Reviewer

Chapter 1: Introduction to Accounting

1. Need for Accounting

• Records transactions to avoid confusion and complications.

• Helps answer:

o “Has the business improved?” (Owner)

o “Can the business meet obligations?” (Creditors)

2. Why Study Accounting?

• To gather, record, and interpret financial data for decision-making.

3. Definition of Accounting

• Provides quantitative financial information to aid economic decisions.

• Key definitions:

o American Accounting Association: Identifying, measuring, communicating

economic data.

4. Four Phases of Accounting

1. Recording - Systematic bookkeeping.

2. Classifying - Grouping into accounts (assets, liabilities, etc.).

3. Summarizing - Preparing financial statements.

4. Interpreting - Analyzing reports for users.

5. Fields of Accounting

• Public Accounting: Auditing, tax services, advisory.

• Private Accounting: General accounting, cost accounting, internal auditing.

• Government and Social Accounting.

6. Business Organizations

• Sole Proprietorship: One owner.

• Partnership: Two or more owners.

• Corporation: Organized by law (5 or more).

• Nature of business: Service, Trading/Merchandising, Manufacturing.

7. Accounting Assumptions/Postulates

• Going Concern: Entity continues indefinitely.

• Accounting Entity: Entity is separate from owners.

• Time Period: Business life divided into equal reporting periods.

8. Transactions

• Value Received = Value Parted With

o Example: Buying tools with cash.

o External (involving other entities) vs. Internal transactions.

9. Accounting Elements

• Assets: Resources providing economic benefit.

• Liabilities: Obligations to transfer resources.

• Equity: Residual interest after liabilities.

• Income: Increase in assets.

• Expenses: Decrease in assets.

Chapter 2: Accounting Equation

1. Accounting Equation

• Formula: Assets = Liabilities + Proprietorship (Equity).

• Assets: What the business owns.

• Liabilities: Obligations owed to creditors.

• Proprietorship: Owner’s investment (capital).

2. Transactions Illustrating the Equation

1. Owner Invests Cash

o Assets ↑, Equity ↑.

2. Purchases on Credit

o Assets ↑, Liabilities ↑.

3. Billed for Services Rendered

o Assets ↑ (Receivable), Equity ↑ (Income).

4. Bought Equipment with Cash

 o Assets ↔ (One form increases, another decreases).

5. Issued Promissory Note for Payable

o Liabilities ↔ (One liability replaces another).

6. Paid Salaries

o Assets ↓ (Cash), Equity ↓ (Expense).

7. Paid Note Payable

o Assets ↓, Liabilities ↓.

8. Purchased Equipment (Part Credit, Part Cash)

o Assets ↑, Liabilities ↑, Cash ↓.

9. Owner Withdraws Cash

o Assets ↓, Equity ↓.

Chapter 3: Principles of Debit and Credit

1. T-Account

• Summarizes increases and decreases in an account.

• Left Side = Debit (Dr)

• Right Side = Credit (Cr)

2. Rules of Debit and Credit

Account Type Debit (Increase) Credit (Increase)

Assets ↑ ↓

Liabilities ↓ ↑

Equity ↓ ↑

Income ↓ ↑

Expenses/Drawings ↑ ↓

3. Sample Transactions

1. Owner Invests Cash (P100,000)

o Debit: Cash P100,000 | Credit: Capital P100,000

2. Purchased Supplies on Credit (P25,000)

 o Debit: Supplies P25,000 | Credit: Accounts Payable P25,000

3. Billed Customer for Services (P12,000)

o Debit: Accounts Receivable P12,000 | Credit: Service Income P12,000

4. Paid Assistant’s Salary (P1,900)

o Debit: Salary Expense P1,900 | Credit: Cash P1,900

5. Owner Withdraws Cash (P15,000)

o Debit: Drawings P15,000 | Credit: Cash P15,000

Key Exam Focus

1. Definitions: Accounting, phases, assumptions, T-accounts.

2. Accounting Equation: Understand transactions and their effects on the equation.

3. Debit and Credit: Master rules of increases/decreases for different accounts.

4. Sample Transactions: Analyze and prepare T-accounts.

Midterm Exam: Accounting 1

Coverage: Chapters 1–3

Format:

• 30 items: Multiple Choice

• 10 items: Identification/Fill-in the Blanks

• 10 items: Modified True or False

Part I: Multiple Choice (1 point each)

Choose the letter of the correct answer.

1. What is the primary purpose of accounting?

a) Record business transactions
b) Manage company operations
c) Provide financial information for decision-making
d) Perform internal audits

2. What phase of accounting is also known as bookkeeping?

a) Recording
b) Classifying
 c) Summarizing
d) Interpreting

3. Which of the following increases when an owner invests cash into a business?
a) Liabilities
b) Assets
c) Expenses
d) Drawings

4. In the accounting equation, liabilities represent:

a) Economic benefits received
b) Owner’s investment in the business
c) Obligations owed to creditors
d) Business income

5. Which transaction causes assets and liabilities to increase?

a) Cash investment by the owner
b) Purchase of supplies on credit
c) Withdrawal by the owner
d) Payment of salaries

6. What is the term for the residual interest after deducting liabilities from assets?
a) Equity
b) Revenue
c) Income
d) Liability

7. A sole proprietorship is characterized by:

a) Unlimited number of owners
b) Only one owner
c) Government ownership
d) Legal organization through shares

8. Which of the following accounts decreases when debited?

a) Assets
b) Liabilities
c) Expenses
d) Drawings

9. What type of account is "Service Income"?

a) Asset
b) Liability
c) Revenue
d) Expense

10. When a business purchases equipment for cash, the accounting equation reflects:
a) Decrease in liabilities, increase in assets
b) Increase in one asset, decrease in another
 c) Increase in liabilities, decrease in equity
d) Increase in equity, decrease in liabilities

11. Which field of accounting involves auditing financial statements?

a) Public Accounting
b) Private Accounting
c) Social Accounting
d) Government Accounting

12. An obligation to transfer an economic resource as a result of past events is called:

a) Asset
b) Equity
c) Income
d) Liability

13. The T-account's left side is also known as:

a) Credit
b) Debit
c) Equity
d) Expense

14. What happens when a business pays salaries?

a) Cash increases, expenses decrease
b) Assets decrease, equity decreases
c) Assets increase, liabilities decrease
d) Liabilities increase, equity increases

15. The "going concern" assumption implies that a business:

a) Will close after a year
b) Will continue operating indefinitely
c) Is separate from its owners
d) Uses cash as the primary asset

16. Which of the following decreases equity?

a) Investment by the owner
b) Service Income
c) Expenses
d) Purchase of supplies

17. Transaction: Mr. Gil withdrew cash for personal use. What accounts are affected?
a) Cash and Capital
b) Cash and Drawings
c) Cash and Revenue
d) Cash and Accounts Payable

18. The equation “Assets = Liabilities + Proprietorship” is known as:

a) Financial Position Statement
b) Accounting Equation
 c) Bookkeeping Formula
d) Balance Principle

19. What classification are "Office Supplies" considered in accounting?

a) Current Asset
b) Non-current Liability
c) Owner’s Equity
d) Expense

20. What happens when a business pays its accounts payable?

a) Liabilities decrease, cash decreases
b) Liabilities increase, cash decreases
c) Liabilities decrease, equity increases
d) Cash increases, expenses decrease

21. The right side of a T-account records:

a) Expenses
b) Assets
c) Debits
d) Credits

22. In the debit and credit rule, equity increases on the:

a) Left side
b) Right side
c) Both sides
d) Neither side

23. What phase of accounting involves preparing financial statements?

a) Recording
b) Classifying
c) Summarizing
d) Interpreting

24. How does purchasing equipment on credit affect the accounting equation?
a) Assets increase, liabilities increase
b) Assets increase, equity decreases
c) Liabilities increase, expenses decrease
d) Assets increase, equity increases

25. Which of the following statements is true about “Drawings”?

a) It increases equity
b) It decreases equity
c) It increases revenue
d) It is a liability

26. Which account is debited when rent is paid?

a) Cash
b) Rent Expense
 c) Accounts Payable
d) Service Income

27. The concept of separating a business's transactions from the owner's is called:
a) Entity Assumption
b) Going Concern
c) Time Period
d) Continuity

28. What account is increased when billed services are rendered?

a) Cash
b) Accounts Receivable
c) Accounts Payable
d) Service Expense

29. If an expense is incurred, what happens?

a) Assets decrease, equity decreases
b) Assets increase, liabilities decrease
c) Liabilities increase, equity increases
d) Assets increase, equity increases

30. Which financial statement shows assets, liabilities, and equity?

a) Income Statement
b) Statement of Financial Position
c) Cash Flow Statement
d) Revenue Summary

Part II: Identification/Fill-in the Blanks (1 point each)

1. The equation for the balance sheet is: ______ = Liabilities + Equity.

2. The left side of a T-account is called a ______.

3. Paying for office supplies with cash is an example of a/an ______ transaction.

4. The account type that shows an increase when debited is ______.

5. Owner’s withdrawals from the business are recorded as ______.

6. The process of grouping accounts is called ______.

7. Services rendered but not yet paid are recorded as ______.

8. ______ is the phase of accounting that involves interpreting financial data.

9. Current assets are expected to be used within ______ months.

10. ______ assumption states that business operations will continue indefinitely.
Part III: Modified True or False (1 point each)

Write “True” if the statement is correct. If false, underline the incorrect word(s) and correct it.

1. The accounting equation is Assets = Liabilities - Equity.

2. Service Income is classified as a liability.

3. Paying liabilities decreases both liabilities and assets.

4. The right side of a T-account is called a debit.

5. Withdrawals increase owner’s equity.

6. Expenses decrease equity.

7. The entity assumption states that business records are separate from the owner’s personal
records.

8. Recording is the final phase of accounting.

9. An increase in cash is always a debit entry.

10. Purchase of equipment on credit decreases equity.

End of Exam
Passing Score: 38/50

Midterm Exam: Accounting 1

Coverage: Chapters 1–3

Format:

• 30 items: Multiple Choice

• 10 items: Identification/Fill-in the Blanks

• 10 items: Modified True or False

Part I: Multiple Choice (Correct answers included)

Choose the letter of the correct answer.

1. What is the primary purpose of accounting?

c) Provide financial information for decision-making

2. What phase of accounting is also known as bookkeeping?

a) Recording
3. Which of the following increases when an owner invests cash into a business?
b) Assets

4. In the accounting equation, liabilities represent:

c) Obligations owed to creditors

5. Which transaction causes assets and liabilities to increase?

b) Purchase of supplies on credit

6. What is the term for the residual interest after deducting liabilities from assets?
a) Equity

7. A sole proprietorship is characterized by:

b) Only one owner

8. Which of the following accounts decreases when debited?

b) Liabilities

9. What type of account is "Service Income"?

c) Revenue

10. When a business purchases equipment for cash, the accounting equation reflects:
b) Increase in one asset, decrease in another

11. Which field of accounting involves auditing financial statements?

a) Public Accounting

12. An obligation to transfer an economic resource as a result of past events is called:

d) Liability

13. The T-account's left side is also known as:

b) Debit

14. What happens when a business pays salaries?

b) Assets decrease, equity decreases

15. The "going concern" assumption implies that a business:

b) Will continue operating indefinitely

16. Which of the following decreases equity?

c) Expenses

17. Transaction: Mr. Gil withdrew cash for personal use. What accounts are affected?
b) Cash and Drawings

18. The equation “Assets = Liabilities + Proprietorship” is known as:

b) Accounting Equation

19. What classification are "Office Supplies" considered in accounting?

a) Current Asset
 20. What happens when a business pays its accounts payable?
a) Liabilities decrease, cash decreases

21. The right side of a T-account records:

d) Credits

22. In the debit and credit rule, equity increases on the:

b) Right side

23. What phase of accounting involves preparing financial statements?

c) Summarizing

24. How does purchasing equipment on credit affect the accounting equation?
a) Assets increase, liabilities increase

25. Which of the following statements is true about “Drawings”?

b) It decreases equity

26. Which account is debited when rent is paid?

b) Rent Expense

27. The concept of separating a business's transactions from the owner's is called:
a) Entity Assumption

28. What account is increased when billed services are rendered?

b) Accounts Receivable

29. If an expense is incurred, what happens?

a) Assets decrease, equity decreases

30. Which financial statement shows assets, liabilities, and equity?

b) Statement of Financial Position

Part II: Identification/Fill-in the Blanks (Correct answers included)

Write the correct answer in the blank.

1. The equation for the balance sheet is: Assets = Liabilities + Equity.

2. The left side of a T-account is called a Debit.

3. Paying for office supplies with cash is an example of a/an External transaction.

4. The account type that shows an increase when debited is Assets.

5. Owner’s withdrawals from the business are recorded as Drawings.

6. The process of grouping accounts is called Classifying.

7. Services rendered but not yet paid are recorded as Accounts Receivable.

8. Interpreting is the phase of accounting that involves analyzing financial data.

 9. Current assets are expected to be used within 12 months.

10. Going concern assumption states that business operations will continue indefinitely.

Part III: Modified True or False (Correct answers included with corrections)

Write “True” if the statement is correct. If false, underline the incorrect word(s) and correct it.

1. The accounting equation is Assets = Liabilities - Equity.

False. Correct: Assets = Liabilities + Equity

2. Service Income is classified as a liability.

False. Correct: Service Income is classified as revenue.

3. Paying liabilities decreases both liabilities and assets.

True

4. The right side of a T-account is called a debit.

False. Correct: The right side is called a credit.

5. Withdrawals increase owner’s equity.

False. Correct: Withdrawals decrease owner’s equity.

6. Expenses decrease equity.

True

7. The entity assumption states that business records are separate from the owner’s personal
records.
True

8. Recording is the final phase of accounting.

False. Correct: Interpreting is the final phase of accounting.

9. An increase in cash is always a debit entry.

True

10. Purchase of equipment on credit decreases equity.

False. Correct: Purchase of equipment on credit increases liabilities and assets.

End of Exam
Passing Score: 38/50