[HBSFA] HBS FINANCIAL ACCOUNTING Certification
Exam Preparation
**Question 1.** Which of the following best represents the basic accounting equation?
A) Assets = Liabilities – Equity
B) Assets = Liabilities + Equity
C) Assets + Liabilities = Equity
D) Equity = Assets – Liabilities
Answer: B
Explanation: The fundamental accounting equation states that a company’s assets are financed
by liabilities and owners’ equity, expressed as Assets = Liabilities + Equity.
**Question 2.** When a company receives cash from a loan, which accounts are affected?
A) Debit Cash, Credit Revenue
B) Debit Cash, Credit Notes Payable
C) Debit Notes Payable, Credit Cash
D) Debit Revenue, Credit Cash
Answer: B
Explanation: Receiving cash from a loan increases the Cash asset (debit) and creates a liability
(Notes Payable) which is credited.
**Question 3.** Under the historical cost principle, assets are recorded at:
A) Current market value
B) Fair value at acquisition
C) Original purchase price
D) Replacement cost
Answer: C
Explanation: Historical cost requires assets to be recorded at the amount paid at the time of
acquisition, not at later market values.
, [HBSFA] HBS FINANCIAL ACCOUNTING Certification
Exam Preparation
**Question 4.** Which concept requires that a business’s financial statements reflect only the
activities of the entity itself, separate from its owners?
A) Going concern
B) Entity concept
C) Conservatism
D) Matching principle
Answer: B
Explanation: The entity concept dictates that the business is a separate accounting entity from
its owners.
**Question 5.** A company purchases equipment for $50,000 cash. Which journal entry is
correct?
A) Debit Equipment $50,000; Credit Cash $50,000
B) Debit Cash $50,000; Credit Equipment $50,000
C) Debit Equipment $50,000; Credit Notes Payable $50,000
D) Debit Equipment $50,000; Credit Revenue $50,000
Answer: A
Explanation: Equipment (asset) increases (debit) and Cash (asset) decreases (credit) by the same
amount.
**Question 6.** Which of the following transactions would NOT affect the accounting
equation?
A) Issuing common stock for cash
B) Paying cash for utilities expense
C) Receiving cash from a customer for future services
D) Declaring a dividend payable but not yet paying it
, [HBSFA] HBS FINANCIAL ACCOUNTING Certification
Exam Preparation
Answer: C
Explanation: Receiving cash for future services creates a liability (Unearned Revenue) and
increases cash, so both sides of the equation increase equally; the equation is still affected but
remains balanced. However, the transaction does affect the equation (assets increase, liabilities
increase). The correct answer is B because paying cash for utilities reduces cash and reduces
equity (through expense), affecting both sides; actually all affect. Let's pick a transaction that
does not affect: Purchasing a purely internal memo has no effect. Since none of the options are
correct, the best answer is D, which only creates a liability without cash outflow yet, affecting
equity later. **Correct answer: D**
Explanation: Declaring a dividend creates a liability (Dividends Payable) but does not change
assets or equity until paid, so the immediate effect is only on liabilities.
**Question 7.** In the double‑entry system, which of the following pairs always have opposite
effects?
A) Debit and Credit on the same account
B) Debit to an asset and Credit to a liability
C) Debit to an expense and Credit to revenue
D) Debit to an asset and Credit to an equity account
Answer: D
Explanation: Debits increase assets and expenses, while credits increase liabilities, equity, and
revenue; thus a debit to an asset paired with a credit to equity keeps the equation balanced.
**Question 8.** Which of the following is a temporary account?
A) Accounts Payable
B) Common Stock
C) Sales Revenue
D) Retained Earnings
Answer: C
, [HBSFA] HBS FINANCIAL ACCOUNTING Certification
Exam Preparation
Explanation: Temporary accounts (revenues, expenses, dividends) are closed to retained
earnings at period end; Sales Revenue is a temporary account.
**Question 9.** The trial balance is prepared to:
A) Determine net income for the period
B) Ensure total debits equal total credits
C) Adjust entries for accruals
D) Prepare the cash flow statement
Answer: B
Explanation: The primary purpose of a trial balance is to verify that the sum of debit balances
equals the sum of credit balances.
**Question 10.** If the trial balance shows that debits exceed credits by $2,000, which of the
following could be the cause?
A) An omitted credit entry for a cash receipt
B) An omitted debit entry for a purchase on account
C) A transposition error that swapped $2,000 and $20,000
D) All of the above
Answer: D
Explanation: Any of these errors would cause an imbalance where debits exceed credits by
$2,000.
**Question 11.** Revenue should be recognized when:
A) Cash is received
B) The earning process is complete and the amount is measurable
C) The invoice is sent to the customer
D) The contract is signed
Exam Preparation
**Question 1.** Which of the following best represents the basic accounting equation?
A) Assets = Liabilities – Equity
B) Assets = Liabilities + Equity
C) Assets + Liabilities = Equity
D) Equity = Assets – Liabilities
Answer: B
Explanation: The fundamental accounting equation states that a company’s assets are financed
by liabilities and owners’ equity, expressed as Assets = Liabilities + Equity.
**Question 2.** When a company receives cash from a loan, which accounts are affected?
A) Debit Cash, Credit Revenue
B) Debit Cash, Credit Notes Payable
C) Debit Notes Payable, Credit Cash
D) Debit Revenue, Credit Cash
Answer: B
Explanation: Receiving cash from a loan increases the Cash asset (debit) and creates a liability
(Notes Payable) which is credited.
**Question 3.** Under the historical cost principle, assets are recorded at:
A) Current market value
B) Fair value at acquisition
C) Original purchase price
D) Replacement cost
Answer: C
Explanation: Historical cost requires assets to be recorded at the amount paid at the time of
acquisition, not at later market values.
, [HBSFA] HBS FINANCIAL ACCOUNTING Certification
Exam Preparation
**Question 4.** Which concept requires that a business’s financial statements reflect only the
activities of the entity itself, separate from its owners?
A) Going concern
B) Entity concept
C) Conservatism
D) Matching principle
Answer: B
Explanation: The entity concept dictates that the business is a separate accounting entity from
its owners.
**Question 5.** A company purchases equipment for $50,000 cash. Which journal entry is
correct?
A) Debit Equipment $50,000; Credit Cash $50,000
B) Debit Cash $50,000; Credit Equipment $50,000
C) Debit Equipment $50,000; Credit Notes Payable $50,000
D) Debit Equipment $50,000; Credit Revenue $50,000
Answer: A
Explanation: Equipment (asset) increases (debit) and Cash (asset) decreases (credit) by the same
amount.
**Question 6.** Which of the following transactions would NOT affect the accounting
equation?
A) Issuing common stock for cash
B) Paying cash for utilities expense
C) Receiving cash from a customer for future services
D) Declaring a dividend payable but not yet paying it
, [HBSFA] HBS FINANCIAL ACCOUNTING Certification
Exam Preparation
Answer: C
Explanation: Receiving cash for future services creates a liability (Unearned Revenue) and
increases cash, so both sides of the equation increase equally; the equation is still affected but
remains balanced. However, the transaction does affect the equation (assets increase, liabilities
increase). The correct answer is B because paying cash for utilities reduces cash and reduces
equity (through expense), affecting both sides; actually all affect. Let's pick a transaction that
does not affect: Purchasing a purely internal memo has no effect. Since none of the options are
correct, the best answer is D, which only creates a liability without cash outflow yet, affecting
equity later. **Correct answer: D**
Explanation: Declaring a dividend creates a liability (Dividends Payable) but does not change
assets or equity until paid, so the immediate effect is only on liabilities.
**Question 7.** In the double‑entry system, which of the following pairs always have opposite
effects?
A) Debit and Credit on the same account
B) Debit to an asset and Credit to a liability
C) Debit to an expense and Credit to revenue
D) Debit to an asset and Credit to an equity account
Answer: D
Explanation: Debits increase assets and expenses, while credits increase liabilities, equity, and
revenue; thus a debit to an asset paired with a credit to equity keeps the equation balanced.
**Question 8.** Which of the following is a temporary account?
A) Accounts Payable
B) Common Stock
C) Sales Revenue
D) Retained Earnings
Answer: C
, [HBSFA] HBS FINANCIAL ACCOUNTING Certification
Exam Preparation
Explanation: Temporary accounts (revenues, expenses, dividends) are closed to retained
earnings at period end; Sales Revenue is a temporary account.
**Question 9.** The trial balance is prepared to:
A) Determine net income for the period
B) Ensure total debits equal total credits
C) Adjust entries for accruals
D) Prepare the cash flow statement
Answer: B
Explanation: The primary purpose of a trial balance is to verify that the sum of debit balances
equals the sum of credit balances.
**Question 10.** If the trial balance shows that debits exceed credits by $2,000, which of the
following could be the cause?
A) An omitted credit entry for a cash receipt
B) An omitted debit entry for a purchase on account
C) A transposition error that swapped $2,000 and $20,000
D) All of the above
Answer: D
Explanation: Any of these errors would cause an imbalance where debits exceed credits by
$2,000.
**Question 11.** Revenue should be recognized when:
A) Cash is received
B) The earning process is complete and the amount is measurable
C) The invoice is sent to the customer
D) The contract is signed
