The Accounting Cycle: Service Business: Test Review

Key facts

Where marks get lost

• ×Thinking "debit" always means increase and "credit" always means decrease — it depends entirely on the account type. (The Account, Debits, and Credits)
• ×Believing debit/credit relate to good news or bad news for the business (like a bank statement's "credit" to your account) — in accounting, they are purely positional: left and right. (The Account, Debits, and Credits)
• ×Forgetting that Drawings and Expenses behave like assets (debit-normal) rather than like Capital, even though they all connect to owner's equity. (The Account, Debits, and Credits)
• ×Memorizing the rules as a list without connecting them back to $A=L+OE$ — that connection is what lets you rebuild the rules if you forget them. (The Account, Debits, and Credits)
• ×Recording only the side of the transaction that feels obvious (e.g., only recording the cash received) and forgetting the other account entirely. (Double-Entry Accounting)
• ×Debiting and crediting the same account instead of two different accounts. (Double-Entry Accounting)
• ×Using the wrong amount on one side, so debits and credits don't match even though the right accounts were chosen. (Double-Entry Accounting)
• ×Skipping the classification step and guessing debit vs. credit instead of applying the rules methodically. (Double-Entry Accounting)
• ×Believing a balanced trial balance means the books have no errors at all — it only proves the ledger is arithmetically balanced. (The Trial Balance)
• ×Forgetting to check for divisibility by 9 or 2 when hunting for an out-of-balance error, and instead re-adding everything from scratch first. (The Trial Balance)
• ×Mixing up transposition (swapped digits, e.g., 918 → 981) with a slide error (decimal shift, e.g., $450.00\to$45.00) — both divide evenly by 9, but they are different mistakes. (The Trial Balance)
• ×Listing an account's balance on the wrong side of the trial balance (e.g., putting a liability in the debit column) purely out of habit rather than checking its normal balance. (The Trial Balance)
• ×Writing an income statement heading "as at" a single date instead of "for the period ended" a date — that mistake belongs to the balance sheet. (The Income Statement)
• ×Forgetting that a net loss is still shown as a positive subtraction result, just labelled and often bracketed to show it reduces owner's equity. (The Income Statement)
• ×Confusing revenue with cash received — revenue is recorded when earned, which may be before the cash arrives (see the revenue recognition principle). (The Income Statement)
• ×Leaving depreciation and other non-cash items out of expenses because "no cash was paid" — depreciation is still a real expense of using up an asset. (The Income Statement)
• ×Recording an owner's personal withdrawal as an expense instead of using the Drawings account — this would incorrectly lower net income on the income statement. (Drawings and the Statement of Owner's Equity)
• ×Forgetting that Drawings has a normal debit balance and closes to Capital with a debit to Capital, not a credit. (Drawings and the Statement of Owner's Equity)
• ×Adding net income directly onto the trial balance's Capital figure without checking it against the statement of owner's equity first. (Drawings and the Statement of Owner's Equity)
• ×Assuming a net loss and drawings do the same thing to the business — a net loss means the business itself lost money; drawings means the owner chose to remove assets regardless of performance. (Drawings and the Statement of Owner's Equity)
• ×Writing the credit account without indenting it, making the entry hard to read and easy to mis-post. (The General Journal)
• ×Forgetting the explanation line, which makes the journal much harder to audit or understand later. (The General Journal)
• ×In a compound entry, forgetting to check that the single debit (or single credit) total equals the sum of the multiple credits (or debits) on the other side. (The General Journal)
• ×Recording transactions out of date order, defeating the whole purpose of a chronological journal. (The General Journal)
• ×Posting an amount to the wrong side of the ledger account (posting a debit as a credit, or vice versa). (Posting to the Ledger)
• ×Forgetting to update the running balance column after each posting, instead of just filling in the debit/credit columns. (Posting to the Ledger)
• ×Skipping the posting reference, which breaks the ability to trace an amount back to its original journal entry later. (Posting to the Ledger)
• ×Numbering a new account outside its correct range in the chart of accounts (e.g., giving an expense account a 100-series number), which makes account organization inconsistent. (Posting to the Ledger)
• ×Recording a transaction without a source document, breaking the objectivity principle — even a legitimate transaction needs paper (or digital) proof. (Source Documents)
• ×Confusing a sales invoice with a purchase invoice — they can be the exact same document, but the label depends on which side of the transaction you're on (seller vs. buyer). (Source Documents)
• ×Mixing up a bank credit memo (increases the account) with a bank debit memo (decreases the account) — remember these are from the bank's point of view about the customer's account. (Source Documents)
• ×Forgetting that an ordinary endorsement just proves who's depositing a cheque, while a restrictive endorsement actively limits what can be done with it. (Source Documents)
• ×Extending a Drawings balance into the Income Statement columns — Drawings is an owner's equity account and belongs in the Balance Sheet columns, even though it feels expense-like. (The Work Sheet)
• ×Forgetting that a work sheet is an internal working paper, not something presented to external users as a financial statement. (The Work Sheet)
• ×Adding net income to the wrong Balance Sheet column — net income (Credit > Debit) balances by being added to the Balance Sheet Credit column; net loss goes to the Debit column. (The Work Sheet)
• ×Copying a Trial Balance amount to the wrong section because the account type wasn't checked first. (The Work Sheet)
• ×Adjusting Supplies Expense to equal the amount purchased instead of the amount used — the adjustment is based on what's left after a physical count, not the original purchase amount. (Adjusting Entries)
• ×Forgetting that a prepaid expense adjustment only expenses the portion of time that has already passed, leaving the rest as an asset for future periods. (Adjusting Entries)
• ×Skipping an adjustment because "no source document arrived yet" — the matching principle still requires estimating and recording expenses incurred, even without a formal invoice in hand yet. (Adjusting Entries)
• ×Treating cash basis and accrual basis as equally acceptable choices — GAAP requires accrual basis for financial reporting. (Adjusting Entries)
• ×Subtracting salvage value before applying the declining-balance rate — declining-balance ignores salvage value in its yearly calculation entirely. (Depreciation)
• ×Debiting the asset account directly for depreciation instead of crediting the contra account, Accumulated Depreciation. (Depreciation)
• ×Forgetting that declining-balance depreciation applies the rate to the current book value each year, not the original cost every year. (Depreciation)
• ×Confusing book value with market value — book value is just cost minus accumulated depreciation on the books; it has nothing to do with what the asset could sell for today. (Depreciation)
• ×Letting straight-line depreciation continue past the point where book value equals salvage value — depreciation stops once the asset is fully written down to salvage value. (Depreciation)
• ×Listing a fixed asset at its original cost only, forgetting to subtract accumulated depreciation to show book value. (Classified Financial Statements)
• ×Classifying a long-term loan's entire balance as a current liability just because some payment is due this year — only the portion actually due within the year is current; the rest stays long-term. (Classified Financial Statements)
• ×Putting Supplies in fixed assets because it "feels equipment-related" — supplies are consumed within the year, so they're a current asset. (Classified Financial Statements)
• ×Forgetting to still list current assets in liquidity order even within a classified balance sheet. (Classified Financial Statements)
• ×Closing Drawings into Income Summary instead of directly into Capital — Drawings never touches Income Summary at all. (Closing the Books)
• ×Getting the direction of the Income Summary-to-Capital entry backwards — a net loss (debit balance in Income Summary) is closed with a debit to Capital and a credit to Income Summary; a net income (credit balance) is closed with a credit to Capital and a debit to Income Summary. (Closing the Books)
• ×Forgetting that Assets, Liabilities, and Capital are permanent accounts and should never be closed — only Revenue, Expenses, and Drawings are closed. (Closing the Books)
• ×Skipping the post-closing trial balance and assuming the books are ready for the next period without checking debits still equal credits. (Closing the Books)
• ×Closing expense accounts with a debit instead of a credit — expense accounts have debit balances, so closing them (bringing them to zero) requires a credit. (Closing the Books)

Practice test

26 questions from across the unit. Each one shows the lesson it comes from.

Endless drill

Fresh numbers every time, for the calculation questions in this unit.