Question

Question 18 In closing off the accounts the balance in the Service Revenue account will be Selected Answer: D. debited to the profit and loss account Answers: A. credited to the profit and loss account. debited to the retained earnings account. B. c. transferred to the balance sheet. D. debited to the profit and loss account.

I would like to have detailed explaination for these questions, I am not sure why I am wrong

Answer 1

Question 18

Answer: A. credited to the profit and loss account

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• The normal balance of Revenue account is a Credit balance.

This means that

if you want to increase the balance of the revenue account, the revenue account needs to be credited.

If you want to decrease the balance of the revenue account, the revenue account needs to be debited.

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• The normal balance of Profit and loss account is credit balance.

if you want to increase the balance of the Profit and loss account, the Profit and loss account needs to be credited.

If you want to decrease the balance of the Profit and loss account, the Profit and loss account needs to be debited.

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• Closing the revenue account means transferring entire balance of the revenue account to profit and loss account.

Transferring the revenue balance to the profit and loss account involves decreasing the entire balance of revenue account and increasing the balance of profit and loss account by the amount of balance of revenue account.

So, the Revenue account is debited and the Profit and loss account is credited.

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The journal entry to close the revenue account is as follows:

Account Titles	Debit	Credit
Service revenue	XXX
Profit and loss account		XXX

The understanding of the above journal entry is follows:

The balance in the service revenue account is debited to the revenue account.

The balance in the service revenue account is credited to the profit and loss account.

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Question 22

Answer: A. The total sales, both cash sales and credit sales, for the period.

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Under accrual basis of accounting, entire sales made during a financial year should be recognized as revenue.

It does not matter whether you received or not received the cash towards the sale made during the financial year.

Total sales = Cash sales + Credit sales

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Question 24

Answer: A. The amount of rent used up during the current period to earn revenue

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Under accrual basis of accounting, you should recognize the rent expense for the entire period the company used the space (during the financial year) which is taken on rent.

It does not matter whether you paid or not paid the cash towards the rent used up during the financial year.

The amount of rent expense reported on the income statement is the amount of rent used up

Rent expense = Paid rent + Unpaid rent