Below are several revision test questions inspired by key concepts typically covered in
Accounting (14th Canadian Edition Volume 1 by Donald E. Kieso). Each question is followed
by an explanation (rationale) that clarifies why the correct answer is right and why the other
options are not. You can use these questions to test your understanding of core principles.
Question 1: The Basic Accounting Equation
Question:
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
Correct Answer: A
Rationale:
The fundamental accounting equation is Assets = Liabilities + Equity. This equation underpins the
double-entry system by ensuring that a company’s resources (assets) are always financed by borrowing
(liabilities) or by the owners’ claims (equity). The other options mix up the relationships between these
elements.
Question 2: Adjusting Entries for Prepaid Expenses
Question:
At the end of an accounting period, what adjustment is necessary for a prepaid expense that has been
partially used?
A. Debit Expense; Credit Prepaid Expense
B. Debit Prepaid Expense; Credit Expense
C. Debit Revenue; Credit Unearned Revenue
D. Debit Unearned Revenue; Credit Revenue
Correct Answer: A
Rationale:
When a prepaid expense is used up, you must transfer the appropriate portion from an asset (Prepaid
Expense) to an expense account. This is done by debiting the expense account (to record the cost
incurred) and crediting Prepaid Expense (to reduce the asset). The other options do not reflect the
proper adjustment for a prepaid expense.
Question 3: Revenue Recognition Principle
, Question:
According to the revenue recognition principle, when should revenue be recognized?
A. When cash is received
B. When goods are delivered or services are performed
C. When a contract is signed
D. At the end of the accounting period
Correct Answer: B
Rationale:
Revenue is recognized when it is earned—that is, when goods are delivered or services are performed—
regardless of when cash is received. Option A refers to cash basis accounting, which is not in accordance
with the accrual basis that underlies most modern accounting standards. Options C and D do not match
the principle of recognizing revenue when it is actually earned.
Question 4: Purpose of Accrual Adjusting Entries
Question:
What is the main purpose of an accrual adjusting entry?
A. To record cash transactions
B. To record revenues that have been earned or expenses incurred without a corresponding cash
transaction
C. To record revenues only when cash is received
D. To correct previous ledger errors
Correct Answer: B
Rationale:
Accrual adjusting entries ensure that revenues and expenses are recorded in the period in which they
are earned or incurred, even if cash has not been received or paid. This is essential for adhering to the
accrual basis of accounting and the matching principle. Options A and C incorrectly focus on cash, while
option D addresses error correction rather than timing adjustments.
Question 5: Classification of Accounts
Question:
Which of the following accounts is considered temporary (nominal) rather than permanent (real)?
A. Cash
B. Accounts Receivable
C. Rent Expense
D. Inventory
Correct Answer: C
Accounting (14th Canadian Edition Volume 1 by Donald E. Kieso). Each question is followed
by an explanation (rationale) that clarifies why the correct answer is right and why the other
options are not. You can use these questions to test your understanding of core principles.
Question 1: The Basic Accounting Equation
Question:
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
Correct Answer: A
Rationale:
The fundamental accounting equation is Assets = Liabilities + Equity. This equation underpins the
double-entry system by ensuring that a company’s resources (assets) are always financed by borrowing
(liabilities) or by the owners’ claims (equity). The other options mix up the relationships between these
elements.
Question 2: Adjusting Entries for Prepaid Expenses
Question:
At the end of an accounting period, what adjustment is necessary for a prepaid expense that has been
partially used?
A. Debit Expense; Credit Prepaid Expense
B. Debit Prepaid Expense; Credit Expense
C. Debit Revenue; Credit Unearned Revenue
D. Debit Unearned Revenue; Credit Revenue
Correct Answer: A
Rationale:
When a prepaid expense is used up, you must transfer the appropriate portion from an asset (Prepaid
Expense) to an expense account. This is done by debiting the expense account (to record the cost
incurred) and crediting Prepaid Expense (to reduce the asset). The other options do not reflect the
proper adjustment for a prepaid expense.
Question 3: Revenue Recognition Principle
, Question:
According to the revenue recognition principle, when should revenue be recognized?
A. When cash is received
B. When goods are delivered or services are performed
C. When a contract is signed
D. At the end of the accounting period
Correct Answer: B
Rationale:
Revenue is recognized when it is earned—that is, when goods are delivered or services are performed—
regardless of when cash is received. Option A refers to cash basis accounting, which is not in accordance
with the accrual basis that underlies most modern accounting standards. Options C and D do not match
the principle of recognizing revenue when it is actually earned.
Question 4: Purpose of Accrual Adjusting Entries
Question:
What is the main purpose of an accrual adjusting entry?
A. To record cash transactions
B. To record revenues that have been earned or expenses incurred without a corresponding cash
transaction
C. To record revenues only when cash is received
D. To correct previous ledger errors
Correct Answer: B
Rationale:
Accrual adjusting entries ensure that revenues and expenses are recorded in the period in which they
are earned or incurred, even if cash has not been received or paid. This is essential for adhering to the
accrual basis of accounting and the matching principle. Options A and C incorrectly focus on cash, while
option D addresses error correction rather than timing adjustments.
Question 5: Classification of Accounts
Question:
Which of the following accounts is considered temporary (nominal) rather than permanent (real)?
A. Cash
B. Accounts Receivable
C. Rent Expense
D. Inventory
Correct Answer: C
