Understanding Capital and Expenses

Capital is increased by:

• Losses

• Owner’s drawings

• Profits

• Expenses

Which of the following is an example of an indirect expense?

• Rent

• Purchase of inventory

• Sales

• Owner’s capital

Which term refers to the cost of resources used in generating income?

• Assets

• Liabilities

• Expenses

• Capital

Which account will be credited when the business earns revenue?

• Revenue account

• Expense account

• Capital account

• Asset account

If a business incurs a loss, it will:

• Increase its liabilities

• Increase its capital

• Reduce its capital

• Have no effect

Which entry correctly represents receiving a discount from a supplier?

• Debit Discount Received

• Credit Discount Allowed

• Debit Purchases

• Credit Discount Received

What is the effect of expenses on profit?

• Increase profit

• No effect

• Decrease profit

• Increase capital

Which of the following is NOT classified as income?

• Interest received

• Commission received

• Rental income

• Loan repayment

The double-entry principle ensures:

• Only income is recorded

• All payments are in cash

• Every transaction affects two accounts

• Losses are ignored

The increase in revenue results in:

• Increase in expenses

• Increase in capital

• Decrease in profit

• Decrease in equity