c) The payroll service is depositing the taxes late, which is why the liability balances keep growing each month - d) Payroll Liabilities always grows, because the employer's share stays on the books until the annual return is filed > The journal already records the wages, the withholdings and the employer taxes. The withdrawal is the payment of those amounts, so it must be split against the liability accounts rather than coded to expense again — hence inflated wages and liabilities that never clear. Dropping the journal would hide the withholdings, and neither a late deposit nor the employer's share explains both symptoms — a payment settles a liability. ### Q17. A court order requires a company to hold back $150 from an employee's weekly paycheck and send it to a state child-support agency. How should the $150 be handled in the books each week? - a) As part of Wages Expense, since it is money the company pays out on the employee's behalf - b) As a reduction of Wages Expense, because the employee never receives that part of the gross pay - **✓ c) As a liability when withheld, cleared when it is sent, with no effect on Wages Expense** - d) As Payroll Tax Expense of the employer, alongside the company's Social Security and Medicare match > Gross wages are the company's expense whatever happens to them afterwards. A garnishment is the employee's own money, held back and owed to a third party, so it credits a liability that the payment to the agency clears. Reducing wages understates the cost of employing the worker, and this is not a tax the employer bears — an amount withheld is a liability, not an expense. ### Q18. Cash is tight in March. The owner tells the bookkeeper to use the $4,800 of withheld income tax and FICA in Payroll Liabilities to pay rent, and deposit it with the IRS next month. How should the bookkeeper respond? - a) Agree, provided the deposit is made before the quarterly payroll return is filed - b) Agree, as long as a journal entry moves the shortfall to a loan-from-owner account until the cash returns - c) Decline for this amount only; smaller balances can be deposited whenever cash allows - **✓ d) Decline; withheld tax is held in trust, and a late deposit brings penalties and personal liability** > Withheld income tax and FICA belong to the employees and are held in trust until deposited on schedule. Missing the deadline brings penalties and interest, and those who decided can be held personally liable. No journal entry creates the cash. ### Q19. A boutique sells a jacket for $200 plus $16 of sales tax, not yet remitted. The customer returns it in the same filing period and gets the full $216 back. What does the refund do to the books? - **✓ a) Sales fall by $200 and Sales Tax Payable falls by $16, so only tax on kept sales is remitted** - b) Sales fall by $216, and the $16 stays in Sales Tax Payable until the next return is filed - c) Sales fall by $200 and the $16 becomes a refund expense, since the tax was already reported - d) Nothing changes for the return; the tax follows the original sale and the refund is an expense > The store collected the tax as the state's agent, so when the sale is undone it never owed it. The credit reverses revenue ($200) and the liability ($16) together. Charging all $216 to sales leaves $16 to remit on a sale that no longer exists. ### Q20. A shop pays a local supplier $650 for cleaning supplies plus $52 of sales tax. The bookkeeper debits the $52 to Sales Tax Payable, reasoning that it offsets tax the shop collects from its own customers. Why is that wrong? - a) Sales tax paid to a supplier is never part of what was bought, so it belongs in its own Sales Tax Expense account - b) The offset is right in amount but must wait until the shop files and pays its own sales tax return - **✓ c) Tax paid on a purchase is part of what the supplies cost; it doesn't offset tax collected from customers** - d) The offset applies only to goods bought to resell, and these supplies are used up in the store > US sales tax has no input credit. Tax paid to a supplier goes with the item it was charged on, here supplies expense. Sales Tax Payable holds only tax collected from customers, so a debit there quietly shrinks the remittance. ### Q21. A tile wholesaler sells $4,000 of tile to a contractor who has supplied a valid resale certificate, so no sales tax is charged on the sale. How should the wholesaler handle it? - **✓ a) Record $4,000 of revenue, keep the certificate on file, and report the sale as exempt on the return** - b) Record $4,000 of revenue and leave the sale off the sales tax return, since no tax was collected - c) Record $4,000 of revenue and accrue the tax anyway, in case the certificate is later challenged - d) Record the sale net of the tax normally charged, treating the certificate as a customer discount > An exempt sale is still a sale: it belongs in revenue and on the return, where gross sales are reported and the exemption deducted, with the certificate as the evidence behind it. Omitting the sale makes the return disagree with the books, accruing tax records a liability nobody owes, and a certificate is not a price concession — exemptions are documented, not hidden. ### Q22. A furniture store in a destination-based state charges its own city's 8% rate on every sale. A $5,000 order ships to a county with a combined 9% rate, so $50 less tax was collected than the state expects. The state assesses the difference. Who owes the $50? - a) The customer owes it, so the store should collect the shortfall before remitting anything to the state - **✓ b) The store owes the correct tax; it remits the difference and charges the destination rate from now on** - c) Nobody owes it, because the store used the rate registered for its own location in good faith - d) The store may net the shortfall against tax over-collected on other sales in the same period > The seller owes the correct tax whether or not it collected enough. In a destination-based state the rate follows the ship-to address, so the store remits the $50 and fixes its rate setup. Good faith and netting against other sales don't change that. ### Q23. A studio paid an unincorporated graphic designer $9,000 over the year, $3,500 by check and $5,500 on the company credit card. What amount goes on the Form 1099-NEC? - a) $9,000, the full amount paid in the calendar year, however each payment was made - b) $0, because the designer invoices under a registered business name, which exempts the payments - c) $5,500, because card payments are the traceable ones and the checks are in the studio's bank records - **✓ d) $3,500, because card payments are reported to the IRS by the card processor, not the studio** > Card payments are reported by the processor on Form 1099-K, so the payer leaves them off to avoid double reporting. Only the $3,500 paid by check goes on the 1099-NEC. A registered trading name isn't incorporation. ### Q24. A bakery pays $2,400 a month to rent its shop from a landlord who owns the building personally, and $500 a month to a sole-proprietor cleaner. At year end, how should the two payments be reported? - **✓ a) The rent on a Form 1099-MISC and the cleaning on a Form 1099-NEC** - b) Both on a Form 1099-NEC, since both payees are unincorporated - c) The rent on a Form 1099-NEC and the cleaning on a Form 1099-MISC - d) Neither one; a lease and a service agreement are contracts, not reportable > The 1099-NEC reports fees for services performed by a non-employee, which is what the cleaner's $6,000 is. Rent is not payment for services; it is reported as rent on the 1099-MISC. Swapping the forms files the right money in the wrong place, and having a signed contract exempts nothing — the form follows what the money bought. ### Q25. A subcontractor billed a client $18,000 this year and was paid $15,000. The last $3,000 invoice, dated December 18, was paid January 8. The client keeps its books on the accrual basis. What goes on the 1099-NEC for the year just ended? - a) $18,000. The form follows the expense the client recorded on the accrual basis - **✓ b) $15,000. The form reports the cash actually paid during the calendar year** - c) $15,000 now, with a corrected form issued in January once the last invoice is paid - d) $0. The subcontractor reports the income himself, so the client files nothing > Information returns use the cash basis for the calendar year, whatever basis the payer's books use. Only the $15,000 actually paid is reported, and the January payment goes on next year's form. No corrected form is needed for it. ### Q26. A landscaper has paid a subcontractor $4,000 so far this year. The subcontractor has ignored three requests for a Form W-9 and won't give a taxpayer identification number. What should the company do? - a) Recode the payments to miscellaneous expense so no information return is needed - b) Stop paying the subcontractor and treat the amounts already paid as outside the 1099 rules - **✓ c) Start backup withholding on further payments and still file the 1099 for the year's amounts** - d) Nothing more; with no W-9 there is no number to report, so no obligation to file > The duty to report belongs to the payer and doesn't go away when a payee won't identify itself. A missing taxpayer ID calls for backup withholding on later payments, and the 1099 is still filed. The other choices leave an unreported payment and penalties. ### Q27. A bakery buys an oven for $18,000 and also pays $900 freight, $1,200 for installation and wiring, $1,440 sales tax on the purchase, and $400 to train two staff on it. What goes in the Equipment account? - **✓ a) $21,540. Every cost of getting the oven in place and ready to use is capitalised** - b) $21,940. Every amount paid in connection with acquiring the oven belongs in the asset - c) $18,000. Only the invoice price is the oven's cost, and the rest are expenses of the month - d) $20,100. Freight and installation are capitalised, but sales tax is recovered on the tax return > Asset cost includes the price, freight, installation and the sales tax charged, $21,540 in all. Training is a cost of the staff, not the oven, so it is expensed. Sales tax paid isn't recoverable. ### Q28. A delivery van that cost $28,000 has accumulated depreciation of $22,000 when the company sells it for $9,000 cash. What does the sale produce, and what happens to the two van accounts? - a) A $19,000 loss; the $28,000 of cost leaves the books against the $9,000 received - b) A $3,000 gain; leave the accumulated depreciation in place and reduce Equipment by $6,000 - c) No gain or loss; record the $9,000 as other income and write the van down to zero - **✓ d) A $3,000 gain; remove the $28,000 of cost and the $22,000 of accumulated depreciation** > Carrying value is cost less accumulated depreciation: $28,000 − $22,000 = $6,000, so $9,000 of proceeds is a $3,000 gain. Disposal removes both accounts in full; leaving the accumulated depreciation behind keeps a sold van on the schedule. Measuring against original cost ignores the depreciation already taken, and treating the whole receipt as income double-counts it — gain is proceeds less carrying value. ### Q29. A company buys a $9,600 machine on October 1 and puts it into service the same day. The machine has a four-year life and no salvage value and is depreciated straight-line, and the company closes its books on December 31. How much depreciation belongs in the year of purchase? - a) $2,400 — a full year's charge, because the machine was bought during the year - b) $9,600 — the whole cost, because the machine was paid for in the current year - **✓ c) $600 — three months of the $2,400 annual charge, counted from the day it went into service** - d) $0 — depreciation begins with the first full year the machine is in service > Depreciation runs from the date an asset is placed in service, so a machine working for three months of the year carries three months of charge: $9,600 ÷ 4 = $2,400 a year, $200 a month, $600 this year. A full year overstates the expense, expensing the cost skips depreciation altogether, and waiting a year understates it — depreciation starts when the asset goes to work. ### Q30. At June 30 the bank reconciliation is finished and balanced, yet Undeposited Funds still shows $3,600. The office manager confirms every customer check received in June went to the bank before month end. What is the most likely explanation? - **✓ a) The June deposits were entered straight to income, leaving the received payments stranded in the account** - b) Undeposited Funds is a clearing account, so it is expected to carry a balance from month to month - c) The deposits are in transit; the bank hasn't credited them yet, and that is where such amounts wait - d) The payments were never applied to the customers' invoices, which is what the clearing account holds them for > Undeposited Funds holds received payments only until the deposit is recorded. If that deposit was entered as new income, the payments stay stranded and revenue is counted twice. A deposit in transit sits in the bank account, not here.