Multiple Choice: Chapter Two

1. Of the following account types, which would be increased by a debit?

a. Liabilities and expenses.
b. Assets and equity.
c. Assets and expenses.
d. Equity and revenues.


2. The following comments all relate to the recording process. Which of these statements is correct?

a. The general ledger is a chronological record of transactions.
b. The general ledger is posted from transactions recorded in the general journal.
c. The trial balance provides the primary source document for recording transactions into the general journal.
d. Transposition is the transfer of information from the general journal to the general ledger.


3. The following comments each relate to the recording of journal entries. Which statement is true?

a. For any given journal entry, debits must exceed credits.
b. It is customary to record credits on the left and debits on the right.
c. The chart of accounts reveals the amount to debit and credit to the affected accounts.
d. Journalization is the process of converting transactions and events into debit/credit format.


4. Failure to record the receipt of a utility bill for services already received will result in:

a. An overstatement of assets.
b. An overstatement of liabilities.
c. An overstatement of equity.
d. An understatement of assets.


5. The proper journal entry to record Ransom Company's billing of clients for $500 of services rendered is:

a. Cash                                                 500
                Accounts Receivable                     500

b. Accounts Receivable                          500
                        Capital Stock                        500

c. Accounts Receivable                          500
                        Service Revenue                   500

d. Cash                                                 500
                        Service Revenue                   500


6. The proper journal entry to record $1,000 of Dividends paid by Myer's Corporation is:

a. Dividends                                      1,000
                                Cash                         1,000

b. Accounts Payable                         1,000
                                Cash                         1,000

c. Dividends Expense                        1,000
                                Cash                         1,000

d. Dividends Expense                        1,000
                Service Revenue                         1,000


7. Lynn Lipincott invested land valued at $5,000 in her business. This transaction would be recorded by:

a. Cash                                             5,000
                Capital Stock                              5,000

b. Land                                             5,000
                Capital Stock                              5,000

c. Land                                             5,000
                Service Revenue                         5,000

d. Capital Stock                                5,000
                Land                                          5,000


8. The trial balance:

a. Is a formal financial statement.
b. Is used to prove that there are no errors in the journal or ledger.
c. Provides a listing of every account in the chart of accounts.
d. Provides a listing of the balance of each account in active use.


9. Which of the following errors will be disclosed in the preparation of a trial balance?

a. Recording transactions in the wrong account.
b. Duplication of a transaction in the accounting records.
c. Posting only the debit portion of a particular journal entry.
d. Recording the wrong amount for a transaction to both the account debited and the account credited.


10. The basic sequence in the accounting process can best be described as:

a. Transaction, journal entry, source document, ledger account, trial balance.
b. Source document, transaction, ledger account, journal entry, trial balance.
c. Transaction, source document, journal entry, trial balance, ledger account.
d. Transaction, source document, journal entry, ledger account, trial balance.

























1. c. Assets and expenses are increased with debits. Liabilities,  equity, and revenues are increased with credits.
















2. b. The general ledger is posted from transactions recorded in the general journal. The general journal is a chronological record of transactions. Invoices, checks, receipts, shipping reports, and numerous other items provide the source documents for recording transactions into the general journal; the trial balance is a listing of account balances. Transposition is the accidental reversing of two digits in a number.
















3. d. Journalization is the process of converting transactions to their debit/credit form and recording them in the general journal. Of course, debits equal credits, debits are customarily recorded on the left, and the chart of accounts is a listing of accounts in use (and their corresponding reference number).




















4. c. The journal entry would involve a debit to expense and a credit to a liability. Failure to record this entry causes expenses and liabilities to be understated. As a result of understating expenses, income and owner's equity are overstated. Notice that assets are correct.




















5. c. Both Accounts Receivable (an asset which is increased with a debit) and Service Revenue (increased with a credit) increase by the rendering of services on account. Cash is not impacted and should not be debited or credited. The increase in revenue will ultimately cause an increase in owner's equity -- but this occurs through financial statement preparation, not a direct credit to Capital Stock.

















6. a. The Dividends account is increased with a debit and Cash is decreased with a credit. Accounts Payable and Service Revenue are not involved at all. Also, never record dividends as an expense -- they are distributions of income.

















7. b. Land, an asset, is increased and should be debited. Capital Stock is also increased and should be credited.
















8. d. The trial balance provides a listing of the balance of each active account. The trial balance is not a formal financial statement, there are errors (such as transpositions and posting to the wrong account) that will not result in an out-of-balance condition in the trial balance, and there may be accounts in the chart of accounts that are not in actual use and will not appear in the trial balance.



















9. c. Posting only the debit portion of a particular entry will cause debits to exceed credits -- an error that will be revealed by a trial balance. The other errors do not cause out-of-balance conditions.

















10. d. Transactions occur, are documented (source document), reduced to debit/credit form (journal entry), and posted to the ledger. From the ledger, a trial balance can be prepared.