D774 Introduction to Business Accounting - Set 3 - Part 1

Correct Answer: The accounting equation

The accounting equation states that assets equal liabilities plus equity, so what a business owns always balances against what it owes plus the owners' residual stake. It quietly underlies every financial report. Option a is incorrect because the matching principle deals only with timing, pairing expenses against the revenues they helped produce within one period. It governs the income statement rather than the ownership balance the friend asked about. Option b is incorrect because revenue recognition decides the moment earnings get recorded, when goods or services are delivered. That rule settles a timing question and says nothing about owning, owing, and the owners' leftover stake. Option d is incorrect because the cash-basis rule records events only when money changes hands. It is one bookkeeping method, not the foundational identity tying together everything a business owns, owes, and retains for its owners.

Correct Answer: Subtract what is owed from assets

Equity is the residual, so rearranging the accounting equation gives equity as assets minus liabilities. Subtracting what the business owes from what it owns leaves exactly the owners' remaining stake in the company. Option b is incorrect because adding what is owned to what is owed inflates the result far beyond the owners' stake. The equation pairs assets against liabilities plus equity, so equity comes from subtraction, never from piling both totals together. Option c is incorrect because division produces a ratio, not the dollar residual the student needs. Equity is a leftover amount reached by taking liabilities away from assets, so dividing one balance into another yields a meaningless figure here. Option d is incorrect because multiplying two unrelated balances gives a number with no accounting meaning. The owners' stake is a difference, found by removing obligations from assets, and it is never the product of owning and owing combined.

Correct Answer: Assets rise and equity rises

When the owner contributes cash, the asset cash increases and her ownership stake increases by the same amount. Both effects sit on opposite sides of the equation, so the two sides remain perfectly equal afterward. Option a is incorrect because an owner contribution creates no obligation to anyone outside the business. Nothing is borrowed, so liabilities stay flat while the owner's stake grows alongside the new cash she personally put in. Option b is incorrect because the owner is adding resources, not removing them. Cash climbs rather than drops, and her stake climbs too, so calling both effects a decrease reverses the actual direction of this funding event. Option c is incorrect because no debt arises and the owner's stake grows rather than shrinks. An investment increases equity, so pairing a liability increase with an equity decrease misreads both halves of what happened here.

Correct Answer: What remains after subtracting debts

Equity is a residual, what remains once liabilities are removed from assets. A business can hold little cash yet large equity tied up in equipment, so equity and the bank balance are genuinely different things. Option a is incorrect because cash is just one asset among many. Equity can be large while cash is small if value sits in inventory or buildings, so equating the owners' stake with the bank balance misstates what equity measures. Option c is incorrect because expenses reduce equity over a period rather than define it. The owners' stake is a leftover balance after debts, not a running tally of the costs a business has paid out while operating. Option d is incorrect because borrowed money is a liability, the opposite of equity. Lenders' claims get subtracted to reach the owners' residual stake, so describing equity as the amount borrowed confuses the two sides of the equation.

Correct Answer: Owner investments and revenue

The expanded equation shows equity rising with owner contributions and with revenue earned, while expenses and draws pull it down. So investments and revenue are the two forces that lift the owners' stake over a period. Option b is incorrect because expenses and draws both shrink equity rather than grow it. Expenses are the costs of operating, and draws remove value for personal use, so naming them as upward forces reverses their real effect. Option c is incorrect because liabilities are obligations sitting outside equity entirely, and dividends are distributions that reduce the owners' retained stake. Neither lifts equity, so this pairing describes claims and payouts rather than genuine increases. Option d is incorrect because draws withdraw value for the owner and losses erode it, so both drag equity down. Listing two reducing forces as the items that raise the owners' stake gets the direction exactly backward.

Correct Answer: Debit is left, credit is right

Debit simply means the left side of an account and credit means the right side. Whether either raises or lowers a balance depends entirely on the account type, not on any notion of good, bad, plus, or minus. Option a is incorrect because a debit does not universally decrease anything. For assets, expenses, and draws a debit increases the balance, so tying debit permanently to decrease ignores how account type sets the direction. Option b is incorrect because debits and credits are positions in an account, not measures of profit or loss. They carry no inherent good or bad meaning, so equating them with gains and losses misreads their purpose entirely. Option d is incorrect because debits and credits are not tied to cash specifically. Every account has a left and a right side, so mapping the two terms onto money flowing in and out is far too narrow.

Correct Answer: Draws, expenses, assets

The first half of DEALER stands for draws, expenses, and assets, the three account types that increase with a debit. The second half, liabilities, equity, and revenue, increase with a credit instead. Option a is incorrect because liabilities, equity, and revenue make up the second half of DEALER, the accounts that rise with a credit. They decrease when debited, so this group answers the opposite of what was asked. Option c is incorrect because it blends the halves: assets do increase with a debit, but revenue and liabilities both increase with a credit. A correct debit-increase list cannot include accounts that grow on the credit side. Option d is incorrect because equity grows with a credit, not a debit, and dividends are not the listed term in DEALER. Only expenses in this set truly increase with a debit, so the grouping as a whole fails.

Correct Answer: A credit balance

A normal balance sits on the side that increases the account. Liabilities increase with credits under DEALER, so their balance normally rests on the credit side. The same logic gives equity and revenue credit balances too. Option a is incorrect because a debit balance belongs to accounts that increase with debits, namely assets, expenses, and draws. Liabilities decrease when debited, so their normal resting balance cannot sit on the debit side. Option b is incorrect because a normal balance describes a usual side, not a zero amount. A liability carries a real outstanding balance on its credit side until paid, so claiming it is always zero misunderstands the concept. Option c is incorrect because each account type has one definite normal side, fixed by what increases it. Liabilities are firmly credit-normal, so saying either side is equally likely ignores the rule that pins down their resting balance.

Correct Answer: Total debits must equal total credits

Double-entry bookkeeping requires that total debits equal total credits in every entry. When they differ, the equation falls out of balance, which is exactly the signal the bookkeeper saw, so this rule was broken. Option b is incorrect because most entries never involve cash at all. Buying inventory on credit or recording depreciation touches no cash, so a missing cash line is not what unbalanced the books in this situation. Option c is incorrect because debits are meant to equal credits, not exceed them. An entry where debits outweigh credits is itself the error that throws the equation off, so requiring that imbalance would cause the very problem described. Option d is incorrect because every transaction affects at least two accounts under double-entry rules. Using a single account would make balancing impossible, so this describes a violation rather than the law that keeps the books equal.

Correct Answer: Debit the payable and credit cash

Paying a supplier lowers the liability, which decreases with a debit, and lowers cash, which decreases with a credit. So the entry debits the payable and credits cash, leaving both sides of the equation reduced equally. Option a is incorrect because debiting cash would increase cash, yet paying a supplier reduces it. The directions here are reversed, so this entry would wrongly show the business gaining money while supposedly settling a debt it owes. Option b is incorrect because no revenue is earned by settling a debt, and cash falls rather than rises. This entry describes a sale collected in cash, an entirely different event from paying down what the business already owed. Option d is incorrect because crediting the payable would increase the obligation instead of reducing it, and no new expense arises from repaying an existing balance. Both halves misdescribe what happens when a supplier debt is paid off.

Correct Answer: On the day the work finishes

Accrual accounting records revenue when it is earned, meaning when the service is performed. The repair is finished that day, so the revenue belongs to that date regardless of when the customer's cash actually arrives later. Option a is incorrect because waiting for payment describes the cash basis, not accrual. Under accrual the earning event, completing the repair, fixes the date, so tying recognition to the eventual payment applies the wrong method here. Option b is incorrect because revenue is tied to the specific moment work is performed, not to an arbitrary year-end. Delaying recognition until December would scatter earnings away from the period that actually produced them. Option c is incorrect because cash clearing is irrelevant under accrual recognition. The service was delivered when the repair finished, so the earnings are recorded then, even though the money settles in the bank some days afterward.

Correct Answer: In December with the related revenue

The matching principle places expenses in the same period as the revenue they helped generate. The ingredients and labor produced December's cakes, so their cost belongs in December alongside that revenue, regardless of payment timing. Option a is incorrect because matching ties costs to the revenue they created, not to cash dates. The cakes were made and sold in December, so pushing their costs into January would separate the effort from the result it produced. Option c is incorrect because the costs were entirely consumed making December's cakes, not gradually used over two months. Splitting them evenly ignores matching, which anchors each expense to the period of the revenue it supported. Option d is incorrect because supplier payment timing follows the cash basis, which matching deliberately overrides. The expense belongs with December's sale, so deferring it until the bill is settled misplaces the cost away from its revenue.

Correct Answer: The cash basis

Cash-basis accounting records events only when money changes hands and needs no judgment about when something was earned. A salon paid on the spot, with no inventory or credit, fits this simple checkbook approach well. Option b is incorrect because accrual suits businesses with credit, inventory, or timing gaps between earning and collecting. A cash-paid salon has none of those, so the more elaborate accrual method offers little benefit over the simpler cash basis. Option c is incorrect because matching is a principle within accrual accounting, not a standalone basis a business picks. It pairs expenses with revenues, unnecessary detail for a salon collecting cash immediately on every single service. Option d is incorrect because depreciation is one adjusting process for long-term assets, not a basis of accounting. It spreads an asset's cost over time, which is unrelated to how a cash-only salon records its daily sales.

Correct Answer: They never involve the cash account

Every adjusting entry updates accruals or allocations between an income-statement account and a balance-sheet account, but none touches cash. Cash moves on its own date in a separate entry, so seeing cash in an adjustment signals an error. Option a is incorrect because only some adjusting entries raise revenue, such as accrued or earned unearned revenue. Others raise expenses instead, like depreciation or prepaid usage, so increasing revenue is not a trait shared by all five. Option b is incorrect because reducing equipment is not what these entries do. Depreciation builds a separate accumulated account rather than cutting the asset directly, and the other four adjustments do not touch equipment at all. Option d is incorrect because each adjusting entry pairs one income-statement account with one balance-sheet account, not two liabilities. The defining shared feature is the absence of cash, not any pattern of touching two obligations at once.

Correct Answer: Accrued revenue, raising a receivable

Accrued revenue records earnings before the cash arrives by increasing a receivable and increasing revenue. The pastries were delivered, so the revenue is earned now, while the client's payment and the receivable settle next month. Option a is incorrect because depreciation allocates a long-term asset's cost over its life. It records an expense and accumulated depreciation, which has nothing to do with recognizing pastry revenue earned ahead of the customer's payment. Option b is incorrect because unearned revenue applies when cash was collected in advance before delivery. Here the goods were delivered first and payment comes later, so this is the reverse of an advance-payment liability being earned. Option c is incorrect because a prepaid expense adjustment moves a previously paid asset into expense as it is consumed. That handles costs the business paid early, not revenue the business has earned but not yet collected.

Correct Answer: Raises an expense, lowers the prepaid asset

As prepaid insurance is used up, the adjusting entry shifts the consumed portion from the asset into insurance expense. It raises the expense and lowers the prepaid asset, recognizing the benefit that has now expired. Option b is incorrect because cash already left months ago when the policy was purchased, so no cash moves now. Adjusting entries never touch cash, and the expired coverage raises the expense rather than reducing it. Option c is incorrect because using up insurance creates no obligation and no revenue. This instead describes the unearned-revenue adjustment, which lowers a liability as goods are delivered, not the consumption of a prepaid asset. Option d is incorrect because the prepaid asset shrinks as coverage expires, not grows, and no cash is involved at year-end. Raising the asset and lowering cash describes the original purchase, not this later usage adjustment.

Correct Answer: The unearned liability falls, revenue rises

The advance payment created an unearned-revenue liability. As deliveries occur, the earned portion moves out of that liability into revenue, so the liability falls and revenue rises, with no cash touched in the adjustment. Option a is incorrect because the cash arrived earlier when the customer prepaid, so no cash moves during this adjustment. Recognizing the earned share shifts a liability into revenue rather than reducing the cash account at period-end. Option c is incorrect because that pairing describes a prepaid expense being consumed, an entry about costs the business paid early. Here the business received money early and now earns it, the opposite direction from a prepaid expense. Option d is incorrect because no receivable arises when the customer has already paid in advance. A receivable would form if delivery preceded payment, but here payment came first, so the earned amount is released from the existing liability.

Correct Answer: Depreciation, raising expense and accumulated depreciation

Depreciation spreads a long-term asset's cost across its useful life. The adjusting entry raises depreciation expense and increases accumulated depreciation, a contra-asset that lowers book value, all without any cash changing hands. Option a is incorrect because an accrued expense records a cost incurred but not yet paid, by raising a payable. Spreading an oven's cost over years is allocation through depreciation, not the accrual of an unpaid bill. Option b is incorrect because unearned revenue involves money collected in advance from a customer. It reduces a liability as goods are delivered, which has nothing to do with allocating the cost of equipment the business already owns. Option c is incorrect because accrued revenue recognizes earnings before collection by raising a receivable. The oven situation is about spreading an asset's cost as an expense over time, not about recording revenue the business has earned.

Correct Answer: Accrued expense, raising a payable

An accrued expense records a cost the business has incurred but not yet paid, raising an expense and a payable. The bakers earned wages this period, so the cost belongs now even though cash leaves later. Option a is incorrect because a prepaid expense works the opposite way, recognizing a cost paid in advance as it gets used up. Here nothing was paid ahead; the wages are owed after the work, not before. Option b is incorrect because unearned revenue is a liability for cash collected before a service is delivered, which involves revenue rather than an expense. Wages the bakery owes its workers are a cost, so this label misses entirely. Option d is incorrect because depreciation gradually writes down a long-term asset such as an oven over the years it serves. The wages here involve no asset wearing out, so a depreciation entry simply does not fit this situation.

Correct Answer: The income statement

The income statement reports revenues and expenses over a period and boils them down to net income or net loss. It directly answers whether the business earned a profit, which is precisely what the banker asked. Option b is incorrect because the balance sheet is a snapshot of financial position at a single date. It shows position, not profit earned over a period, so it does not answer the banker's profitability question. Option c is incorrect because the cash-flow statement tracks actual cash moving in and out, not profit. A business can be profitable yet short on cash, so this statement answers a liquidity question rather than whether earnings beat costs. Option d is incorrect because the equity statement shows how the owners' stake changed over the period. It uses net income as an input but does not itself calculate profit, so it is not built to answer the banker directly.