Problem 1: True or False
Liabilities + Equity) in balance. While they can be
1. The first step in the accounting cycle is
the preparation of journal entries.
False.
The first step in the accounting cycle is often
referred to as "Analyzing Transactions" rather
than the actual preparation of journal entries.
Analyzing transactions involves examining the
financial transactions that have occurred and
determining how they should be recorded. It is a
critical step in understanding the nature of each
transaction, identifying the accounts affected,
and deciding whether to debit or credit those
accounts.
Once the analysis is complete, the next step is to
prepare journal entries based on that analysis.
These journal entries record the transactions in
the accounting system.
2. A sale in exchange for a note receivable
can be recorded in the special journal
called sales journal.
True.
A sale in exchange for a note receivable can be
recorded in the special journal called the sales
journal. The sales journal is typically used to
record credit sales of merchandise or services,
and it can include transactions where customers
promise to pay at a later date, such as when they
issue a promissory note (note receivable) to the
seller. This journal helps businesses keep track
of sales on credit and manage their accounts
receivable.
3. An entry that has a single debit and a
single credit is called a simple entry.
False.
An entry that has a single debit and a single
credit is not typically referred to as a "simple
entry." Instead, it is commonly called a "journal
entry" or just an "entry." Journal entries are the
fundamental building blocks of accounting
transactions and are used to record changes in
financial transactions by debiting one or more
accounts and crediting one or more accounts to
maintain the accounting equation (Assets =
straightforward with only one debit and one
credit, they can also be more complex in cases
involving multiple accounts and amounts.
4. To determine the account balance of a
specific customer, you would most likely
refer to the general ledger.
False.
To determine the account balance of a specific
customer, you would typically refer to the
customer's individual account within the
accounts receivable subsidiary ledger, not the
general ledger. The accounts receivable
subsidiary ledger is a detailed record of all
individual customer accounts, showing their
transactions, balances, and other relevant
information. It provides a breakdown of amounts
owed by each customer and helps in managing
accounts receivable more effectively. The
general ledger contains summary-level
information for all accounts in the accounting
system and would not provide the specific
details needed to determine an individual
customer's balance.
5. A 10 pesos erroneous debit to
advertising expense, which should have
been debited to transportation expense,
would make the trial balance imbalance.
False.
A 10 pesos erroneous debit to advertising
expense, which should have been debited to
transportation expense, would not make the trial
balance imbalance. The trial balance is a
summary of all the general ledger accounts with
their respective debit and credit balances. In this
case, both the advertising expense and
transportation expense accounts are affected by
the error, but the overall trial balance would still
be in balance because the total debits and total
credits in the ledger would still match.
The error should be corrected by making an
adjusting journal entry to debit transportation
expense by 10 pesos and credit advertising
expense by 10 pesos. This would rectify the
mistake and ensure that the financial
statements are accurate, but it wouldn't affect
the trial balance's balance.
6. If the total debits exceed the total credits
in the statement of financial position
columns of the worksheet, there is profit.
False.
If the total debits exceed the total credits in the
balance sheet columns, it suggests that the
assets are greater than the sum of liabilities and
equity. This would indicate a situation where the
company has more resources (assets) than it
owes to creditors (liabilities) and shareholders
(equity), which is not necessarily indicative of
profit. Profit or loss is typically determined in the
income statement, not the balance sheet.
7. Entity A uses the income method of
initial recording of advanced collections
of income. During the period, Entity A
collects 10 pesos for an item of income.
By the end of the period, 3 pesos of the
collection is earned. The year-end
adjusting entry involves a debit to a
liability account for 7 pesos.
True.
In this scenario, Entity A uses the income
method of initial recording of advanced
collections of income. This means that when
they receive cash in advance for income that has
not yet been earned, they initially record it as a
liability because they owe a future service or
product to the customer.
So, when Entity A collects 10 pesos for an item
of income during the period but has only earned
3 pesos of that income by the end of the period,
they have an unearned revenue liability of 7
pesos. To recognize this, the year-end adjusting
entry would involve a debit to the liability
account (typically called "Unearned Revenue" or
something similar) for 7 pesos. This debit
reduces the liability, reflecting that a portion of
the advance payment has been earned, while the
remaining 3 pesos would stay as a liability until
they are earned in the future.
8. The adjusting entry for the previous
question can be reversed in the next
accounting period.
True.
The adjusting entry made to recognize unearned
revenue in the previous question can typically be
reversed in the next accounting period.
When you initially record unearned revenue as a
liability and then adjust it at the end of the period
to recognize the revenue that has been earned,
you may create a reversing entry at the
beginning of the next accounting period. This
reversing entry typically involves debiting the
liability account and crediting the corresponding
revenue account. This action effectively reverses
the adjustment made at the end of the previous
period.
The purpose of reversing entries is to simplify
accounting for transactions that span multiple
periods and to ensure that the financial
statements accurately reflect the current
period's transactions without the need for
manual adjustments. It also helps prevent the
double counting of revenue.
Reversing entries are especially common when
dealing with items like unearned revenue,
accrued expenses, and prepaid expenses.
However, whether or not a reversing entry is
made depends on the specific accounting
practices of the company and the requirements
of the accounting standards they follow.
9. An entity's adjusting entry related to a
prepayment of expense during the period
involves a debit to an expense account.
the entity must be using the expense
method of initial recording of
prepayments.
True.
In the context of adjusting entries related to a
prepayment of an expense during the period, if
the entity is using the expense method of initial
recording of prepayments, then the adjusting
entry would involve a debit to an expense
account.
The expense method of recording prepayments
means that when a prepayment is initially made
(e.g., paying for an insurance premium in
advance), the entity records it as an expense.
This is done because the entity is recognizing
the cost upfront, even though the benefit of the
expense will be realized over a future period.
debit or credit the income summary account
accordingly.
- If there's a net income, you credit the income
summary account.
- If there's a net loss, you debit the income
summary account.

To adjust for this during the period-end, when
only a portion of the prepaid expense has been
consumed or earned, the entity would debit the
expense account and credit a prepaid expense
asset account. This adjustment reduces the
prepaid expense on the balance sheet and
recognizes the portion of the expense that has
been incurred as an actual expense on the
income statement. This is done to match
expenses with the revenues they help generate,
following the accrual accounting principles.
10. There is a profit if the income summary
account is debited when closing to an
equity account.
False.
4. Finally, you transfer the balance in the income
summary account to the owner's equity account
(e.g., retained earnings). If you debited the
income summary account, it reduces the equity,
indicating a net loss. If you credited the income
summary account, it increases the equity,
indicating a net profit.
So, if the income summary account is debited
during the closing process, it indicates a net
loss, not a profit. Profits are typically credited to
increase equity, not debited.
Problem 2: Multiple Choice -
Theoretical

If the income summary account is debited when 1. The basic sequence in the accounting
closing to an equity account, it means that there process can best be described as:
is a net loss, not a profit. The income summary
account is used during the closing process to D. Transaction, Source Document, Journal
temporarily hold the net income (profit) or net Entry, Ledger Account, Trial Balance
loss for the accounting period before it is
transferred to the owner's equity section of the
balance sheet.

Here's how it works:

1. Throughout the accounting period, revenue

accounts (which have credit balances)
accumulate the company's revenues, and
expense accounts (which have debit balances)
accumulate the company's expenses.

2. At the end of the period, you calculate the net

income or net loss by subtracting total expenses
from total revenues. If total revenues exceed
total expenses, you have a net income (profit). If
total expenses exceed total revenues, you have a
net loss.

3. To close the revenue and expense accounts

and transfer the net income or net loss to the
owner's equity section of the balance sheet, you