Free Accounting Principles MCQs with Answers

• A. Assets increase and liabilities increase
• B. Assets increase and owner's equity increase
• C. Liabilities decrease and equity increase
• D. Assets decrease and liabilities increase

Explanation: The inventory received increases assets, while the unpaid supplier balance increases liabilities.

• A. Debit cash and credit accounts receivable
• B. Debit accounts receivable and credit cash
• C. Debit sales and credit cash
• D. Debit cash and credit sales

Explanation: Cash is an asset that increases, so it is debited. The customer's receivable decreases, so the receivable account is credited; no new sale…

• A. The service is completed
• B. The customer is billed
• C. Cash is received
• D. The accounting year ends

Explanation: Cash-basis accounting recognises revenue when money is actually received.

• A. An accrued expense
• B. A prepaid expense
• C. A revenue receipt
• D. A capital reserve

Explanation: The future insurance benefit is an asset called prepaid expense until it is used.

• A. Ignored until the customer defaults
• B. Recognised when a reasonable estimate is possible
• C. Recorded as revenue when the sale occurs
• D. Recognised only after legal recovery fails

Explanation: Prudence requires probable losses to be recognised when they can be reasonably estimated.

• A. Liquidation or realisable value
• B. Original invoice value only
• C. Expected future sales value
• D. Nominal value of owner's capital

Explanation: When continuation is doubtful, assets may need to be measured at amounts obtainable through sale or liquidation.

• A. Revenue from ordinary activities
• B. A capital receipt creating a liability
• C. An owner's equity contribution
• D. A reduction in operating expense

Explanation: A bank loan provides cash but creates an obligation to repay, so it is a capital receipt in this classification and a liability in the…

• A. Monthly office electricity
• B. Annual staff training cost
• C. Cost of constructing an additional factory room
• D. Routine cleaning of business premises

Explanation: Constructing an additional factory room creates or improves a long-term operating asset, so its cost is capital expenditure.

• A. Buying equipment for cash
• B. Collecting cash from a debtor
• C. Receiving a bank loan in cash
• D. Paying an outstanding supplier

Explanation: Collection from a debtor increases cash but decreases accounts receivable by the same amount.

• A. Debit purchases and credit accounts payable
• B. Debit accounts payable and credit purchases
• C. Debit cash and credit purchases
• D. Debit sales and credit accounts payable

Explanation: The purchase account is debited to record the cost of goods acquired, while the supplier's payable is credited because the liability…

• A. Assets decrease and liabilities decrease
• B. Assets increase and equity decreases
• C. Liabilities increase and equity decreases
• D. Assets decrease and equity increases

Explanation: Cash, an asset, decreases when the supplier is paid, while the payable, a liability, also decreases.

• A. It increases assets and expenses
• B. It increases liabilities and income
• C. It decreases assets and expenses
• D. It decreases liabilities and capital

Explanation: Debits normally increase asset and expense accounts. Debits reduce liabilities, capital and income, so the other combinations reverse the…

• A. March, when the work is completed
• B. April, when the cash is received
• C. The month in which the invoice is printed
• D. The month in which the bank confirms payment

Explanation: Accrual accounting recognises revenue when it is earned, not when cash is collected.

• A. Cash received from selling goods
• B. Cash received from providing services
• C. Proceeds from selling a business vehicle
• D. Commission received from customers

Explanation: Proceeds from selling a business vehicle arise from disposing of a long-term asset and are therefore capital in nature.

• A. It permits comparison of results between accounting periods
• B. It requires every asset to be valued at market price
• C. It records transactions only when cash changes hands
• D. It prevents businesses from preparing financial statements

Explanation: Using the same accounting methods over time improves comparison between periods.

• A. Depreciate it over its useful life
• B. Charge its full cost as an immediate loss
• C. Value it only at its scrap price
• D. Exclude it from the statement of financial position

Explanation: Going concern assumes that the business will continue operating and using its assets.

• A. The lower of cost and net realisable value
• B. The higher of cost and net realisable value
• C. Its original invoice price plus expected profit
• D. Its expected selling price without selling costs

Explanation: Prudence avoids overstating assets and profit, so inventory is measured at the lower of cost and net realisable value.

• A. It is not recorded in the shop's books
• B. It is recorded as shop property
• C. It is recorded as shop revenue
• D. It is recorded as a shop expense

Explanation: The business entity concept separates the business from its owner. A house bought personally with personal funds is not a transaction of…

• A. Replacing a worn-out part during routine operations
• B. Constructing an additional factory building
• C. Purchasing a new delivery truck
• D. Installing a new production line

Explanation: Routine replacement that maintains an asset in its existing condition is normally revenue expenditure.

• A. The electricity is consumed
• B. The bill is received
• C. The bill is paid
• D. The financial year ends

Explanation: Cash-basis accounting records expenses when cash is actually paid. Accrual accounting would normally recognise the electricity cost when…