Grade 10 Business Studies – Effects of Business Transactions (12 Lessons) Quiz

1. A business buys office furniture for cash. What is the immediate effect on the accounting equation?

Assets increase and liabilities increase
Assets increase and owner's equity increases
Liabilities decrease and owner's equity increases
One asset increases and another asset decreases (net effect on total assets is zero)
Explanation:

Buying furniture for cash increases the furniture asset but reduces the cash asset by the same amount, so total assets are unchanged.

2. The business takes a bank loan and deposits it into the business bank account. Which accounts are affected?

Assets (bank) increase and liabilities (loan) increase
Only owner's equity increases
Liabilities decrease and owner's equity increases
Assets (bank) increase and owner's equity decreases
Explanation:

A bank loan brings cash into the business (asset up) while creating a loan payable (liability up).

3. The owner withdraws cash from the business for personal use (drawings). What is the effect?

Liabilities increase and owner's equity increases
Assets increase and owner's equity increases
Assets decrease and owner's equity decreases
Only liabilities decrease
Explanation:

Drawings reduce the business cash (asset) and reduce owner's capital (equity) because it is a distribution to the owner.

4. A business makes a cash sale of goods. Which best describes the effect?

Inventory increases and owner's equity decreases
Cash (asset) increases and owner's equity (via revenue) increases
Liabilities increase and cash decreases
Cash decreases and liabilities increase
Explanation:

A cash sale brings in cash (asset up) and creates revenue, which increases owner's equity (profit).

5. Goods are purchased on credit from a supplier. What is the immediate effect on the accounting equation?

Inventory (asset) increases and accounts payable (liability) increases
Assets decrease and owner's equity increases
Cash increases and liabilities decrease
Owner's equity increases and liabilities decrease
Explanation:

A credit purchase increases stock (asset) while creating a creditor (liability) until payment is made.

6. A customer returns goods that were sold on credit (sales return). What happens?

Cash increases and liabilities increase
Accounts receivable decreases and sales (or revenue) decreases
Liabilities decrease and sales increase
Inventory increases and owner's equity increases
Explanation:

A sales return reduces the amount owed by the customer (receivable) and reduces revenue, lowering profit and equity.

7. A debtor pays the business the amount owed from a previous credit sale. What is the effect?

Cash increases and accounts receivable decreases
Inventory increases and owner's equity decreases
Owner's drawings increase and cash increases
Accounts payable increases and cash decreases
Explanation:

Receiving payment converts receivables (asset) into cash (asset); total assets remain but cash rises while receivables fall.

8. The business pays rent in advance for three months. How is this recorded initially?

Rent expense increases and liabilities increase
Prepaid rent (asset) increases and cash (asset) decreases
Cash increases and owner's equity increases
Liabilities increase and inventory increases
Explanation:

Paying rent in advance creates a prepaid expense (asset) because the benefit is for future periods; cash is reduced now.

9. At year end wages owed but not yet paid are recorded. What is the effect of this accrual?

Assets increase and owner's equity increases
Cash increases and liabilities decrease
Liabilities decrease and revenue increases
Expenses increase (reducing owner's equity) and liabilities increase
Explanation:

Accruing unpaid wages records an expense (which reduces equity) and creates a liability (accrued wages payable).

10. The owner injects more capital into the business by depositing personal cash into the business bank account. What is the effect?

Liabilities increase and owner's equity decreases
Bank decreases and liabilities increase
Bank (asset) increases and owner's capital (equity) increases
Inventory increases and owner's equity decreases
Explanation:

Owner's investment increases business cash (asset) and increases owner's capital (equity).

11. Depreciation is recorded on factory machinery at the end of the year. Which best shows the effect?

Cash increases and liabilities increase
Assets increase and revenue increases
Liabilities decrease and owner's equity increases
Accumulated depreciation (contra-asset) increases and owner's equity decreases via expense
Explanation:

Depreciation is an expense that reduces profit (and equity) and increases accumulated depreciation (which reduces net asset value).

12. A trade debtor is declared irrecoverable and bad debt is written off. What is the effect?

Inventory increases and revenue increases
Liabilities decrease and owner's equity increases
Accounts receivable decreases and owner's equity decreases (bad debt expense)
Cash increases and liabilities increase
Explanation:

Writing off bad debts removes the receivable (asset down) and records an expense that reduces profit and owner's equity.

13. The business pays a supplier early and receives a cash discount. How does this affect the accounts?

Inventory increases and accounts receivable increases
Cash increases and liabilities increase
Cash decreases and accounts payable decreases; net cost of purchases is reduced
Owner's equity decreases and cash increases
Explanation:

Paying early reduces cash and clears the payable; the discount reduces the cost of purchases or reduces expense, benefiting equity.

14. A sale is made on credit. Which two accounts are increased immediately?

Cash and accounts payable
Accounts receivable (asset) and sales (revenue/owner's equity increase)
Bank loan and inventory
Inventory and owner's drawings
Explanation:

A credit sale creates a receivable (asset up) and records revenue, which increases profit and thus owner's equity.

15. The owner takes goods from stock for personal use. What is the immediate accounting effect?

Cash increases and liabilities increase
Revenue increases and inventory increases
Liabilities increase and cash decreases
Inventory decreases and owner's equity decreases (drawings)
Explanation:

When goods are withdrawn for personal use they reduce business inventory and are treated as drawings, reducing owner's capital.

16. A business pays a supplier by cheque. Which accounts are affected at payment?

Cash increases and sales increase
Bank (asset) decreases and accounts payable (liability) decreases
Inventory increases and owner's equity increases
Bank increases and accounts receivable increases
Explanation:

Paying a creditor by cheque reduces the bank balance and removes the liability to the supplier.

17. A contra entry is made when the owner transfers cash from the bank to the petty cash float. What is the effect?

One asset (bank) decreases and another asset (cash float) increases
Liabilities increase and owner's equity increases
Accounts payable increases and inventory decreases
Revenue increases and expenses decrease
Explanation:

A contra entry records a transfer between cash accounts: bank falls while petty cash (another asset) rises; total assets stay the same.

18. Which transaction would increase both an asset and owner's equity at the same time?

Purchasing equipment by cash
Paying salaries in cash
Providing services on credit (increases accounts receivable and revenue)
Owner withdrawing cash for personal use
Explanation:

Earning revenue on credit increases receivables (asset) and increases equity through increased income/profit.

19. The owner introduces stock (inventory) from home into the business as additional capital. What happens?

Bank decreases and liabilities increase
Inventory (asset) increases and owner's capital (equity) increases
Accounts payable increases and inventory decreases
Owner's drawings increase and cash decreases
Explanation:

Owner's contribution of goods increases business inventory and is treated as capital, raising owner's equity.

20. Which of the following is NOT affected by a business transaction under the business-entity concept?

Business bank account used for company transactions
Owner's personal bank account (if no business use)
Business inventory bought or sold
Accounts payable to a supplier
Explanation:

Under the business-entity concept the owner's personal accounts are kept separate; only business accounts are recorded in business books.

21. A cheque received from a customer is later dishonoured (bounces). What is the accounting effect when the cheque is dishonoured?

Inventory increases and sales increase
Owner's equity increases and bank increases
Cash increases and liabilities decrease
Bank decreases and accounts receivable increases (reinstating the debtor)
Explanation:

When a cheque bounces, the bank balance is reduced (reversal of receipt) and the customer's debt is reinstated as receivable.

22. Payment of an outstanding electricity bill previously recorded as a payable results in which effect?

Bank (asset) decreases and accounts payable (liability) decreases
Cash increases and revenue increases
Bank increases and owner's equity increases
Inventory increases and liabilities increase
Explanation:

Settling a recorded payable reduces the bank balance and clears the liability on the balance sheet.

23. Stationery is bought and paid for in cash. Which accounts are affected?

Cash decreases and stationery expense increases (reducing owner's equity)
Accounts receivable increases and cash increases
Inventory increases and accounts payable increases
Bank increases and revenue increases
Explanation:

Buying stationery for cash reduces cash (asset) and records an expense, which reduces profit and owner's equity.

24. A business sells old equipment for cash at a price below its book value. Which describes the combined effect?

Inventory increases and liabilities increase
Cash increases, equipment (asset) decreases and owner's equity decreases because of the loss
Accounts receivable increases and revenue increases
Cash decreases and owner's equity increases
Explanation:

Sale brings in cash (asset up) and removes the equipment (asset down); selling below book value creates a loss (expense) that reduces equity.

25. Equipment is purchased using a bank loan (credit purchase financed by loan). What is the immediate effect?

Owner's drawings increase and cash decreases
Cash increases and owner's equity increases
Inventory increases and accounts receivable increases
Non-current asset (equipment) increases and long-term liability (loan) increases
Explanation:

Buying equipment financed by a loan adds the asset to the business while creating a corresponding loan liability.