Accounting Cycle True or False Quiz: 50 Questions with Answers and Detailed Explanations

Question 1

The accounting cycle is a process used to record and report financial transactions.

✅ Answer: True

Explanation:
The accounting cycle is a structured sequence of accounting procedures used to identify, record, classify, summarize, and report financial transactions. It ensures that financial information is accurate and organized for decision-making purposes.

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Question 2

The accounting cycle begins with preparing financial statements.

❌ Answer: False

Explanation:
The accounting cycle begins with identifying and analyzing business transactions. Financial statements are prepared near the end of the cycle after all transactions have been recorded and adjusted.

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Question 3

Every business transaction should be analyzed before it is recorded.

✅ Answer: True

Explanation:
Transaction analysis determines whether an event affects the company’s financial position and identifies the accounts that will be debited and credited.

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Question 4

Journal entries are recorded after transactions are posted to the ledger.

❌ Answer: False

Explanation:
Transactions are first recorded in the journal and then posted to the ledger. The journal serves as the book of original entry.

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Question 5

The general ledger contains all accounts used by a business.

✅ Answer: True

Explanation:
The general ledger includes assets, liabilities, equity, revenues, and expenses, providing a complete record of financial activity.

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Question 6

Posting transfers information from the journal to the ledger.

✅ Answer: True

Explanation:
Posting updates individual account balances in the ledger based on journal entries.

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Question 7

A trial balance is prepared to verify that total debits equal total credits.

✅ Answer: True

Explanation:
The trial balance checks the mathematical accuracy of recorded transactions by comparing total debits and credits.

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Question 8

If a trial balance balances, there can be no accounting errors.

❌ Answer: False

Explanation:
A balanced trial balance does not guarantee that all errors are eliminated. Errors such as omissions or incorrect account classifications may still exist.

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Question 9

Adjusting entries are usually prepared at the end of an accounting period.

✅ Answer: True

Explanation:
Adjusting entries ensure revenues and expenses are recognized in the proper accounting period according to accrual accounting principles.

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Question 10

Adjusting entries are unnecessary under accrual accounting.

❌ Answer: False

Explanation:
Adjusting entries are essential under accrual accounting because revenues and expenses often occur in different periods than related cash flows.

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Question 11

Accrued expenses are expenses that have been incurred but not yet paid.

✅ Answer: True

Explanation:
Examples include salaries payable, interest payable, and utilities payable.

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Question 12

Accrued revenue represents revenue earned but not yet received in cash.

✅ Answer: True

Explanation:
Revenue is recognized when earned, even if payment is received later.

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Question 13

Prepaid expenses are initially recorded as assets.

✅ Answer: True

Explanation:
Prepaid expenses provide future economic benefits and therefore qualify as assets until consumed.

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Question 14

Unearned revenue is considered an asset.

❌ Answer: False

Explanation:
Unearned revenue is a liability because the company owes goods or services to customers.

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Question 15

An adjusted trial balance is prepared after adjusting entries are recorded.

✅ Answer: True

Explanation:
The adjusted trial balance reflects updated account balances and serves as the basis for preparing financial statements.

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Question 16

Financial statements are prepared before the adjusted trial balance.

❌ Answer: False

Explanation:
Financial statements are prepared from information contained in the adjusted trial balance.

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Question 17

The income statement reports revenues and expenses for a period.

✅ Answer: True

Explanation:
The income statement measures profitability by comparing revenues with expenses.

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Question 18

The balance sheet reports assets, liabilities, and equity.

✅ Answer: True

Explanation:
The balance sheet presents the company’s financial position at a specific date.

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Question 19

The statement of cash flows is prepared from accounting records and financial data.

✅ Answer: True

Explanation:
It explains changes in cash balances through operating, investing, and financing activities.

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Question 20

Closing entries are prepared before financial statements.

❌ Answer: False

Explanation:
Financial statements must be completed before closing entries because closing resets temporary accounts.

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Question 21

Revenue accounts are temporary accounts.

✅ Answer: True

Explanation:
Revenue accounts accumulate activity for one accounting period and are closed at period-end.

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Question 22

Expense accounts are permanent accounts.

❌ Answer: False

Explanation:
Expense accounts are temporary accounts that are closed at the end of each accounting period.

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Question 23

Cash is a permanent account.

✅ Answer: True

Explanation:
Cash remains open from period to period and appears on the balance sheet.

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Question 24

Closing entries transfer temporary account balances to retained earnings or owner’s capital.

✅ Answer: True

Explanation:
This process prepares temporary accounts for the next accounting period.

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Question 25

After closing entries, all account balances become zero.

❌ Answer: False

Explanation:
Only temporary accounts are closed. Permanent accounts retain their balances.

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Question 26

The post-closing trial balance contains only permanent accounts.

✅ Answer: True

Explanation:
Temporary accounts have already been closed and therefore do not appear.

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Question 27

The accounting cycle is repeated every accounting period.

✅ Answer: True

Explanation:
The cycle occurs monthly, quarterly, or annually depending on reporting requirements.

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Question 28

Source documents provide evidence that transactions occurred.

✅ Answer: True

Explanation:
Invoices, receipts, and contracts are examples of source documents.

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Question 29

A sales invoice can serve as a source document.

✅ Answer: True

Explanation:
Sales invoices provide proof that a sale transaction occurred.

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Question 30

The accounting cycle guarantees that financial statements are completely error-free.

❌ Answer: False

Explanation:
While the accounting cycle reduces errors, human mistakes and judgment errors can still occur.

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Question 31

Depreciation expense is commonly recorded through an adjusting entry.

✅ Answer: True

Explanation:
Depreciation allocates the cost of long-term assets over their useful lives.

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Question 32

Accumulated depreciation is a contra-asset account.

✅ Answer: True

Explanation:
It reduces the carrying value of related fixed assets on the balance sheet.

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Question 33

Accrual accounting recognizes revenues only when cash is received.

❌ Answer: False

Explanation:
Accrual accounting recognizes revenues when earned, regardless of when cash is collected.

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Question 34

The matching principle is supported through adjusting entries.

✅ Answer: True

Explanation:
Adjustments help match expenses with the revenues they help generate.

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Question 35

Journalizing occurs before posting.

✅ Answer: True

Explanation:
Transactions must first be recorded in the journal before being transferred to the ledger.

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Question 36

The ledger summarizes transactions by account.

✅ Answer: True

Explanation:
Each ledger account shows increases, decreases, and current balances.

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Question 37

The trial balance is prepared directly from journal entries.

❌ Answer: False

Explanation:
The trial balance is prepared using balances from the ledger after posting.

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Question 38

The accounting cycle applies to both small and large businesses.

✅ Answer: True

Explanation:
Organizations of all sizes use the accounting cycle to maintain accurate financial records.

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Question 39

Adjusting entries can affect both income statement and balance sheet accounts.

✅ Answer: True

Explanation:
For example, recording accrued salaries affects Salary Expense and Salaries Payable.

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Question 40

Unearned revenue adjustments generally increase revenue and decrease liabilities.

✅ Answer: True

Explanation:
As services are performed, a portion of the liability is transferred to earned revenue.

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Question 41

Prepaid insurance adjustments increase insurance expense and decrease prepaid insurance.

✅ Answer: True

Explanation:
This recognizes the portion of insurance coverage used during the period.

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Question 42

Closing entries are recorded in the general journal.

✅ Answer: True

Explanation:
Closing entries are journal entries that transfer temporary account balances to equity accounts.

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Question 43

Dividends or withdrawals are temporary accounts.

✅ Answer: True

Explanation:
These accounts are closed at period-end because they relate only to the current period.

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Question 44

The accounting cycle helps produce reliable financial information.

✅ Answer: True

Explanation:
Its structured approach improves consistency, completeness, and accuracy.

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Question 45

The post-closing trial balance is prepared before closing entries.

❌ Answer: False

Explanation:
It is prepared after closing entries to verify permanent account balances.

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Question 46

An omitted transaction may not be detected by a trial balance.

✅ Answer: True

Explanation:
If both debit and credit aspects are omitted, the trial balance will still balance.

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Question 47

The accounting cycle ends with preparing a post-closing trial balance.

✅ Answer: True

Explanation:
This is generally considered the final step in the traditional accounting cycle.

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Question 48

Financial statements are one of the primary outputs of the accounting cycle.

✅ Answer: True

Explanation:
The ultimate goal of the accounting cycle is to provide useful financial reports.

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Question 49

The accounting cycle includes both recording and reporting activities.

✅ Answer: True

Explanation:
It covers everything from transaction analysis to financial statement preparation.

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Question 50

The accounting cycle helps stakeholders make informed economic decisions.

✅ Answer: True

Explanation:
Investors, creditors, managers, and regulators rely on accurate financial information generated through the accounting cycle to evaluate performance, assess risk, and make strategic decisions.

Here is a comprehensive set of 50 True or False questions covering the entire Accounting Cycle. Each question includes the correct answer and a detailed explanation to ensure you understand the underlying concepts.

Part 1: Analyzing and Journalizing Transactions

1. The accounting cycle begins with the preparation of a trial balance.

• Answer: False

• Explanation: The accounting cycle begins with identifying and analyzing business transactions from source documents (e.g., invoices, receipts) to determine their impact on the financial position.

2. A transaction that increases an asset must always be accompanied by a decrease in another asset.

• Answer: False

• Explanation: According to the accounting equation ($\text{Assets} = \text{Liabilities} + \text{Equity}$), an increase in an asset can also be balanced by an increase in a liability or an increase in equity (such as a capital contribution or revenue).

3. The general journal is known as the “book of original entry.”

• Answer: True

• Explanation: It is called the book of original entry because it is the very first place where transactions are formally recorded in chronological order before being transferred anywhere else.

4. A debit entry always signifies an increase in an account’s balance.

• Answer: False

• Explanation: “Debit” simply means the left side of an account. While it increases assets, dividends, and expenses, it decreases liabilities, equity, and revenues.

5. If a business purchases equipment on credit, the transaction involves a debit to Equipment and a credit to Accounts Payable.

• Answer: True

• Explanation: Equipment is an asset, which increases with a debit. Accounts Payable is a liability, which increases with a credit.

6. The Chart of Accounts is a listing of all accounts available in the general ledger, complete with their current balances.

• Answer: False

• Explanation: The Chart of Accounts is just a systematic list of account titles and their identifying numbers. It does not show current balances; that is the purpose of the Trial Balance or Ledger.

7. Normal balances for Dividends, Expenses, and Assets are all debits.

• Answer: True

• Explanation: Under the expanded accounting equation, Assets, Expenses, and Dividends are increased by debits, meaning their natural or “normal” balances are debits.

8. Compound journal entries involve more than two accounts but the total debits must still equal total credits.

• Answer: True

• Explanation: No matter how many accounts are affected (e.g., purchasing an asset with part cash and part credit), the fundamental rule remains: $\text{Total Debits} = \text{Total Credits}$.

Part 2: Posting to the Ledger and Unadjusted Trial Balance

9. Posting is the process of transferring information from the general ledger to the general journal.

• Answer: False

• Explanation: Posting is the exact opposite: it is transferring information from the general journal to the specific accounts in the general ledger.

10. The general ledger organizes financial data by account, whereas the journal organizes data chronologically.

• Answer: True

• Explanation: The journal is a diary of daily events, while the ledger acts as a filing cabinet that groups those events by specific items (e.g., Cash, Rent Expense).

11. An unadjusted trial balance will catch an error where a transaction was completely omitted from the journal.

• Answer: False

• Explanation: If a transaction is completely omitted, debits and credits are both missing by the same amount. The trial balance will still balance, making this error undetectable by this tool alone.

12. If the total debits equal total credits in a trial balance, it proves that all transactions were recorded correctly.

• Answer: False

• Explanation: A trial balance only proves mathematical equality. It cannot detect errors like posting to the wrong account (e.g., debiting Supplies instead of Equipment) or omitting entries entirely.

13. A transposition error occurs when digits are accidentally reversed (e.g., writing $540 instead of $450).

• Answer: True

• Explanation: Transposition is a common clerical error where numbers swap places. The resulting mathematical discrepancy on the trial balance is always perfectly divisible by 9.

14. The ledger account balance is updated immediately after every single transaction is thought of, before writing it in the journal.

• Answer: False

• Explanation: Transactions must be journalized first to preserve the chronological narrative. Only after journalization are they posted to the ledger.

Part 3: Adjusting Entries (Accrual Accounting)

15. Under cash-basis accounting, revenue is recognized when earned, regardless of when cash is received.

• Answer: False

• Explanation: This describes accrual-basis accounting. Cash-basis accounting only recognizes revenue when cash is physically collected.

16. Adjusting entries are required at the end of the accounting period to satisfy the revenue recognition and matching principles.

• Answer: True

• Explanation: Adjusting entries ensure that revenues are reported when earned and expenses are matched to the period they helped generate revenue, satisfying GAAP.

17. Every adjusting entry affects at least one income statement account and one balance sheet account.

• Answer: True

• Explanation: Adjusting entries adjust an economic event that spans across time. Therefore, they always update a balance sheet account (asset/liability) and recognize a performance element on the income statement (revenue/expense). Cash is never involved in an adjusting entry.

18. Accumulated Depreciation is a contra-asset account with a normal credit balance.

• Answer: True

• Explanation: It is an asset-offsetting account. Because it reduces the gross asset value, it carries a normal credit balance, opposite to a standard asset.

19. Unearned Revenue is classified as a revenue account on the income statement.

• Answer: False

• Explanation: Unearned Revenue is a liability on the balance sheet. It represents an obligation to provide a service or good in the future because the customer paid in advance.

20. If an adjusting entry for an accrued expense is omitted, net income for the period will be overstated.

• Answer: True

• Explanation: Omitting an accrued expense means expenses are understated. Since $\text{Net Income} = \text{Revenues} – \text{Expenses}$, lower expenses result in an artificially high (overstated) net income.

21. Prepaid Insurance is an asset that turns into an expense over time as it expires.

• Answer: True

• Explanation: When purchased, it represents a future economic benefit (asset). As time passes, the benefit is consumed, requiring an adjusting entry to shift the used portion to Insurance Expense.

22. Accrued revenues represent cash collected before services are performed.

• Answer: False

• Explanation: Accrued revenues are revenues that have been earned but not yet recorded or paid. Cash collected before services are performed is called Unearned (or deferred) revenue.

23. The book value of a long-term asset is calculated as its historical cost minus accumulated depreciation.

• Answer: True

• Explanation: Book Value (or carrying value) is defined mathematically as:

  $$\text{Book Value} = \text{Historical Cost} – \text{Accumulated Depreciation}$$

24. Depreciation expense allocates the cost of a long-term asset over its useful life; it does not represent the actual physical decline in market value.

• Answer: True

• Explanation: In accounting, depreciation is a process of cost allocation, not valuation. It spreads the asset’s cost systematically to the periods it helps generate revenue.

Part 4: The Adjusted Trial Balance and Financial Statements

25. The Adjusted Trial Balance is prepared before adjusting entries are posted to the ledger.

• Answer: False

• Explanation: The adjusted trial balance is prepared after adjusting entries have been journalized and posted to ensure the accounts are numerically balanced before building the financial statements.

26. Financial statements must be prepared in a specific order because the output of one statement is needed as an input for the next.

• Answer: True

• Explanation: You must prepare the Income Statement first to find Net Income. Net Income is then used in the Statement of Retained Earnings (or Capital). Finally, the ending balance of Equity is used to balance the Balance Sheet.

27. The Income Statement reports the financial position of a company at a specific point in time.

• Answer: False

• Explanation: The Income Statement reports financial performance over a period of time (e.g., month, year). It is the Balance Sheet that reports financial position at a specific point in time.

28. Dividends (or owner’s drawings) are reported as an expense on the income statement.

• Answer: False

• Explanation: Dividends are a distribution of net earnings to the owners. They are not an expense incurred to generate revenue, so they are subtracted on the Statement of Retained Earnings/Equity, not the Income Statement.

Part 5: Closing Entries

29. Permanent accounts are closed out at the end of every fiscal year.

• Answer: False

• Explanation: Temporary accounts (revenues, expenses, dividends) are closed. Permanent accounts (assets, liabilities, equity) carry their balances forward into the next fiscal period.

30. The Income Summary account is a temporary account used exclusively during the closing process.

• Answer: True

• Explanation: Income Summary is a holding account used to clear out revenues and expenses. It has a zero balance before and after the closing process.

31. To close a revenue account with a credit balance, you must credit the revenue account and debit Income Summary.

• Answer: False

• Explanation: To reduce a revenue account’s credit balance to zero, you must debit the revenue account and credit Income Summary.

32. If a company suffers a net loss, the Income Summary account will have a debit balance before it is closed into Retained Earnings.

• Answer: True

• Explanation: A net loss means expenses (debits transferred to Income Summary) exceeded revenues (credits transferred to Income Summary), leaving the account with a net debit balance.

33. Closing the Dividends account involves debiting Retained Earnings and crediting Dividends.

• Answer: True

• Explanation: Since Dividends have a normal debit balance, crediting the account zeroes it out. The debit to Retained Earnings directly reduces company equity.

34. After closing entries are posted, all income statement accounts have a balance of zero.

• Answer: True

• Explanation: This is the core goal of closing entries—to wipe the slate clean for revenues and expenses so the next period can start recording from zero.

Part 6: Post-Closing Trial Balance

35. The post-closing trial balance contains assets, liabilities, equity, revenues, and expenses.

• Answer: False

• Explanation: Because revenues, expenses, and dividends have been closed to zero, the post-closing trial balance contains only permanent accounts (Assets, Liabilities, and ending Capital/Retained Earnings).

36. The purpose of the post-closing trial balance is to verify that the ledger is in balance for the start of the next period.

• Answer: True

• Explanation: It provides a final check that no clerical or mathematical errors were made during the closing process before the new accounting year begins.

Part 7: Reversing Entries (Optional Step)

37. Reversing entries are a mandatory step in the accounting cycle under GAAP.

• Answer: False

• Explanation: Reversing entries are strictly optional. They are a bookkeeping convenience used to simplify the recording of subsequent payments related to prior-period adjustments.

38. Reversing entries are typically made on the first day of the new accounting period.

• Answer: True

• Explanation: They are dated the first day of the new period to intentionally undo certain adjusting entries from the previous night, setting up clear processing for future cash entries.

39. Adjusting entries for depreciation are commonly reversed.

• Answer: False

• Explanation: Reversing entries are generally applied only to accrued items (like Accrued Wages) or prepayments initially recorded as expenses. Estimates like depreciation are never reversed.

Part 8: Comprehensive and Contextual Application

40. The accounting cycle must be completed exactly once a year, with no intermediate reporting allowed.

• Answer: False

• Explanation: While the full cycle is completed annually, companies can run parts of the cycle monthly or quarterly to produce interim financial statements for managers and investors.

41. A worksheet is a formal financial statement distributed to banks and shareholders.

• Answer: False

• Explanation: A worksheet is an informal, internal tool used by accountants to organize adjustments and draft financial statement figures before entering them into the official records.

42. If Salaries Expense is not adjusted for work done at the end of the month, liabilities are understated.

• Answer: True

• Explanation: Failing to record accrued salaries means you fail to record the obligation owed to workers (Salaries Payable), which directly understates total liabilities.

43. Cash is a temporary account because its balance shifts constantly every day.

• Answer: False

• Explanation: “Temporary” in accounting doesn’t mean volatile; it means the account’s balance is reset to zero at the end of the period. Cash is a permanent asset account; its closing balance is carried forward to the next day.

44. Correcting entries can be made at any time an error is discovered, whereas adjusting entries are made specifically at the end of a period.

• Answer: True

• Explanation: Errors must be fixed immediately upon discovery via correcting entries. Adjusting entries, however, are scheduled cleanups to align statements with time-period constraints.

45. Net Income increases the Retained Earnings of a corporation.

• Answer: True

• Explanation: Net Income represents profitable operations. When closed out, it flows into Retained Earnings, building up the equity of the business.

46. The matching principle states that cash received must match cash spent within an individual cycle.

• Answer: False

• Explanation: The matching principle (expense recognition) states that expenses incurred to generate revenue must be recognized in the same period as the related revenue, regardless of when cash changes hands.

47. If an accountant records a payment for maintenance as a debit to Buildings (an asset), net income for that period will be overstated.

• Answer: True

• Explanation: Capitalizing a repair expense as an asset means an expense was avoided on the Income Statement. Lower expenses result in an overstated net income.

48. Service Revenue carries a normal credit balance, which reflects an increase in Equity.

• Answer: True

• Explanation: Revenue increases equity. Since equity increases on the credit side, revenue accounts naturally increase with credits.

49. The post-closing trial balance should match the balances reported directly on the Balance Sheet for assets, liabilities, and equity.

• Answer: True

• Explanation: Both documents represent the permanent, open financial accounts of the business at that exact moment in time, so their itemized balances must align.

50. The proper sequence of the accounting cycle is: Journalize, Post, Adjust, Close, and Prepare Financial Statements.

• Answer: False

• Explanation: The sequence is slightly out of order here. The correct flow is: Journalize $\rightarrow$ Post $\rightarrow$ Adjust $\rightarrow$ Prepare Financial Statements $\rightarrow$ Close. Financial statements must always be created before the temporary revenue and expense accounts are wiped out via closing entries.

 

Questions 1–10: Fundamentals of the Accounting Cycle

1. The first step in the accounting cycle is to prepare the financial statements. Answer: False Explanation: The accounting cycle begins with identifying and analyzing business transactions that have a financial impact on the company. Preparing financial statements is one of the last steps.

2. Only events that can be expressed in monetary terms are recorded in the accounting system. Answer: True Explanation: The money measurement concept requires that only transactions measurable in currency units are recorded, ensuring objectivity and consistency.

3. The accounting equation (Assets = Liabilities + Owner’s Equity) must remain in balance after every transaction. Answer: True Explanation: This fundamental equation is the foundation of double-entry bookkeeping. Every transaction affects at least two accounts, keeping the equation balanced.

4. In double-entry accounting, every transaction is recorded in only one account. Answer: False Explanation: Every transaction affects at least two accounts, with total debits always equaling total credits.

5. Assets and expenses increase with debit entries. Answer: True Explanation: According to normal balance rules, assets and expenses have debit normal balances, while liabilities, equity, and revenues have credit normal balances.

6. The general journal is also known as the book of final entry. Answer: False Explanation: The general journal is the book of original entry. The general ledger is considered the book of final entry.

7. Posting means transferring information from the general ledger to the general journal. Answer: False Explanation: Posting is the process of transferring journal entries from the general journal to the individual accounts in the general ledger.

8. A chart of accounts is a list of all the accounts a company uses in its accounting system. Answer: True Explanation: It serves as an index of all accounts with assigned account numbers, providing structure and consistency.

9. External transactions involve exchanges with outside parties, while internal transactions do not. Answer: True Explanation: Examples of external transactions include sales and purchases. Internal transactions include adjustments like depreciation and accruals.

10. The accounting cycle is usually performed only once a year at the end of the fiscal year. Answer: False Explanation: The cycle is typically completed at the end of each accounting period (monthly, quarterly, or annually) to produce timely financial information.

Questions 11–20: Journalizing, Posting & Trial Balance

11. The unadjusted trial balance is prepared after adjusting entries have been made. Answer: False Explanation: The unadjusted trial balance is prepared after regular transactions are posted but before any adjusting entries.

12. A trial balance proves that all transactions have been recorded correctly. Answer: False Explanation: A trial balance only proves that total debits equal total credits. It does not detect errors such as omitted transactions or incorrect accounts.

13. Accumulated Depreciation is a contra-asset account. Answer: True Explanation: It has a credit balance and is subtracted from the related asset (e.g., Equipment) on the balance sheet.

14. All accounts in the trial balance appear in the order they will appear on the financial statements. Answer: False Explanation: Trial balance accounts are usually listed in the order of the chart of accounts (assets, liabilities, equity, revenues, expenses).

15. Temporary accounts include revenues, expenses, and dividends. Answer: True Explanation: These accounts are closed at the end of the period, unlike permanent (real) accounts such as assets and liabilities.

16. The post-closing trial balance contains only permanent accounts. Answer: True Explanation: After closing entries, all temporary accounts have zero balances, leaving only assets, liabilities, and equity accounts.

17. Closing entries are made at the beginning of the next accounting period. Answer: False Explanation: Closing entries are made at the end of the current accounting period to prepare for the next period.

18. The Income Summary account is a permanent account. Answer: False Explanation: Income Summary is a temporary account used only during the closing process to summarize revenues and expenses.

19. The purpose of closing entries is to transfer net income or net loss to the Retained Earnings account. Answer: True Explanation: This resets temporary accounts to zero so they can accumulate data for the next period.

20. A transposition error (e.g., writing 54 instead of 45) will always cause the trial balance to be out of balance. Answer: False Explanation: Transposition errors often produce a difference divisible by 9, but the trial balance may still balance if the error affects both sides equally.

Questions 21–35: Adjusting Entries

21. Adjusting entries are required under the cash basis of accounting. Answer: False Explanation: Adjusting entries are essential under the accrual basis to match revenues and expenses to the proper period.

22. Prepaid expenses are assets that will become expenses over time. Answer: True Explanation: Examples include prepaid rent or insurance. As time passes, adjusting entries transfer the used portion to expense.

23. The adjusting entry for depreciation is: Debit Accumulated Depreciation, Credit Depreciation Expense. Answer: False Explanation: The correct entry is Debit Depreciation Expense, Credit Accumulated Depreciation.

24. Accrued revenues are revenues that have been earned but not yet received in cash. Answer: True Explanation: An example is interest earned but not collected by period-end.

25. The adjusting entry for unearned revenue that has now been earned is: Debit Revenue, Credit Unearned Revenue. Answer: False Explanation: The correct entry is Debit Unearned Revenue, Credit Revenue.

26. Every adjusting entry affects both the income statement and the balance sheet. Answer: True Explanation: Adjusting entries always involve one income statement account (revenue or expense) and one balance sheet account (asset or liability).

27. The matching principle requires that expenses be recorded in the same period as the revenues they help generate. Answer: True Explanation: This is a core principle of accrual accounting and the main reason for adjusting entries.

28. Supplies on hand at the end of the period require no adjusting entry. Answer: False Explanation: An adjusting entry is needed to record the used supplies as Supplies Expense and reduce the asset account.

29. Accrued expenses create a liability at the end of the period. Answer: True Explanation: Examples include salaries or interest owed but not yet paid.

30. The adjusted trial balance is prepared before adjusting entries. Answer: False Explanation: It is prepared after adjusting entries to reflect updated account balances.

31. Bad debts expense is usually recorded through an adjusting entry under the allowance method. Answer: True Explanation: This follows the matching principle by estimating uncollectible accounts in the same period as the related sales.

32. Adjusting entries are journalized and posted to the ledger. Answer: True Explanation: Like regular transactions, adjustments must be recorded in the journal and posted to the ledger.

33. Cash is never adjusted at the end of the period. Answer: True Explanation: Cash balance is verified through bank reconciliation, but it does not require accrual-type adjusting entries.

34. Deferrals involve cash received or paid before revenue or expense is recognized. Answer: True Explanation: Examples include unearned revenue (deferral of revenue) and prepaid expenses (deferral of expense).

35. An adjusting entry can never decrease an asset account. Answer: False Explanation: Many adjustments decrease assets, such as using up prepaid expenses or recording depreciation.

Questions 36–50: Financial Statements, Closing & Complete Cycle

36. The income statement is prepared using the adjusted trial balance. Answer: True Explanation: Revenues and expenses from the adjusted trial balance are used to calculate net income.

37. The statement of retained earnings is prepared before the income statement. Answer: False Explanation: The income statement must be prepared first because net income is needed for the retained earnings statement.

38. Dividends are closed to the Income Summary account. Answer: False Explanation: Dividends are closed directly to Retained Earnings, not through Income Summary.

39. After closing entries, all temporary accounts have zero balances. Answer: True Explanation: This allows the next accounting period to start with clean temporary accounts.

40. A reversing entry is mandatory for every accrual. Answer: False Explanation: Reversing entries are optional but simplify recording of subsequent payments or receipts.

41. Omitting an adjusting entry for accrued salaries will overstate net income. Answer: True Explanation: Expenses will be understated, leading to overstated net income and understated liabilities.

42. The post-closing trial balance should have zero balances for all accounts. Answer: False Explanation: Only temporary accounts should be zero. Permanent accounts carry forward their balances.

43. The complete accounting cycle ends with the preparation of the post-closing trial balance. Answer: True Explanation: This is the final step that verifies the ledger is ready for the next period.

44. Under cash-basis accounting, adjusting entries for accruals are still required. Answer: False Explanation: Cash-basis accounting records transactions only when cash changes hands, so most adjusting entries are unnecessary.

45. A worksheet is a required part of the accounting cycle. Answer: False Explanation: A worksheet is an optional multi-column tool that helps organize adjustments and statements.

46. Errors discovered after the books are closed must be corrected through Retained Earnings. Answer: True Explanation: Prior period adjustments are made directly to beginning Retained Earnings.

47. The accounting cycle helps ensure compliance with generally accepted accounting principles (GAAP). Answer: True Explanation: Following the cycle, especially adjusting entries, supports accrual accounting required by GAAP.

48. Financial statements can be prepared directly from the unadjusted trial balance. Answer: False Explanation: Adjustments are necessary for accurate statements under the accrual basis.

49. Closing entries affect the balances of asset and liability accounts. Answer: False Explanation: Closing entries affect only temporary accounts (revenues, expenses, dividends, and Income Summary).

50. The accounting cycle is a continuous process that repeats in each accounting period. Answer: True Explanation: It is a systematic, step-by-step process designed to be repeated every reporting period to produce reliable financial information.