Recording Income Statement Transactions - Spreadsheet
Self Test
Introduction to Accounting
Recording Income Statement Transactions – Spreadsheet
Self Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
1. Revenues and expenses become part of
a. assets
b. liabilities
c. owner’s equity
d. gains and losses
Check Your Answer
C. Revenues less expenses equals profits which are part of retained earnings which is an owner’s equity account. Retained earnings is cumulative profits and losses that are kept by the company
2. The account that revenues and expenses are transferred to at the end of each period is
a. investments
b. common stock
c. retained earnings
d. additional paid in capital
Check Your Answer
C. Retained earnings represents cumulative profits and losses less dividends paid to shareholders. Cumulative means all years the company has been in business. Revenues less expenses equal profits or losses. An investment is an asset. Common stock and additional paid in capital are other owner’s equity accounts.
3. A company should record rent paid for this period’s use as
a. an increase to rent revenue
b. an increase to rent expense
c. a decrease to rent expense
d. an increase to prepaid rent
Check Your Answer
B. An expense is recorded when a service is provided and used this period. This transaction decreases cash (it is paid) and increases rent expense because a service was provided this period. An increase in an expense is recorded with a negative amount. Expenses are negative accounts.
4. A common revenue account is
a. unearned revenue
b. accrued expenses
c. service fees
d. rent incurred
Check Your Answer
C. Revenues occur when a good or service is provided. Fees are something that is earned when a service is provided. Unearned revenue is a liability. Accrued expenses is a liability. Rent incurred is a rent expense. Incurred means a service was provided to the company that must be paid for.
5. When recording revenue you will also record
a. an increase in an asset
b. an increase in a liability
c. an increase in common stock
d. an increase in a prepaid
Check Your Answer
A. A revenue is providing a good or service in exchange for an asset. This means an asset will be received. This is an increase to the asset account cash or accounts receivable.
6. When recording an expense, you will also record
a. an increase in an asset
b. an increase in a liability
c. an increase in common stock
d. an increase in a prepaid
Check Your Answer
B. An expense is recorded when an asset is used or a service has been provided to the company that must be paid for. Using an asset or paying cash will decrease assets which is not one of the answers. The only other thing that occurs with an expense is that it is paid for later, which is an increase in a liability. An expense can decrease a prepaid, but never increase a prepaid. An expense never increases an asset because you are never provided something and get something in exchange, you pay something.
7. When a service is provided, the company will
a. increase revenues and increase assets
b. increase revenues and increase liabilities
c. decrease assets and increase liabilities
d. decrease liabilities and increase an asset
Check Your Answer
A. Providing a service is an increase in a revenue account. Services are provided in exchange for an asset, which increases an asset (cash or accounts receivable). You must keep the accounting equation in balance and all other choices will not result in assets equaling liabilities plus owner’s equity.
8. When a company is provided a service, the company will also
a. increase revenues and increase assets
b. increase revenues and increase liabilities
c. decrease expenses and increase liabilities
d. increase expenses and decrease an asset
Check Your Answer
D. Being provided a service increases an expense. The company must pay for the service now (the asset cash decreases) or later (liability increases). Expenses are always increased with a negative amount. The other choices will not keep the accounting equation in balance.
9. Using up supplies will result in
a. an increase to supplies expense
b. a decrease to supplies expense
c. an increase in prepaid supplies
d. a decrease in accrued expenses
Check Your Answer
A. Using up an asset is always an expense. More expense is an increase.
The increase in an expense is recorded with a negative number because expenses are always negative. Adding more negatives increases the account.
10. The accounts used when goods are provided to the customer are
a. accounts payable and service fees
b. accounts receivable and sales, inventory and cost of goods sold
c. accounts receivable and cash
d. accounts collected and sales expense
Check Your Answer
B. Revenues are goods provided in exchange for an asset. Providing goods is called “sales” to the customer. The customer either pays at the time, increasing cash, or pays later, increasing accounts receivable. Giving the inventory to the customer reduces the asset and increases the expense cost of goods sold. Accounts collected is not an account. A company will not owe and provide a service at the same time.
11. Receiving a service and not paying for it now will result in
a. an increase in a revenue and receivable
b. a decrease in expense and liability
c. an increase in expense and liability
d. an increase in revenue and accounts payable
Check Your Answer
C. Receiving a service is an increase in an expense. Paying later is an increase in a liability. (a.) occurs when the company provides a service. Revenues are provided in exchange for an asset, not a liability (d.)
12. When an expense is incurred and recorded, the other account that may be
impacted is
a. an asset account
b. an owner’s equity account
c. a revenue account
d. an investment account
Check Your Answer
A. An expense is using an asset or having a service provided to the company that must be paid for. Both of these decreases an asset. The other type of account that may increase is a liability if the expense is not yet paid for.
13. Which account is used when inventory is provided to the customer?
a. cost of revenues
b. cost of goods provided
c. cost of goods sold
d. supplies
Check Your Answer
C. Providing goods to the customer is an expense called “cost of goods sold”. Cost of goods sold is recorded when the inventory is used to provide to the customer. Supplies are used in the business and are used up in a short time period.
14. How many account names are used when a company sells goods on account to a customer?
a. 2
b. 3
c. 4
d. not enough information to determine
Check Your Answer
C. When a company sells goods on account there are 4 accounts used. Sales and accounts receivable are increased for the sales price to the customer. Inventory is decreased and cost of goods sold is recorded as a negative for the amount the goods originally cost the company. Increasing an expense is always recorded as a negative.
15. Interest income earned impacts a(n)
a. asset account
b. liability account
c. revenue account
d. both a. and c.
Check Your Answer
D. Interest income is earned when the company provides the service of letting another use their money. Providing a service is a revenue. When the term “earned” is used it is a revenue. Cash or interest receivable (both assets) will also increase. Every transaction will change at least 2 accounts.