Accounting Online Program Accounting Basics 5 — Questions and Answers
Question 1: Which type of business organization offers limited liability to all its owners?
- Sole proprietorship
- General partnership
- Corporation (Correct answer)
- Joint venture
Correct answer: Corporation
A corporation's shareholders enjoy limited liability, meaning they are not personally responsible for the company's debts beyond their investment.
Question 2: What does 'double-entry bookkeeping' mean?
- Every transaction is entered twice in the same account
- Every transaction affects at least two accounts with equal debits and credits (Correct answer)
- All entries require two separate journal entries
- Transactions are recorded by two different employees
Correct answer: Every transaction affects at least two accounts with equal debits and credits
Double-entry bookkeeping requires each transaction to affect at least two accounts so that total debits always equal total credits.
Question 3: Which of the following would be classified as an intangible asset?
- Inventory
- Land
- Patent (Correct answer)
- Accounts Receivable
Correct answer: Patent
A patent is an intangible asset — it has value but lacks physical substance and provides legal rights to the holder.
Question 4: The closing process at the end of an accounting period transfers balances from temporary accounts to:
- Cash
- Retained Earnings (or Owner's Capital) (Correct answer)
- Accounts Payable
- Accumulated Depreciation
Correct answer: Retained Earnings (or Owner's Capital)
Closing entries zero out temporary accounts (revenues, expenses, dividends) by transferring their net balances to Retained Earnings or Owner's Capital.
Question 5: If a company collects cash in advance for services not yet performed, this is recorded as:
- Revenue earned
- An asset called Prepaid Revenue
- A liability called Unearned Revenue (Correct answer)
- An expense
Correct answer: A liability called Unearned Revenue
Cash collected before the service is performed creates an Unearned Revenue liability until the company fulfills its obligation.
Question 6: Which financial statement reports a company's assets, liabilities, and owner's equity at a specific point in time?
- Income statement
- Balance sheet (Correct answer)
- Statement of cash flows
- Statement of retained earnings
Correct answer: Balance sheet
The balance sheet is a snapshot of the company's financial position — its assets, liabilities, and equity — on a specific date.
Question 7: Which accounting concept states that insignificant items do not need to be disclosed separately if they would not influence a user's decision?
- Conservatism
- Materiality (Correct answer)
- Consistency
- Objectivity
Correct answer: Materiality
The materiality concept allows accountants to disregard strict accounting rules for items whose omission would not affect decision-making.
Accounting Online Program Accounting Basics 5
Which type of business organization offers limited liability to all its owners?