Accounting Terminology
Basic Terms
Mastery of terms like Accounts Payable/Receivable, Accrual vs. Cash basis, Liquidity, and Retained Earnings.
Questions use standard office and bookkeeping scenarios: purchasing supplies on account, recording sales revenue before payment is received, and determining where a term appears on financial statements. Answer choices pair the correct term against closely related alternatives (e.g., A/P vs. A/R, accrual vs. cash).
What the exam tests
Term-to-Definition Identification
Choose the correct definition for a given accounting term from four options.
Definition-to-Term Identification
A definition is provided; identify the corresponding term (e.g., 'transactions recorded when they occur' = Accrual Basis Accounting).
Formula-Based Questions
Identify the correct variables in a term's calculation or solve for a value, such as Retained Earnings = profits kept rather than paid as dividends.
Coding and Checking Application
Apply terms like Accounts Payable (A/P) and Accounts Receivable (A/R) to a Chart of Accounts to code a specific transaction (e.g., supplies purchased on account → debit Supplies, credit A/P).
Journal Entry Construction
Select the correct debit and credit entries for transactions involving these terms (e.g., machine purchased on account → debit Equipment, credit Accounts Payable).
Recognition and Recall
Key rules
- ›Liquidity = the ability to convert assets to cash quickly without significant loss.
- ›Accounts Receivable = money owed TO the company; Accounts Payable = money the company OWES.
- ›Retained Earnings = cumulative profits kept by the company rather than distributed as dividends.
Common traps
- !Confusing Accounts Receivable (asset) with Accounts Payable (liability).
Analytical Discrimination (Accrual vs. Cash Basis)
Key rules
- ›Accrual Basis: transactions are recorded when they occur, regardless of when cash changes hands.
- ›Cash Basis: transactions are recorded only when cash is received or paid.
- ›Government and most businesses use Accrual; small businesses may use Cash Basis.
Common traps
- !Selecting Cash Basis for a scenario that describes recording at the time of the transaction rather than payment.
Practical Application
Key rules
- ›Accounts Receivable appears on the Balance Sheet as a current asset.
- ›On-account purchases increase Accounts Payable (liability); cash purchases do not.
- ›Know which financial statement each term affects: Balance Sheet (assets/liabilities/equity), Income Statement (revenues/expenses), Cash Flow (cash in/out).
Common traps
- !Placing an accrual-basis item on the Cash Flow Statement as if it were a cash transaction.
Try one
What type of stock has dividends that are paid out first?
Preferred stockholders have priority over common stockholders when dividends are distributed.
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