Accounting Basics True or False Quiz: 50 Questions with Answers and Detailed Explanations
Question 1
Accounting is the process of recording, classifying, and summarizing financial transactions.
✅ Answer: True
Explanation:
Accounting involves identifying, recording, classifying, summarizing, and reporting financial transactions to provide useful information for decision-making.
Question 2
Assets are amounts owed by a business to creditors.
❌ Answer: False
Explanation:
Assets are resources owned by a business, such as cash, inventory, and equipment. Amounts owed to creditors are liabilities.
Question 3
The accounting equation is Assets = Liabilities + Owner’s Equity.
✅ Answer: True
Explanation:
This fundamental equation forms the basis of the double-entry accounting system and must always remain balanced.
Question 4
Cash is classified as an asset.
✅ Answer: True
Explanation:
Cash is one of the most liquid assets and is reported as a current asset on the balance sheet.
Question 5
Accounts Payable is a liability account.
✅ Answer: True
Explanation:
Accounts Payable represents amounts owed to suppliers for goods or services purchased on credit.
Question 6
Owner’s Equity represents the owner’s claim on business assets.
✅ Answer: True
Explanation:
Owner’s Equity is the residual interest in assets after deducting liabilities.
Question 7
Revenue decreases owner’s equity.
❌ Answer: False
Explanation:
Revenue increases net income, which ultimately increases owner’s equity.
Question 8
Expenses increase owner’s equity.
❌ Answer: False
Explanation:
Expenses reduce net income and therefore decrease owner’s equity.
Question 9
The Balance Sheet reports assets, liabilities, and equity.
✅ Answer: True
Explanation:
The Balance Sheet provides a snapshot of a company’s financial position at a specific date.
Question 10
The Income Statement reports revenues and expenses.
✅ Answer: True
Explanation:
The Income Statement measures profitability during an accounting period.
Question 11
A debit always increases every type of account.
❌ Answer: False
Explanation:
Debits increase assets and expenses but decrease liabilities, equity, and revenues.
Question 12
A credit increases liability accounts.
✅ Answer: True
Explanation:
Liabilities normally carry credit balances, so credits increase liabilities.
Question 13
Accounts Receivable represents money owed by customers.
✅ Answer: True
Explanation:
Accounts Receivable arises when sales are made on credit.
Question 14
Inventory is classified as a liability.
❌ Answer: False
Explanation:
Inventory is an asset because it represents goods available for sale.
Question 15
Equipment is usually classified as a long-term asset.
✅ Answer: True
Explanation:
Equipment provides benefits for more than one accounting period.
Question 16
A company can have assets without having liabilities.
✅ Answer: True
Explanation:
A business may be financed entirely by owner investments and have no liabilities.
Question 17
Double-entry accounting requires every transaction to affect at least two accounts.
✅ Answer: True
Explanation:
Every transaction impacts at least two accounts to keep the accounting equation balanced.
Question 18
Total debits must always equal total credits.
✅ Answer: True
Explanation:
This is the foundation of the double-entry accounting system.
Question 19
Cash received from a customer increases cash.
✅ Answer: True
Explanation:
Receiving cash increases the company’s asset balance.
Question 20
Paying rent creates a rent expense.
✅ Answer: True
Explanation:
Rent paid for business premises is recorded as an expense.
Question 21
The Trial Balance is prepared to verify that debits equal credits.
✅ Answer: True
Explanation:
A Trial Balance helps identify mathematical errors in the accounting records.
Question 22
Land is considered a current asset.
❌ Answer: False
Explanation:
Land is a non-current (long-term) asset because it is used for business operations over many years.
Question 23
Accounts Payable normally has a debit balance.
❌ Answer: False
Explanation:
Accounts Payable is a liability account and normally carries a credit balance.
Question 24
Cash is usually reported on the Income Statement.
❌ Answer: False
Explanation:
Cash appears on the Balance Sheet, not the Income Statement.
Question 25
Net Income equals Revenue minus Expenses.
✅ Answer: True
Explanation:
This formula is used to determine a company’s profit for a period.
Question 26
Revenue is earned only when cash is received.
❌ Answer: False
Explanation:
Under accrual accounting, revenue is recognized when earned, not necessarily when cash is received.
Question 27
Utilities Expense is an expense account.
✅ Answer: True
Explanation:
Electricity, water, and internet costs are operating expenses.
Question 28
A loan received by a company increases liabilities.
✅ Answer: True
Explanation:
Borrowing creates an obligation to repay the lender.
Question 29
Owner withdrawals increase owner’s equity.
❌ Answer: False
Explanation:
Withdrawals reduce owner’s equity because resources are taken out of the business.
Question 30
Unearned Revenue is a liability.
✅ Answer: True
Explanation:
The company owes goods or services to customers who paid in advance.
Question 31
Assets are economic resources owned by a business.
✅ Answer: True
Explanation:
Assets provide future economic benefits to the business.
Question 32
Liabilities represent obligations owed to external parties.
✅ Answer: True
Explanation:
Liabilities include debts, loans, and other obligations.
Question 33
Expenses increase profit.
❌ Answer: False
Explanation:
Expenses reduce profit because they represent costs incurred.
Question 34
Revenue accounts normally have credit balances.
✅ Answer: True
Explanation:
Revenue increases owner’s equity and therefore carries a credit balance.
Question 35
The purchase of equipment for cash affects only one account.
❌ Answer: False
Explanation:
Equipment increases while cash decreases, affecting two accounts.
Question 36
The Chart of Accounts contains all accounts used by a company.
✅ Answer: True
Explanation:
It serves as the framework for organizing accounting records.
Question 37
Accounts Receivable is an asset account.
✅ Answer: True
Explanation:
It represents future cash expected from customers.
Question 38
Salary Expense is reported on the Balance Sheet.
❌ Answer: False
Explanation:
Salary Expense appears on the Income Statement.
Question 39
Buildings are generally depreciated over their useful lives.
✅ Answer: True
Explanation:
Depreciation allocates the cost of buildings over their useful lives.
Question 40
Every business transaction affects the accounting equation.
✅ Answer: True
Explanation:
All transactions impact assets, liabilities, equity, or a combination of them.
Question 41
The accounting period concept allows performance to be measured over specific periods.
✅ Answer: True
Explanation:
Financial reports are prepared monthly, quarterly, or annually.
Question 42
The Balance Sheet shows financial position at a specific date.
✅ Answer: True
Explanation:
It presents assets, liabilities, and equity at a particular point in time.
Question 43
The Income Statement covers a period of time rather than a single date.
✅ Answer: True
Explanation:
It reports revenues and expenses over a month, quarter, or year.
Question 44
Liabilities can never be current.
❌ Answer: False
Explanation:
Many liabilities are current, such as Accounts Payable and short-term loans.
Question 45
Cash payments to suppliers reduce cash.
✅ Answer: True
Explanation:
Cash decreases when obligations to suppliers are settled.
Question 46
Retained Earnings are part of owner’s equity.
✅ Answer: True
Explanation:
Retained Earnings represent accumulated profits retained in the business.
Question 47
The double-entry system helps maintain accounting accuracy.
✅ Answer: True
Explanation:
Requiring equal debits and credits helps detect errors and maintain balance.
Question 48
Expenses normally have debit balances.
✅ Answer: True
Explanation:
Expense accounts increase with debits and decrease with credits.
Question 49
The accounting equation must remain balanced after every transaction.
✅ Answer: True
Explanation:
A balanced equation ensures accurate financial reporting.
Question 50
Understanding accounting basics is essential before studying advanced accounting topics.
✅ Answer: True
Explanation:
Concepts such as debits, credits, assets, liabilities, equity, and financial statements form the foundation for all advanced accounting subjects, including Financial Accounting, Cost Accounting, CMA, CPA, and ACCA studies.
Accounting Basics True or False Quiz: 50 Questions with Answers and Detailed Explanations
1- Financial accounting is primarily designed to provide financial information to internal managers for daily decision-making.
Answer: False
Explanation: Financial accounting is focused on providing financial information to external users, such as investors, creditors, and regulatory agencies. Managerial accounting is the branch designed for internal managers.
2- The basic accounting equation must always balance after recording any transaction.
Answer: True
Explanation: The fundamental equation (Assets = Liabilities + Equity) must always remain in balance because every transaction has a dual effect in a double-entry bookkeeping system.
3- Accounts Receivable is classified as a current liability on the Balance Sheet.
Answer: False
Explanation: Accounts Receivable represents money owed to the business by customers for goods or services delivered on credit. It is an economic resource expected to be converted into cash within a year, making it a current asset.
4- Under the accrual basis of accounting, revenue is recognized only when cash is received from the customer.
Answer: False
Explanation: Accrual accounting recognizes revenue when it is earned (goods delivered or services performed), completely independent of when the actual cash transaction occurs. Cash basis accounting records revenue when cash is received.
5- The Balance Sheet reports the financial performance of a company over a specific period of time.
Answer: False
Explanation: The Balance Sheet reports a company’s financial position (assets, liabilities, and equity) at a specific point in time (a snapshot). The Income Statement is the one that reports performance over a period of time.
6- In a double-entry system, a debit entry always signifies an increase in an account balance, while a credit entry signifies a decrease.
Answer: False
Explanation: Whether a debit or credit increases an account depends entirely on the account type. Debits increase asset and expense accounts, but decrease liability, equity, and revenue accounts.
7- The primary purpose of a Trial Balance is to prove that no errors of any kind have been made in the accounting records.
Answer: False
Explanation: A Trial Balance only proves that total debits equal total credits. It cannot detect errors such as completely omitting a transaction, posting a correct amount to the wrong account, or recording an incorrect amount on both sides.
8- The Going Concern Assumption presumes that a business entity will continue to operate indefinitely into the foreseeable future.
Answer: True
Explanation: This principle assumes the business will not liquidate anytime soon, which justifies recording long-term assets at their historical cost rather than their current liquidation value.
9- Unearned Revenue is recorded as a liability because the company has an obligation to perform a service or deliver goods in the future.
Answer: True
Explanation: Since the company received cash before earning it, it owes the customer the performance of a service or a product. Once the service is rendered, it is shifted from a liability to revenue.
10- Amortization is the systematic allocation of the cost of a tangible fixed asset over its useful life.
Answer: False
Explanation: Amortization applies to intangible assets (like patents or copyrights). Depreciation is the term used for allocating the cost of tangible fixed assets (like machinery or buildings).
11- The Historical Cost Principle dictates that assets should be reported on the balance sheet at their current market value.
Answer: False
Explanation: The Historical Cost Principle states that assets must be recorded and reported at their original acquisition price, as it is objective and verifiable, regardless of changes in market value over time.
12- The Matching Principle requires that expenses incurred to generate revenue must be recognized in the same period as the related revenue.
Answer: True
Explanation: Also known as the expense recognition principle, matching ensures that net income accurately reflects the profitability of an accounting period by aligning efforts (expenses) with accomplishments (revenues).
13- Temporary or nominal accounts are closed to a zero balance at the end of each accounting period.
Answer: True
Explanation: Revenue, expense, and dividend accounts are temporary. They accumulate balances for one period only and are closed out to Retained Earnings so they can start tracking the next period from zero.
14- Posting is the process of entering financial transactions chronologically into the General Journal.
Answer: False
Explanation: Entering transactions into the journal is called “Journalizing.” “Posting” is the subsequent step where those journal entries are transferred to their respective individual accounts in the General Ledger.
15- Net Income is calculated by subtracting total expenses from total revenues.
Answer: True
Explanation: Net income represents the profit earned during a period. If total expenses exceed total revenues, the result is a net loss.
16- Current liabilities are obligations that a business expects to settle within one year or its operating cycle, whichever is longer.
Answer: True
Explanation: Examples include Accounts Payable, Short-term Notes Payable, and Accrued Salaries, all of which require liquidity within the short term.
17-Adjusting journal entries are typically prepared at the beginning of an accounting period to set targets.
Answer: False
Explanation: Adjusting entries are prepared at the end of an accounting period. Their purpose is to update account balances to ensure compliance with the accrual and matching concepts before building financial statements.
18- Revenue accounts carry a normal credit balance.
Answer: True
Explanation: Revenues increase owner’s equity. Since equity increases with credits, revenue accounts are increased by credits and carry a normal credit balance.
19- Retained Earnings represent the total cash available for the business owners to withdraw at any time.
Answer: False
Explanation: Retained Earnings represent cumulative lifetime net profits that have been reinvested in the corporation rather than distributed as dividends. It is an equity breakdown, not a cash reserve.
20- The Statement of Cash Flows reports cash receipts and cash payments categorized into operating, investing, and financing activities.
Answer: True
Explanation: This statement reconciles the beginning and ending cash balances by grouping all cash movements into three major operational components of a business.
21- Prepaid Insurance is classified as an operating expense on the Income Statement when paid.
Answer: False
Explanation: When paid in advance, it represents a future economic benefit, so it is recorded as a current asset. It is systematically shifted to an expense later as the insurance coverage expires over time.
22- Purchasing manufacturing equipment for cash is considered an Investing Activity on the Statement of Cash Flows.
Answer: True
Explanation: Investing activities involve the acquisition and disposal of long-term assets and other investments not included in cash equivalents.
23- Gross Profit is calculated by subtracting operating expenses from total sales revenue.
Answer: False
Explanation: Gross Profit is calculated by subtracting Cost of Goods Sold (COGS) from Net Sales Revenue. Operating expenses are deducted later to calculate Operating Income.
24- Accumulated Depreciation is a contra-asset account with a normal credit balance.
Answer: True
Explanation: As a contra-asset, it is paired with a fixed asset account on the balance sheet to reduce its value to Net Book Value. Because it reduces an asset, it holds a credit balance.
25- Liquidity refers to how quickly and easily an asset can be converted into cash without a significant loss in its value.
Answer: True
Explanation: Cash is the most liquid asset. Inventory is less liquid because it must be sold first, and accounts receivable must be collected.
26- The General Journal is often referred to as the book of original entry.
Answer: True
Explanation: Financial transactions are first recorded chronologically in the General Journal before being organized by account names into the ledger.
27- The Economic Entity Assumption states that personal financial activities of the owners must be kept separate from the business records.
Answer: True
Explanation: Even if a business is a sole proprietorship, its financial records must strictly isolate corporate activities from the owner’s personal living expenses.
28- Depreciation expense requires an immediate cash outflow every time it is recorded.
Answer: False
Explanation: Depreciation is a non-cash expense. It is an accounting entry to allocate the cost of a previously purchased asset across time; no cash changes hands during the adjustment.
29- A Chart of Accounts is a summary sheet showing the final net profit metrics of the business.
Answer: False
Explanation: The Chart of Accounts is simply an indexed list or directory of all account names and identifying numbers available for recording data in a company’s ledger.
30- Borrowing cash from a bank by signing a note payable increases both assets and liabilities.
Answer: True
Explanation: The journal entry debits Cash (increasing an asset) and credits Notes Payable (increasing a liability), leaving the accounting equation perfectly balanced.
31- The Materiality Concept implies that all financial events, regardless of how small the dollar amount, must strictly follow every accounting rule.
Answer: False
Explanation: Materiality allows items with negligible financial impact to bypass strict accounting standards if the deviation does not mislead or influence the decisions of a reasonable user.
32- Operating Expenses are the daily costs required to run core business tasks, excluding the direct cost of goods sold.
Answer: True
Explanation: Operating Expenses (OPEX) include expenses like office rent, utility bills, advertising costs, and administrative salaries.
33- Net Book Value of a fixed asset is calculated as Historical Cost minus Accumulated Depreciation.
Answer: True
Explanation: Net Book Value represents the remaining unallocated cost of the asset carried on the financial statement balance sheet.
34- Allowing the same employee to collect cash and handle the bookkeeping records is an example of strong internal control.
Answer: False
Explanation: This violates the principle of segregation of duties. Strong internal controls require that the person handling physical assets should never have access to the accounting logs for those assets.
35- Cost of Goods Sold (COGS) represents the direct costs attributable to the production or purchase of the inventory units sold by a company.
Answer: True
Explanation: COGS includes direct materials, direct labor, and factory overhead used to create the specific products sold.
36- Paying dividends to shareholders reduces the Net Income reported on the Income Statement.
Answer: False
Explanation: Dividends are distributions of profits to owners and are not considered business operating expenses. They bypass the income statement completely and directly reduce Retained Earnings.
37- Relevance and Faithful Representation are the two primary qualitative characteristics that make financial information useful.
Answer: True
Explanation: According to GAAP and IFRS conceptual frameworks, info must be relevant to decision-making and faithfully represent the economic substance of what it claims to show.
38-Common Stock is classified as a long-term liability account.
Answer: False
Explanation: Common Stock is a fundamental component of Shareholders’ Equity, representing the capital contributed by owners in exchange for corporate shares.
39- A credit entry to an expense account increases its balance.
Answer: False
Explanation: Expenses have a normal debit balance. Therefore, a debit increases an expense account, and a credit entry decreases it.
40- The standard accounting period length for external financial reporting to the public is typically one fiscal or calendar year.
Answer: True
Explanation: While companies issue quarterly or monthly interim statements for tracking, the standard formal comprehensive reporting cycle is an annual one.
41- A debit balance in a company’s internal Cash ledger account indicates an overdraft or negative cash balance.
Answer: False
Explanation: Cash is an asset account, and assets increase with debits. A normal debit balance indicates a positive cash position. A credit balance would indicate an overdraft.
42- Accrued expenses represent liabilities for expenses that have been incurred but not yet paid or officially invoiced at the end of the period.
Answer: True
Explanation: Examples include utility services consumed during the final week of a month but not billed until the next month, or salaries earned by workers but not paid yet.
43- A bank statement is a document prepared by the company’s internal accountant to correct bank bookkeeping errors.
Answer: False
Explanation: A bank statement is issued by the financial institution (the bank) to the company, summarizing all account transactions, clearings, deposits, and fees from the bank’s viewpoint.
44- Long-term liabilities are obligations that are reasonably expected to be settled within 12 months.
Answer: False
Explanation: Long-term (or non-current) liabilities are obligations due beyond one year or outside the normal operational business cycle.
45- The ultimate goal of the closing process is to update permanent equity and clear temporary trackers to start a new period from zero.
Answer: True
Explanation: Closing entries clear out the revenue, expense, and dividend balances, transferring their net effect into Retained Earnings so the next year can be tracked cleanly.
46- Land purchased for business operations is depreciated systematically over a standard 30-year useful life framework.
Answer: False
Explanation: Land is an asset that is assumed to have an infinite useful life and does not lose its utility over time. Therefore, land is never depreciated in accounting.
47- If total assets increase by $10,000, liabilities must also increase by $10,000 to keep the accounting equation balanced.
Answer: False
Explanation: Not necessarily. An asset increase can be balanced by a decrease in another asset (asset exchange), an increase in equity, or an increase in liabilities.
48- The Monetary Unit Assumption implies that financial statements should only record transactions that can be expressed in terms of money.
Answer: True
Explanation: This ensures that financial records use a common denominator (currency units) to compile data, meaning qualitative factors like employee morale are excluded.
49- An item purchased for $500 with terms 2/10, n/30 means the buyer receives a 2% discount if paid within 10 days.
Answer: True
Explanation: These credit terms indicate that a 2% discount is granted if payment is made within the 10-day discount window; otherwise, the full (net) balance is due within 30 days.
50- Salvage value represents the estimated value of a fixed asset at the end of its useful life after all depreciation has taken place.
Answer: True
Explanation: Salvage value (or residual value) is deducted from the historical cost of an asset to determine the total depreciable base used in calculation methods.
Accounting Basics Quiz – 50 True or False Questions (With Correct Answers & Detailed Explanations)
1. The fundamental accounting equation is Assets = Liabilities + Equity.
Answer: True
Explanation: This is the most basic equation in accounting. It shows that everything a business owns (assets) is financed either by borrowing (liabilities) or by the owner’s investment (equity). The equation must always remain in balance.
2. Liabilities represent resources owned by the business.
Answer: False
Explanation: Liabilities are obligations or debts the business owes to outsiders. Resources owned by the business are called Assets.
3. Owner’s Equity increases when the owner withdraws money from the business.
Answer: False
Explanation: Withdrawals (Drawings) decrease Owner’s Equity because the owner is taking resources out of the business.
4. Cash is an example of a current asset.
Answer: True
Explanation: Current assets are resources that are expected to be converted into cash or used up within one year. Cash is the most liquid current asset.
5. In double-entry bookkeeping, every transaction affects at least two accounts.
Answer: True
Explanation: This is the core rule of double-entry accounting, ensuring the accounting equation always stays balanced (debits = credits).
6. Debit entries always increase account balances.
Answer: False
Explanation: Debit increases Assets and Expenses, but decreases Liabilities, Equity, and Revenue.
7. Revenue accounts have a normal credit balance.
Answer: True
Explanation: Revenues increase Owner’s Equity, and equity accounts increase with credit entries.
8. Expenses are recorded on the credit side of the account.
Answer: False
Explanation: Expenses decrease equity and are recorded with debit entries.
9. The Journal is also known as the book of final entry.
Answer: False
Explanation: The Journal is the book of original entry where transactions are recorded chronologically. The Ledger is the book of final entry.
10. Posting means transferring entries from the Journal to the Ledger.
Answer: True
Explanation: Posting is the second step in the accounting cycle after journalizing.
11. The Trial Balance proves that there are no errors in the accounting records.
Answer: False
Explanation: The Trial Balance only proves that total debits equal total credits. It does not detect errors such as omitted transactions or incorrect account classifications.
12. Prepaid expenses are classified as liabilities.
Answer: False
Explanation: Prepaid expenses (e.g., prepaid rent) are current assets because they provide future economic benefits.
13. Unearned revenue is a liability.
Answer: True
Explanation: It represents cash received in advance for goods or services not yet delivered, creating an obligation for the business.
14. The Income Statement shows the financial position of a business at a specific point in time.
Answer: False
Explanation: The Income Statement (Profit & Loss) shows performance over a period of time. The Balance Sheet shows financial position at a specific date.
15. Accrual basis accounting records revenue when cash is received.
Answer: False
Explanation: Accrual accounting records revenue when it is earned, regardless of when cash is received.
16. The Matching Principle requires that expenses be matched with the revenues they help generate.
Answer: True
Explanation: This principle is essential for accurately measuring profit in accrual accounting.
17. Depreciation is a non-cash expense.
Answer: True
Explanation: Depreciation allocates the cost of a fixed asset over its useful life but does not involve any cash outflow in the current period.
18. Accumulated Depreciation is an asset account.
Answer: False
Explanation: It is a contra-asset account that reduces the value of fixed assets on the Balance Sheet.
19. Gross Profit equals Total Revenue minus Operating Expenses.
Answer: False
Explanation: Gross Profit = Sales Revenue – Cost of Goods Sold. Operating expenses are deducted later to arrive at Operating Profit.
20. The Statement of Cash Flows shows only cash transactions.
Answer: True
Explanation: It reports all cash inflows and outflows categorized into operating, investing, and financing activities.
21. Closing entries are made at the beginning of the accounting period.
Answer: False
Explanation: Closing entries are made at the end of the accounting period to reset temporary accounts to zero.
22. Retained Earnings is part of Owner’s Equity.
Answer: True
Explanation: Retained Earnings represent accumulated profits that have not been distributed to owners.
23. FIFO means First In, First Out.
Answer: True
Explanation: It is an inventory valuation method that assumes the oldest inventory items are sold first.
24. In a period of rising prices, LIFO results in higher ending inventory value than FIFO.
Answer: False
Explanation: LIFO results in lower ending inventory value because the most recent (higher) costs are assigned to Cost of Goods Sold.
25. Working Capital = Current Assets – Current Liabilities.
Answer: True
Explanation: Positive working capital indicates the company can meet its short-term obligations.
26. Goodwill is a tangible asset.
Answer: False
Explanation: Goodwill is an intangible asset that arises when a company acquires another for more than the fair value of its net assets.
27. The double-entry system was developed by Luca Pacioli.
Answer: True
Explanation: Luca Pacioli published the first description of the double-entry system in 1494.
28. Drawings increase Owner’s Equity.
Answer: False
Explanation: Drawings (withdrawals) decrease Owner’s Equity.
29. The Chart of Accounts is a list of all accounts used by a business.
Answer: True
Explanation: It serves as the framework for organizing the general ledger.
30. Nominal accounts are closed at the end of each period.
Answer: True
Explanation: Nominal (temporary) accounts include revenues, expenses, and drawings.
31. Real accounts carry their balances forward to the next period.
Answer: True
Explanation: Real (permanent) accounts are Assets, Liabilities, and Equity.
32. Accrued expenses are expenses that have been paid but not yet incurred.
Answer: False
Explanation: Accrued expenses are incurred but not yet paid.
33. The Conservatism Principle suggests recording potential gains early.
Answer: False
Explanation: It requires recognizing potential losses early but gains only when they are realized.
34. The Break-even Point is where Total Revenue equals Total Costs.
Answer: True
Explanation: At this point, the business makes neither profit nor loss.
35. Budgeting is a main function of Financial Accounting.
Answer: False
Explanation: Budgeting belongs to Managerial Accounting, which serves internal decision-making.
36. Financial accounting information is mainly used by external users.
Answer: True Explanation: External users include investors, creditors, and regulators.
37. A credit sale increases both Accounts Receivable and Sales Revenue.
Answer: True
Explanation: It increases assets and revenue simultaneously.
38. Purchasing equipment for cash decreases total assets.
Answer: False
Explanation: One asset (cash) decreases while another asset (equipment) increases by the same amount.
39. The Materiality Principle allows ignoring insignificant items.
Answer: True
Explanation: Accountants can use simpler methods for items that do not affect users’ decisions.
40. Consistency Principle means using the same accounting methods over time.
Answer: True
Explanation: This allows meaningful comparison between periods.
41. Accounts Payable is a current liability.
Answer: True
Explanation: It represents short-term obligations to suppliers.
42. The Allowance for Doubtful Accounts is a contra-asset account.
Answer: True
Explanation: It reduces the value of Accounts Receivable on the Balance Sheet.
43. All assets must be recorded at their current market value.
Answer: False
Explanation: Most assets are recorded at historical cost under GAAP/IFRS.
44. The Going Concern Assumption assumes the business will continue operating indefinitely.
Answer: True
Explanation: This allows spreading the cost of assets over multiple years.
45. Net Profit equals Gross Profit minus all expenses.
Answer: True
Explanation: This is the bottom line of the Income Statement.
46. Adjusting entries are made at the end of the accounting period.
Answer: True Explanation: They ensure revenues and expenses are recorded in the correct period.
47. Owner’s Capital is increased by net profit.
Answer: True
Explanation: Net profit is added to the owner’s capital at the end of the period.
48. Intangible assets have physical substance.
Answer: False
Explanation: Intangible assets (patents, trademarks, goodwill) lack physical substance.
49. The primary objective of accounting is to provide useful information for decision-making.
Answer: True
Explanation: This is the main purpose according to the conceptual framework of accounting.
50. Liabilities decrease with debit entries.
Answer: True
Explanation: Liabilities have a normal credit balance; debits decrease them.