Accounting Process Quiz (Part 1)

John owns a coffee shop and maintains separate records for "Cash," "Sales Revenue," "Coffee Supplies," and "Utilities Expense."

Why is it important for John to have these individual accounts?

• To attract more customers.

• To have detailed records of each type of business activity.

• To keep track of competitors.

• To avoid recording expenses altogether.

Answer explanation

It is important for John to have individual accounts to have detailed records of each type of business activity. This helps him track income and expenses accurately, manage finances effectively, and make informed business decisions.

Maria, a freelance graphic designer, records her income from each project. She also has accounts for "Software Subscription" and "Office Supplies."

Which role do these accounts play in her business?

• They help her keep track of her financial obligations and resources.

• They are used to attract new clients.

• They serve to calculate tax only.

• They provide contact information for her clients.

Answer explanation

The accounts for 'Software Subscription' and 'Office Supplies' help Maria track her financial obligations and resources, which is essential for managing her freelance business effectively.

Why might a small business, like a bakery, create separate accounts for "Ingredients," "Sales," and "Rent"?

• To track employee productivity.

• To understand specific costs and revenues for better financial management.

• To avoid paying taxes on certain items.

• To show only cash inflows and outflows.

Answer explanation

Creating separate accounts for "Ingredients," "Sales," and "Rent" helps the bakery understand specific costs and revenues, leading to better financial management and informed decision-making.

Sarah, an accountant for a fitness studio, debits the "Cash" account and credits the "Membership Revenue" account every time a member pays their fees.

Why does she record the transaction in this way?

• To show an increase in both accounts.

• To correctly record an increase in cash and an increase in revenue.

• To make both accounts balance automatically.

• To prepare for yearend financial reporting.

Answer explanation

Sarah records the transaction by debiting "Cash" and crediting "Membership Revenue" to accurately reflect the increase in cash from member payments and the corresponding increase in revenue.

Carlos, a restaurant owner, buys kitchen equipment on credit. How would this transaction be recorded?

• Debit "Equipment" and credit "Accounts Payable."

• Debit "Cash" and credit "Revenue."

• Debit "Accounts Receivable" and credit "Supplies."

• Debit "Expenses" and credit "Revenue."

Answer explanation

The correct entry for purchasing equipment on credit is to debit "Equipment" to increase assets and credit "Accounts Payable" to recognize the liability. This reflects the obligation to pay for the equipment later.

When recording a sale on credit at a retail store, the accountant should:

• Debit "Cash" and credit "Sales Revenue."

• Debit "Accounts Receivable" and credit "Sales Revenue."

• Debit "Inventory" and credit "Sales Revenue."

• Debit "Sales Revenue" and credit "Accounts Receivable."

Answer explanation

When a sale is made on credit, the store records the amount owed by the customer as 'Accounts Receivable' (debit) and recognizes the revenue earned as 'Sales Revenue' (credit). Thus, the correct entry is to debit 'Accounts Receivable' and credit 'Sales Revenue'.

Sarah runs an online shop. After receiving an order, she records it in the journal, posts it to the ledger, and prepares a monthly summary.

Which step would come next?

• Close all accounts.

• Prepare financial statements.

• Make a backup copy of all records.

• Send invoices to customers.

Answer explanation

After recording orders and posting to the ledger, the next logical step is to prepare financial statements. This summarizes the financial activity and provides insights into the business's performance.

During a busy season, a small business skips a few transactions in the journal and only records them in the ledger later.

What potential issue could arise from this?

• It increases profits.

• It leads to inaccurate financial statements.

• It simplifies the recording process.

• It makes the business look more profitable.

Answer explanation

Skipping transactions can lead to incomplete records, resulting in inaccurate financial statements. This misrepresentation can affect decision-making and financial analysis.

Lily owns a flower shop. She records each sale in a journal daily before updating her ledger at the end of the week.

What is the primary purpose of her journal entries?

• To track only cash received.

• To keep a chronological record of all transactions.

• To calculate monthly profit.

• To compare competitors' sales.

Answer explanation

The primary purpose of Lily's journal entries is to keep a chronological record of all transactions. This helps her track sales over time before updating her ledger.

David records a large purchase for his café in his journal but forgets to post it to the ledger. What issue could this cause?

• It will increase his café's profit.

• It may lead to inaccurate account balances.

• It simplifies his accounting process.

• It will ensure all entries match.

Answer explanation

Not posting the purchase to the ledger means the expense won't be reflected in the financial records, which may lead to inaccurate account balances and misrepresent the café's financial health.