1.
Introduction to Accounting and Business Transactions
1. What is the primary objective of accounting?
a) To prepare tax returns
b) To provide financial information to stakeholders
c) To maintain inventory levels
d) To calculate profit margins
2. Which of the following is considered a business transaction?
a) Hiring a new employee
b) Placing an advertisement in a newspaper
c) Purchasing goods on credit
d) Planning for a new product launch
3. Which document is issued by a supplier to request payment?
a) Purchase invoice
b) Sales invoice
c) Delivery note
d) Credit note
4. What is the purpose of a trial balance?
a) To calculate profits
b) To check the arithmetical accuracy of accounts
c) To analyze financial statements
d) To prepare budgets
5. Which of the following is classified as a non-financial transaction?
a) Purchase of inventory
b) Sale of fixed assets
c) Hiring of a new manager
d) Receiving rent income
6. In a double-entry system, every transaction affects:
a) One account
b) Two or more accounts
c) Only expense accounts
d) Only revenue accounts
7. What is the role of accounting in decision-making?
a) Ensure compliance with taxation laws
b) Provide data to evaluate financial performance
c) Manage daily business operations
d) Reduce operational costs
8. Which of the following is not an objective of bookkeeping?
a) Recording daily transactions
b) Maintaining ledgers
c) Preparing tax returns
d) Generating financial reports
9. A business purchases inventory for $5,000 and pays $500 in cash immediately. What is the
impact on the accounting equation?
a) Assets increase by $5,000; liabilities increase by $500
b) Assets increase by $5,000; assets decrease by $500
c) Assets increase by $4,500; liabilities increase by $500
d) Assets increase by $4,500
10. Which of the following best defines accounting?
a) Recording of financial transactions
b) Process of interpreting financial data
c) Preparation of tax returns
d) Ensuring financial accuracy
2. Accounting Equation
11. The accounting equation is represented as:
a) Assets = Liabilities − Capital
b) Assets + Liabilities = Capital
c) Assets = Liabilities + Capital
d) Assets − Liabilities = Capital
12. A business has $10,000 in assets and $4,000 in liabilities. What is the capital?
a) $6,000
b) $10,000
c) $4,000
d) $14,000
13. If a company’s liabilities increase by $2,000 and assets increase by $5,000, what happens to
capital?
a) Increases by $3,000
b) Increases by $7,000
c) Remains the same
d) Decreases by $2,000
14. Which transaction increases both assets and liabilities?
a) Paying rent in cash
b) Purchasing inventory on credit
c) Repayment of a loan
d) Receiving cash for a sale
15. What is the effect on the accounting equation if a business owner withdraws cash for personal
use?
a) Decrease in assets and capital
b) Decrease in liabilities and assets
c) Increase in liabilities and decrease in capital
d) Increase in assets and capital
16. If a business makes a profit of $20,000, what is the impact on the accounting equation?
a) Increase in assets and liabilities
b) Increase in assets and capital
c) Increase in liabilities and decrease in capital
d) No impact
17. Which of the following scenarios violates the accounting equation?
a) Decreasing both assets and liabilities by the same amount
b) Increasing liabilities without an increase in assets or capital
c) Increasing both assets and capital equally
d) Decreasing liabilities and capital equally
18. A business purchases equipment worth $7,000 by taking a bank loan. What is the effect on the
accounting equation?
a) Increase in assets only
b) Increase in liabilities only
c) Increase in both assets and liabilities
d) No effect
19. A business earns $5,000 revenue, of which $3,000 is cash and $2,000 is on credit. How does
this affect the accounting equation?
a) Assets increase by $3,000
b) Assets increase by $5,000
c) Assets increase by $3,000 and liabilities increase by $2,000
d) Assets increase by $2,000 and capital increases by $5,000
20. Which of the following represents a correctly balanced accounting equation?
a) Assets = $50,000; Liabilities = $20,000; Capital = $30,000
b) Assets = $45,000; Liabilities = $50,000; Capital = −$5,000
c) Assets = $70,000; Liabilities = $20,000; Capital = $40,000
d) All of the above
3. Double Entry and Keeping Rules
21. What does the principle of double entry state?
a) Every debit must have a corresponding credit
b) Every transaction must involve cash
c) Every transaction must be recorded in the trial balance
d) Every transaction must increase an asset
22. Which of the following is true for a debit entry?
a) It increases liabilities
b) It decreases assets
c) It increases expenses
d) It increases revenue
23. What type of account is "accounts receivable"?
a) Asset account
b) Liability account
c) Expense account
d) Equity account
24. A business pays $2,000 for rent. What is the correct double entry?
a) Debit Cash; Credit Rent Expense
b) Debit Rent Expense; Credit Cash
c) Debit Rent Expense; Credit Bank Loan
d) Debit Rent Expense; Credit Capital
25. Which of the following accounts is classified as a liability?
a) Prepaid Rent
b) Trade Payables
c) Inventory
d) Accounts Receivable
26. Which of the following is NOT a book of original entry?
a) Sales Day Book
b) Purchase Day Book
c) Ledger
d) Journal
27. Which account is debited when a business owner injects cash into the business?
a) Capital
b) Cash
c) Revenue
d) Bank Loan
28. What is the impact of a credit entry on the equity account?
a) Increase in equity
b) Decrease in equity
c) No impact
d) Depends on the transaction type
29. The purchase of a vehicle for cash would be recorded as:
a) Debit Cash; Credit Vehicle
b) Debit Vehicle; Credit Cash
c) Debit Expense; Credit Cash
d) Debit Vehicle; Credit Expense
30. A business owes $10,000 to its suppliers. In the books, this would be recorded as:
a) Debit Trade Payables; Credit Purchases
b) Debit Trade Payables; Credit Cash
c) Debit Purchases; Credit Trade Payables
d) Debit Cash; Credit Trade Payables
4. Types of Expenditure
31. Which of the following is an example of capital expenditure?
a) Purchase of raw materials
b) Purchase of machinery
c) Payment of utility bills
d) Advertising expenses
32. What type of expenditure is incurred on employee salaries?
a) Capital expenditure
b) Revenue expenditure
c) Deferred expenditure
d) None of the above
33. Which of the following is classified as revenue expenditure?
a) Purchase of a building
b) Installation cost of machinery
c) Repairs of office furniture
d) Acquisition of patents
34. What is the primary purpose of distinguishing between capital and revenue expenditure?
a) To comply with tax regulations
b) To prepare accurate financial statements
c) To simplify bookkeeping
d) To determine profitability
35. The cost of repainting an office building is classified as:
a) Capital expenditure
b) Revenue expenditure
c) Deferred expenditure
d) Operating lease
36. Which of the following expenditures affects the balance sheet?
a) Utility expenses
b) Purchase of equipment
c) Repairs of machinery
d) Employee training costs
37. Depreciation on a fixed asset is classified as:
a) Revenue expenditure
b) Capital expenditure
c) Deferred expenditure
d) Non-operating expenditure
38. What is the effect of capital expenditure on the financial statements?
a) It reduces equity
b) It appears in the income statement
c) It increases fixed assets
d) It has no impact
39. Which of the following is NOT an example of capital expenditure?
a) Purchase of a vehicle
b) Maintenance of a vehicle
c) Building construction
d) Purchase of land
40. Repairs to a manufacturing plant would be classified as:
a) Capital expenditure
b) Revenue expenditure
c) Operating lease
d) None of the above
