Accounting Rules Quiz

1. What is the fundamental Accounting Equation?

Assets = Liabilities - Owner's Equity
Assets = Liabilities + Owner's Equity
Liabilities = Assets + Owner's Equity
Revenue = Expenses + Net Income

Explanation: The baseline of double-entry bookkeeping is Assets = Liabilities + Owner's Equity. It must always balance.

2. In professional bookkeeping, what do the terms "Debit" and "Credit" mean?

Debit means plus, Credit means minus
Debit means taking away money, Credit means adding money
Debit means Left side, Credit means Right side
Debit is for assets, Credit is for liabilities only

Explanation: Literally, Debit means left side and Credit means right side of a ledger account. Their structural impact depends entirely on the account type.

3. Which of the following groups of accounts are increased by a DEBIT entry?

Assets, Expenses, Drawings
Liabilities, Equity, Revenue
Assets, Liabilities, Revenue
Expenses, Equity, Liabilities

Explanation: Remember the acronym AED (Assets, Expenses, Drawings). These accounts are increased with debits on the left side.

4. Under the rule of double-entry bookkeeping, what must happen in every financial transaction?

At least one account must be debited, and one account must be credited
The total dollar amount of debits must equal total credits
The transaction must hit at least two separate accounts
All of the above

Explanation: Double-entry rules require recording both cause and effect. It touches at least two accounts, features matching debits and credits, and maintains structural balance.

5. If a business buys a brand new utility truck for $30,000 cash, how is the entry structured?

Debit Cash, Credit Equipment
Debit Equipment, Credit Cash
Debit Equipment, Credit Owner's Equity
Debit Revenue, Credit Cash

Explanation: Equipment (Asset) increases with a Debit of $30,000. Cash (Asset) decreases with a Credit of $30,000.

6. Which accounting rule says you cannot pay for your personal home groceries out of the company checkbook?

The Cost Principle
The Going Concern Assumption
The Business Entity Concept
The Objectivity Principle

Explanation: The Business Entity Concept strictly dictates that the business finances remain completely isolated from the owner's personal financial activities.

7. A business purchases land for $100,000. Ten years later, a developer says it is worth $300,000. Under the Cost Principle, what value remains on the books?

$100,000
$300,000
$200,000
The average of both amounts ($200,000)

Explanation: The Cost Principle (Historical Cost) requires assets to stay on the books at their original purchase price, avoiding subjective market adjustments.

8. What is required to satisfy the Objectivity Principle when recording a transaction?

A formal verbal confirmation from the manager
Verifiable evidence like receipts, invoices, or statements
An estimated market evaluation tool
A handwritten note detailing the thought process

Explanation: The Objectivity Principle means data must be independent and verifiable. This requires source documentation like receipts or invoices.

9. Why can a bookkeeper record a building as a long-term asset and spread its cost across 30 years instead of expensing it all on Day 1?

Because of the Monetary Unit Principle
Because of the Going Concern Assumption
Because of the Business Entity Concept
Because buildings do not lose immediate utility value

Explanation: The Going Concern Assumption presumes the company will survive indefinitely, justifying long-term classification and depreciation schedules.

10. Why are concepts like "high employee enthusiasm" or "excellent customer service score" left off the formal bookkeeping ledger?

They do not carry actual real-world value
They break the Business Entity concept
They cannot be reliably measured in a stable monetary unit
Managers prefer to evaluate those values on separate spreadsheets

Explanation: The Monetary Unit Principle restricts ledger accounts to items that can be expressed as objective currency figures.

Accounting Rules & Concepts Quiz