Horngren’s Financial and Managerial Accounting, 6e (Miller-Nobles)
Chapter 2 Recording Business Transactions
2.1 Learning Objective 2-1
1) An account is a detailed record of all increases and decreases that have occurred in an individual asset,
liability, or equity during a specific period.
2) The accounting equation is made up of four parts or categories.
3) Each category of the accounting equation contains accounts.
4) Which is a true statement regarding the accounting equation?
A) The equation can be stated as assets minus liabilities equals equity.
B) The equation consists of three parts: assets, liabilities, and net income.
C) The equation is an optional tool for accountants to use.
D) The equation does not need to balance during a specific period.
5) Which of the following statements regarding the accounting equation is incorrect?
A) The equation is the basic tool of accounting.
B) The equation consists of three categories: assets, liabilities, and equity.
C) Each category of the accounting equation contains accounts.
D) The equation can be stated as assets plus liabilities equals equity.
6) A payment of an expense in advance is called a prepaid expense.
7) An accounts receivable requires the business to pay cash in the future.
8) An accounts receivable is often described as a sale “on account.”
9) A note receivable represents an oral promise that a customer will pay a fixed amount of money and
interest by a certain date in the future.
10) The account title used for recording the payment of rent in advance for an office building is ________.
A) Prepaid Rent
B) Rent Payable
C) Rent Revenue
D) Rent Expense
11) The account title used for recording a written promise that a customer will pay the business a fixed
amount of money and interest by a certain date in the future is ________.
A) Prepaid Note
B) Notes Payable
C) Notes Receivable
D) Accounts Receivable
12) Which of the following is an asset account?
A) Wages Payable
B) Notes Payable
C) Unearned Revenue
D) Accounts Receivable
13) A customer’s promise to pay in the future for services or goods sold is called a(n) ________.
A) Accounts Receivable
B) Accounts Payable
C) Unearned Revenue
D) Notes Payable
14) Which of the following accounts is an asset?
A) Salaries Expense
B) Accounts Payable
C) Service Revenue
D) Prepaid Expense
15) Which of the following is classified as an asset account?
A) Prepaid Insurance
B) Notes Payable
C) Dividends
D) Unearned Revenue
16) Provide an explanation for each of the follow asset accounts.
Account Name
Explanation
Accounts Receivable
Prepaid Expense
Notes Receivable
Account Name
Explanation
Accounts Receivable
A customer‘s promise to pay in the future
for services or goods sold. Often
described as “On Account.”
Prepaid Expense
A payment of an expense in advance. It is
considered an asset because the
prepayment provides a benefit in the
future.
Notes Receivable
A written promise that a customer will
pay a fixed amount of money and interest
by a certain date in the future. Often
more formal than an Accounts Receivable.
Diff: 1
LO: 2-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Concept
H2: Assets
17) Liabilities are economic resources that are expected to benefit the business in the future.
18) A payable involves a future receipt of cash.
19) Unearned Revenue is a liability account.
20) Prepaid Rent is a liability account.
21) ________ represents a debt owed for renting a building.
A) Prepaid Rent
B) Rent Payable
C) Rent Revenue
D) Rent Expense
22) Which of the following is a liability account?
A) Prepaid Advertising
B) Cash
C) Building
D) Unearned Rent
23) Which of the following is a liability account?
A) Accounts Payable
B) Prepaid Expense
C) Salaries Expense
D) Service Revenue
24) A liability created when a business receives cash from customers in advance of providing services or
delivering goods is called a(n) ________.
A) notes receivable
B) unearned revenue
C) accrued liability
D) service revenue
25) Which of the following is a liability account?
A) Service Revenue
B) Building
C) Prepaid Rent
D) Unearned Revenue
26) Provide an explanation for each of the follow liability accounts.
Account Name
Explanation
Accounts Payable
Accrued Liability
Unearned Revenue
Account Name
Explanation
Accounts Payable
A promise made by the business to
pay a debt in the future. Arises
from a credit purchase of goods or
services.
Accrued Liability
An amount owed but not paid.
Unearned Revenue
Occurs when a company receives
cash from a customer but has not
provided the product or service.
The promise to provide services or
deliver goods in the future.
27) Explain the difference between Accounts Receivable and Accounts Payable.
28) Explain the difference between Prepaid Rent and Unearned Revenue.
29) The stockholders’ claim to the assets of a business is called equity or stockholders’ equity.
30) Dividends and expenses increase equity.
31) Revenues and stockholders’ contributions in the business increase equity.
32) Saturn, Inc. paid the rent for the current month in cash. Which of the following accounts will be used
to record the transaction?
A) Prepaid Rent
B) Rent Payable
C) Rent Revenue
D) Rent Expense
33) Amounts earned from delivering goods or services to customers are called ________.
A) notes receivable
B) unearned revenues
C) equity
D) revenues
34) Common Stock is a separate account in the ________ category of the accounting equation.
A) equity
B) asset
C) liability
D) revenue