Bookkeeping Skills Test

A ledger is the principal book or computer file for recording and totaling economic transactions measured in terms of a monetary unit of account by account type, with debits and credits in separate columns and a beginning monetary balance and ending monetary balance for each account. It provides a detailed record of every transaction involving each account, helping to keep financial operations transparent and traceable.

Depreciation is an accounting method of allocating the cost of a tangible or physical asset over its useful life to account for declines in value over time. This practice allows businesses to generate revenue from an asset while expensing a portion of its cost each year the asset is used. It recognizes that fixed assets gradually lose value as they approach the end of their usable life due to factors like wear and tear, obsolescence, or age.

Financial auditing is conducted to ensure that financial statements are accurate and complete. This process is crucial for maintaining transparency in financial reporting and helps stakeholders, including investors, creditors, and regulatory agencies, to trust the financial information provided by a company. Auditors review various financial records and transactions, following accounting standards, to verify that the financial reports represent a true and fair view of the company’s financial position.

Net income is calculated by subtracting total expenses from total revenues. This calculation reveals the company’s profit after all operating costs, taxes, and interest have been paid. It is an essential measure of a company’s profitability over a specified period and is used to assess the company's financial health and operational efficiency.

A trial balance is a bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit account column totals that are equal. It is primarily used to ensure that the entries in a company's bookkeeping system are mathematically correct. Errors in the ledger accounts can be identified and corrected before financial statements are prepared.

"Accounts Receivable" is considered an asset account. This account tracks money that customers owe to a company for goods or services that have been delivered or used but not yet paid for. Since these amounts are expected to be paid by customers, they are recorded as assets on the balance sheet.

The income statement, also known as the profit and loss statement, summarizes a company's revenues and expenses over a specific period, usually a fiscal quarter or year. It shows how the revenues are transformed into net income or net profit by detailing both the costs of running the business and the costs of generating the revenue.

The accounting equation, Assets = Liabilities + Owner’s Equity, is the foundation of double-entry bookkeeping. This equation shows that all assets are either financed by borrowing money (liabilities) or investing money (owner's equity). It reflects a company's financial position at a specific point in time and forms the basis for modern accounting.

Revenue accounts generally have a credit balance. They represent the income earned by a business from its operational activities, such as sales of goods or services. Credits increase revenue accounts, while debits decrease them. This characteristic defines the fundamental accounting principle that credit entries reflect increases in income, and thus, typically, revenue accounts maintain a credit balance.

Historical costs are not a typical category in a budget because budgets are forward-looking documents focusing on projected future incomes and expenditures. Budgets are used for planning and controlling financial resources, incorporating categories like projected revenue, expected expenses, and profit margin predictions to guide business decision-making and financial planning.