Journal Entries Quiz – 50 True or False Questions (With Answers & Detailed Explanations)

Journal Entries Quiz (True or False)

Question 1

A journal entry is the first step in recording a financial transaction.
Answer: True

Explanation:
In accounting, transactions are first recorded in the journal before being posted to the ledger. This ensures a chronological record of all business activities.

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Question 2

Debits must always equal credits in a journal entry.
Answer: True

Explanation:
The double-entry system requires equality between debits and credits to maintain the accounting equation: Assets = Liabilities + Equity.

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Question 3

Journal entries are recorded after preparing financial statements.
Answer: False

Explanation:
Journal entries are recorded before financial statements. They form the basis for the entire accounting cycle.

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Question 4

Cash is increased with a credit entry.
Answer: False

Explanation:
Cash is an asset account and increases with a debit, not a credit.

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Question 5

Revenue accounts are normally credited.
Answer: True

Explanation:
Revenue increases equity and is recorded with a credit entry.

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Question 6

Expenses are increased with credits.
Answer: False

Explanation:
Expenses increase with debits because they reduce equity.

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Question 7

Accounts Payable is a liability account.
Answer: True

Explanation:
It represents amounts owed to suppliers and is classified as a liability.

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Question 8

Purchasing equipment on account increases liabilities.
Answer: True

Explanation:
When equipment is purchased on credit, Accounts Payable increases.

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Question 9

Journal entries do not require descriptions.
Answer: False

Explanation:
Descriptions are important for clarity and audit trails.

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Question 10

Unearned revenue is recorded as a liability.
Answer: True

Explanation:
It represents cash received before services are delivered.

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Question 11

Owner’s capital increases with a debit entry.
Answer: False

Explanation:
Capital increases with a credit because it represents equity.

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Question 12

Depreciation expense is recorded with a debit entry.
Answer: True

Explanation:
Depreciation is an expense and increases with debits.

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Question 13

Posting is the process of transferring journal entries to the ledger.
Answer: True

Explanation:
Posting moves entries from the journal to specific ledger accounts.

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Question 14

Assets always increase with credits.
Answer: False

Explanation:
Assets increase with debits and decrease with credits.

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Question 15

Accounts Receivable increases when sales are made on credit.
Answer: True

Explanation:
When customers buy on credit, the company records a receivable.

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Question 16

A journal entry can contain more than two accounts.
Answer: True

Explanation:
This is called a compound journal entry.

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Question 17

Cash sales increase Accounts Receivable.
Answer: False

Explanation:
Cash sales increase Cash, not Accounts Receivable.

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Question 18

Interest expense is recorded with a credit.
Answer: False

Explanation:
Expenses are always debited.

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Question 19

The accounting equation must remain balanced after every journal entry.
Answer: True

Explanation:
Every transaction affects at least two accounts equally.

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Question 20

Dividends decrease equity.
Answer: True

Explanation:
Dividends reduce retained earnings, lowering equity.

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Question 21

Prepaid expenses are liabilities.
Answer: False

Explanation:
Prepaid expenses are assets because they represent future benefits.

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Question 22

Equipment is a long-term asset.
Answer: True

Explanation:
Equipment is used over multiple accounting periods.

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Question 23

Journal entries are always recorded in chronological order.
Answer: True

Explanation:
The journal provides a time-based record of transactions.

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Question 24

Revenue is increased with a debit entry.
Answer: False

Explanation:
Revenue increases with credits.

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Question 25

A trial balance is prepared before journal entries.
Answer: False

Explanation:
Trial balance comes after posting journal entries.

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Question 26

Purchasing supplies for cash increases assets and decreases assets.
Answer: True

Explanation:
One asset (Supplies) increases while another (Cash) decreases.

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Question 27

Liabilities decrease with debits.
Answer: True

Explanation:
Liabilities have a normal credit balance.

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Question 28

Owner withdrawals reduce equity.
Answer: True

Explanation:
Withdrawals are recorded as debits to capital.

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Question 29

Journal entries are optional in accounting systems.
Answer: False

Explanation:
They are a mandatory part of the accounting cycle.

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Question 30

A bank loan increases liabilities.
Answer: True

Explanation:
Borrowing creates an obligation to repay.

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Question 31

Cash is never credited in accounting.
Answer: False

Explanation:
Cash is credited when it decreases.

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Question 32

Revenue recognition happens when cash is received, regardless of performance.
Answer: False

Explanation:
Under accrual accounting, revenue is recognized when earned.

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Question 33

Journal entries help in preparing financial statements.
Answer: True

Explanation:
They form the basis for ledger balances used in statements.

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Question 34

Accrued expenses are liabilities.
Answer: True

Explanation:
They represent expenses incurred but not yet paid.

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Question 35

Posting errors can lead to an unbalanced trial balance.
Answer: True

Explanation:
Incorrect posting affects account balances.

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Question 36

Inventory is a revenue account.
Answer: False

Explanation:
Inventory is an asset.

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Question 37

Cash received from customers reduces Accounts Receivable.
Answer: True

Explanation:
Payment clears the receivable.

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Question 38

Journal entries must always be approved before recording.
Answer: True

Explanation:
Internal controls require authorization.

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Question 39

Every debit must have a corresponding credit.
Answer: True

Explanation:
This is the core principle of double-entry accounting.

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Question 40

Expenses increase equity.
Answer: False

Explanation:
Expenses reduce equity.

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Question 41

Prepaid insurance is expensed immediately.
Answer: False

Explanation:
It is first recorded as an asset.

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Question 42

Revenue can be earned even if cash is not received.
Answer: True

Explanation:
Under accrual accounting, revenue is recognized when earned.

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Question 43

Journal entries are part of the accounting cycle.
Answer: True

Explanation:
They are the first formal step in the cycle.

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Question 44

Liabilities increase equity.
Answer: False

Explanation:
Liabilities are separate from equity and represent obligations.

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Question 45

The journal is also called the book of original entry.
Answer: True

Explanation:
Because transactions are first recorded here.

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Question 46

Accounts Receivable is increased with a credit.
Answer: False

Explanation:
It increases with debits.

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Question 47

Dividends are treated as expenses.
Answer: False

Explanation:
Dividends are distributions of profit, not expenses.

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Question 48

Adjusting entries are part of journal entries.
Answer: True

Explanation:
They ensure accurate financial reporting at period end.

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Question 49

A journal entry affects at least two accounts.
Answer: True

Explanation:
Every transaction involves at least one debit and one credit.

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Question 50

Journal entries are unnecessary in computerized accounting systems.
Answer: False

Explanation:
Even software systems generate journal entries automatically behind the scenes.

Part 1: Basic Accounting Principles & Rules (Questions 1 – 15)

Q1: In double-entry bookkeeping, every journal entry must have at least one debit and one credit.

• Answer: TRUE

• Explanation: The fundamental rule of double-entry accounting dictates that every transaction affects at least two accounts. To keep the accounting equation in balance, total debits must always equal total credits.

Q2: An increase in an asset account is always recorded as a credit.

• Answer: FALSE

• Explanation: Assets have a normal debit balance. Therefore, an increase in an asset account (like Cash or Equipment) is always recorded as a Debit, while a decrease is recorded as a Credit.

Q3: Liabilities and Owner’s Equity accounts both have a normal credit balance.

• Answer: TRUE

• Explanation: According to the accounting equation ($Assets = Liabilities + Equity$), both liabilities and equity sit on the right side, meaning they increase with a Credit and decrease with a Debit.

Q4: A journal entry can have multiple debits and multiple credits, which is known as a compound journal entry.

• Answer: TRUE

• Explanation: A compound entry records a transaction that affects three or more accounts (e.g., buying land with partial cash and a note payable). As long as total debits equal total credits, it is perfectly valid.

Q5: The Journal is known as the “book of original entry” because transactions are recorded there first chronologically.

• Answer: TRUE

• Explanation: Transactions are first analyzed and entered into the General Journal in date order before being posted to the General Ledger.

Q6: Expenses have a normal credit balance because they reduce Owner’s Equity.

• Answer: FALSE

• Explanation: While expenses do reduce equity, they have a normal debit balance. An increase in an expense is recorded as a debit, which ultimately reduces equity when closed.

Q7: The Drawings (or Withdrawals) account has a normal debit balance.

• Answer: TRUE

• Explanation: Owner’s Drawings represent a temporary reduction in equity. Since equity decreases with a debit, the Drawings account carries a normal debit balance.

Q8: If a journal entry is balanced (Debits = Credits), it guarantees that the accounting records contain no errors.

• Answer: FALSE

• Explanation: An entry can balance even if the wrong account was used (e.g., debiting Supplies instead of Equipment) or if the transaction amount was completely omitted or double-counted.

Q9: Revenues have a normal credit balance because they increase Owner’s Equity.

• Answer: TRUE

• Explanation: Revenues increase net income, which increases equity. Since equity increases on the credit side, revenue accounts carry a normal credit balance.

Q10: When a company pays cash for a liability, the journal entry includes a credit to Accounts Payable.

• Answer: FALSE

• Explanation: Paying cash reduces the liability. Since liabilities decrease on the debit side, the correct entry is to Debit Accounts Payable and Credit Cash.

Q11: A credit always signifies an increase in an account balance.

• Answer: FALSE

• Explanation: “Credit” simply means the right side of an account. It increases liabilities, equity, and revenues, but it decreases assets and expenses.

Q12: The account “Prepaid Rent” is classified as an expense and has a normal debit balance.

• Answer: FALSE

• Explanation: Prepaid Rent is an Asset account because it represents a future economic benefit. However, it does have a normal debit balance like all assets.

Q13: Unearned Revenue is classified as a liability account.

• Answer: TRUE

• Explanation: Unearned revenue represents money received before a service is performed. It is an obligation (liability) to deliver goods/services in the future.

Q14: Contra-asset accounts, such as Accumulated Depreciation, have a normal credit balance.

• Answer: TRUE

• Explanation: Contra-assets operate opposite to normal assets. Since assets are debited to increase, contra-assets are credited to increase, reducing the net book value of the main asset.

Q15: When recording a journal entry, debits are always indented to the right, and credits are listed first.

• Answer: FALSE

• Explanation: Standard practice dictates that Debits are listed first on the left margin, and Credits are listed underneath and indented to the right.

Part 2: Operating & Service Transactions (Questions 16 – 30)

Q16: When a business provides services on account, the journal entry includes a credit to Accounts Receivable.

• Answer: FALSE

• Explanation: Providing services on account increases the asset Accounts Receivable ($\rightarrow$ Debit) and increases Service Revenue ($\rightarrow$ Credit).

Q17: Recording a cash advance received from a customer requires a credit to Unearned Revenue.

• Answer: TRUE

• Explanation: Since the work is not yet performed, a liability is created. The entry is Debit Cash and Credit Unearned Revenue.

Q18: When a utility bill is received but not paid immediately, no journal entry is recorded until cash changes hands.

• Answer: FALSE

• Explanation: Under accrual accounting, expenses must be recorded when incurred. The entry is Debit Utilities Expense and Credit Utilities Payable.

Q19: Paying employee wages for the current week results in a debit to Wages Expense and a credit to Cash.

• Answer: TRUE

• Explanation: This transaction increases an operational expense (Debit) and decreases an asset (Credit).

Q20: A company collects cash from a customer who was previously billed on account. The entry should include a credit to Service Revenue.

• Answer: FALSE

• Explanation: Service Revenue was already credited when the customer was billed. The collection entry is Debit Cash and Credit Accounts Receivable.

Q21: Buying office supplies on credit requires a debit to Supplies and a credit to Accounts Payable.

• Answer: TRUE

• Explanation: The asset Supplies increases ($\rightarrow$ Debit) and the liability Accounts Payable increases ($\rightarrow$ Credit).

Q22: When an owner invests a personal vehicle into the company, the business debits Vehicles and credits Owner’s Capital.

• Answer: TRUE

• Explanation: The business entity is separate from the owner. It receives an asset (Debit Vehicles) and records equity creation (Credit Capital).

Q23: When a firm recognizes a cash refund given to a customer for poor service, it directly debits Service Revenue.

• Answer: FALSE

• Explanation: Best practice is to debit a contra-revenue account, such as Sales Returns and Allowances or Customer Refunds, to track service quality issues clearly.

Q24: Paying a cash dividend to shareholders or making an owner withdrawal decreases cash and decreases equity.

• Answer: TRUE

• Explanation: Cash is credited (asset drops) and Dividends/Drawings is debited (temporary equity account drops).

Q25: Borrowing money from a bank by signing a short-term note requires a debit to Notes Payable and a credit to Cash.

• Answer: FALSE

• Explanation: The business is receiving cash, so it should Debit Cash and Credit Notes Payable (increasing the liability).

Q26: Under accrual accounting, revenue is recognized only when cash is received.

• Answer: FALSE

• Explanation: Revenue is recognized when it is earned (goods delivered or services performed), regardless of when cash is collected.

Q27: Paying a monthly office rent of $2,000 requires a debit to Rent Expense and a credit to Cash.

• Answer: TRUE

• Explanation: Rent consumed within the current period is an operating cost (Debit Rent Expense) paid out of cash reserves (Credit Cash).

Q28: Advertising expenses paid in advance for the upcoming six months should be debited directly to Advertising Expense.

• Answer: FALSE

• Explanation: Since it provides a future economic benefit beyond the current month, it must be capitalized as an asset: Debit Prepaid Advertising.

Q29: The journal entry to record minor, routine maintenance on equipment involves a debit to the Equipment asset account.

• Answer: FALSE

• Explanation: Routine maintenance maintains current status rather than extending life or capacity. It is a revenue expenditure: Debit Maintenance/Repair Expense.

Q30: If a company fixes a previous error where cash spent on Land was mistakenly debited to Building, the correcting entry is Debit Land and Credit Building.

• Answer: TRUE

• Explanation: Crediting Building removes the incorrect amount, and debiting Land places it in the correct asset account.

Part 3: Adjusting & Closing Entries (Questions 31 – 40)

Q31: Adjusting journal entries never involve the Cash account.

• Answer: TRUE

• Explanation: Adjusting entries ensure revenues and expenses are matched to the correct period before statements are pulled. By definition, they record internal updates and never affect Cash.

Q32: The adjusting entry to record accrued interest receivable includes a credit to Interest Expense.

• Answer: FALSE

• Explanation: Since it’s interest we are owed (receivable), it represents revenue. The entry is Debit Interest Receivable and Credit Interest Revenue.

Q33: Depreciation adjusting entries reduce the historical cost balance of the corresponding fixed asset account directly.

• Answer: FALSE

• Explanation: The historical cost is left untouched. Depreciation is accumulated in the contra-asset account, Accumulated Depreciation.

Q34: As time passes, the adjusting entry for prepaid insurance shifts value from an asset account to an expense account.

• Answer: TRUE

• Explanation: The expired portion is recorded as Debit Insurance Expense and Credit Prepaid Insurance (reducing the asset).

Q35: Closing entries are performed at the beginning of the fiscal period to set up budgets.

• Answer: FALSE

• Explanation: Closing entries are made at the very end of the fiscal period to reset temporary account balances to zero and move net results to capital/retained earnings.

Q36: Permanent accounts (Assets, Liabilities, Equity) are closed to the Income Summary account at year-end.

• Answer: FALSE

• Explanation: Only temporary accounts (Revenues, Expenses, Drawings) are closed. Balance sheet accounts carry their balances forward to the next year and are never closed.

Q37: To close a revenue account with a credit balance of $10,000, the entry must debit the Revenue account for $10,000.

• Answer: TRUE

• Explanation: To reduce a credit balance to zero, you must apply an equal Debit. The matching credit goes to Income Summary.

Q38: The Income Summary account is a permanent balance sheet account.

• Answer: FALSE

• Explanation: Income Summary is a highly temporary account used only during the closing process. It is created, used, and fully closed within the same day.

Q39: If Income Summary has a debit balance after closing all revenues and expenses, it indicates the company earned a Net Income.

• Answer: FALSE

• Explanation: Expenses exceed revenues if Income Summary has a debit balance, which represents a Net Loss.

Q40: The Owner’s Drawings account is closed directly to the Owner’s Capital account, bypassing the Income Summary.

• Answer: TRUE

• Explanation: Drawings are not business expenses and do not impact Net Income. Therefore, they are closed directly into equity via capital.

Part 4: Inventory & Merchandising (Questions 41 – 50)

Q41: In a Perpetual Inventory System, purchasing inventory on credit requires a debit to the Purchases account.

• Answer: FALSE

• Explanation: In a perpetual system, the asset account is updated continuously. Thus, you Debit Inventory. (The “Purchases” account is used in the Periodic System).

Q42: Under a Perpetual Inventory System, a sale of goods requires two separate journal entries: one for revenue and one for cost.

• Answer: TRUE

• Explanation: Perpetual requires recording the sale value (Debit Cash/AR, Credit Sales) AND immediately removing the stock cost (Debit COGS, Credit Inventory).

Q43: FOB Shipping Point means the buyer is responsible for transport costs, and these costs are added to the Inventory account under a perpetual system.

• Answer: TRUE

• Explanation: Product-delivery acquisition costs are capitalized into the product cost under perpetual rules (Debit Inventory).

Q44: FOB Destination means the seller pays for freight, which is recorded by the seller as “Freight-In”.

• Answer: FALSE

• Explanation: Outbound delivery to customers paid by the seller is recorded as Freight-Out or Delivery Expense (a selling expense).

Q45: A credit term of “2/10, n/30” means a 2% discount is available if paid within 30 days.

• Answer: FALSE

• Explanation: It means a 2% discount is available if paid within 10 days; otherwise, the net balance is due within 30 days.

Q46: In a Periodic Inventory System, returning defective goods to a vendor requires a credit to the Inventory account.

• Answer: FALSE

• Explanation: In a periodic system, the inventory account is frozen until the year-end count. Returns are credited to a temporary account called Purchase Returns and Allowances.

Q47: The “Sales Discounts” account has a normal debit balance and is subtracted from Gross Sales to find Net Sales.

• Answer: TRUE

• Explanation: Sales Discounts is a contra-revenue account. Its normal debit balance directly offsets the normal credit balance of Sales Revenue.

Q48: Under a perpetual system, taking a purchase discount when paying a vendor reduces the recorded cost of Inventory.

• Answer: TRUE

• Explanation: Since the inventory cost ended up being less, the perpetual system updates this by Crediting Inventory for the discount amount during payment.

Q49: Cost of Goods Sold (COGS) is classified as an asset account because it relates to inventory items.

• Answer: FALSE

• Explanation: COGS is an Expense account on the Income Statement representing the expired cost of inventory that has been delivered to customers.

Q50: Writing off a completely uncollectible account receivable using the Allowance Method requires a debit to Bad Debt Expense.

• Answer: FALSE

• Explanation: Under the Allowance Method, the expense is estimated and recorded earlier. The actual write-off entry is Debit Allowance for Doubtful Accounts and Credit Accounts Receivable.