Free Financial Accounting CLEP Practice Test

This is the formal expression of the dual aspect concept of accounting. All the assets of a business are claimed by someone (owners or creditors) and the total of these claims can not exceed the total of the assets. When a transaction takes place, the result must balance the fundamental accounting equation thus the dual aspect or double sided entry method of accounting.

For example: Ms. Smith starts a business and puts $10,000 into the entity's bank account. The transaction is recorded as a $10,000 increase in the entity's cash and a $10,000 increase in Ms. Smith's equity (claim on the assets). The next day, Ms. Smith receives a bank loan of $5,000. This is recorded as a $5,000 increase in cash and a $5,000 liability (claim by a creditor on the assets).

Every transaction affects as least two accounts thus keeping the fundamental accounting equation balanced.

Net Income = Revenue - Expense

4,000 = 14,000 - expenses

expenses = 10,000

This requires us to put together a couple of the equations we learned earlier:

The bills arrived but have not been paid, therefore they are recorded as a liability (obligation to pay) and the utilities expense for January is increased. The liability is increased (cr) and the expense is increased which has the effect of decreasing retained earnings, thus equity is ultimately decreased (dr).

10 years equals 120 months, thus the amount "used-up" in January is $60 ($7,200 / 120). The Depreciation Expense account is increased (debited) by $60, and the Accumulated Depreciation account is increased (credited) by $60.

The interest due is an expense, therefore the Interest Expense account is debited. The amount is calculated by finding out how much interest you would pay in a year, and then divide that by 12 to find the monthly interest ($4,000 x 9% / 12) which equals $30. Because the interest has not yet been paid (it is just being calculated to accurately reflect the financial position of LJM at the end of January) the amount is shown as a liability in an account called Interest Payable (may be called Accrued Expenses). The amount in this account represents LJM's obligation to pay $30 in interest.

The total estimate for Allowance for Bad Debts is $3,000, if the balance is already at $1,200, then the adjusting entry is a credit for the difference to bring the balance in the account to $3,000.

product cost = direct materials + direct labor + overhead

= 10 + (0.5 * 12) + (0.5 * 8)

= 10 + 6 + 4 = $20

On terms of 2/10 net 30, the entity pays $29,400 for the machine after the 2% discount for paying within 10 days. The freight, and all the labor and materials required to get the machine ready to generate revenue are added to the cost for a total of

$29,400 + 150+700+250+30= $30,530

The entity made $300,000 in sales and only $14,000 ($78,000 - $64,000)of it was uncollected at the end of the year. Thus the company collected $286,000 cash.