Bookkeeping

Question 1

You buy products you plan to sell paying
cash on delivery on June 15. How and
when would you record this transaction in
your books if you are using cash-basis
accounting and how would you record it
using accrual accounting?

Answer 1

You would record the transaction the same way using cash-basis or accrual accounting. Cash was paid on June 15, so the transaction would be recorded as a cash transaction in cash-basis accounting. The transaction was completed on June 15, so the transaction would be recorded in accrual accounting as well.

Question 2

You contract with a painter to paint your
store front on June 15 and he completes
the work on July 1 and gives you a bill for
the work. You pay for the work with cash
on July 5. How and when would you record
this transaction in your books if you are
using cash-basis accounting and how
would you record it using accrual
accounting?

Answer 2

You would record the money due the painter on July 1 when the work is completed in the Accounts Payable account to reflect the money that is due if you are using accrual accounting. You would not record the transaction until July 5 when you pay the painter in cash using cash basis accounting.

Question 3

You order office supplies on credit on June
15 and receive them on June 16. You are
billed for them on July 1, but don’t pay for
them with cash until July 15. How and
when would you first record this transaction
in your books if you are using cashbasis
accounting and how would you
record it using accrual accounting?

Answer 3

You would record the payment on July 15 when you pay with cash if you are using cash-basis accounting. If you are using accrual accounting, you would record the bill on July 1 in the Accounts Payable account if you are using accrual accounting.

Question 4

You sell your products to a customer on
store credit on June 15. You send a bill to
the customer on July 1. You receive payment
in cash from the customer on July 15.
How and when would you first record this
transaction in your books if you are using
cash-basis accounting and how would you
record it using accrual accounting?

Answer 4

You would record the transaction on July 15 if you are using cash-basis accounting. You would record the transaction on June 15 when you first make the sale in the Accounts Receivables account, where you track sales to customers who buy on store credit if you are using accrual accounting.

Question 5

Suppose you are keeping the books for a
carpenter who contracted to do a job on
December 15 for $15,000 and received 50
percent up front or $7,500. He bought $5,000
of materials on store credit on December 16
and paid his workers $5,000 in cash on
December 31 when the work was completed.
He will not be billed for the materials
until December 31 and won’t pay for them
with cash until January 10. While the contractor
submitted a bill for the completed
work on December 31, he did not meet with
the customer for final approval of the work
and final payment until January 3. How
would you record these transactions using
the cash-basis accounting method and how
would you record them using the accrual
accounting method? Would the job show a
profit or a loss on December 31?

Answer 5

If you were keeping the books using cash-basis accounting, you would record the cash revenue of
$7,500 on December 15. You would record the cash payment to the workers on December 31. You
would record the cash revenue on January 3 and you would record the payment for materials on
January 10. At the end of the year the job would show a profit of $2,500 because only $5,000 had
been paid to workers and the materials were not yet paid. If you were keeping the books using
accrual accounting, you would record the cash revenue of $7,500 on December 15. You would
record the cash payments to workers of $5,000 on December 31. You would record the bill for
materials of $5,000 on December 31, and you would also record the revenue for the completed job
now due from the customer of $7,500 on December 31 in the Accounts Receivable account on
December 31. At the end of the year the job would show a profit of $5,000.

Question 6

Suppose you purchased $1,500 in products
using cash on December 15 that you intend
to sell to your customers. These products
were completely sold out by December 25
and your total revenue for these products
was $2,500, but not all of that revenue was
in cash. You sold $1,500 of products and
were paid with cash and $1,000 of products
were sold using store credit. The customers
would not be billed for that credit until
January 2 and you won’t receive payment
until mid-January. How would you record
these transactions using the cash-basis
accounting method and how would you
record them using the accrual accounting
method? How would your revenues and
expenses differ between these methods
when you close the books on December 31?

Answer 6

If you were keeping the books using cash-basis accounting, you would record the $1,500 purchase
of the products on December 15. You would record the cash sales of $1,500 as they were
received. You would not record the sales to customers who you sold to on store credit until the
money was received in mid-January. You would show $0 profit on these product sales on December 31. If you were keeping the books using an accrual accounting method, you would record the $1,500 purchase of the products on December 15. You would record the sales on the days they were made, but you would have recorded the total revenue of $2,500 by December 25. Cash sales would be recorded in the Cash account and store credit sales would be recorded in the Accounts Receivable account. You would show a profit on these product sales of $1,000 on December 31. The accrual method of accounting would show a $1,000 profit, while the cash method would show a $0 profit.

Question 7

Suppose you purchased $1,500 in products on credit with the vendor on December 15 that you
intend to sell to your customers. You won’t be billed for these products until December 31 and
won’t have to pay for them with cash until January 10. These products were completely sold out
by December 25 and your total revenue for these products was $2,500 in cash. How would you
record these transactions using the cash-basis accounting method and how would you record
them using the accrual accounting method? How would your revenues and expenses differ
between these methods when you close the books on December 31?

Answer 7

If you were keeping the books using cash-basis accounting, you would record the cash sales as
they were made but would total $2,500 by December 25. You would not record the cash payment
of $1,500 for the products bought until you pay that bill with cash on January 10. Your revenues for these sales would total $2,500 and you wouldn’t show any costs on December 31. If you were keeping the books using the accrual accounting method, you would record the sales
as they were made, but would total $2,500 by December 25. You would record the bill to cover the costs of the goods on December 31 in Accounts Payable. Your revenues for these sales would total $2,500 and the costs of goods sold would total $1,500 on December 31.

Question 8

Where in the books would you find bills

due to vendors?

Answer 8

In a liability account where you track bills called Accounts Payable.

Question 9

Where in the books would you find
inventory you have on hand to sell to
customers?

Answer 9

In an asset account called Inventory.

Question 10

Where in the books would you find money
put into the company when the owners
first started the business?

Answer 10

In an equity account called Capital.

Question 11

Where in the books would you find the
mortgage for the store that your company
owns that you must pay off?

Answer 11

In a liability account called Mortgages Payable.

Question 12

On which statement and where in that
statement would you find the value of the
mortgages due to be paid to lenders?

Answer 12

In the liability section of the Balance Sheet in a line item called Mortgages Payable.

Question 13

On which statement and where in that
statement would you find a business’s
total sales for the year?

Answer 13

In the revenues section of the Income Statement in a line item called Sales.

Question 14

On which statement and where in that
statement would you find the total amount
a business spent to purchase the products
it planned to sell?

Answer 14

In the cost of goods sold section of the Income Statement in a line item called Purchases.

Question 15

On which statement and where in that
statement would you find the value of the
inventory the company had on hand to sell
to its customers?

Answer 15

In the assets section of the Balance Sheet in a line item called Inventory.

Question 16

In what type of accounts would you record
the cash purchase of goods to be sold?

a. Record the goods purchased in an asset
account called Inventory; record the
cash in an asset account called Cash.

b. Record the goods purchased in a cost of
goods sold account called Purchases;
record the cash spent in an asset
account called Cash.

c. Record the goods purchased in a cost of
goods sold account called Purchases;
record the cash spent in a liabilities
account called Cash.

d. Record the goods purchased in an asset
account called Inventory; record the
cash in a liability account called Cash.

Answer 16

B: Record the goods purchased in a cost of goods sold account called Purchases; record the cash spent in an asset account. You would not record the goods purchased in the Inventory account. Inventory is adjusted at the end of an accounting period after a physical count of the inventory has been done. The one exception to this is a business that does computerized management
of its inventory system. In most cases when inventory is computerized, the system automatically adjusts inventory with each purchase of goods. But even with this type of system the initial entry would be to the Purchases account and the computer would then automatically
update the Inventory account.

Question 17

In what type of accounts would you record
the purchase of furniture for your office
using a credit card?

a. Record the furniture in an asset account
called Furniture; record the credit card
transaction in an asset account called
Cash.

b. Record the furniture in an Office Supplies
expense account; record the credit card
transaction in a liability account called
Credit Card.

c. Record the furniture in an asset account
called Furniture; record the credit card
transaction in a liability account called
Credit Card.

d. Record the furniture in an Office Supplies
expense account; record the credit card
transaction in an asset account called
Cash.

Answer 17

C: Record the furniture in an asset account called Furniture, record the credit card transaction in a liability account called Credit Card. You would record the charge on the credit card in a liability account called Credit Card. Cash would not be paid until the credit card bill is due to be paid. Furniture is always listed as an asset on your balance sheet. Anything you buy that you expect to use for more than one year will be an asset rather then an expense.

Question 18

In what type of accounts would you record the payment of rent to your landlord in cash?

a. Record the rent payment in an expense account called Rent; record the cash used in a liability
account called Cash.

b. Record the rent payment in an expense account called Rent; record the cash used in an asset
account called Cash.

c. Record the rent payment in a liability account called Rent; record the cash used in an asset
account called Cash.

d. Record the rent payment in a liability account; record the cash used in an expense account
called Cash.

Answer 18

B: Record the rent payment in an expense account called Rent; record the cash used in an asset account called Cash. Cash is always an asset account. It does not matter whether or not you are taking cash out to buy something or depositing cash you received after making a sale. Rent
is always an expense.

Question 19

If the accountant wants to know how many
products are still on the shelves after you
closed the books for an accounting period,
which account would you show him?

a. Cost of Goods Sold account
b. Purchases account
c. Inventory account
d. Tell him you have to count what’s left in
the store.

Answer 19

C: Inventory Account. The Inventory account is adjusted at the end of each accounting period to show the total number of products remaining to be sold at the end of the accounting period.

Question 20

If a customer buys your product on store
credit, in which account would you record
the transaction:

a. Accounts Payable
b. Accounts Receivable
c. Credit account
d. Would not record until the customer
pays the bill

Answer 20

B: Accounts Receivable. The Accounts Receivable is the account that is used to track all customer
purchases made by store credit. In addition to this account that summarizes all products
bought on credit, you would also need to enter the purchases into the individual accounts of
each of your customers so you can bill them and track their payments.

Question 21

You receive a bill for a new shipment of products. Where would you record that bill in the
accounting system so you can pay it in the future?

a. Cost of Goods Sold account
b. Credit account
c. Accounts Payable
d. Expense account

Answer 21

C: Accounts Payable. All bills that will be due at some time in the future are tracked in the Accounts Payable account.

Question 22

What starts the bookkeeping cycle?

a. Sales in the store
b. Rental of store space
c. Any financial transaction
d. Paying for your business license

Answer 22

The answer would be c. Any financial transaction can start the bookkeeping cycle. The key is when that transaction happens. The first transaction of a new
accounting period starts the bookkeeping cycle for that period, but remember once you start keeping the books the cycle is more like a continuous circle.

Question 23

What must you prepare to enter the
transaction in your books?

a. Calculation of entry
b. Journal entry
c. Transaction entry
d. Business entry

Answer 23

C: Journal entry. When you prepare the journal entry, you take the time to think about the accounts impacted by the transaction. There will always be at least two accounts in the entry — one a debit and one a credit.

Question 24

How do you figure out if your books are in
balance?

a. Add up the accounts
b. Match the balance to your checkbook
c. Prepare a balance sheet
d. Prepare a trial balance

Answer 24

D: Prepare a trial balance. The trial balance is a working tool that helps you test whether your books are in balance before you prepare your financial statements.

Question 25

What type of entries do you use to correct any mistakes to get your books back in balance?

a. Adjusting journal entries
b. Closing entries
c. Posting entries
d. Correcting entries

Answer 25

A: Adjusting Journal Entries. At the end of an accounting period you correct any mistakes using Adjusting Journal Entries. These entries will also need to be in balance. You will always have at least one account that is a debit and one that is a credit.

Question 26

You buy new products to be sold in your
store on credit for $3,000. How would you
enter this transaction in your books?

Answer 26

In this transaction you would debit the Purchases account to show the additional purchases made during that period and credit the Accounts Payable account. Since you are buying the goods on credit that means you will have to pay the bill at some point in the future.

Purchases Debit $3,000
Accounts Payable Credit $3,000

Question 27

You sold $5,000 worth of goods and
received $5,000 in cash. How would
you enter it in your books?

Answer 27

As you think about the journal entry you may not know whether something is a credit or a debit. As you know from our discussions earlier in the chapter, a debit to the Cash account increases the balance in that account. In this question since you did receive cash, you know that the Cash account needs to be a debit. So your only choice is to make the Sales account the account to be credited. All income accounts are increased by a credit. If you are having trouble figuring this out, use the chart at the end of the chapter to become familiar with which
accounts are increased by a credit or a debit and which accounts are decreased by a debit or a credit.

Cash Debit $5,000
Sales Credit $5,000

Question 28

You sold $3,000 worth of goods on store
credit. You didn’t get cash. Customers will
pay you after you bill them. How will your
record the sales transaction?

Answer 28

In this question, rather than taking in cash, the customers were allowed to pay on credit, so you need to debit the asset account Accounts Receivable. You will credit the Sales account to track the additional revenue.

Accounts Receivable Debit $3,000
Sales Credit $3,000

Question 29

You buy office supplies for $500 using a
check. How would you record the
transaction?

Answer 29

In this question since you are paying with a check, it will be recorded in your Cash account.
The Cash account tracks the amount in your bank account. Any cash, checks, debit cards or other types of transactions that will be taken directly from you bank account will always be entered as a credit. All money paid out for expenses will always be a debit.

Office Supplies Debit $500
Cash Credit $500

Question 30

Account Type Debits Credits

Assets Increase Decrease
Liabilities Decrease Increase
Income Decrease Increase
Expenses Increase Decrease

Answer 30

Memorize Front

Question 31

You buy new products to be sold in your
store on credit for $3,000. Copy the journal
entry you developed above and then indicate
whether the transaction action would
increase or decrease the accounts
involved.

Answer 31

In this transaction the debit would increase the balance of the Purchases account to show the additional money spent and the credit would increase the balance of the Accounts Payable account to show the additional bill that must be paid at some point in the future.

Purchases Debit $3,000
Accounts Payable Credit $3,000

Question 32

You sold $5,000 worth of goods and
received $5,000 in cash. Copy the journal
entry you developed above and then indicate
whether the transaction action would
increase or decrease the accounts
involved.

Answer 32

The Cash account balance would be increased to show the newly received cash and the Sales account would be increased to show the new sales.

Cash Debit $5,000
Sales Credit $5,000

Question 33

You sold $3,000 worth of goods on store
credit. You didn’t get cash. Customers will
pay you after you bill them. Copy the journal
entry you developed above and then
indicate whether the transaction action
would increase or decrease the accounts
involved.

Answer 33

The Accounts Receivable account balance would be increased to show the new customer purchases
that will be paid at some point in the future. The Sales account would be increased to show the new sales.

Accounts Receivable Debit $3,000
Sales Credit $3,000

Question 34

You buy office supplies using a check.
Copy the journal entry you developed
above and then indicate whether the transaction
action would increase or decrease
the accounts involved.

Answer 34

The Office Supplies account balance would be increased to show the additional expenses. The Cash account would be decreased to track the use of cash.

Office Supplies Debit $500
Cash Credit $500

Question 35

In what section of the Chart of Accounts
would you list the account called Inventory?

a. Current Assets
b. Long-term Assets
c. Cost of Goods Sold
d. Expenses

Answer 35

A: Current Assets. Inventory is considered an asset that will be used up in the next 12 months. It is not an Expense or Cost of Goods Sold account. When inventory is actually purchased it is recorded in the Purchases account, but the Inventory account tracks that inventory on hand in the warehouse or on the store shelves at the end of an accounting period.

Question 36

In what section of your Chart of Accounts
would you list the account called Sales?

a. Current Assets
b. Revenue
c. Equity
d. Long-term Assets

Answer 36

B: Revenue. All money taken into the business from the sale of your products or services would be recorded in Revenue accounts.

Question 37

In what section of the Chart of Accounts
would you list the account called Advertising?

a. Current Liabiltiies
b. Long-term Liabiilties
c. Cost of Goods Sold
d. Expenses

Answer 37

D: Expenses. Advertising is an expense because it usually involves the promotion of more than just one individual item to be sold. Advertising draws people into the business with the hopes of selling other items as well, so advertising transactions are not recorded in Cost of Goods Sold accounts.

Question 38

In what section of the Chart of Accounts
would you list the account called Purchases?

a. Current Liabiltiies
b. Long-term Liabiilties
c. Cost of Goods Sold
d. Expenses

Answer 38

C: Costs of Goods Sold. As indicated in the answer to question 1, purchases of inventory are recorded in Cost of Goods Sold accounts.