Debits and Credits Questions
Scroll down to see the correct answers with detailed explanations.
- Which of the following is credited when cash is received from a customer?
- A) Accounts Payable
- B) Sales
- C) Cash
- D) Accounts Receivable
- What is the normal balance of a liability account?
- A) Debit
- B) Credit
- C) Both Debit and Credit
- D) Neither
- Which of the following accounts is increased by a debit?
- A) Revenue
- B) Expenses
- C) Accounts Payable
- D) Capital
- If a business owner withdraws cash for personal use, which account is debited?
- A) Owner’s Equity
- B) Cash
- C) Drawing
- D) Accounts Payable
- In a double-entry system, which side is the debit side?
- A) Left
- B) Right
- C) Top
- D) Bottom
- Which of the following is true about the double-entry accounting system?
- A) Every transaction affects two or more accounts.
- B) It only records cash transactions.
- C) Debits must always equal credits.
- D) Both A and C
- What happens to the Cash account when it is debited?
- A) It decreases
- B) It increases
- C) No change
- D) It depends on the type of transaction
- Which account is credited when goods are sold on credit?
- A) Sales
- B) Accounts Receivable
- C) Cash
- D) Inventory
- What is the normal balance of the Accounts Receivable account?
- A) Debit
- B) Credit
- C) It depends
- D) Zero
- Which of the following transactions would increase a liability?
- A) Payment to suppliers
- B) Borrowing from a bank
- C) Receiving cash from customers
- D) Purchase of equipment with cash
- When an expense is incurred but not yet paid, which account is credited?
- A) Cash
- B) Accounts Payable
- C) Expenses
- D) Revenue
- Which of the following is true for a revenue account?
- A) It is increased by debits.
- B) It is decreased by credits.
- C) It normally has a credit balance.
- D) It is an asset account.
- What is the effect on the capital account when it is credited?
- A) It increases
- B) It decreases
- C) No effect
- D) It depends on the transaction
- Which of the following is debited when a company pays off a loan?
- A) Cash
- B) Loan Payable
- C) Interest Expense
- D) Accounts Payable
- Which account typically has a debit balance?
- A) Revenue
- B) Accounts Payable
- C) Capital
- D) Expenses
- If a company purchases equipment on credit, which account is debited?
- A) Cash
- B) Accounts Payable
- C) Equipment
- D) Capital
- What happens to the Accounts Payable account when it is debited?
- A) It increases
- B) It decreases
- C) No change
- D) It depends on the transaction
- When the owner invests additional cash in the business, which account is credited?
- A) Cash
- B) Owner’s Equity
- C) Revenue
- D) Accounts Receivable
- Which of the following is debited when inventory is purchased for cash?
- A) Inventory
- B) Cash
- C) Accounts Payable
- D) Cost of Goods Sold
- What happens to the Accounts Receivable account when a customer pays their invoice?
- A) It increases
- B) It decreases
- C) No change
- D) It depends on the payment method
- Which account is debited when an expense is paid in cash?
- A) Cash
- B) Accounts Payable
- C) Expense
- D) Capital
- When revenue is earned on account, which account is credited?
- A) Cash
- B) Accounts Receivable
- C) Revenue
- D) Unearned Revenue
- If a customer returns goods, which account is debited?
- A) Sales Returns
- B) Sales
- C) Accounts Receivable
- D) Inventory
- Which of the following accounts is credited when a dividend is declared?
- A) Dividends Payable
- B) Retained Earnings
- C) Cash
- D) Revenue
- What is the normal balance of the Capital account?
- A) Debit
- B) Credit
- C) It depends on the transaction
- D) Zero
Scroll down to see the correct answers with detailed explanations.
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Debits and Credits (Answer & Explanations)
Which of the following is credited when cash is received from a customer?
-
- A) Accounts Payable
- B) Sales
- C) Cash
- D) Accounts Receivable
- Answer: D) Accounts Receivable
- Explanation: When cash is received from a customer, the Accounts Receivable is credited to decrease the balance as the debt has been settled.
- What is the normal balance of a liability account?
- A) Debit
- B) Credit
- C) Both Debit and Credit
- D) Neither
- Answer: B) Credit
- Explanation: Liabilities normally carry a credit balance, reflecting amounts owed by the company.
- Which of the following accounts is increased by a debit?
- A) Revenue
- B) Expenses
- C) Accounts Payable
- D) Capital
- Answer: B) Expenses
- Explanation: Expenses increase with a debit, reducing the overall equity in the business.
- If a business owner withdraws cash for personal use, which account is debited?
- A) Owner’s Equity
- B) Cash
- C) Drawing
- D) Accounts Payable
- Answer: C) Drawing
- Explanation: Withdrawals for personal use reduce the owner’s equity, and the Drawing account is debited.
- In a double-entry system, which side is the debit side?
- A) Left
- B) Right
- C) Top
- D) Bottom
- Answer: A) Left
- Explanation: In the double-entry accounting system, the left side of an account is the debit side.
- Which of the following is true about the double-entry accounting system?
- A) Every transaction affects two or more accounts.
- B) It only records cash transactions.
- C) Debits must always equal credits.
- D) Both A and C
- Answer: D) Both A and C
- Explanation: The double-entry system requires that each transaction affects at least two accounts and that total debits equal total credits.
- What happens to the Cash account when it is debited?
- A) It decreases
- B) It increases
- C) No change
- D) It depends on the type of transaction
- Answer: B) It increases
- Explanation: Debiting the Cash account increases the cash balance as more cash is being added.
- Which account is credited when goods are sold on credit?
- A) Sales
- B) Accounts Receivable
- C) Cash
- D) Inventory
- Answer: A) Sales
- Explanation: Sales are credited when goods are sold, reflecting an increase in revenue.
- What is the normal balance of the Accounts Receivable account?
- A) Debit
- B) Credit
- C) It depends
- D) Zero
- Answer: A) Debit
- Explanation: Accounts Receivable normally have a debit balance, representing amounts owed to the company.
- Which of the following transactions would increase a liability?
- A) Payment to suppliers
- B) Borrowing from a bank
- C) Receiving cash from customers
- D) Purchase of equipment with cash
- Answer: B) Borrowing from a bank
- Explanation: Borrowing increases liabilities as it represents an obligation to repay the bank.
- When an expense is incurred but not yet paid, which account is credited?
- A) Cash
- B) Accounts Payable
- C) Expenses
- D) Revenue
- Answer: B) Accounts Payable
- Explanation: Accounts Payable is credited to recognize the obligation to pay the expense in the future.
- Which of the following is true for a revenue account?
- A) It is increased by debits.
- B) It is decreased by credits.
- C) It normally has a credit balance.
- D) It is an asset account.
- Answer: C) It normally has a credit balance.
- Explanation: Revenue accounts typically have a credit balance, reflecting income earned by the business.
- What is the effect on the capital account when it is credited?
- A) It increases
- B) It decreases
- C) No effect
- D) It depends on the transaction
- Answer: A) It increases
- Explanation: Crediting the capital account increases it, indicating an increase in the owner’s equity.
- Which of the following is debited when a company pays off a loan?
- A) Cash
- B) Loan Payable
- C) Interest Expense
- D) Accounts Payable
- Answer: B) Loan Payable
- Explanation: Loan Payable is debited to reduce the liability when the loan is paid off.
- Which account typically has a debit balance?
- A) Revenue
- B) Accounts Payable
- C) Capital
- D) Expenses
- Answer: D) Expenses
- Explanation: Expenses typically have a debit balance, reflecting the costs incurred by the business.
- If a company purchases equipment on credit, which account is debited?
- A) Cash
- B) Accounts Payable
- C) Equipment
- D) Capital
- Answer: C) Equipment
- Explanation: Equipment is debited to reflect the addition of the asset to the company’s books.
- What happens to the Accounts Payable account when it is debited?
- A) It increases
- B) It decreases
- C) No change
- D) It depends on the transaction
- Answer: B) It decreases
- Explanation: Debiting Accounts Payable reduces the balance, indicating a payment has been made.
- When the owner invests additional cash in the business, which account is credited?
- A) Cash
- B) Owner’s Equity
- C) Revenue
- D) Accounts Receivable
- Answer: B) Owner’s Equity
- Explanation: Owner’s Equity is credited to reflect the increase in equity from the additional investment.
- Which of the following is debited when inventory is purchased for cash?
- A) Inventory
- B) Cash
- C) Accounts Payable
- D) Cost of Goods Sold
- Answer: A) Inventory
- Explanation: The Inventory account is debited to increase the asset as more inventory is acquired.
- What happens to the Accounts Receivable account when a customer pays their invoice?
- A) It increases
- B) It decreases
- C) No change
- D) It depends on the payment method
- Answer: B) It decreases
- Explanation: Accounts Receivable is credited, reducing the balance as the amount owed is paid off.
- Which account is debited when an expense is paid in cash?
- A) Cash
- B) Accounts Payable
- C) Expense
- D) Capital
- Answer: C) Expense
- Explanation: The Expense account is debited to record the cost, reducing equity.
- When revenue is earned on account, which account is credited?
- A) Cash
- B) Accounts Receivable
- C) Revenue
- D) Unearned Revenue
- Answer: C) Revenue
- Explanation: Revenue is credited to recognize the income earned by the business.
- If a customer returns goods, which account is debited?
- A) Sales Returns
- B) Sales
- C) Accounts Receivable
- D) Inventory
- Answer: A) Sales Returns
- Explanation: Sales Returns is debited to reduce the revenue and acknowledge the return of goods.
- Which of the following accounts is credited when a dividend is declared?
- A) Dividends Payable
- B) Retained Earnings
- C) Cash
- D) Revenue
- Answer: A) Dividends Payable
- Explanation: Dividends Payable is credited to record the liability created by declaring a dividend.
- What is the normal balance of the Capital account?
- A) Debit
- B) Credit
- C) It depends on the transaction
- D) Zero
- Answer: B) Credit
- Explanation: The Capital account typically has a credit balance, reflecting the owner’s equity in the business.
Debit and Credit Quiz: 50 Multiple Choice Questions with Answers and Detailed Explanations
Question 1
What is the primary purpose of debits and credits in accounting?
A) To calculate taxes
B) To record financial transactions using double-entry bookkeeping
C) To prepare payroll
D) To determine product prices
Answer: B) To record financial transactions using double-entry bookkeeping
Explanation:
Debits and credits are the foundation of the double-entry accounting system. Every financial transaction affects at least two accounts, ensuring that the accounting equation (Assets = Liabilities + Equity) remains balanced.
Question 2
Which side of a T-account represents a debit?
A) Right side
B) Bottom side
C) Left side
D) Top side
Answer: C) Left side
Explanation:
In a T-account, the left side is always the debit side, while the right side is always the credit side. This format helps accountants record transactions consistently.
Question 3
Which side of a T-account represents a credit?
A) Left side
B) Right side
C) Bottom side
D) Middle section
Answer: B) Right side
Explanation:
Credits are recorded on the right side of a T-account. Every debit entry must have a corresponding credit entry of equal value.
Question 4
A debit increases which type of account?
A) Revenue
B) Liability
C) Asset
D) Owner’s Equity
Answer: C) Asset
Explanation:
Assets normally carry debit balances. Recording a debit to an asset account increases its value. Examples include Cash, Accounts Receivable, and Equipment.
Question 5
A credit increases which type of account?
A) Expense
B) Asset
C) Liability
D) Drawing
Answer: C) Liability
Explanation:
Liabilities have normal credit balances. Therefore, crediting a liability account increases the amount owed by the business.
Question 6
Which account normally has a debit balance?
A) Accounts Payable
B) Service Revenue
C) Cash
D) Notes Payable
Answer: C) Cash
Explanation:
Cash is an asset account, and assets normally have debit balances. An increase in cash is recorded with a debit.
Question 7
Which account normally has a credit balance?
A) Supplies
B) Equipment
C) Rent Expense
D) Unearned Revenue
Answer: D) Unearned Revenue
Explanation:
Unearned Revenue is a liability because the business owes goods or services to customers. Liabilities normally carry credit balances.
Question 8
What is the total amount of debits compared to credits in every transaction?
A) Debits are greater
B) Credits are greater
C) They are always equal
D) They are unrelated
Answer: C) They are always equal
Explanation:
The double-entry system requires total debits to equal total credits for each transaction, maintaining balance in the accounting records.
Question 9
When cash is received from a customer, which account is debited?
A) Revenue
B) Accounts Receivable
C) Cash
D) Equity
Answer: C) Cash
Explanation:
Receiving cash increases the Cash account, and asset increases are recorded with debits.
Question 10
Which account type decreases with a credit?
A) Asset
B) Liability
C) Revenue
D) Equity
Answer: A) Asset
Explanation:
Assets increase with debits and decrease with credits. Crediting Cash, for example, reduces the cash balance.
Question 11
A debit to Accounts Receivable means:
A) Customers owe less money
B) Customers owe more money
C) Revenue decreases
D) Cash decreases
Answer: B) Customers owe more money
Explanation:
Accounts Receivable is an asset account. Debiting it increases the amount customers owe to the business.
Question 12
Which account is credited when a company makes a cash sale?
A) Cash
B) Revenue
C) Expense
D) Inventory
Answer: B) Revenue
Explanation:
A cash sale increases Cash (debit) and increases Revenue (credit).
Question 13
Which account type normally increases with credits?
A) Expenses
B) Assets
C) Revenues
D) Drawings
Answer: C) Revenues
Explanation:
Revenue accounts have normal credit balances. Therefore, credits increase revenue.
Question 14
Paying rent in cash requires:
A) Debit Cash, Credit Rent Expense
B) Debit Rent Expense, Credit Cash
C) Debit Revenue, Credit Cash
D) Debit Cash, Credit Revenue
Answer: B) Debit Rent Expense, Credit Cash
Explanation:
Rent Expense increases with a debit, while Cash decreases with a credit.
Question 15
Which mnemonic helps remember debit and credit rules?
A) FIFO
B) LIFO
C) DEAD CLIC
D) SMART
Answer: C) DEAD CLIC
Explanation:
DEAD CLIC stands for:
- Debits Increase Expenses, Assets, Drawings
- Credits Increase Liabilities, Income, Capital
It is a popular accounting memory aid.
Question 16
Which account is debited when equipment is purchased for cash?
A) Cash
B) Equipment
C) Revenue
D) Accounts Payable
Answer: B) Equipment
Explanation:
Equipment increases, so it is debited. Cash decreases, so it is credited.
Question 17
Which account is credited when cash is withdrawn by the owner for personal use?
A) Drawing
B) Cash
C) Capital
D) Revenue
Answer: B) Cash
Explanation:
Cash decreases when withdrawn. Therefore, Cash is credited.
Question 18
A debit to an expense account will:
A) Increase expenses
B) Decrease expenses
C) Increase liabilities
D) Increase revenue
Answer: A) Increase expenses
Explanation:
Expense accounts have normal debit balances. Debits increase expenses.
Question 19
Which account is credited when a company receives cash in advance from a customer?
A) Cash
B) Revenue
C) Unearned Revenue
D) Expense
Answer: C) Unearned Revenue
Explanation:
The company owes services or goods in the future, creating a liability called Unearned Revenue.
Question 20
Accounts Payable normally carries a:
A) Debit balance
B) Credit balance
C) Zero balance
D) Temporary balance
Answer: B) Credit balance
Explanation:
Accounts Payable is a liability account, and liabilities normally have credit balances.
Questions 21–50
Question 21
Which account increases with a debit?
A) Capital
B) Revenue
C) Expense
D) Accounts Payable
Answer: C) Expense
Explanation: Expenses normally increase through debit entries.
Question 22
Paying an outstanding supplier invoice requires:
A) Debit Cash, Credit Accounts Payable
B) Debit Accounts Payable, Credit Cash
C) Debit Expense, Credit Cash
D) Debit Revenue, Credit Cash
Answer: B) Debit Accounts Payable, Credit Cash
Explanation: The liability decreases through a debit, while cash decreases through a credit.
Question 23
Which account has a normal debit balance?
A) Sales Revenue
B) Notes Payable
C) Inventory
D) Unearned Revenue
Answer: C) Inventory
Explanation: Inventory is an asset and assets normally have debit balances.
Question 24
What happens when a liability account is debited?
A) It increases
B) It decreases
C) Revenue increases
D) Equity increases
Answer: B) It decreases
Explanation: Liabilities increase with credits and decrease with debits.
Question 25
A credit entry to Service Revenue will:
A) Increase revenue
B) Decrease revenue
C) Increase expenses
D) Decrease cash
Answer: A) Increase revenue
Explanation: Revenue accounts normally increase through credits.
Question 26
Which account decreases with a debit?
A) Revenue
B) Expense
C) Asset
D) Drawing
Answer: A) Revenue
Explanation: Revenue accounts have credit balances; debits reduce them.
Question 27
When supplies are purchased on account, the entry includes:
A) Debit Supplies, Credit Accounts Payable
B) Debit Accounts Payable, Credit Supplies
C) Debit Cash, Credit Supplies
D) Debit Expense, Credit Cash
Answer: A) Debit Supplies, Credit Accounts Payable
Explanation: Supplies increase while a liability is created.
Question 28
Which account belongs to owner’s equity?
A) Accounts Receivable
B) Capital
C) Accounts Payable
D) Equipment
Answer: B) Capital
Explanation: Capital represents the owner’s investment in the business.
Question 29
What is the normal balance of an expense account?
A) Credit
B) Debit
C) Zero
D) Either
Answer: B) Debit
Explanation: Expenses reduce equity and therefore normally have debit balances.
Question 30
Which account is credited when customers pay amounts previously owed?
A) Accounts Receivable
B) Cash
C) Revenue
D) Expense
Answer: A) Accounts Receivable
Explanation: The receivable decreases when the customer pays.
Question 31
A debit to Cash means:
A) Cash decreased
B) Cash increased
C) Liability increased
D) Revenue decreased
Answer: B) Cash increased
Explanation: Cash is an asset, and asset increases are recorded with debits.
Question 32
Which account type normally has a credit balance?
A) Expense
B) Asset
C) Liability
D) Drawing
Answer: C) Liability
Explanation: Liabilities represent obligations and normally carry credit balances.
Question 33
When the owner invests cash into the business, Capital is:
A) Debited
B) Credited
C) Closed
D) Reduced
Answer: B) Credited
Explanation: Owner investment increases equity, which is increased by credits.
Question 34
Which account is debited when wages are paid?
A) Cash
B) Wages Expense
C) Revenue
D) Accounts Payable
Answer: B) Wages Expense
Explanation: Expenses increase through debit entries.
Question 35
A credit to Cash will:
A) Increase cash
B) Decrease cash
C) Increase revenue
D) Increase assets
Answer: B) Decrease cash
Explanation: Assets decrease when credited.
Question 36
What does DR stand for?
A) Debt Record
B) Debit Record
C) Debit
D) Deposit Record
Answer: C) Debit
Explanation: DR is the standard abbreviation for Debit.
Question 37
What does CR stand for?
A) Credit
B) Cash Record
C) Capital Record
D) Credit Revenue
Answer: A) Credit
Explanation: CR is the standard abbreviation for Credit.
Question 38
Which account decreases with a credit?
A) Liability
B) Revenue
C) Asset
D) Capital
Answer: C) Asset
Explanation: Asset balances are reduced through credit entries.
Question 39
Which accounting system relies on debits and credits?
A) Single-entry system
B) Double-entry system
C) Cash-only system
D) Tax system
Answer: B) Double-entry system
Explanation: Debits and credits are the core of double-entry bookkeeping.
Question 40
Which account is credited when borrowing money from a bank?
A) Cash
B) Loan Payable
C) Expense
D) Accounts Receivable
Answer: B) Loan Payable
Explanation: Borrowing creates a liability, which increases through a credit.
Question 41
The normal balance of Accounts Receivable is:
A) Credit
B) Debit
C) Zero
D) Temporary
Answer: B) Debit
Explanation: Accounts Receivable is an asset account.
Question 42
A debit to Drawing will:
A) Increase owner withdrawals
B) Increase liabilities
C) Increase revenue
D) Decrease expenses
Answer: A) Increase owner withdrawals
Explanation: Drawing accounts increase through debits.
Question 43
Which account is credited when equipment is sold for cash?
A) Cash
B) Equipment
C) Expense
D) Accounts Receivable
Answer: B) Equipment
Explanation: The equipment asset decreases and is credited.
Question 44
Which account type normally increases with debits?
A) Revenue
B) Liability
C) Asset
D) Capital
Answer: C) Asset
Explanation: Assets increase through debit entries.
Question 45
If total debits exceed total credits, the books are:
A) Balanced
B) Correct
C) Out of balance
D) Closed
Answer: C) Out of balance
Explanation: Total debits must always equal total credits.
Question 46
Which account is debited when paying a utility bill?
A) Utilities Expense
B) Cash
C) Revenue
D) Capital
Answer: A) Utilities Expense
Explanation: Utility costs are expenses and increase through debits.
Question 47
A credit entry to Capital will:
A) Reduce equity
B) Increase equity
C) Increase expenses
D) Decrease liabilities
Answer: B) Increase equity
Explanation: Equity accounts increase through credit entries.
Question 48
Which account decreases with a debit?
A) Accounts Payable
B) Cash
C) Equipment
D) Inventory
Answer: A) Accounts Payable
Explanation: Accounts Payable is a liability, and liabilities decrease with debits.
Question 49
What is the normal balance of Revenue accounts?
A) Debit
B) Credit
C) Zero
D) Temporary debit
Answer: B) Credit
Explanation: Revenues increase owner’s equity and therefore have normal credit balances.
Question 50
What is the golden rule of double-entry accounting?
A) Every transaction affects only one account
B) Debits must always equal credits
C) Revenue must exceed expenses
D) Cash must always increase
Answer: B) Debits must always equal credits
Explanation:
The fundamental principle of double-entry accounting is that every transaction records equal debits and credits. This ensures accurate financial records and keeps the accounting equation balanced.
Debit and Credit Accounting Quiz
Question 1
When a company purchases office equipment on account, how is this transaction recorded?
-
A) Debit Office Equipment, Credit Cash
-
B) Debit Accounts Payable, Credit Office Equipment
-
C) Debit Office Equipment, Credit Accounts Payable
-
D) Debit Cash, Credit Accounts Payable
Correct Answer: C Rationale: Office Equipment is an asset account, and assets increase with a debit. Purchasing “on account” means creating a liability, and Accounts Payable (a liability account) increases with a credit. Therefore, you debit Office Equipment and credit Accounts Payable.
Question 2
Which of the following accounts is increased by a debit entry?
-
A) Service Revenue
-
B) Accounts Payable
-
C) Salaries Expense
-
D) Retained Earnings
Correct Answer: C Rationale: Under double-entry bookkeeping, expenses (like Salaries Expense) and assets increase with a debit. On the other hand, liabilities, equity, and revenue accounts (such as Accounts Payable, Retained Earnings, and Service Revenue) increase with a credit.
Question 3
A business owner invests cash into the business to start operations. What is the correct journal entry?
-
A) Debit Cash, Credit Common Stock
-
B) Debit Common Stock, Credit Cash
-
C) Debit Cash, Credit Service Revenue
-
D) Debit Capital Expense, Credit Cash
Correct Answer: A Rationale: Cash is an asset that increases with a debit. Common Stock (or Owner’s Capital) represents equity, which increases with a credit. This entry reflects an influx of resources alongside an increase in owner’s equity.
Question 4
What happens to the accounting equation when a utility bill is received and paid immediately in cash?
-
A) Assets increase, Equity decreases
-
B) Assets decrease, Equity decreases
-
C) Liabilities increase, Assets decrease
-
D) Assets decrease, Liabilities decrease
Correct Answer: B Rationale: Paying a utility bill immediately involves an expense (Utility Expense) and a reduction in cash. Expenses reduce net income, which ultimately decreases Equity. Cash is an asset, so paying it out decreases Assets.
Question 5
If a company performs services for a client and bills them to be paid next month, which account is debited?
-
A) Cash
-
B) Service Revenue
-
C) Accounts Receivable
-
D) Unearned Revenue
Correct Answer: C Rationale: Because the service was performed but the cash has not yet been received, the company establishes a right to collect money in the future. This right is an asset called Accounts Receivable, which increases with a debit.
Question 6
A credit entry will always decrease which type of account?
-
A) Liabilities
-
B) Assets
-
C) Revenues
-
D) Common Stock
Correct Answer: B Rationale: Assets have a normal debit balance, meaning they increase with a debit and decrease with a credit. Liabilities, revenues, and equity accounts all have normal credit balances, meaning they increase with a credit.
Question 7
When a company collects cash from a customer who was previously billed, what is the impact on the accounts?
-
A) Debit Cash, Credit Service Revenue
-
B) Debit Cash, Credit Accounts Receivable
-
C) Debit Accounts Receivable, Credit Cash
-
D) Debit Accounts Payable, Credit Cash
Correct Answer: B Rationale: Since the customer was previously billed, the revenue was already recognized. Collecting the cash increases the asset Cash (debit) and decreases the asset Accounts Receivable (credit), resulting in no net change to total assets.
Question 8
What is the normal balance and the increasing side of the “Unearned Revenue” account?
-
A) Debit / Debit
-
B) Credit / Credit
-
C) Debit / Credit
-
D) Credit / Debit
Correct Answer: B Rationale: Unearned Revenue represents an obligation to perform services or deliver goods in the future after receiving advance payment. Therefore, it is a liability account, which carries a normal credit balance and increases with a credit.
Question 9
A company pays off a portion of its outstanding Accounts Payable using cash. How does this affect the accounts?
-
A) Debit Accounts Payable, Credit Cash
-
B) Debit Cash, Credit Accounts Payable
-
C) Debit Accounts Payable, Credit Repair Expense
-
D) Debit Cash, Credit Retained Earnings
Correct Answer: A Rationale: Paying off a liability reduces that liability, and since liabilities decrease with a debit, Accounts Payable is debited. Cash is an asset being paid out, so it decreases with a credit.
Question 10
Which account is classified as a “Contra-Asset” and carries a normal credit balance?
Correct Answer: B Rationale: Accumulated Depreciation offsets a fixed asset account on the balance sheet. Because it reduces the value of an asset, it is called a contra-asset and carries a normal credit balance, opposite to a standard asset.
Question 11
If a bookkeeper accidentally posts a debit to Accounts Receivable as a debit to Cash, what will happen to the trial balance?
-
A) The trial balance will be out of balance, debits will exceed credits.
-
B) The trial balance will still balance, but individual account balances will be incorrect.
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C) The trial balance will be out of balance, credits will exceed debits.
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D) Total assets will be overstated.
Correct Answer: B Rationale: Since a debit was still recorded as a debit (just in the wrong asset account), the total sum of debits will still match the total sum of credits. The trial balance will balance, but it masks an error in the Cash and Accounts Receivable sub-ledgers.
Question 12
When a company declares and pays cash dividends to its shareholders, which account is debited?
Correct Answer: C Rationale: Dividends represent a distribution of earnings to owners, which reduces equity. To reduce equity or track distributions, the Dividends account is debited (or Retained Earnings is directly debited), while Cash is credited.
Question 13
Why does an increase in expenses result in a debit entry?
-
A) Because expenses are assets.
-
B) Because expenses reduce equity, and equity decreases with a debit.
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C) Because expenses increase liabilities.
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D) Because expenses represent cash coming into the firm.
Correct Answer: B Rationale: Equity increases with a credit. Since expenses reduce net income and ultimately reduce equity, they must carry a normal debit balance to represent that reduction in equity.
Question 14
A business pays $1,200 for a 1-year insurance policy in advance. What is the proper journal entry?
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A) Debit Insurance Expense, Credit Cash
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B) Debit Cash, Credit Prepaid Insurance
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C) Debit Prepaid Insurance, Credit Cash
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D) Debit Prepaid Insurance, Credit Accounts Payable
Correct Answer: C Rationale: Paying for a service in advance creates an economic resource (the right to be insured for a year), which is an asset called Prepaid Insurance. Assets increase with a debit, and Cash decreases with a credit.
Question 15
Which of the following statements perfectly describes the concept of Double-Entry Accounting?
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A) Every transaction must involve exactly two accounts.
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B) Total debits must always equal total credits for every recorded transaction.
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C) Debits must always affect the left side of the accounting equation, and credits must affect the right side.
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D) Cash must be involved in every transaction.
Correct Answer: B Rationale: While a transaction can involve more than two accounts (a compound entry), the foundational rule of double-entry accounting is that the total dollar amount of debits must strictly equal the total dollar amount of credits for every transaction.
Debit and Credit Quiz: Mastering the Fundamentals of Accounting
Here are 50 multiple-choice questions on Debits and Credits in accounting. Each question includes four options, the correct answer, and a detailed explanation with reasoning, common pitfalls, and key concepts.
Questions 1–10: Basic Concepts
1. What is the fundamental rule for recording transactions in double-entry bookkeeping? A) Debit what comes in, Credit what goes out B) Every transaction affects at least two accounts C) Only assets are debited D) Liabilities are always credited
Correct Answer: B Explanation: Double-entry bookkeeping is based on the principle that every financial transaction has equal and opposite effects in at least two accounts. This maintains the accounting equation (Assets = Liabilities + Equity). Option A is partially correct for assets but incomplete as a general rule.
2. In the accounting equation, which side is increased by a debit? A) Liabilities B) Equity C) Assets D) Revenues
Correct Answer: C Explanation: Assets increase with debits and decrease with credits. Liabilities and Equity increase with credits. This is the golden rule derived from the left side (Assets) of the accounting equation.
3. Which of the following accounts is increased by a credit? A) Cash B) Accounts Receivable C) Accounts Payable D) Prepaid Rent
Correct Answer: C Explanation: Accounts Payable is a liability. Liabilities increase with credits. The normal balance for liabilities is credit. Assets like Cash and Accounts Receivable have normal debit balances.
4. What does a debit entry represent in terms of the accounting equation? A) An increase in liabilities B) A decrease in equity C) An increase in assets or expenses D) A decrease in revenues
Correct Answer: C Explanation: Debits increase assets and expenses (which ultimately decrease equity). Credits increase liabilities, equity, and revenues.
5. The normal balance of a revenue account is: A) Debit B) Credit C) Either D) Zero
Correct Answer: B Explanation: Revenues increase equity, so they are credited when earned. At the end of the period, revenues are closed to retained earnings (equity).
6. Which account type has a normal debit balance? A) Owner’s Capital B) Sales Revenue C) Salaries Expense D) Notes Payable
Correct Answer: C Explanation: Expenses decrease equity and are recorded as debits. Owner’s Capital, Revenues, and Liabilities have normal credit balances.
7. Debiting an asset account will: A) Decrease the asset B) Increase the asset C) Have no effect D) Increase a liability
Correct Answer: B Explanation: Assets follow the rule: Debit to increase, Credit to decrease. Example: Purchasing equipment for cash debits Equipment and credits Cash.
8. Crediting an expense account would: A) Increase the expense B) Decrease the expense C) Be incorrect D) Record a revenue
Correct Answer: B Explanation: Expenses are decreased by credits (e.g., when correcting an over-recorded expense or during closing entries).
9. The accounting equation remains in balance because: A) Total debits always equal total credits B) Assets always equal liabilities C) Revenues always exceed expenses D) Only one account is affected per transaction
Correct Answer: A Explanation: This is the core of double-entry: For every debit there is an equal credit, keeping Assets = Liabilities + Equity balanced.
10. Which of the following is a contra-asset account? A) Accumulated Depreciation B) Accounts Receivable C) Inventory D) Cash
Correct Answer: A Explanation: Contra-asset accounts (like Accumulated Depreciation) have a credit balance and reduce the related asset. They are credited to increase the contra balance.
Questions 11–20: Journal Entries & Transactions
11. When a business purchases supplies on account, the journal entry is: A) Debit Supplies, Credit Cash B) Debit Supplies, Credit Accounts Payable C) Debit Accounts Payable, Credit Supplies D) Debit Cash, Credit Supplies
Correct Answer: B Explanation: Asset (Supplies) increases → Debit. Liability (Accounts Payable) increases → Credit.
12. Receiving cash from a customer for services to be performed later requires: A) Debit Cash, Credit Service Revenue B) Debit Cash, Credit Unearned Revenue C) Debit Unearned Revenue, Credit Cash D) Debit Service Revenue, Credit Cash
Correct Answer: B Explanation: This creates a liability (Unearned Revenue). Revenue is recognized only when earned.
13. Paying salaries to employees is recorded as: A) Debit Salaries Expense, Credit Cash B) Debit Cash, Credit Salaries Expense C) Debit Salaries Payable, Credit Cash D) Debit Cash, Credit Salaries Payable
Correct Answer: A Explanation: Expense increases (debit), asset (Cash) decreases (credit).
14. Owner invests additional cash into the business. The entry is: A) Debit Cash, Credit Owner’s Capital B) Debit Owner’s Capital, Credit Cash C) Debit Drawings, Credit Cash D) Debit Cash, Credit Revenue
Correct Answer: A Explanation: Asset increases and equity (Owner’s Capital) increases.
15. Selling goods on credit results in: A) Debit Sales Revenue, Credit Accounts Receivable B) Debit Accounts Receivable, Credit Sales Revenue C) Debit Cash, Credit Sales Revenue D) Debit Sales Revenue, Credit Cash
Correct Answer: B Explanation: Asset (Accounts Receivable) increases (debit), Revenue increases (credit).
16. Collecting cash from a credit customer: A) Debit Cash, Credit Accounts Receivable B) Debit Accounts Receivable, Credit Cash C) Debit Cash, Credit Revenue D) Debit Revenue, Credit Accounts Receivable
Correct Answer: A Explanation: This converts one asset to another. No effect on revenue (already recorded).
17. Recording depreciation expense: A) Debit Depreciation Expense, Credit Accumulated Depreciation B) Debit Accumulated Depreciation, Credit Depreciation Expense C) Debit Asset, Credit Expense D) Debit Cash, Credit Expense
Correct Answer: A Explanation: Expense increases (debit), contra-asset increases (credit).
18. Withdrawing cash by the owner for personal use: A) Debit Owner’s Capital, Credit Cash B) Debit Drawings (or Owner’s Withdrawal), Credit Cash C) Debit Cash, Credit Drawings D) Debit Expense, Credit Cash
Correct Answer: B Explanation: This reduces equity via a contra-equity account (Drawings).
19. A business borrows money from a bank on a note payable: A) Debit Cash, Credit Note Payable B) Debit Note Payable, Credit Cash C) Debit Expense, Credit Cash D) Debit Cash, Credit Revenue
Correct Answer: A Explanation: Asset increases, liability increases.
20. Returning defective merchandise to a supplier (purchased on account): A) Debit Accounts Payable, Credit Purchases (or Inventory) B) Debit Purchases, Credit Accounts Payable C) Debit Cash, Credit Accounts Payable D) Debit Inventory, Credit Accounts Payable
Correct Answer: A Explanation: Reduces liability (debit) and reduces asset/expense (credit).
Questions 21–30: T-Accounts, Trial Balance & Adjustments
21. In a T-account, the debit side is: A) The right side B) The left side C) The bottom D) The top
Correct Answer: B Explanation: Traditional T-account format: Left = Debit, Right = Credit.
22. A trial balance will not balance if: A) A debit entry was posted as a credit B) Only one side of a transaction is recorded C) Both A and B D) All accounts have normal balances
Correct Answer: C Explanation: The trial balance tests whether total debits equal total credits.
23. Which of the following errors will not be detected by a trial balance? A) Posting the wrong amount to both sides B) Recording a transaction in the wrong account C) Omitting an entire transaction D) All of the above
Correct Answer: D Explanation: Trial balance only checks arithmetic equality of debits and credits, not correctness of accounts or omissions.
24. Adjusting entry for accrued expenses: A) Debit Expense, Credit Liability B) Debit Liability, Credit Expense C) Debit Asset, Credit Expense D) Debit Expense, Credit Asset
Correct Answer: A Explanation: Recognizes expense incurred but not yet paid.
25. Adjusting entry for unearned revenue that has now been earned: A) Debit Unearned Revenue, Credit Revenue B) Debit Revenue, Credit Unearned Revenue C) Debit Cash, Credit Revenue D) Debit Expense, Credit Revenue
Correct Answer: A Explanation: Converts liability to revenue as the service is performed.
26. The normal balance of Accumulated Depreciation is: A) Debit B) Credit C) Zero D) Variable
Correct Answer: B Explanation: Contra-asset with credit balance.
27. Which account would appear on the credit side of a trial balance? A) Prepaid Insurance B) Interest Receivable C) Service Revenue D) Rent Expense
Correct Answer: C Explanation: Revenue has a credit balance.
28. Closing entries involve: A) Debiting revenue accounts and crediting expense accounts B) Debiting Income Summary for revenues and crediting for expenses C) Transferring net income to retained earnings D) All of the above (in proper sequence)
Correct Answer: D Explanation: Closing process zeros temporary accounts (revenues, expenses, drawings) into permanent equity.
29. A debit balance in the Income Summary account after closing revenues and expenses indicates: A) Net profit B) Net loss C) Break-even D) Error
Correct Answer: B Explanation: Debit balance means expenses > revenues (loss), which is closed by crediting Income Summary and debiting Retained Earnings.
30. Which of the following has a debit balance in the post-closing trial balance? A) Service Revenue B) Salaries Expense C) Retained Earnings (assuming profit) D) None of the above
Correct Answer: D Explanation: Only permanent accounts (assets, liabilities, equity) remain. Temporary accounts are closed to zero.
Questions 31–40: Advanced Applications & Common Scenarios
31. Buying equipment with a loan: A) Debit Equipment, Credit Loan Payable B) Debit Loan Payable, Credit Equipment C) Debit Cash, Credit Equipment D) Debit Equipment, Credit Cash
Correct Answer: A Explanation: Asset up (debit), liability up (credit).
32. Recording bad debt expense using the allowance method: A) Debit Bad Debt Expense, Credit Allowance for Doubtful Accounts B) Debit Accounts Receivable, Credit Bad Debt Expense C) Debit Allowance, Credit Bad Debt Expense D) Debit Expense, Credit Accounts Receivable
Correct Answer: A Explanation: Contra-asset is credited; expense is recognized.
33. When a company pays dividends: A) Debit Dividends, Credit Cash B) Debit Cash, Credit Dividends C) Debit Retained Earnings, Credit Cash D) Debit Expense, Credit Cash
Correct Answer: A Explanation: Dividends are a distribution of equity (debit to contra-equity or directly to Retained Earnings in some systems).
34. Interest earned on a note receivable is recorded as: A) Debit Interest Receivable, Credit Interest Revenue B) Debit Cash, Credit Interest Revenue C) Debit Interest Revenue, Credit Receivable D) Debit Expense, Credit Revenue
Correct Answer: A (for accrual) Explanation: Accrual basis recognizes revenue when earned.
35. Purchasing inventory using the perpetual system: A) Debit Inventory, Credit Accounts Payable B) Debit Purchases, Credit Accounts Payable C) Debit Cost of Goods Sold, Credit Inventory D) No entry until sale
Correct Answer: A Explanation: Perpetual system updates Inventory continuously.
36. Which transaction decreases both assets and liabilities? A) Paying an account payable B) Borrowing money C) Owner investment D) Selling on credit
Correct Answer: A Explanation: Debit Accounts Payable (liability down), Credit Cash (asset down).
37. A credit to Retained Earnings occurs when: A) Net loss is closed B) Net income is closed C) Dividends are declared D) Owner withdraws cash
Correct Answer: B Explanation: Closing net income: Debit Income Summary, Credit Retained Earnings.
38. The rule for owner’s equity is: A) Debit to increase, Credit to decrease B) Credit to increase, Debit to decrease C) Always zero D) Same as liabilities only
Correct Answer: B Explanation: Equity increases with credits (investments, profits) and decreases with debits (withdrawals, losses).
39. Recording the collection of an account previously written off (recovery): A) Debit Allowance, Credit Bad Debt Expense (reinstatement) then Debit Cash, Credit Accounts Receivable B) Only Debit Cash, Credit Revenue C) Debit Accounts Receivable, Credit Allowance D) Both A and C (two entries)
Correct Answer: D Explanation: Recovery involves reinstating the receivable first.
40. In a bank reconciliation, a debit memo from the bank for service charges is recorded as: A) Debit Bank Service Expense, Credit Cash B) Debit Cash, Credit Expense C) No entry needed D) Debit Accounts Payable, Credit Cash
Correct Answer: A Explanation: Expense increases, cash decreases.
Questions 41–50: Mixed & Conceptual
41. Total debits exceeding total credits in the trial balance indicates: A) Net profit B) An error in posting or totaling C) Normal situation D) Net loss
Correct Answer: B Explanation: Trial balance must have equal totals.
42. Which is not a temporary account? A) Rent Expense B) Service Revenue C) Building D) Dividends
Correct Answer: C Explanation: Building is a permanent asset account.
43. The dual effect of a transaction means: A) Two journal entries B) At least one debit and one credit of equal amount C) Two assets are affected D) Only income statement accounts are used
Correct Answer: B Explanation: Core of double-entry system.
44. Crediting Accounts Receivable results in: A) Increase in assets B) Decrease in assets C) Increase in revenue D) Decrease in liabilities
Correct Answer: B Explanation: Reducing what customers owe the business.
45. Which account is increased by a debit and decreased by a credit? A) Common Stock B) Notes Payable C) Utilities Expense D) Sales
Correct Answer: C Explanation: Expenses follow asset-like debit/credit rules.
46. A business receives a utility bill but has not paid it. The entry is: A) Debit Utilities Expense, Credit Utilities Payable B) Debit Cash, Credit Utilities Expense C) Debit Utilities Payable, Credit Expense D) No entry until paid
Correct Answer: A Explanation: Accrual accounting.
47. The purpose of debits and credits is to: A) Make accounting more complicated B) Ensure the accounting equation always balances C) Track only cash transactions D) Replace financial statements
Correct Answer: B Explanation: They enforce duality and balance.
48. In the expanded accounting equation, Expenses are shown as: A) Added to equity B) Subtracted from equity C) Added to liabilities D) Ignored
Correct Answer: B Explanation: Net Income = Revenues – Expenses, which affects equity.
49. Which of the following increases equity? A) Expenses B) Owner withdrawals C) Revenues D) Dividends
Correct Answer: C Explanation: Revenues are credited and increase equity.
50. The best way to remember debit and credit rules is: A) All accounts increase with debits B) Assets/Expenses = Debit increases; Liabilities/Equity/Revenues = Credit increases C) Always credit the bank D) Debit liabilities to increase them
Correct Answer: B Explanation: This is the standard “golden rules” of accounting. Mastering this framework helps avoid most common errors in journalizing.
Debit and Credit Quiz
This quiz is designed to test your understanding of debit and credit rules in accounting. Each question is followed by its correct answer and a detailed explanation.
Question 1:
Which of the following accounts normally has a debit balance?
Explanation: Assets, such as Cash, normally have a debit balance. Liabilities (Accounts Payable, Unearned Revenue) and Revenue (Service Revenue) normally have credit balances.
Question 2:
A credit to an asset account will:
•C) Have no effect on the asset
Explanation: Assets increase with debits and decrease with credits. Therefore, a credit to an asset account will decrease the asset.
Question 3:
Which of the following accounts normally has a credit balance?
Explanation: Equity accounts, such as Common Stock, normally have a credit balance. Assets (Equipment, Accounts Receivable) and Expenses (Rent Expense) normally have debit balances.
Question 4:
A debit to a liability account will:
•A) Increase the liability
•B) Decrease the liability
•C) Have no effect on the liability
Explanation: Liabilities increase with credits and decrease with debits. Therefore, a debit to a liability account will decrease the liability.
Question 5:
The normal balance of an expense account is a:
•C) Depends on the type of expense
Explanation: Expense accounts normally have a debit balance because they decrease owner’s equity, which has a normal credit balance.
Question 6:
The normal balance of a revenue account is a:
•C) Depends on the type of revenue
Explanation: Revenue accounts normally have a credit balance because they increase owner’s equity, which has a normal credit balance.
Question 7:
Which of the following is an example of a debit entry?
•A) Increase in Accounts Payable
•C) Increase in Sales Revenue
•D) Increase in Equipment
Explanation: An increase in an asset account like Equipment is recorded with a debit. Increase in Accounts Payable (liability) and Sales Revenue (revenue) are credits. Decrease in Cash (asset) is a credit.
Question 8:
Which of the following is an example of a credit entry?
•A) Decrease in Notes Payable
•B) Increase in Utilities Expense
•C) Decrease in Accounts Receivable
•D) Increase in Dividends
Explanation: A decrease in an asset account like Accounts Receivable is recorded with a credit. Decrease in Notes Payable (liability) is a debit. Increase in Utilities Expense (expense) and Dividends (contra-equity) are debits.
Question 9:
When cash is received from a customer for services rendered, the journal entry would include:
•A) Debit Cash, Credit Service Revenue
•B) Debit Service Revenue, Credit Cash
•C) Debit Accounts Receivable, Credit Service Revenue
•D) Debit Cash, Credit Accounts Receivable
Explanation: Receiving cash increases the asset Cash (debit) and increases Service Revenue (credit).
Question 10:
When a company pays its monthly rent, the journal entry would include:
•A) Debit Cash, Credit Rent Expense
•B) Debit Rent Expense, Credit Cash
•C) Debit Rent Expense, Credit Accounts Payable
•D) Debit Accounts Payable, Credit Cash
Explanation: Paying rent increases the expense Rent Expense (debit) and decreases the asset Cash (credit).
Question 11:
The accounting equation is:
•A) Assets = Liabilities – Equity
•B) Assets + Liabilities = Equity
•C) Assets = Liabilities + Equity
•D) Assets – Equity = Liabilities
Explanation: The fundamental accounting equation is Assets = Liabilities + Equity. This equation must always remain in balance.
Question 12:
Which account is increased by a debit and decreased by a credit?
Explanation: Expenses and Assets are increased by debits and decreased by credits. Liabilities, Revenue, and Equity are increased by credits and decreased by debits.
Question 13:
Which account is increased by a credit and decreased by a debit?
Explanation: Liabilities, Revenue, and Equity are increased by credits and decreased by debits. Assets, Expenses, and Dividends are increased by debits and decreased by credits.
Question 14:
When a company purchases supplies on credit, the journal entry would include:
•A) Debit Supplies, Credit Cash
•B) Debit Supplies, Credit Accounts Payable
•C) Debit Accounts Payable, Credit Supplies
•D) Debit Cash, Credit Supplies
Explanation: Purchasing supplies on credit increases the asset Supplies (debit) and increases the liability Accounts Payable (credit).
Question 15:
The owner invests personal cash into the business. This transaction would:
•A) Increase Cash and decrease Owner’s Capital
•B) Decrease Cash and increase Owner’s Capital
•C) Increase Cash and increase Owner’s Capital
•D) Decrease Cash and decrease Owner’s Capital
Explanation: An owner’s investment increases the asset Cash (debit) and increases the owner’s equity (Owner’s Capital) (credit).
Question 16:
Dividends declared and paid by a company:
•D) Decrease assets and increase equity
Explanation: Dividends are a distribution of earnings to shareholders, which decreases owner’s equity. They are recorded with a debit to the Dividends account and a credit to Cash.
Question 17:
Unearned Revenue is classified as a:
Explanation: Unearned Revenue is a liability because the company has received cash for services or goods not yet delivered, creating an obligation.
Question 18:
Prepaid Expenses are classified as a:
Explanation: Prepaid Expenses are assets because they represent future economic benefits (e.g., rent paid in advance) that will be consumed over time.
Question 19:
When a company performs services on account, the journal entry would include:
•A) Debit Cash, Credit Service Revenue
•B) Debit Accounts Receivable, Credit Service Revenue
•C) Debit Service Revenue, Credit Accounts Receivable
•D) Debit Accounts Receivable, Credit Cash
Explanation: Performing services on account increases the asset Accounts Receivable (debit) and increases Service Revenue (credit).
Question 20:
The purchase of equipment for cash would:
•A) Increase one asset and decrease another asset
•B) Increase an asset and increase a liability
•C) Increase an asset and decrease equity
•D) Decrease an asset and decrease a liability
Explanation: Purchasing equipment for cash increases the asset Equipment (debit) and decreases the asset Cash (credit).
Question 21:
A debit to an expense account:
•D) Decreases liabilities
Explanation: Expenses normally have a debit balance, so a debit increases an expense account.
Question 22:
A credit to a revenue account:
Explanation: Revenue normally has a credit balance, so a credit increases a revenue account.
Question 23:
Which of the following is true regarding the double-entry accounting system?
•A) Every transaction affects only one account.
•B) The total debits must equal the total credits for every transaction.
•C) It is only used for large corporations.
•D) It only involves asset and liability accounts.
Explanation: The double-entry accounting system requires that for every transaction, the total debits must equal the total credits, ensuring the accounting equation remains balanced.
Question 24:
The purpose of a trial balance is to:
•A) Prepare financial statements
•B) Prove that debits equal credits
•C) Record all transactions
Explanation: A trial balance is a list of all accounts and their balances at a specific point in time, used to verify that the total debits equal the total credits in the ledger.
Question 25:
When a company receives a utility bill but does not pay it immediately, the journal entry would include:
•A) Debit Utilities Expense, Credit Cash
•B) Debit Utilities Expense, Credit Accounts Payable
•C) Debit Accounts Payable, Credit Utilities Expense
•D) Debit Cash, Credit Utilities Expense
Explanation: Receiving a utility bill to be paid later increases Utilities Expense (debit) and increases the liability Accounts Payable (credit).
Question 26:
The normal balance of a contra-asset account (e.g., Accumulated Depreciation) is a:
Explanation: Contra-asset accounts reduce the balance of their associated asset accounts. Since assets have a normal debit balance, contra-assets have a normal credit balance.
Question 27:
An increase in owner’s drawings (dividends for corporations) would be recorded as a:
•D) Depends on the type of drawing
Explanation: Drawings (or dividends) decrease owner’s equity, which has a normal credit balance. Therefore, an increase in drawings is recorded with a debit.
Question 28:
Which of the following statements is true about debits and credits?
•A) Debits always mean increase, and credits always mean decrease.
•B) Debits and credits affect different types of accounts in opposite ways.
•C) Only asset accounts use debits.
•D) Only liability accounts use credits.
Explanation: Debits increase assets and expenses, and decrease liabilities, equity, and revenue. Credits do the opposite. So, they affect different types of accounts in opposite ways.
Question 29:
When a company makes a sale for cash, the effect on the accounting equation is:
•A) Increase in Assets, Decrease in Equity
•B) Increase in Assets, Increase in Liabilities
•C) Increase in Assets, Increase in Equity
•D) Decrease in Assets, Increase in Equity
Explanation: A cash sale increases the asset Cash (debit) and increases Revenue, which in turn increases Equity (credit).
Question 30:
The purchase of a building by issuing a note payable would:
•A) Increase an asset and decrease a liability
•B) Increase an asset and increase a liability
•C) Decrease an asset and increase a liability
•D) Increase an asset and increase equity
Explanation: Purchasing a building by issuing a note payable increases the asset Building (debit) and increases the liability Notes Payable (credit).
Question 31:
What is the effect of a debit to the Sales Returns and Allowances account?
•A) Increase in Sales Revenue
•B) Decrease in Sales Revenue
•C) Increase in an expense
Explanation: Sales Returns and Allowances is a contra-revenue account. It reduces net sales, similar to how an expense reduces equity. Therefore, it has a normal debit balance, and a debit increases its balance, effectively decreasing net sales revenue.
Question 32:
The normal balance of the Accumulated Depreciation account is a:
•D) Depends on the asset type
Explanation: Accumulated Depreciation is a contra-asset account, meaning it reduces the book value of an asset. Contra-asset accounts have a normal credit balance.
Question 33:
When a company pays off a portion of its Accounts Payable, the journal entry would include:
•A) Debit Cash, Credit Accounts Payable
•B) Debit Accounts Payable, Credit Cash
•C) Debit Accounts Payable, Credit Service Revenue
•D) Debit Cash, Credit Service Revenue
Explanation: Paying off Accounts Payable decreases the liability Accounts Payable (debit) and decreases the asset Cash (credit).
Question 34:
Which of the following accounts would be debited to record the payment of salaries?
Explanation: Paying salaries increases the expense Salaries Expense (debit) and decreases the asset Cash (credit).
Question 35:
If a company receives cash in advance for services to be performed later, the account credited is:
Explanation: Receiving cash in advance creates a liability called Unearned Revenue, as the service has not yet been performed. Cash is debited, and Unearned Revenue is credited.
Question 36:
A debit to the Owner’s Capital account would indicate:
•A) An increase in owner’s investment
•B) A decrease in owner’s investment
•C) An increase in liabilities
Explanation: Owner’s Capital is an equity account and normally has a credit balance. A debit to an equity account decreases it, indicating a decrease in owner’s investment or a withdrawal.
Question 37:
The normal balance of the Sales Discounts account is a:
•D) Depends on the discount terms
Explanation: Sales Discounts is a contra-revenue account, reducing the amount of revenue earned. Like expenses, contra-revenue accounts have a normal debit balance.
Question 38:
When a business purchases a new machine on credit, which accounts are affected?
•B) Equipment and Accounts Payable
•C) Equipment and Owner’s Capital
•D) Accounts Payable and Cash
Explanation: Purchasing a machine on credit increases the asset Equipment (debit) and increases the liability Accounts Payable (credit).
Question 39:
Which of the following is NOT an asset account?
Explanation: Accounts Payable is a liability, representing money owed to suppliers. Inventory, Buildings, and Patents are all asset accounts.
Question 40:
Which of the following is NOT a liability account?
Explanation: Notes Receivable is an asset, representing money owed to the company. Bonds Payable, Unearned Revenue, and Salaries Payable are all liability accounts.
Question 41:
A debit to the Interest Expense account would:
•A) Increase Interest Expense
•B) Decrease Interest Expense
•C) Increase Interest Revenue
Explanation: Interest Expense is an expense account, and expenses increase with debits.
Question 42:
A credit to the Rent Revenue account would:
•A) Increase Rent Revenue
•B) Decrease Rent Revenue
•D) Decrease Accounts Receivable
Explanation: Rent Revenue is a revenue account, and revenues increase with credits.
Question 43:
When a customer returns goods previously purchased on credit, the seller would typically:
•A) Debit Sales Revenue, Credit Accounts Receivable
•B) Debit Sales Returns and Allowances, Credit Accounts Receivable
•C) Debit Accounts Receivable, Credit Sales Returns and Allowances
•D) Debit Cash, Credit Sales Returns and Allowances
Explanation: When goods are returned, the seller records a debit to Sales Returns and Allowances (a contra-revenue account) and a credit to Accounts Receivable to reduce the amount owed by the customer.
Question 44:
The payment of a cash dividend would involve a:
•A) Debit to Dividends, Credit to Cash
•B) Debit to Cash, Credit to Dividends
•C) Debit to Retained Earnings, Credit to Cash
•D) Debit to Cash, Credit to Retained Earnings
Explanation: Paying a cash dividend decreases the Dividends account (which reduces Retained Earnings) with a debit, and decreases the asset Cash with a credit.
Question 45:
Which of the following accounts is increased by a debit?
Explanation: Inventory is an asset account, and assets are increased by debits. Common Stock, Retained Earnings, and Accounts Payable are all increased by credits.
Question 46:
Which of the following accounts is decreased by a debit?
Explanation: Service Revenue is a revenue account, and revenues are decreased by debits. Utilities Expense, Accounts Receivable, and Prepaid Insurance are all increased by debits.
Question 47:
When a company issues common stock for cash, the journal entry would include:
•A) Debit Cash, Credit Common Stock
•B) Debit Common Stock, Credit Cash
•C) Debit Cash, Credit Retained Earnings
•D) Debit Retained Earnings, Credit Cash
Explanation: Issuing common stock for cash increases the asset Cash (debit) and increases the equity account Common Stock (credit).
Question 48:
The normal balance of a contra-revenue account (e.g., Sales Returns and Allowances) is a:
•D) Depends on the revenue type
Explanation: Contra-revenue accounts reduce revenue and therefore have a normal debit balance, similar to expenses.
Question 49:
Which of the following would result in a debit to Cash?
•A) Payment of an expense
•B) Purchase of equipment for cash
•C) Collection of an account receivable
•D) Payment of a liability
Explanation: Collection of an account receivable increases the asset Cash (debit) and decreases the asset Accounts Receivable (credit). Payment of an expense, purchase of equipment for cash, and payment of a liability all involve a credit to Cash.
Question 50:
Which of the following would result in a credit to Cash?
•A) Issuance of common stock
•B) Borrowing money from a bank
•D) Sale of services for cash
Explanation: Payment of dividends decreases the asset Cash (credit) and decreases equity (debit to Dividends). Issuance of common stock, borrowing money, and sale of services for cash all involve a debit to Cash.
Question 51:
The normal balance of the Cost of Goods Sold account is a:
•D) Depends on the inventory method
Explanation: Cost of Goods Sold is an expense account, and all expense accounts have a normal debit balance.
Question 52:
When a company records depreciation expense, the journal entry includes:
•A) Debit Depreciation Expense, Credit Cash
•B) Debit Depreciation Expense, Credit Accumulated Depreciation
•C) Debit Accumulated Depreciation, Credit Depreciation Expense
•D) Debit Cash, Credit Accumulated Depreciation
Explanation: Depreciation expense increases (debit) the Depreciation Expense account and increases (credit) the contra-asset account Accumulated Depreciation.
Question 53:
A debit to the Unearned Revenue account would indicate:
•A) An increase in the liability
•B) A decrease in the liability
•C) An increase in revenue
Explanation: Unearned Revenue is a liability account and normally has a credit balance. A debit to a liability account decreases it, indicating that the revenue has now been earned.
Question 54:
A credit to the Accounts Receivable account would indicate:
•A) An increase in the asset
•B) A decrease in the asset
•C) An increase in revenue
•D) A decrease in liabilities
Explanation: Accounts Receivable is an asset account and normally has a debit balance. A credit to an asset account decreases it, typically due to cash collection from a customer.
Question 55:
Which of the following is a permanent account?
Explanation: Permanent accounts (balance sheet accounts) carry their balances forward from one accounting period to the next. Accounts Payable is a liability. Rent Expense, Service Revenue, and Dividends are temporary accounts that are closed at the end of the period.
Question 56:
Which of the following is a temporary account?
Explanation: Temporary accounts (income statement accounts and dividends) are closed at the end of the accounting period. Salaries Expense is an expense account. Cash, Equipment, and Common Stock are permanent accounts.
Question 57:
The normal balance of the Sales Revenue account is a:
•D) Depends on the sales volume
Explanation: Sales Revenue is a revenue account, and all revenue accounts have a normal credit balance.
Question 58:
When a company purchases a patent for cash, the journal entry would include:
•A) Debit Cash, Credit Patent
•B) Debit Patent, Credit Cash
•C) Debit Patent, Credit Accounts Payable
•D) Debit Cash, Credit Accounts Payable
Explanation: Purchasing a patent for cash increases the asset Patent (debit) and decreases the asset Cash (credit).
Question 59:
A debit to the Advertising Expense account would:
•A) Increase Advertising Expense
•B) Decrease Advertising Expense
•D) Decrease Accounts Payable
Explanation: Advertising Expense is an expense account, and expenses increase with debits.
Question 60:
A credit to the Notes Payable account would indicate:
•A) An increase in the liability
•B) A decrease in the liability
•C) An increase in an asset
Explanation: Notes Payable is a liability account, and liabilities increase with credits.
Question 61:
When a company receives a payment for an account receivable, the journal entry would include:
•A) Debit Cash, Credit Accounts Receivable
•B) Debit Accounts Receivable, Credit Cash
•C) Debit Cash, Credit Service Revenue
•D) Debit Accounts Receivable, Credit Service Revenue
Explanation: Receiving payment for an account receivable increases the asset Cash (debit) and decreases the asset Accounts Receivable (credit).
Question 62:
The normal balance of the Interest Revenue account is a:
•D) Depends on the interest rate
Explanation: Interest Revenue is a revenue account, and all revenue accounts have a normal credit balance.
Question 63:
Which of the following accounts is increased by a credit?
Explanation: Bonds Payable is a liability account, and liabilities are increased by credits. Land (asset), Utilities Expense (expense), and Dividends (contra-equity) are increased by debits.
Question 64:
Which of the following accounts is decreased by a credit?
Explanation: Cash is an asset account, and assets are decreased by credits. Sales Revenue (revenue), Accounts Payable (liability), and Common Stock (equity) are all increased by credits.
Question 65:
When a company pays for advertising in advance, the journal entry would include:
•A) Debit Advertising Expense, Credit Cash
•B) Debit Prepaid Advertising, Credit Cash
•C) Debit Cash, Credit Prepaid Advertising
•D) Debit Advertising Expense, Credit Accounts Payable
Explanation: Paying for advertising in advance creates an asset called Prepaid Advertising (debit) and decreases the asset Cash (credit).
Question 66:
The normal balance of the Accumulated Amortization account is a:
•D) Depends on the intangible asset
Explanation: Accumulated Amortization is a contra-asset account for intangible assets, similar to Accumulated Depreciation for tangible assets. It has a normal credit balance.
Question 67:
A debit to the Salaries Payable account would indicate:
•A) An increase in the liability
•B) A decrease in the liability
•C) An increase in salaries expense
Explanation: Salaries Payable is a liability account and normally has a credit balance. A debit to a liability account decreases it, typically when salaries are paid.
Question 68:
A credit to the Prepaid Insurance account would indicate:
•A) An increase in the asset
•B) A decrease in the asset
•C) An increase in insurance expense
Explanation: Prepaid Insurance is an asset account and normally has a debit balance. A credit to an asset account decreases it, typically when the insurance coverage expires and becomes an expense.
Question 69:
Which of the following accounts is increased by a debit?
•C) Unearned Rent Revenue
Explanation: Sales Discounts is a contra-revenue account, which reduces revenue and has a normal debit balance. Interest Payable (liability), Unearned Rent Revenue (liability), and Owner’s Capital (equity) are all increased by credits.
Question 70:
Which of the following accounts is decreased by a debit?
•A) Accumulated Depreciation
Explanation: Accumulated Depreciation is a contra-asset account and has a normal credit balance. Therefore, a debit decreases its balance. Advertising Expense, Accounts Receivable, and Inventory are all increased by debits.
Question 71:
When a company sells land for cash, the journal entry would include:
•A) Debit Cash, Credit Land
•B) Debit Land, Credit Cash
•C) Debit Cash, Credit Gain on Sale of Land
•D) Debit Loss on Sale of Land, Credit Cash
Explanation: Selling land for cash increases the asset Cash (debit) and decreases the asset Land (credit). Any gain or loss would be recorded separately if the selling price differs from the book value.
Question 72:
The normal balance of the Gain on Sale of Assets account is a:
•D) Depends on the asset sold
Explanation: Gains are similar to revenues and increase equity, thus having a normal credit balance.
Question 73:
The normal balance of the Loss on Sale of Assets account is a:
•D) Depends on the asset sold
Explanation: Losses are similar to expenses and decrease equity, thus having a normal debit balance.
Question 74:
When a company receives a cash refund for an overpayment of an expense, the journal entry would include:
•A) Debit Cash, Credit Expense
•B) Debit Expense, Credit Cash
•C) Debit Cash, Credit Accounts Payable
•D) Debit Accounts Payable, Credit Cash
Explanation: Receiving a cash refund increases the asset Cash (debit) and decreases the expense (credit), as the original expense was overstated.
Question 75:
A debit to the Allowance for Doubtful Accounts would indicate:
•A) An increase in the allowance
•B) A decrease in the allowance
•C) An increase in bad debt expense
•D) A decrease in accounts receivable
Explanation: Allowance for Doubtful Accounts is a contra-asset account with a normal credit balance. A debit to this account decreases the allowance, typically when a specific account is written off as uncollectible.
Question 76:
The normal balance of the Bad Debt Expense account is a:
•D) Depends on the collectibility
Explanation: Bad Debt Expense is an expense account, and all expense accounts have a normal debit balance.
Question 77:
When a company writes off an uncollectible account receivable, the journal entry would include:
•A) Debit Bad Debt Expense, Credit Accounts Receivable
•B) Debit Allowance for Doubtful Accounts, Credit Accounts Receivable
•C) Debit Accounts Receivable, Credit Allowance for Doubtful Accounts
•D) Debit Cash, Credit Accounts Receivable
Explanation: Writing off an uncollectible account receivable decreases the Allowance for Doubtful Accounts (debit) and decreases Accounts Receivable (credit). This method is used when the allowance method for bad debts is applied.
Question 78:
Which of the following accounts is increased by a debit?
•A) Sales Returns and Allowances
Explanation: Sales Returns and Allowances is a contra-revenue account, which reduces revenue and has a normal debit balance. Interest Payable (liability), Common Stock (equity), and Bonds Payable (liability) are all increased by credits.
Question 79:
Which of the following accounts is decreased by a debit?
•A) Accumulated Amortization
Explanation: Accumulated Amortization is a contra-asset account and has a normal credit balance. Therefore, a debit decreases its balance. Patent (asset), Cost of Goods Sold (expense), and Prepaid Rent (asset) are all increased by debits.
Question 80:
When a company issues a bond at a premium, the journal entry would include:
•A) Debit Cash, Credit Bonds Payable
•B) Debit Cash, Credit Bonds Payable and Premium on Bonds Payable
•C) Debit Cash and Discount on Bonds Payable, Credit Bonds Payable
•D) Debit Bonds Payable, Credit Cash
Explanation: Issuing a bond at a premium increases Cash (debit) by the face value plus the premium, increases Bonds Payable (credit) by the face value, and increases Premium on Bonds Payable (credit) by the premium amount.
Question 81:
The normal balance of the Discount on Bonds Payable account is a:
•D) Depends on the bond terms
Explanation: Discount on Bonds Payable is a contra-liability account, reducing the carrying value of the bonds. Contra-liability accounts have a normal debit balance.
Question 82:
The normal balance of the Premium on Bonds Payable account is a:
•D) Depends on the bond terms
Explanation: Premium on Bonds Payable is an adjunct-liability account, increasing the carrying value of the bonds. Adjunct-liability accounts have a normal credit balance.
Question 83:
When a company declares a cash dividend, the journal entry would include:
•A) Debit Dividends Payable, Credit Cash
•B) Debit Retained Earnings, Credit Dividends Payable
•C) Debit Dividends, Credit Cash
•D) Debit Cash, Credit Dividends Payable
Explanation: When a cash dividend is declared, it creates a liability (Dividends Payable) and reduces Retained Earnings. So, Retained Earnings is debited, and Dividends Payable is credited.
Question 84:
Which of the following accounts is increased by a credit?
Explanation: Unearned Revenue is a liability account, and liabilities are increased by credits. Accounts Receivable (asset), Sales Discounts (contra-revenue), and Equipment (asset) are all increased by debits.
Question 85:
Which of the following accounts is decreased by a credit?
Explanation: Prepaid Expenses is an asset account, and assets are decreased by credits. Service Revenue (revenue), Notes Payable (liability), and Common Stock (equity) are all increased by credits.
Question 86:
When a company incurs interest expense but has not yet paid it, the journal entry would include:
•A) Debit Interest Expense, Credit Cash
•B) Debit Interest Expense, Credit Interest Payable
•C) Debit Interest Payable, Credit Interest Expense
•D) Debit Cash, Credit Interest Expense
Explanation: Incurring interest expense that is not yet paid increases the expense Interest Expense (debit) and increases the liability Interest Payable (credit).
Question 87:
The normal balance of the Treasury Stock account is a:
•D) Depends on the stock price
Explanation: Treasury Stock is a contra-equity account, reducing total equity. Contra-equity accounts have a normal debit balance.
Question 88:
When a company reacquires its own shares (treasury stock) for cash, the journal entry would include:
•A) Debit Cash, Credit Treasury Stock
•B) Debit Treasury Stock, Credit Cash
•C) Debit Retained Earnings, Credit Cash
•D) Debit Cash, Credit Retained Earnings
Explanation: Reacquiring treasury stock decreases the asset Cash (credit) and increases the contra-equity account Treasury Stock (debit).
Question 89:
Which of the following accounts is increased by a debit?
•A) Accumulated Depreciation
Explanation: Inventory is an asset account, and assets are increased by debits. Accumulated Depreciation (contra-asset), Sales Revenue (revenue), and Dividends Payable (liability) are all increased by credits.
Question 90:
Which of the following accounts is decreased by a debit?
Explanation: Accounts Payable is a liability account, and liabilities are decreased by debits. Rent Expense (expense), Prepaid Rent (asset), and Cash (asset) are all increased by debits.
Question 91:
When a company issues bonds at a discount, the journal entry would include:
•A) Debit Cash, Credit Bonds Payable
•B) Debit Cash, Credit Bonds Payable and Discount on Bonds Payable
•C) Debit Cash and Discount on Bonds Payable, Credit Bonds Payable
•D) Debit Bonds Payable, Credit Cash
Explanation: Issuing bonds at a discount increases Cash (debit) by the net amount received, increases Discount on Bonds Payable (debit) by the discount amount, and increases Bonds Payable (credit) by the face value.
Question 92:
The normal balance of the Patent account is a:
•D) Depends on the amortization
Explanation: Patent is an intangible asset account, and all asset accounts have a normal debit balance.
Question 93:
When a company adjusts for accrued salaries at year-end, the journal entry would include:
•A) Debit Salaries Expense, Credit Cash
•B) Debit Salaries Expense, Credit Salaries Payable
•C) Debit Salaries Payable, Credit Salaries Expense
•D) Debit Cash, Credit Salaries Payable
Explanation: Accruing salaries increases the expense Salaries Expense (debit) and increases the liability Salaries Payable (credit) for salaries earned but not yet paid.
Question 94:
A credit to the Accumulated Depreciation account would indicate:
•A) An increase in the asset
•B) A decrease in the asset
•C) An increase in accumulated depreciation
•D) A decrease in depreciation expense
Explanation: Accumulated Depreciation is a contra-asset account and has a normal credit balance. A credit to this account increases its balance, reflecting more depreciation recorded.
Question 95:
Which of the following accounts is increased by a credit?
Explanation: Retained Earnings is an equity account, and equity accounts are increased by credits. Cost of Goods Sold (expense), Accounts Receivable (asset), and Prepaid Insurance (asset) are all increased by debits.
Question 96:
Which of the following accounts is decreased by a credit?
Explanation: Land is an asset account, and assets are decreased by credits. Unearned Revenue (liability), Notes Payable (liability), and Sales Revenue (revenue) are all increased by credits.
Question 97:
When a company sells merchandise on account, the journal entry would include:
•A) Debit Cash, Credit Sales Revenue
•B) Debit Accounts Receivable, Credit Sales Revenue
•C) Debit Sales Revenue, Credit Accounts Receivable
•D) Debit Accounts Receivable, Credit Cash
Explanation: Selling merchandise on account increases the asset Accounts Receivable (debit) and increases Sales Revenue (credit).
Question 98:
The normal balance of the Sales Returns and Allowances account is a:
•D) Depends on the returns
Explanation: Sales Returns and Allowances is a contra-revenue account, which reduces revenue and has a normal debit balance.
Question 99:
When a company collects cash from a customer for services to be performed in the future, the journal entry would include:
•A) Debit Cash, Credit Service Revenue
•B) Debit Cash, Credit Unearned Revenue
•C) Debit Unearned Revenue, Credit Cash
•D) Debit Accounts Receivable, Credit Service Revenue
Explanation: Collecting cash in advance increases the asset Cash (debit) and increases the liability Unearned Revenue (credit).
Question 100:
A debit to the Interest Payable account would indicate:
•A) An increase in the liability
•B) A decrease in the liability
•C) An increase in interest expense
Explanation: Interest Payable is a liability account and normally has a credit balance. A debit to a liability account decreases it, typically when the interest is paid.
Question 101:
The normal balance of the Copyright account is a:
•D) Depends on the amortization
Explanation: Copyright is an intangible asset account, and all asset accounts have a normal debit balance.
Question 102:
When a company pays its annual insurance premium, the journal entry would include:
•A) Debit Insurance Expense, Credit Cash
•B) Debit Prepaid Insurance, Credit Cash
•C) Debit Cash, Credit Prepaid Insurance
•D) Debit Insurance Expense, Credit Accounts Payable
Explanation: Paying an annual insurance premium creates an asset called Prepaid Insurance (debit) and decreases the asset Cash (credit).
Question 103:
A credit to the Common Stock account would indicate:
•A) An increase in owner’s investment
•B) A decrease in owner’s investment
•C) An increase in liabilities
Explanation: Common Stock is an equity account and normally has a credit balance. A credit to an equity account increases it, indicating an increase in owner’s investment.
Question 104:
Which of the following accounts is increased by a debit?
•A) Accumulated Amortization
Explanation: Dividends is a contra-equity account, which reduces equity and has a normal debit balance. Accumulated Amortization (contra-asset), Sales Revenue (revenue), and Accounts Payable (liability) are all increased by credits.
Question 105:
Which of the following accounts is decreased by a debit?
Explanation: Unearned Revenue is a liability account, and liabilities are decreased by debits. Cost of Goods Sold (expense), Cash (asset), and Prepaid Advertising (asset) are all increased by debits.
Question 106:
When a company receives a bill for advertising services but will pay it later, the journal entry would include:
•A) Debit Advertising Expense, Credit Cash
•B) Debit Advertising Expense, Credit Accounts Payable
•C) Debit Accounts Payable, Credit Advertising Expense
•D) Debit Cash, Credit Advertising Expense
Explanation: Receiving a bill for advertising services to be paid later increases Advertising Expense (debit) and increases the liability Accounts Payable (credit).
Question 107:
The normal balance of the Goodwill account is a:
•D) Depends on the impairment
Explanation: Goodwill is an intangible asset account, and all asset accounts have a normal debit balance.
Question 108:
When a company sells an old piece of equipment for cash, the journal entry would include:
•A) Debit Cash, Credit Equipment
•B) Debit Equipment, Credit Cash
•C) Debit Cash, Credit Equipment and Gain on Sale of Equipment
•D) Debit Cash and Accumulated Depreciation, Credit Equipment and Gain on Sale of Equipment
Explanation: Selling equipment for cash requires removing the equipment (credit) and its accumulated depreciation (debit) from the books. Cash received is debited. Any difference between the book value and cash received is a gain (credit) or loss (debit).
Debit and Credit Quiz: 50 Multiple-Choice Questions with Detailed Explanations
Section 1: Basic Concepts and Terminology
1. In accounting, the term “debit” literally refers to: A) An increase in an account B) A decrease in an account C) The left side of an account D) The right side of an accountCorrect Answer: C Detailed Explanation: In double-entry bookkeeping, “debit” (Dr.) simply means the left side of any T-account, and “credit” (Cr.) means the right side. Whether a debit increases or decreases an account depends entirely on the account’s normal balance. It does not inherently mean “good” or “bad,” “increase” or “decrease.”
2. The fundamental rule of double-entry accounting states that: A) Every transaction must affect at least two accounts. B) Total debits must always equal total credits for every transaction. C) The accounting equation must remain in balance after every transaction. D) All of the above.Correct Answer: D Detailed Explanation: Double-entry bookkeeping requires that every financial transaction has equal and opposite effects in at least two different accounts. Therefore, every transaction affects two or more accounts, total debits must equal total credits, and the fundamental accounting equation (Assets = Liabilities + Equity) must always remain balanced.
3. Which of the following groups of accounts normally have a DEBIT balance? A) Assets, Liabilities, and Equity B) Assets, Expenses, and Dividends C) Liabilities, Revenues, and Equity D) Assets, Revenues, and DividendsCorrect Answer: B Detailed Explanation: Accounts that represent resources owned by the company (Assets), costs incurred to generate revenue (Expenses), and distributions to owners (Dividends/Drawings) normally carry a debit balance. Liabilities, Equity, and Revenues normally carry a credit balance.
4. To increase a liability account, you must: A) Debit the account B) Credit the account C) Either debit or credit depending on the transaction D) Close the account to Retained EarningsCorrect Answer: B Detailed Explanation: Liabilities have a normal credit balance. Therefore, to increase a liability, you must credit it. Conversely, to decrease a liability, you would debit it.
5. The accounting equation can be expanded to include revenues and expenses. Which of the following is the correct expanded equation? A) Assets = Liabilities + Common Stock + Revenues – Expenses – Dividends B) Assets + Liabilities = Common Stock + Revenues – Expenses C) Assets = Liabilities + Common Stock – Revenues + Expenses + Dividends D) Assets = Liabilities – Common Stock + Revenues + Expenses – DividendsCorrect Answer: A Detailed Explanation: The basic equation is Assets = Liabilities + Equity. Equity is increased by owner investments (Common Stock) and Revenues, and decreased by Expenses and Dividends. Therefore, the expanded equation is Assets = Liabilities + Common Stock + Revenues – Expenses – Dividends.
Section 2: Normal Balances of Specific Accounts
6. What is the normal balance of the “Cash” account? A) Debit B) Credit C) It depends on whether cash is coming in or going out D) ZeroCorrect Answer: A Detailed Explanation: Cash is an asset account. All asset accounts have a normal debit balance, meaning they are increased by debits and decreased by credits.
7. What is the normal balance of “Accounts Payable”? A) Debit B) Credit C) Contra-asset D) EquityCorrect Answer: B Detailed Explanation: Accounts Payable represents amounts owed to suppliers, making it a liability. Liabilities have a normal credit balance.
8. Which of the following accounts has a CREDIT normal balance? A) Prepaid Insurance B) Supplies C) Unearned Revenue D) Accounts ReceivableCorrect Answer: C Detailed Explanation: Unearned Revenue represents cash received for services not yet performed. Even though it has the word “revenue” in it, it is actually a liability because the company owes a service to the customer. Liabilities have a normal credit balance. Prepaid Insurance, Supplies, and Accounts Receivable are all assets and have debit balances.
9. The “Accumulated Depreciation” account has a normal balance of: A) Debit, because it is an asset B) Credit, because it is a contra-asset account C) Credit, because it is a liability D) Debit, because it is an expenseCorrect Answer: B Detailed Explanation: Accumulated Depreciation is a contra-asset account. It is used to offset the balance of the related fixed asset (like Equipment). Because it reduces the total asset value, it has a normal balance opposite to regular assets, which is a credit.
10. What is the normal balance of “Dividends” (or “Owner’s Drawings”)? A) Credit B) Debit C) It reduces equity, so it has no normal balance D) Credit, because it is part of equityCorrect Answer: B Detailed Explanation: Dividends represent a distribution of earnings to shareholders, which reduces Retained Earnings (Equity). Since Equity has a normal credit balance, the account used to track its reduction (Dividends) has a normal debit balance.
11. “Sales Returns and Allowances” is a contra-revenue account. Its normal balance is: A) Debit B) Credit C) Zero D) Depends on the amount of salesCorrect Answer: A Detailed Explanation: Revenue accounts normally have a credit balance. A contra-revenue account is used to deduct from gross sales (e.g., when customers return goods). To offset a credit balance, a contra-revenue account must have a normal debit balance.
12. Which of the following accounts normally has a DEBIT balance? A) Notes Payable B) Salaries Payable C) Salaries Expense D) Service RevenueCorrect Answer: C Detailed Explanation: Salaries Expense is an expense account. Expenses reduce equity and therefore have a normal debit balance. Notes Payable and Salaries Payable are liabilities (credit balance), and Service Revenue is a revenue account (credit balance).
13. The normal balance of “Common Stock” is: A) Debit B) Credit C) It fluctuates daily D) Zero at the end of the yearCorrect Answer: B Detailed Explanation: Common Stock represents the owners’ investment in the corporation and is a core component of Stockholders’ Equity. All equity accounts (except Dividends) have a normal credit balance.
14. If a company has an “Equipment” account, what is its normal balance? A) Credit B) Debit C) Debit, but it is closed at year-end D) Credit, because it is depreciatedCorrect Answer: B Detailed Explanation: Equipment is a long-term tangible asset. All asset accounts, whether current or long-term, have a normal debit balance. (Note: The relatedAccumulated Depreciation has a credit balance, but the Equipment account itself remains a debit).
15. “Retained Earnings” at the end of a profitable year will typically have a: A) Debit balance B) Credit balance C) Zero balance D) Contra balanceCorrect Answer: B Detailed Explanation: Retained Earnings represents the cumulative net income kept in the business rather than distributed as dividends. Since revenues increase it and it is part of Equity, it normally carries a credit balance. (It would only have a debit balance if the company had accumulated massive net losses, known as a deficit).
Section 3: Analyzing Transactions (Journal Entries)
16. A company receives $10,000 cash from the owner in exchange for common stock. The journal entry is: A) Debit Cash $10,000; Credit Common Stock $10,000 B) Debit Common Stock $10,000; Credit Cash $10,000 C) Debit Cash $10,000; Credit Service Revenue $10,000 D) Debit Retained Earnings $10,000; Credit Cash $10,000Correct Answer: A Detailed Explanation: The company’s Cash (an asset) is increasing, so it must be debited. The owner’s equity (Common Stock) is increasing, so it must be credited.
17. The company purchases equipment for $5,000, paying cash immediately. The entry is: A) Debit Equipment $5,000; Credit Accounts Payable $5,000 B) Debit Equipment $5,000; Credit Cash $5,000 C) Debit Cash $5,000; Credit Equipment $5,000 D) Debit Supplies $5,000; Credit Cash $5,000Correct Answer: B Detailed Explanation: Equipment (an asset) is increasing, requiring a debit. Cash (an asset) is decreasing, requiring a credit. Total assets remain unchanged; the composition of assets simply shifts.
18. A company performs a service for a customer on account (meaning the customer will pay later). The entry is: A) Debit Cash; Credit Service Revenue B) Debit Service Revenue; Credit Accounts Receivable C) Debit Accounts Receivable; Credit Service Revenue D) Debit Accounts Receivable; Credit Unearned RevenueCorrect Answer: C Detailed Explanation: “On account” means no cash changed hands yet. The company has a right to receive cash in the future, so Accounts Receivable (an asset) increases (Debit). The company earned revenue, so Service Revenue (a revenue account) increases (Credit).
19. The company pays $1,200 cash for this month’s rent. The entry is: A) Debit Cash $1,200; Credit Rent Expense $1,200 B) Debit Rent Expense $1,200; Credit Cash $1,200 C) Debit Prepaid Rent $1,200; Credit Cash $1,200 D) Debit Rent Expense $1,200; Credit Accounts Payable $1,200Correct Answer: B Detailed Explanation: Rent is an expense incurred for the current period. Expenses increase with a debit. Cash is paid out, decreasing the asset, which requires a credit.
20. The company pays $2,000 cash to a supplier on account (reducing Accounts Payable). The entry is: A) Debit Accounts Payable $2,000; Credit Cash $2,000 B) Debit Cash $2,000; Credit Accounts Payable $2,000 C) Debit Supplies $2,000; Credit Cash $2,000 D) Debit Accounts Receivable $2,000; Credit Cash $2,000Correct Answer: A Detailed Explanation: Paying a supplier reduces the liability (Accounts Payable). Liabilities decrease with a debit. Cash is also decreasing, which requires a credit.
21. A customer pays $500 cash for a service the company performed today. The entry is: A) Debit Accounts Receivable; Credit Service Revenue B) Debit Service Revenue; Credit Cash C) Debit Cash; Credit Service Revenue D) Debit Cash; Credit Unearned RevenueCorrect Answer: C Detailed Explanation: The company receives cash immediately (Asset increases -> Debit Cash) and earns the revenue instantly (Revenue increases -> Credit Service Revenue).
22. The company receives $3,000 cash in advance for services to be performed next month. The entry is: A) Debit Cash $3,000; Credit Service Revenue $3,000 B) Debit Cash $3,000; Credit Unearned Revenue $3,000 C) Debit Unearned Revenue $3,000; Credit Cash $3,000 D) Debit Cash $3,000; Credit Accounts Receivable $3,000Correct Answer: B Detailed Explanation: Cash is received (Asset increases -> Debit Cash). However, the revenue has not been earned yet, so it cannot be credited to a revenue account. Instead, it creates a liability (Unearned Revenue increases -> Credit Unearned Revenue).
23. The company purchases $800 of supplies on account. The entry is: A) Debit Supplies $800; Credit Cash $800 B) Debit Supplies $800; Credit Accounts Payable $800 C) Debit Accounts Payable $800; Credit Supplies $800 D) Debit Supplies Expense $800; Credit Accounts Payable $800Correct Answer: B Detailed Explanation: Supplies are an asset until they are used. Therefore, the Supplies account increases (Debit Supplies). Because they were bought “on account,” a liability is created (Credit Accounts Payable).
24. The company declares and pays a $5,000 cash dividend to shareholders. The entry is: A) Debit Retained Earnings $5,000; Credit Cash $5,000 B) Debit Dividends $5,000; Credit Cash $5,000 C) Debit Cash $5,000; Credit Dividends $5,000 D) Debit Dividends Expense $5,000; Credit Cash $5,000Correct Answer: B Detailed Explanation: Dividends are not an expense; they are a distribution of equity. The Dividends account increases (Debit Dividends), and Cash decreases (Credit Cash).Note: Some textbooks directly debit Retained Earnings, but using a temporary “Dividends” account is the standard pedagogical approach.
25. The company receives $1,500 cash from a customer who previously owed money on account. The entry is: A) Debit Cash $1,500; Credit Service Revenue $1,500 B) Deit Cash $1,500; Credit Accounts Receivable $1,500 C) Debit Accounts Receivable $1,500; Credit Cash $1,500 D) Debit Cash $1,500; Credit Unearned Revenue $1,500Correct Answer: B Detailed Explanation: Cash is increasing (Debit Cash). The customer’s outstanding balance is decreasing, so Accounts Receivable (an asset) decreases (Credit Accounts Receivable). No revenue is recorded now because it was already recorded when the service was initially performed on account.
Section 4: Impact on the Accounting Equation
26. When a company collects an account receivable, what is the effect on total assets? A) Total assets increase. B) Total assets decrease. C) Total assets remain unchanged. D) Total liabilities increase.Correct Answer: C Detailed Explanation: Collecting an account receivable increases one asset (Cash) and decreases another asset (Accounts Receivable) by the exact same amount. Therefore, the total amount of assets remains unchanged.
27. A company pays off a $10,000 note payable in cash. How does this affect the accounting equation? A) Assets increase; Liabilities increase B) Assets decrease; Liabilities decrease C) Assets decrease; Equity decreases D) Assets remain unchanged; Liabilities decreaseCorrect Answer: B Detailed Explanation: Paying cash decreases the asset “Cash” (Credit). Paying off the note decreases the liability “Notes Payable” (Debit). Both sides of the accounting equation decrease by $10,000, keeping it in balance.
28. A company performs a service and immediately receives cash. How does this affect the accounting equation? A) Assets increase; Liabilities increase B) Assets increase; Equity increases C) Assets decrease; Equity decreases D) One asset increases; another asset decreasesCorrect Answer: B Detailed Explanation: Receiving cash increases Assets (Debit). Performing the service increases Revenue, which ultimately increases Retained Earnings, thereby increasing Equity (Credit).
29. A company uses $500 of supplies that were previously purchased. What is the effect on the accounting equation? A) Assets increase; Equity increases B) Assets decrease; Equity decreases C) One asset increases; another asset decreases D) Liabilities decrease; Equity increasesCorrect Answer: B Detailed Explanation: Using supplies means the asset “Supplies” decreases (Credit). At the same time, a “Supplies Expense” is recognized, which decreases Equity (Debit). Thus, both total assets and total equity decrease.
30. A company earns $2,000 of revenue that was previously recorded as Unearned Revenue. What is the effect on the accounting equation? A) Assets increase; Equity increases B) Liabilities decrease; Equity increases C) Assets decrease; Liabilities decrease D) No effect on the accounting equationCorrect Answer: B Detailed Explanation: The company has now performed the service, so the liability “Unearned Revenue” decreases (Debit). The revenue is now realized, increasing “Service Revenue,” which increases Equity (Credit). Assets are not affected because the cash was already received in the past.
Section 5: Advanced Concepts, Contra Accounts, and Trial Balance
31. Which of the following errors will cause the Trial Balance to be out of balance (i.e., total debits will not equal total credits)? A) Recording a transaction twice. B) Posting a $100 debit to the wrong account, but on the correct debit side. C) Recording a debit of $500 and a credit of $50 for the same transaction. D) Omitting a transaction entirely from the journal.Correct Answer: C Detailed Explanation: A trial balance checks the mathematical equality of total debits and total credits. If a transaction is recorded with unequal debits and credits ($500 vs $50), the trial balance will not balance. Errors like posting to the wrong account, recording twice, or omitting a transaction do not affect the equality of debits and credits.
32. If the total debits exceed the total credits in a Trial Balance, which of the following errors could have occurred? A) A credit amount was accidentally entered as a debit. B) A debit amount was accidentally entered as a credit. C) A debit account was omitted from the trial balance. D) Both A and C.Correct Answer: D Detailed Explanation: If debits > credits, it means there is too much on the debit side or too little on the credit side. Entering a credit as a debit adds to the debit side and removes from the credit side (widening the gap). Omitting a debit account would actuallydecrease total debits, so that’s incorrect. Wait, let’s re-evaluate: If adebit account is omitted, total debits decrease, making credits > debits. Therefore, D is wrong. Let’s correct the logic: If debits > credits, a credit was entered as a debit (Option A) OR a debit was omitted (not C). Let’s adjust the options for the final output to ensure absolute accuracy.Correction for Q32 in final text: A) A credit amount was accidentally entered as a debit. B) A debit amount was accidentally entered as a credit. C) A debit account balance was omitted from the trial balance. D) A revenue account balance was omitted.Correct Answer: A. (Entering a credit as a debit inflates debits and deflates credits).
33. Which of the following accounts would appear on the right side (credit column) of an unadjusted Trial Balance? A) Prepaid Rent B) Salaries Expense C) Accounts Payable D) DividendsCorrect Answer: C Detailed Explanation: The right side of a trial balance lists accounts with normal credit balances. Accounts Payable is a liability and has a credit balance. Prepaid Rent (Asset), Salaries Expense (Expense), and Dividends (Contra-Equity) all have debit balances and would appear on the left side.
34. A company has the following account balances: Cash $5,000; Accounts Receivable $2,000; Equipment $10,000; Accounts Payable $3,000. What is the balance of Common Stock? A) $14,000 B) $17,000 C) $11,000 D) $8,000Correct Answer: A Detailed Explanation: Using the accounting equation: Assets = Liabilities + Equity. Total Assets = Cash ($5,000) + AR ($2,000) + Equipment ($10,000) = $17,000. Total Liabilities = $3,000. Equity = Assets – Liabilities = $17,000 – $3,000 = $14,000. Assuming Common Stock is the only equity account, its balance is $14,000.
35. Which of the following represents a “compound journal entry”? A) An entry with only one debit and one credit. B) An entry with three or more lines (e.g., one debit and two credits, or two debits and one credit). C) An entry that affects only asset accounts. D) An entry made at the end of the year.Correct Answer: B Detailed Explanation: A simple journal entry involves exactly one debit and one credit. A compound journal entry involves three or more accounts (e.g., debiting two different assets and crediting one liability, or debiting one account and crediting three different revenue accounts).
36. When recording a transaction, the account to be debited is always listed: A) First and indented B) First and flush left C) Second and indented D) Second and flush leftCorrect Answer: B Detailed Explanation: In standard accounting format, the account(s) to be debited are always written first and aligned flush left. The account(s) to be credited are written below, slightly indented to the right.
37. A company purchases a building for $100,000. It pays $20,000 in cash and signs a mortgage for the remaining $80,000. The correct journal entry is: A) Debit Building $100,000; Credit Cash $100,000 B) Debit Building $100,000; Credit Cash $20,000; Credit Mortgage Payable $80,000 C) Debit Building $20,000; Debit Mortgage Payable $80,000; Credit Cash $100,000 D) Debit Cash $20,000; Debit Building $80,000; Credit Mortgage Payable $100,000Correct Answer: B Detailed Explanation: The Building (asset) increases by its total cost ($100,000 Debit). Cash (asset) decreases by the amount paid ($20,000 Credit). The remaining balance creates a liability, Mortgage Payable ($80,000 Credit). This is a compound entry.
38. Which of the following accounts is NOT closed at the end of the accounting period? A) Service Revenue B) Rent Expense C) Dividends D) Accounts PayableCorrect Answer: D Detailed Explanation: Temporary (nominal) accounts like Revenues, Expenses, and Dividends are closed to Retained Earnings at the end of the period to reset their balances to zero. Accounts Payable is a permanent (real) account (a liability) and its balance is carried forward to the next period.
39. The process of transferring journal entry information from the journal to the ledger accounts is called: A) Journalizing B) Posting C) Trial Balancing D) AdjustingCorrect Answer: B Detailed Explanation: Journalizing is the act of recording the transaction in the general journal. Posting is the subsequent step of copying (transferring) those debit and credit amounts into the specific T-accounts in the general ledger.
40. If an expense is accidentally debited as an asset (e.g., debiting “Supplies” instead of “Supplies Expense” for supplies used), what is the effect on the Trial Balance? A) The trial balance will not balance. B) Total debits will be higher than total credits. C) The trial balance will still balance, but the net income will be incorrect. D) Total credits will be higher than total debits.Correct Answer: C Detailed Explanation: The trial balance only checks if total debits equal total credits. Since a debit was still recorded (just in the wrong account), the mathematical equality remains intact. However, the financial statements will be wrong because assets will be overstated and expenses understated.
Section 6: Conceptual and Analytical Questions
41. Which of the following statements about the “Normal Balance” of an account is TRUE? A) It is always the side that increases the account. B) It is always the debit side. C) It is the side that decreases the account. D) It changes depending on the profit of the company.Correct Answer: A Detailed Explanation: The normal balance of any account is the side (debit or credit) that increases the account. For example, assets have a normal debit balance because debits increase assets. Liabilities have a normal credit balance because credits increase liabilities.
42. A company has an “Insurance Expense” account with a debit balance of $5,000. What does this mean? A) The company has $5,000 of prepaid insurance. B) The company has incurred $5,000 of insurance costs during the period. C) The company owes $5,000 for insurance. D) The company has $5,000 of unearned insurance.Correct Answer: B Detailed Explanation: Insurance Expense is an expense account. A debit balance in an expense account represents the total amount of that expense incurred during the current accounting period. Prepaid insurance would be an asset (also a debit balance, but a different account).
43. Which of the following transactions would result in a decrease in Total Equity? A) Providing services to a customer on account. B) Paying cash for salaries expense. C) Receiving cash from a customer on account. D) Purchasing equipment for cash.Correct Answer: B Detailed Explanation: Paying cash for salaries increases Salaries Expense (which decreases Equity) and decreases Cash (an asset). Providing services increases Equity. Collecting cash on account and buying equipment for cash have no effect on Equity.
44. In the double-entry system, a credit to an asset account indicates: A) An increase in the asset B) A decrease in the asset C) An increase in a liability D) A decrease in a liabilityCorrect Answer: B Detailed Explanation: Assets have a normal debit balance. Therefore, any entry on the opposite side—the credit side—will decrease the asset account.
45. If a company receives a utility bill for $300 but decides not to pay it until next month, what is the correct journal entry today? A) Debit Utilities Expense $300; Credit Cash $300 B) Debit Utilities Expense $300; Credit Accounts Payable $300 C) Debit Accounts Payable $300; Credit Utilities Expense $300 D) No entry is required until the cash is paid.Correct Answer: B Detailed Explanation: Under the accrual basis of accounting, expenses are recorded when incurred, regardless of when cash is paid. The company incurred a utility expense (Debit Utilities Expense) and owes the money (Credit Accounts Payable).
46. Which of the following is considered a “permanent” or “real” account? A) Service Revenue B) Rent Expense C) Accounts Receivable D) DividendsCorrect Answer: C Detailed Explanation: Permanent (real) accounts are balance sheet accounts (Assets, Liabilities, Equity) whose balances are carried forward to the next accounting period. Accounts Receivable is an asset. Revenues, Expenses, and Dividends are temporary (nominal) accounts that are closed at year-end.
47. A company issues a $1,000 check to pay for office supplies that were purchased on account last month. The entry is: A) Debit Supplies $1,000; Credit Cash $1,000 B) Debit Supplies Expense $1,000; Credit Cash $1,000 C) Debit Accounts Payable $1,000; Credit Cash $1,000 D) Debit Cash $1,000; Credit Accounts Payable $1,000Correct Answer: C Detailed Explanation: The supplies were already recorded as an asset (or expense) and a liability (Accounts Payable) last month. Paying the bill now does not affect the Supplies account; it simply reduces the liability (Debit Accounts Payable) and reduces cash (Credit Cash).
48. What is the primary purpose of preparing a Trial Balance? A) To prove that all transactions are recorded in the correct accounts. B) To prove that the company is profitable. C) To check the mathematical equality of total debits and total credits. D) To prepare the financial statements directly.Correct Answer: C Detailed Explanation: A trial balance is a list of all ledger accounts and their balances. Its primary mathematical purpose is to ensure that total debits equal total credits, proving the arithmetic accuracy of the ledger. It does not guarantee that transactions were posted to the correct accounts.
49. Which of the following accounts would have a normal balance that is the SAME as “Accounts Receivable”? A) Accounts Payable B) Prepaid Rent C) Common Stock D) Interest RevenueCorrect Answer: B Detailed Explanation: Accounts Receivable is an asset, so its normal balance is a Debit. Prepaid Rent is also an asset and has a normal Debit balance. Accounts Payable is a liability (Credit), Common Stock is Equity (Credit), and Interest Revenue is Revenue (Credit).
50. The entire foundation of the Debit and Credit system is designed to ensure that: A) The company always makes a profit. B) The accounting equation (Assets = Liabilities + Equity) remains in balance after every transaction. C) Cash is never overstated. D) Taxes are calculated correctly.Correct Answer: B Detailed Explanation: The dual-aspect concept (double-entry bookkeeping) requires that every transaction affects at least two accounts in a way that keeps the fundamental accounting equation in perfect balance. This is the ultimate purpose of the debit and credit system.
