FAQs

1. What is the journal entry for purchasing a fixed asset with cash?

When a company purchases a fixed asset such as machinery or equipment using cash, the journal entry is:
Debit: Fixed Asset
Credit: Cash
This records the addition of an asset and reduction of cash.
Example: Buying a computer for $5,000 →
Dr. Computer Equipment $5,000
Cr. Cash $5,000

2. Which financial statement shows a company’s financial position?

The Balance Sheet shows a company’s financial position at a specific date. It lists Assets, Liabilities, and Equity.
Example:
Assets = $200,000
Liabilities = $120,000
Equity = $80,000
This means the company owns $200,000 worth of assets financed by $120,000 in debts and $80,000 in owner’s capital.

3. What does the balance sheet show?

The balance sheet presents a snapshot of financial health — what the business owns (assets), owes (liabilities), and the owners’ residual interest (equity).
Example:
Assets: Building $100,000, Cash $20,000
Liabilities: Loan $60,000
Equity: $60,000
It proves the accounting equation: Assets = Liabilities + Equity.

4. How to record an asset purchase on credit?

When an asset is purchased on credit:
Debit: Fixed Asset
Credit: Accounts Payable
Example: Buying machinery worth $15,000 on supplier credit →
Dr. Machinery $15,000
Cr. Accounts Payable $15,000
It records ownership of the asset while recognizing a liability to pay later.

5. What are retained earnings?

Retained earnings represent cumulative profits that are reinvested in the business rather than distributed as dividends.
Formula:
Beginning Retained Earnings + Net Income – Dividends = Ending Retained Earnings
Example:
$100,000 + $40,000 – $10,000 = $130,000 retained for growth.

6. What is the accounting equation?

The core accounting equation is:
Assets = Liabilities + Equity
It ensures that all financial transactions keep the books balanced.
Example:
If a company buys $50,000 equipment with $30,000 cash and a $20,000 loan, both sides equal $50,000.

7. How is depreciation recorded?

Depreciation allocates the cost of a tangible asset over its useful life.
Journal Entry:
Dr. Depreciation Expense
Cr. Accumulated Depreciation
Example:
Depreciating equipment costing $10,000 at $1,000 per year →
Dr. Depreciation Expense $1,000
Cr. Accumulated Depreciation $1,000

8. What is the purpose of the income statement?

The Income Statement shows profitability over a period — revenues minus expenses.
Example:
Sales = $100,000; Expenses = $70,000 → Net Income = $30,000.
It reflects operational performance and helps assess profit trends.

9. What is the difference between assets and liabilities?

Assets are resources owned (e.g., cash, equipment), while liabilities are obligations owed (e.g., loans, payables).
Example:
Company with $50,000 cash and $20,000 loan →
Assets = $50,000; Liabilities = $20,000; Equity = $30,000.

10. What is double-entry accounting?

Double-entry ensures every transaction affects two or more accounts — one debit and one credit — keeping books balanced.
Example:
Issuing shares for $10,000 cash →
Dr. Cash $10,000
Cr. Share Capital $10,000

11. What is accrued expense?

An accrued expense is incurred but not yet paid.
Example:
December salary of $5,000 paid in January →
Dr. Salary Expense $5,000
Cr. Accrued Salaries $5,000
This ensures expenses match the period they belong to.

12. How are prepaid expenses recorded?

Prepaid expenses are advance payments for future benefits.
Example:
Paying $12,000 rent for one year →
Dr. Prepaid Rent $12,000
Cr. Cash $12,000
Each month, $1,000 is expensed until the prepaid balance is zero.

13. What is accounts receivable?

Accounts receivable (AR) represents money owed by customers for credit sales.
Example: Selling goods worth $3,000 on credit →
Dr. Accounts Receivable $3,000
Cr. Sales Revenue $3,000
When paid →
Dr. Cash $3,000
Cr. Accounts Receivable $3,000

14. What is the difference between cash and accrual accounting?

Cash basis: Records revenue/expenses when cash changes hands.
Accrual basis: Records when earned or incurred.
Example: A $2,000 sale on credit is recorded immediately under accrual, but only when paid under cash basis.

15. What is unearned revenue?

Unearned revenue is cash received before service is delivered — a liability until earned.
Example: Receiving $1,000 advance rent →
Dr. Cash $1,000
Cr. Unearned Revenue $1,000
Once earned →
Dr. Unearned Revenue $1,000
Cr. Rent Income $1,000

16. How to record the sale of a fixed asset?

Example:
Selling equipment for $5,000 (cost $10,000, accumulated depreciation $6,000).
Book Value = $4,000 → Gain = $1,000
Journal Entry:
Dr. Cash $5,000
Dr. Accumulated Depreciation $6,000
Cr. Equipment $10,000
Cr. Gain on Sale $1,000

17. What is the difference between capital and revenue expenditure?

Capital Expenditure (CapEx): Improves or extends asset life.
Revenue Expenditure: Day-to-day operating costs.
Example:
Buying a machine = CapEx.
Routine repairs = Revenue expense.

18. What is the purpose of the trial balance?

A Trial Balance ensures total debits equal total credits after posting all transactions.
Example:
Total Debits = $50,000; Total Credits = $50,000 → balanced.
If not, there’s an error in recording.

19. What is a cash flow statement?

The Statement of Cash Flows shows cash inflows/outflows from Operating, Investing, and Financing activities.
Example:
Operating: +$20,000; Investing: -$5,000; Financing: +$10,000 → Net Increase = $25,000.

20. What are adjusting entries?

Adjusting entries update accounts before preparing financial statements, ensuring accuracy.
Examples:

• Accrued revenue

• Prepaid expense adjustments

• Depreciation
  Example Entry:
  Dr. Depreciation Expense $1,000
  Cr. Accumulated Depreciation $1,000