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CB Bookkeeper practice questions

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Question 1Adjusting Entries

What is the main purpose of making adjusting entries at the end of an accounting period?

  1. To fix any errors discovered in financial statements issued in earlier years
  2. To close out the temporary accounts and move their balances to retained earnings
  3. To match revenues and expenses with the period they belong to Correct answer.
  4. To record every cash receipt and cash payment that occurred during the period

Explanation

Adjusting entries update account balances so that revenues are reported in the period they are earned and expenses in the period they are incurred, which is the matching principle. They are internal entries, not recordings of cash activity.

Question 2Adjusting Entries

Which of the following is a characteristic of every adjusting entry?

  1. It increases a revenue account and also increases an expense account
  2. It includes a debit or a credit to the Cash account
  3. It affects at least one income statement account and one balance sheet account Correct answer.
  4. It is recorded on the first day of the new accounting period

Explanation

An adjusting entry always touches one income statement account (a revenue or an expense) and one balance sheet account (an asset or a liability), because it moves amounts between the two statements.

Question 3Adjusting Entries

A company pays $2,400 in advance for a one-year insurance policy and records the payment in Prepaid Insurance. At the end of the first month, one month of coverage has expired. What is the adjusting entry?

  1. Debit Prepaid Insurance $200 and credit Insurance Expense $200
  2. Debit Cash $200 and credit Insurance Expense $200
  3. Debit Insurance Expense $2,400 and credit Prepaid Insurance $2,400
  4. Debit Insurance Expense $200 and credit Prepaid Insurance $200 Correct answer.

Explanation

The expired portion of a prepaid cost becomes an expense of the period, so Insurance Expense is debited and the asset Prepaid Insurance is reduced by the same amount ($2,400 divided by 12 months equals $200).

Question 4Adjusting Entries

At the end of the period, supplies on hand total $700, while the Supplies account has a balance of $1,900. What adjusting entry is required?

  1. Debit Supplies $1,200 and credit Supplies Expense $1,200
  2. Debit Supplies Expense $1,200 and credit Supplies $1,200 Correct answer.
  3. Debit Supplies Expense $1,900 and credit Supplies $1,900
  4. Debit Supplies $700 and credit Supplies Expense $700

Explanation

The difference between the recorded balance and the count of supplies still on hand ($1,900 minus $700 equals $1,200) represents supplies used during the period and is recorded as Supplies Expense.

Question 5Adjusting Entries

A client pays $6,000 in advance for six months of service, and the company credits Unearned Revenue when the cash is received. After one month of service has been performed, what is the adjusting entry?

  1. Debit Unearned Revenue $6,000 and credit Service Revenue $6,000
  2. Debit Service Revenue $1,000 and credit Unearned Revenue $1,000
  3. Debit Cash $1,000 and credit Service Revenue $1,000
  4. Debit Unearned Revenue $1,000 and credit Service Revenue $1,000 Correct answer.

Explanation

As the service is performed, the obligation to the client is reduced and revenue is recognized; one month of the six-month term is $1,000 of earned revenue.

Question 6Adjusting Entries

A company records monthly depreciation on its equipment. Which entry correctly records that adjustment?

  1. Debit Accumulated Depreciation and credit Depreciation Expense
  2. Debit Depreciation Expense and credit Equipment
  3. Debit Equipment and credit Accumulated Depreciation
  4. Debit Depreciation Expense and credit Accumulated Depreciation Correct answer.

Explanation

Depreciation allocates the cost of a long-lived asset to expense over its useful life while keeping the asset's original cost intact in the Equipment account; the credit accumulates in a contra-asset account.

Question 7Adjusting Entries

Employees have earned $3,000 in wages that will not be paid until the following month, and nothing has been recorded yet. What adjusting entry is required?

  1. Debit Cash $3,000 and credit Wages Payable $3,000
  2. Debit Wages Payable $3,000 and credit Wages Expense $3,000
  3. Debit Wages Expense $3,000 and credit Cash $3,000
  4. Debit Wages Expense $3,000 and credit Wages Payable $3,000 Correct answer.

Explanation

The wages were earned in the current period, so the expense is recognized now and the unpaid obligation is recorded as a liability until payment is made.

Question 8Adjusting Entries

At what point are adjusting entries normally prepared?

  1. At the start of the accounting period, right after the previous period has been closed
  2. Only when a cash payment is made to a supplier, employee, or lender during the period
  3. At the end of the fiscal year only, because interim periods never require any adjustments
  4. At the end of each accounting period, before the financial statements are prepared Correct answer.

Explanation

Adjusting entries are made at the end of whatever period is being reported, whether a month, quarter, or year, so that the statements issued for that period reflect accrual-basis amounts.

Question 9Adjusting Entries

A company has a $50,000, 6% note payable outstanding all year and pays interest annually on December 31. If monthly statements are prepared, what adjusting entry is needed at the end of January?

  1. Debit Interest Payable $250 and credit Interest Expense $250
  2. Debit Interest Expense $250 and credit Cash $250
  3. Debit Interest Expense $3,000 and credit Interest Payable $3,000
  4. Debit Interest Expense $250 and credit Interest Payable $250 Correct answer.

Explanation

One month of interest has accrued but will not be paid until year-end, so the expense is recorded now with a corresponding liability; $50,000 times 6% divided by 12 months equals $250.

Question 10Adjusting Entries

A company completes $4,500 of services during the last week of the month but has not yet billed the client or recorded anything. What adjusting entry is required?

  1. Debit Accounts Receivable $4,500 and credit Service Revenue $4,500 Correct answer.
  2. Debit Service Revenue $4,500 and credit Accounts Receivable $4,500
  3. Debit Cash $4,500 and credit Service Revenue $4,500
  4. Debit Accounts Receivable $4,500 and credit Unearned Revenue $4,500

Explanation

Revenue is recognized when the service is performed, even if the client has not been billed, so a receivable is recorded along with the revenue.

Question 11Adjusting Entries

On October 1 a company pays $12,000 for six months of rent beginning that date and debits Prepaid Rent. What amount of rent expense is recognized in the December 31 adjusting entry?

  1. $12,000
  2. $6,000 Correct answer.
  3. $2,000
  4. $4,000

Explanation

The monthly rent is $12,000 divided by 6, or $2,000, and three months (October, November, December) have expired by December 31, giving $6,000 of expense.

Question 12Adjusting Entries

Equipment costing $40,000 has accumulated depreciation of $16,000 before the December 31 adjustment, and monthly depreciation is $500. After the December 31 adjusting entry is posted, what is the book value of the equipment?

  1. $23,500 Correct answer.
  2. $24,000
  3. $40,000
  4. $16,500

Explanation

Book value equals cost minus accumulated depreciation after adjustment; accumulated depreciation becomes $16,500, so $40,000 minus $16,500 equals $23,500.

Question 13Adjusting Entries

On November 1 a company receives $9,000 for nine months of service and credits Unearned Revenue. After the December 31 adjusting entry is posted, what is the balance in the Unearned Revenue account?

  1. $7,000 Correct answer.
  2. $9,000
  3. $8,000
  4. $2,000

Explanation

Revenue of $1,000 per month is earned in November and December, so $2,000 is moved to revenue and $7,000 of the original $9,000 remains unearned.

Question 14Adjusting Entries

A company fails to record an adjusting entry for $2,000 of wages earned by employees but unpaid at year-end. What is the effect on the year-end financial statements?

  1. Net income is understated and liabilities are overstated
  2. Net income is overstated and liabilities are overstated
  3. Net income is overstated and liabilities are understated Correct answer.
  4. Net income is understated and liabilities are understated

Explanation

Omitting the accrual leaves the wage expense out of the income statement, so net income is too high, and it leaves the payable off the balance sheet, so liabilities are too low.

Question 15Adjusting Entries

Supplies began the year with a balance of $800. During the year $3,500 of supplies were purchased and debited to Supplies, and a year-end count shows $600 on hand. What is supplies expense for the year?

  1. $3,700 Correct answer.
  2. $4,300
  3. $600
  4. $3,500

Explanation

Supplies available for use equal $800 plus $3,500, or $4,300; subtracting the $600 still on hand leaves $3,700 consumed during the year.

Question 16Adjusting Entries

An adjusting entry records $1,200 of revenue earned but not yet billed to the customer. Which pair of financial statement effects does this entry have?

  1. Assets increase and expenses increase
  2. Assets increase and revenues increase Correct answer.
  3. Liabilities increase and revenues increase
  4. Assets decrease and revenues decrease

Explanation

Recognizing unbilled revenue debits a receivable, which increases assets, and credits a revenue account, which increases revenues on the income statement.

Question 17Adjusting Entries

If a company forgets to record the adjusting entry for depreciation at year-end, what is the effect on its financial statements?

  1. Assets are overstated and equity is understated
  2. Assets and equity are both understated
  3. Assets are understated and equity is overstated
  4. Assets and equity are both overstated Correct answer.

Explanation

Without the adjustment, Depreciation Expense is too low, which overstates net income and therefore equity, and the related contra-asset account is missing, which overstates total assets.

Question 18Adjusting Entries

A company follows the practice of crediting Service Revenue whenever cash is received in advance. It collected $5,000 in advance, and by year-end $3,000 of the work is still unperformed. What adjusting entry is needed?

  1. Debit Unearned Revenue $3,000 and credit Service Revenue $3,000
  2. Debit Service Revenue $3,000 and credit Unearned Revenue $3,000 Correct answer.
  3. Debit Service Revenue $5,000 and credit Unearned Revenue $5,000
  4. Debit Unearned Revenue $2,000 and credit Service Revenue $2,000

Explanation

Because the full amount was originally credited to revenue, the adjustment must remove the unearned portion from revenue and set it up as a liability, so Service Revenue is debited and Unearned Revenue is credited for $3,000.

Question 19Adjusting Entries

A company records an adjusting entry for property taxes that have accrued but will be paid next year. What is the effect of this entry on the balance sheet and the income statement?

  1. Liabilities increase and equity increases
  2. Liabilities increase and equity decreases Correct answer.
  3. Assets increase and equity increases
  4. Liabilities decrease and equity decreases

Explanation

Accruing an unpaid expense creates or increases a liability and reduces net income, which flows through to a decrease in equity.

Question 20Adjusting Entries

A machine costing $60,000 with a $6,000 residual value and a six-year useful life is depreciated using the straight-line method. What is the amount of the monthly adjusting entry?

  1. $750 Correct answer.
  2. $833
  3. $10,000
  4. $9,000

Explanation

Depreciable cost is $60,000 minus $6,000, or $54,000, spread over 72 months gives $750 per month.

Question 21Adjusting Entries

Which types of adjusting entries are typically reversed on the first day of the following period?

  1. Depreciation of plant assets and bad debt expense
  2. Accrued revenues and accrued expenses Correct answer.
  3. Conversion of unearned revenue into earned revenue
  4. Expiration of prepaid insurance and prepaid rent

Explanation

Reversing entries are used for accruals so that the later cash transaction can be recorded in the ordinary way without double counting; deferral adjustments and estimates such as depreciation are not reversed.

Question 22Adjusting Entries

On October 1 a company debits Insurance Expense for $3,600 covering a twelve-month policy beginning that date. At December 31, what is the appropriate adjusting entry?

  1. Debit Prepaid Insurance $3,600 and credit Insurance Expense $3,600
  2. Debit Prepaid Insurance $900 and credit Insurance Expense $900
  3. Debit Prepaid Insurance $2,700 and credit Insurance Expense $2,700 Correct answer.
  4. Debit Insurance Expense $900 and credit Prepaid Insurance $900

Explanation

Since the whole premium was expensed when paid, the adjustment must move the unexpired portion back to an asset; nine months remain at $300 each, or $2,700.

Question 23Adjusting Entries

A company performed $1,500 of services that were never billed or recorded before year-end. What is the effect of this omission on the year-end statements?

  1. Net income is understated and liabilities are understated
  2. Net income is overstated and assets are overstated
  3. Net income is understated and assets are understated Correct answer.
  4. Net income is overstated and assets are understated

Explanation

Skipping the accrual leaves both the revenue and the related receivable off the books, so net income and total assets are each too low.

Question 24Adjusting Entries

A company buys equipment on April 1 for $48,000 with no residual value and an eight-year useful life. Using straight-line depreciation with monthly adjusting entries, what is depreciation expense for that calendar year?

  1. $4,500 Correct answer.
  2. $6,000
  3. $3,500
  4. $4,000

Explanation

Annual depreciation is $48,000 divided by 8, or $6,000, which is $500 per month; the asset is in service for nine months (April through December), giving $4,500.

Question 25Adjusting Entries

An aging of receivables shows that the Allowance for Doubtful Accounts should have a balance of $4,200. Before adjustment the account has a credit balance of $1,000. What is the adjusting entry?

  1. Debit Bad Debt Expense $4,200 and credit Allowance for Doubtful Accounts $4,200
  2. Debit Bad Debt Expense $5,200 and credit Allowance for Doubtful Accounts $5,200
  3. Debit Bad Debt Expense $3,200 and credit Allowance for Doubtful Accounts $3,200 Correct answer.
  4. Debit Allowance for Doubtful Accounts $3,200 and credit Bad Debt Expense $3,200

Explanation

The aging analysis sets the required ending balance, so the adjustment is the difference between that target and the existing credit balance, or $4,200 minus $1,000 equals $3,200.

Question 26Adjusting Entries

Which pair of terms describes the two broad categories into which adjusting entries are classified?

  1. Deferrals and accruals Correct answer.
  2. Debits and credits
  3. Permanent and temporary accounts
  4. Cash receipts and cash payments

Explanation

Every adjusting entry is either a deferral, which spreads a cash flow already recorded across the periods it belongs to, or an accrual, which records a revenue or expense before the related cash flow occurs. These two categories cover all end-of-period adjustments.

Question 27Adjusting Entries

A company collected cash in advance and credited Unearned Revenue. Which entry records the revenue earned by year-end?

  1. Debit Unearned Revenue and credit Service Revenue Correct answer.
  2. Debit Service Revenue and credit Unearned Revenue
  3. Debit Unearned Revenue and credit Cash
  4. Debit Cash and credit Service Revenue

Explanation

As the service is performed, the liability recorded at the time of collection is reduced and revenue is recognized. The entry therefore debits Unearned Revenue and credits Service Revenue.

Question 28Adjusting Entries

After the adjusting entries are journalized and posted to the ledger, which statement is prepared next?

  1. The post-closing trial balance
  2. The adjusted trial balance Correct answer.
  3. The closing entries
  4. The statement of retained earnings

Explanation

Posting the adjustments updates the ledger accounts, and an adjusted trial balance is then prepared to prove debits still equal credits before the financial statements are built from those balances.

Question 29Adjusting Entries

Credit sales for the year are $200,000. The Allowance for Doubtful Accounts has a $300 debit balance before adjustment, and the company estimates uncollectible accounts at 2% of credit sales. What amount of bad debt expense is recorded?

  1. $2,000
  2. $3,700
  3. $4,000 Correct answer.
  4. $4,300

Explanation

Under the percentage-of-credit-sales approach, the expense is simply 2% of $200,000, or $4,000, and the existing balance in the allowance account is ignored when computing the expense. The prior debit balance is corrected only through the resulting ending balance in the allowance account.

Question 30Adjusting Entries

On November 1 a company accepts an $18,000, 6% note receivable with interest payable at maturity. No interest has been recorded since the note was accepted. What amount of interest revenue is accrued in the December 31 adjusting entry?

  1. $360
  2. $180 Correct answer.
  3. $90
  4. $1,080

Explanation

Interest accrues for the two months from November 1 through December 31: $18,000 × 6% × 2/12 = $180. The adjusting entry debits Interest Receivable and credits Interest Revenue for that amount.

Question 31Adjusting Entries

On November 1 a company received $12,000 for twelve months of service beginning that date and credited Unearned Revenue. At December 31 the company records no adjusting entry. What is the effect of this omission on the year-end financial statements?

  1. Liabilities are overstated and equity is understated Correct answer.
  2. Liabilities are understated and equity is overstated
  3. Assets are overstated and liabilities are understated
  4. Liabilities are overstated and assets are understated

Explanation

Two months of the advance, or $2,000, has been earned by December 31 and should be moved from the liability to revenue. Omitting that entry leaves the liability too high and revenue, net income, and equity too low.

Question 32Adjusting Entries

Why does the year-end depreciation adjusting entry credit Accumulated Depreciation rather than the Equipment account?

  1. To keep the Equipment account at market value
  2. To keep total assets from decreasing on the balance sheet
  3. To keep the asset's original cost in the accounts Correct answer.
  4. To record the expense only when the asset is sold

Explanation

Accumulated Depreciation is a contra asset that accumulates the depreciation taken over the asset's life, so the Equipment account continues to show original cost while book value is reported net of the contra account. The credit does not delay the expense and does not change the asset to market value.

Question 33Adjusting Entries

A company has a five-day workweek and pays its $9,000 weekly payroll each Friday. December 31 falls on a Wednesday. What adjusting entry is required at December 31?

  1. Debit Wages Payable $5,400; credit Wages Expense $5,400
  2. Debit Wages Expense $5,400; credit Wages Payable $5,400 Correct answer.
  3. Debit Wages Expense $9,000; credit Wages Payable $9,000
  4. Debit Wages Expense $3,600; credit Wages Payable $3,600

Explanation

Daily wages are $9,000 ÷ 5 = $1,800, and by Wednesday three days (Monday through Wednesday) have been earned but unpaid. The adjusting entry accrues $1,800 × 3 = $5,400 of wages expense and a matching liability.

Question 34Adjusting Entries

Which pair of year-end adjusting entries both increase a liability account?

  1. Accruing unbilled revenue and recording depreciation
  2. Recognizing revenue collected in advance and recording supplies used
  3. Accruing unpaid wages and accruing unpaid interest Correct answer.
  4. Recording expired prepaid insurance and accruing interest revenue

Explanation

Accruals of unpaid expenses create or increase payables, so both accrued wages and accrued interest credit a liability account. The other listed adjustments either increase an asset, decrease an asset, or reduce an existing liability.

Question 35Correction of Accounting Errors

A credit sale of $900 to a customer was completely omitted from the accounting records. How is this error classified?

  1. Error of commission
  2. Error of principle
  3. Compensating error
  4. Error of omission Correct answer.

Explanation

When a transaction is left out of the books entirely, no entry exists on either the debit or the credit side, so the error is one of omission. Because both sides are missing, the trial balance still agrees.

Question 36Correction of Accounting Errors

A delivery van bought for business use was recorded by debiting the Motor Expenses account. Which type of error is this?

  1. Error of original entry
  2. Error of partial omission
  3. Compensating error
  4. Error of principle Correct answer.

Explanation

A van is a non-current asset, so its cost belongs in a vehicle asset account rather than in expenses. Charging capital expenditure as revenue expenditure breaks a fundamental accounting rule and is an error of principle.

Question 37Correction of Accounting Errors

A bookkeeper entered an amount of $4,500 in the ledger as $5,400. Which type of error does this describe?

  1. Transposition error Correct answer.
  2. Error of original entry
  3. Error of commission
  4. Error of omission

Explanation

A transposition error arises when the digits of a figure are reversed, turning 4,500 into 5,400. The same wrong figure reaches both ledger accounts, so the trial balance can still agree.

Question 38Correction of Accounting Errors

Two separate errors, one overstating expenses by $200 and another understating expenses by $200, leave the trial balance in agreement. What are these called?

  1. Compensating errors Correct answer.
  2. Errors of principle
  3. Errors of complete omission
  4. Errors of commission

Explanation

Compensating errors are two or more unrelated mistakes whose arithmetic effects cancel, leaving a balanced trial balance over a ledger that is still wrong. The $200 overstatement and the $200 understatement offset each other exactly.

Question 39Correction of Accounting Errors

Which error causes the debit and credit totals of the trial balance to differ?

  1. A credit sale completely left out of the books
  2. A sale posted to the account of the wrong customer
  3. A $300 debit posted without its matching credit Correct answer.
  4. A van purchase debited to motor expenses

Explanation

A trial balance agrees only when total debits equal total credits. A one-sided entry adds $300 to the debit column alone, so the totals no longer match and the difference must be held in a suspense account.

Question 40Correction of Accounting Errors

What is the main purpose of a suspense account?

  1. To replace the trial balance when the books are incomplete
  2. To record transactions before they are classified to ledger accounts
  3. To hold the trial balance difference until the error is found Correct answer.
  4. To record errors of principle separately from the ledger

Explanation

When the trial balance fails to agree, the difference is entered in a suspense account so draft financial statements can still be prepared. The account is cleared once the underlying errors are identified and corrected.

Question 41Correction of Accounting Errors

A payment of $250 owed to Supplier A was entered in the account of Supplier B instead. Which type of error is this?

  1. Error of complete omission
  2. Error of commission Correct answer.
  3. Compensating error
  4. Error of principle

Explanation

An error of commission is a clerical slip in which an entry is made in the wrong account of the correct class. Both parties are trade payables, so double entry is intact and the trial balance still agrees.

Question 42Correction of Accounting Errors

A rent payment of $600 was entered in both the cash book and the rent account as $60. Which type of error is this?

  1. Transposition error
  2. Error of complete omission
  3. Error of original entry Correct answer.
  4. Error of principle

Explanation

An error of original entry occurs when a wrong amount is entered in the book of prime entry and that same wrong amount is posted to both accounts. Because both sides are equally wrong, the trial balance still agrees.

Question 43Correction of Accounting Errors

A credit sale of $500 was entered in the sales day book as $50 and posted to the ledger at $50. What is the correcting journal entry?

  1. Debit Receivables $50; credit Sales $50
  2. Debit Sales $450; credit Trade Receivables $450
  3. Debit Receivables $450; credit Sales $450 Correct answer.
  4. Debit Suspense $450; credit Sales $450

Explanation

Both the receivable and the sales income are understated by $450, being $500 less $50. The correction adds the missing amount by debiting Receivables and crediting Sales.

Question 44Correction of Accounting Errors

Closing inventory at the year end was overstated by $1,000. What is the effect on gross profit for that year?

  1. Overstated by $1,000 Correct answer.
  2. Overstated by $2,000
  3. No effect, because inventory is a balance sheet item
  4. Understated by $1,000

Explanation

Closing inventory is deducted in the cost of sales calculation, so overstating it reduces cost of sales and raises gross profit by the same $1,000. The inventory figure in the balance sheet is also overstated by $1,000.

Question 45Correction of Accounting Errors

A purchase return of $320 to Supplier X was posted in error to the account of Supplier Y. Which entry corrects the error?

  1. Debit Supplier Y $320; credit Supplier X $320 Correct answer.
  2. Debit Supplier X $320; credit Supplier Y $320
  3. Debit Purchases Returns $320; credit Supplier Y $320
  4. No entry is needed because the trial balance still agrees

Explanation

The credit should have reduced Supplier X's balance but instead reduced Supplier Y's. The correction removes the wrong credit from Y and applies it to X, so Y is debited and X is credited with $320.

Question 46Correction of Accounting Errors

Salaries of $2,000 paid by cheque were correctly entered in the cash book but posted twice to the salaries account. Which entry corrects the error?

  1. Debit Suspense $2,000; credit Bank $2,000
  2. Debit Salaries Payable $2,000; credit Suspense $2,000
  3. Debit Bank $2,000; credit Salaries $2,000
  4. Debit Suspense $2,000; credit Salaries $2,000 Correct answer.

Explanation

The duplication leaves an extra $2,000 debit in the salaries account, so the trial balance has excess debits. The correction credits salaries to remove the duplicate and debits suspense to clear the resulting difference.

Question 47Correction of Accounting Errors

A trial balance shows debit totals of $84,300 and credit totals of $83,700. Which entry opens the suspense account?

  1. Credit Suspense $84,300
  2. Credit Suspense $600
  3. Debit Suspense $83,700
  4. Debit Suspense $600 Correct answer.

Explanation

The debit column exceeds the credit column by $600, so $600 must be credited to a suspense account to make the trial balance balance. The suspense account therefore opens with a debit balance of $600.

Question 48Correction of Accounting Errors

Wages of $3,000 paid to workers who installed a new machine were debited to the Wages account. What correcting entry is required?

  1. Debit Wages $3,000; credit Machinery $3,000
  2. Debit Capital $3,000; credit Wages $3,000
  3. Debit Machinery $3,000; credit Suspense $3,000
  4. Debit Machinery $3,000; credit Wages $3,000 Correct answer.

Explanation

The cost of installing a machine is capital expenditure and must be added to the cost of the asset rather than charged as an expense. The correction moves $3,000 out of wages and into the machinery account.

Question 49Correction of Accounting Errors

Discount allowed of $150 to a customer was recorded as discount received. Which entry corrects the error?

  1. Debit Discount Received $150; credit Trade Receivables $150
  2. Debit Discount Received $150; credit Discount Allowed $150
  3. Debit Discount Allowed $300; credit Discount Received $300
  4. Debit Discount Allowed $150; credit Discount Received $150 Correct answer.

Explanation

Discount allowed is an expense and discount received is income, so the two accounts have been used the wrong way round. The correction debits the expense account and credits the income account to reverse that swap.

Question 50Correction of Accounting Errors

Depreciation of $4,000 on office equipment was completely omitted from the accounts. What is the effect on the financial statements?

  1. Assets understated and profit overstated by $4,000
  2. Assets overstated and profit understated by $4,000
  3. Assets and profit both overstated by $4,000 Correct answer.
  4. Assets and profit both understated by $4,000

Explanation

Omitting depreciation means no expense is charged and no accumulated depreciation is recorded. Profit is therefore higher by $4,000, and the carrying amount of the equipment is higher by the same amount.