Sample Quiz

Recording Transactions with Debits and Credits

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Material Overview

Applying double-entry accounting rules to business transactions

Subject Business
Subject Area Financial Accounting

Grade/Level College / Undergraduate

Type Quiz

Difficulty Medium

Learning Setting Student / Self-Study

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Study Context

Study Scope

What You Should Know

Under double-entry accounting, every business transaction must impact at least two separate accounts to maintain the balance of the fundamental accounting equation: Assets = Liabilities + Owner's Equity. Debits and credits are the mechanism used to record these changes. Understanding which account types increase with a debit and which increase with a credit is crucial for accurate financial reporting.

Key Skills

  • Identify which accounts are impacted by a standard business transaction.
  • Classify accounts as assets, liabilities, owner's equity, revenues, or expenses.
  • Apply the rules of debits and credits to record increases and decreases in specific accounts.
  • Verify that the total dollar amount of debits equals the total dollar amount of credits for any given transaction.

Important Vocabulary

  • Accounting Equation: The basic structure of financial accounting, stated as Assets = Liabilities + Owner's Equity.
  • Double-Entry System: A system of recording transactions where each transaction affects at least two accounts, with equal total debit and credit amounts.
  • Debit (Dr.): An entry made on the left side of an account ledger.
  • Credit (Cr.): An entry made on the right side of an account ledger.
  • Normal Balance: The side of the account ledger (debit or credit) where increases to that account are recorded. Assets and expenses have a normal debit balance, while liabilities, equity, and revenues have a normal credit balance.

Assessment Boundaries

This quiz focuses on basic, routine business transactions for a service-based business. You will be tested on cash transactions, accounts receivable, prepayments, purchasing supplies and equipment, accounts payable, owner capital investments, service revenue, and operating expenses. It does not cover adjusting entries, depreciation, bad debt provisions, or complex long-term liabilities.

Printable Student Copy

Student Version

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Date:

Welcome to Applying double-entry accounting rules to business transactions! This quiz is designed for individual completion to assess your understanding of the double-entry system, the normal balances of various accounts, and how typical business transactions affect the accounting equation. Please read each question carefully and write your answers clearly.

  1. Which of the following accounts has a normal credit balance?
    A. Accounts Receivable
    B. Rent Expense
    C. Accounts Payable
    D. Equipment

  2. A business purchases $800 of office supplies on account. How is this transaction recorded under the rules of double-entry accounting?
    A. Debit Supplies $800, Credit Cash $800
    B. Debit Supplies $800, Credit Accounts Payable $800
    C. Debit Accounts Payable $800, Credit Supplies $800
    D. Debit Cash $800, Credit Supplies $800

  3. A company performs consulting services for a client and bills the client $2,500. Which of the following describes the correct double-entry record?
    A. Debit Cash $2,500, Credit Service Revenue $2,500
    B. Debit Accounts Receivable $2,500, Credit Service Revenue $2,500
    C. Debit Service Revenue $2,500, Credit Accounts Receivable $2,500
    D. Debit Accounts Receivable $2,500, Credit Cash $2,500

  4. The owner of a business invests $15,000 cash into the company. What is the direct effect of this transaction on the accounting equation?
    A. Assets increase by $15,000 and Liabilities increase by $15,000.
    B. Assets increase by $15,000 and Owner's Equity decreases by $15,000.
    C. Assets decrease by $15,000 and Owner's Equity increases by $15,000.
    D. Assets increase by $15,000 and Owner's Equity increases by $15,000.

  5. If a company pays $1,200 cash for an insurance policy that covers the next twelve months (Prepaid Insurance), which of the following statements is true regarding the accounting equation?
    A. Total assets increase by $1,200.
    B. Total assets remain unchanged.
    C. Liabilities increase by $1,200.
    D. Owner's equity decreases by $1,200.

  6. A bookkeeper mistakenly records a transaction by debiting Cash for $500 and crediting Service Revenue for $50. Which of the following is the immediate consequence of this error?
    A. The accounting equation will still balance.
    B. Total assets will be understated by $450.
    C. The trial balance will be out of balance, with debits exceeding credits by $450.
    D. Owner's equity will be overstated by $450.

  7. On October 1, a business pays $3,000 cash for the current month's rent. Identify the account to be debited, the account to be credited, the dollar amounts, and briefly explain why these choices are correct under double-entry rules.

  1. A business purchases equipment costing $10,000. The business pays $3,000 in cash and promises to pay the remaining $7,000 on account next month. State the accounts to be debited and credited, along with their respective amounts, and verify that total debits equal total credits.
  1. On November 15, a business receives $1,500 cash from a customer who was previously billed for services on account. Identify the accounts affected, state whether each account increases or decreases, and clarify which account is debited and which is credited.
  1. A business starts the month with a cash balance of $5,000. During the month, the following transactions occur:
  2. Transaction A: Received $4,000 cash from a client for services rendered.
  3. Transaction B: Paid $1,200 cash to settle an outstanding accounts payable balance.
  4. Transaction C: Owner withdrew $1,500 cash for personal use.
    Calculate the ending balance of the Cash account, show your calculations, and state whether the ending balance is a debit or a credit.

Your Copy

Answer Key

  1. Which of the following accounts has a normal credit balance?
    A. Accounts Receivable
    B. Rent Expense
    C. Accounts Payable
    D. Equipment

  2. A business purchases $800 of office supplies on account. How is this transaction recorded under the rules of double-entry accounting?
    A. Debit Supplies $800, Credit Cash $800
    B. Debit Supplies $800, Credit Accounts Payable $800
    C. Debit Accounts Payable $800, Credit Supplies $800
    D. Debit Cash $800, Credit Supplies $800

  3. A company performs consulting services for a client and bills the client $2,500. Which of the following describes the correct double-entry record?
    A. Debit Cash $2,500, Credit Service Revenue $2,500
    B. Debit Accounts Receivable $2,500, Credit Service Revenue $2,500
    C. Debit Service Revenue $2,500, Credit Accounts Receivable $2,500
    D. Debit Accounts Receivable $2,500, Credit Cash $2,500

  4. The owner of a business invests $15,000 cash into the company. What is the direct effect of this transaction on the accounting equation?
    A. Assets increase by $15,000 and Liabilities increase by $15,000.
    B. Assets increase by $15,000 and Owner's Equity decreases by $15,000.
    C. Assets decrease by $15,000 and Owner's Equity increases by $15,000.
    D. Assets increase by $15,000 and Owner's Equity increases by $15,000.

  5. If a company pays $1,200 cash for an insurance policy that covers the next twelve months (Prepaid Insurance), which of the following statements is true regarding the accounting equation?
    A. Total assets increase by $1,200.
    B. Total assets remain unchanged.
    C. Liabilities increase by $1,200.
    D. Owner's equity decreases by $1,200.

  6. A bookkeeper mistakenly records a transaction by debiting Cash for $500 and crediting Service Revenue for $50. Which of the following is the immediate consequence of this error?
    A. The accounting equation will still balance.
    B. Total assets will be understated by $450.
    C. The trial balance will be out of balance, with debits exceeding credits by $450.
    D. Owner's equity will be overstated by $450.

  7. On October 1, a business pays $3,000 cash for the current month's rent. Identify the account to be debited, the account to be credited, the dollar amounts, and briefly explain why these choices are correct under double-entry rules.

  8. A business purchases equipment costing $10,000. The business pays $3,000 in cash and promises to pay the remaining $7,000 on account next month. State the accounts to be debited and credited, along with their respective amounts, and verify that total debits equal total credits.

  9. On November 15, a business receives $1,500 cash from a customer who was previously billed for services on account. Identify the accounts affected, state whether each account increases or decreases, and clarify which account is debited and which is credited.

  10. A business starts the month with a cash balance of $5,000. During the month, the following transactions occur:

  11. Transaction A: Received $4,000 cash from a client for services rendered.
  12. Transaction B: Paid $1,200 cash to settle an outstanding accounts payable balance.
  13. Transaction C: Owner withdrew $1,500 cash for personal use.
    Calculate the ending balance of the Cash account, show your calculations, and state whether the ending balance is a debit or a credit.

Answers and Explanations

  1. C. Accounts Payable
    Explanation: Accounts Payable is a liability account, which increases with a credit and therefore has a normal credit balance. Accounts Receivable, Rent Expense, and Equipment all have normal debit balances.

  2. B. Debit Supplies $800, Credit Accounts Payable $800
    Explanation: Purchasing supplies on account increases the asset Supplies with a debit of $800, and increases the liability Accounts Payable with a credit of $800.

  3. B. Debit Accounts Receivable $2,500, Credit Service Revenue $2,500
    Explanation: Billing a client for services performed on account increases the asset Accounts Receivable with a debit of $2,500, and increases Service Revenue with a credit of $2,500.

  4. D. Assets increase by $15,000 and Owner's Equity increases by $15,000.
    Explanation: The cash investment increases the asset Cash by $15,000 and simultaneously increases the Owner's Capital account within Owner's Equity by $15,000, keeping the accounting equation balanced.

  5. B. Total assets remain unchanged.
    Explanation: This transaction is an exchange of assets. The asset Prepaid Insurance increases by $1,200 with a debit, and the asset Cash decreases by $1,200 with a credit, resulting in no net change to total assets.

  6. C. The trial balance will be out of balance, with debits exceeding credits by $450.
    Explanation: Because the debit of $500 does not equal the credit of $50, the double-entry system is out of balance. The debit total exceeds the credit total by exactly $450.

  7. Debit Rent Expense $3,000, Credit Cash $3,000
    Explanation: Rent Expense is debited because expenses increase with a debit and reduce owner's equity. Cash is credited because assets decrease with a credit when cash is paid out.

  8. Debit Equipment $10,000; Credit Cash $3,000 and Credit Accounts Payable $7,000. Total Debits ($10,000) equal Total Credits ($3,000 + $7,000 = $10,000).
    Explanation: The asset Equipment increases by the full cost of $10,000 (debit). The asset Cash decreases by the amount paid, $3,000 (credit). The remaining liability, Accounts Payable, increases by $7,000 (credit). Total debits of $10,000 equal total credits of $10,000.

  9. Cash increases (debited $1,500) and Accounts Receivable decreases (credited $1,500).
    Explanation: Receiving cash from a previously billed client increases the asset Cash (debit) and decreases the asset Accounts Receivable (credit) because the customer's outstanding balance has been settled.

  10. Ending balance: $6,300 Debit. Calculation: $5,000 starting balance + $4,000 (Transaction A) - $1,200 (Transaction B) - $1,500 (Transaction C) = $6,300.
    Explanation: Cash is an asset with a normal debit balance. The starting balance is increased by the cash receipt of $4,000 and decreased by the cash payments of $1,200 and $1,500, yielding a final debit balance of $6,300.