# CS Foundation

## CS Foundation Fundamentals of Accounting and Auditing Notes | CS Foundation Auditing Notes MCQ Study Material

CS Foundation Fundamentals of Accounting and Auditing Notes: Are you the one who applied for the CS foundation Exam and feeling nervous that you didn’t get your study materials from the ICSI through Courier? If yes, you do not need to worry about them as you have came to the right page. Here we are gonna provide you with a soft copy of some study materials for the CS Foundation Fundamentals of Accounting and Auditing that were provided by ICSI with a new syllabus. Even we have the option to download them free of cost.

Quickly look into this comprehensive guide to see all the study material links that are related to accounting and auditing with some other relatable information. Go on!!!

## CS Foundation Auditing Notes | CS Foundation Fundamentals of Accounting and Auditing Notes MCQ Study Material

Look into the below notes that were provided by us for your CS foundation fundamentals of accounting and auditing which were taken from the ICSI official website. Accounting and Auditing are very important subjects for candidates who are studying CA. Download them and prepare well for the exam.

### CS Foundation Fundamentals of Accounting Notes

Below are the notes for every chapter in accounting. And this was the revised/new syllabus that was provided by the ICSI (Institute of company secretaries of India)2023.

### CS Foundation Fundamentals of Auditing Notes

Here you gonna look at the complete syllabus that was revised by ICSI is provided. Download the study material if you need it or study online well for exams by clicking on the links below.

### Safety Tips Needed To Prepare Fundamentals of Accounting and Auditing

Have a look at the below tips and tricks when you are preparing for CS foundation Fundamentals of accounting and auditing. It may help you the best to score good marks in your exam.

• Start preparing for the exam in advance, not at the nick of the moment.
• As we have many principles and practices in accounting, you need to practice more than normal.
• Once you complete the reading of the syllabus, always revise or recall as many times as possible.
• Try to solve practice papers or model papers daily after the completion of your preparation.

### FAQs on CS Foundation Fundamentals of Accounting and Auditing PDF Free Download

1. Does ICSI provide the study material of CS Foundation Fundamentals of Accounting and Auditing?

Yes, ICSI provides the PDF offline & Online study materials along with a free download option for people who are preparing for CS foundation fundamentals of accounting and auditing.

2. What are the 3 fundamentals of accounting?

The three fundamentals of accounting are consistency, accuracy, and going concerned.

3. What are the concepts that we have in auditing?

The concepts that we have in auditing are the concept of auditing, types of auditing, tools of auditing, and basic provisions.

### Final Outcome

Hope that the notes we have shared on CS foundation fundamentals of accounting and auditing are useful for you. If you still have any doubts, you can comment to us in the below comment section. Still, we have many other CS foundation, professional and executive links like CS Foundation Study Material, check them out at gstguntur.com website.

## ICSI CS Foundation Study Material Notes Pdf Free Download New Syllabus

ICSI CS Foundation Study Material: CS Foundation is the first-level company secretary exam. The Institute of Company Secretaries of India will provide the detailed study material and new syllabus for the Foundation Programme. Interested aspirants who have filled out the CS Foundation Application Form 2023 can download the CS Foundation New Syllabus 2023 here. Along with the Revised ICSI CS Foundation Syllabus, we have also given the books and ICSI CS Foundation Study Material to you.

## CS Foundation New Syllabus Study Material | CS Foundation Revision Notes Pdf Free Download

Have you applied for the ICSI CS Foundation Exam 2023? If yes, then here is the revised CS Foundation Study Material 2023. Click on the below links to download chapter wise ICAI CS Foundation Study Material 2022-2023 Pdf. Here given CS Foundation Notes includes CS Foundation MCQ with Answers Pdf, Chapter Wise Important Questions and Answers.

### Subjects of CS Foundation – CS Foundation Subjects – CS Foundation Syllabus

The revised/ new syllabus of CS Foundation is provided here. Get the names of the subjects and model papers.

 CS Foundation Subjects Foundation Programme [4 papers]( New Syllabus – w.e.f. 1st April 2017 ) 1. BUSINESS ENVIRONMENT AND LAW 2. BUSINESS MANAGEMENT, ETHICS & ENTREPRENEURSHIP 3. BUSINESS ECONOMICS 4. FUNDAMENTALS OF ACCOUNTING AND AUDITING Executive Programme [8 first 4 pappapers] ( New Syllabus – w.e.f. 1st Mar 2018 ) Module I (4papers) 1. JURISPRUDENCE, INTERPRETATION & GENERAL LAWS 2. COMPANY LAW 3. SETTING UP OF BUSINESS ENTITIES AND CLOSURE 4. TAX LAWS Module II (4 papers) 5. CORPORATE & MANAGEMENT ACCOUNTING 6. SECURITIES LAWS & CAPITAL MARKETS 7. ECONOMIC, BUSINESS AND COMMERCIAL LAWS 8. FINANCIAL AND STRATEGIC MANAGEMENT

### CS Foundation Books

ICSI will conduct the CS foundation exam in 12 papers. The first 4 papers are the foundation programme, and the remaining 8 papers are the executive programme. Candidates have to buy these particular books specified by ICSI and prepare for the exams.

### Steps to Download CS Foundation Study Plan

Here given are the simple steps to download ICSI CS Foundation Studt Material.

• Initially, go to The Institute of Company Secretaries of India (ICSI) official portal https://icsi.edu/home/
• Check for the new syllabus option on the homepage.
• Open the www.icsi.edu/new-syllabus/ link.
• Click on the Study Material link.
• Now press on the “Foundation Programme” link to see the four papers of the exam.

### Ultimate Preparation Tips for CS Foundation Exam 2023

Individuals who want to clear the Compay Secretary Exam on the first attempt can go through these simple preparation tips.

• As a first step, you have to collect the best and proper books that include CS Foundation Study Material.
• After gathering the new syllabus, decide whether you want to go for coaching or self-study.
• Mark the important topics and concentrate more on them. Regularly take the exams.
• Practice all the topics without fail.
• Plan a schedule that contains the amount of time you have to spend on your studies daily.
• Follow the plan and prepare according to it.
• Revise the topics after the completion of preparation.
• Do a quick revision before the exams.
• Try to attempt the exam smartly.

Also, Refer

### FAQs on ICSI CS Foundation Study Material

1. What is the CS Foundation exam for?

CS foundation exam is conducted by ICSI for candidates who want to pursue a company secretary course after their 12th class. They have to register for the CSEET exam.

2. Which books are best for CS Foundation?

The list of books that are best for the CS foundation is Business Laws and Management, Mercantile Law, A textbook of Business Law, and Business Studies.

3. Does ICSI provide study material for CS Foundation?

Yes, ICSI provides study material for the CS foundation exam.

4. How to prepare for the CS Foundation exam?

Follow these guidelines to prepare for the CS Foundation exam.

• Get the study material that includes the syllabus and books.
• Start preparing each topic individually.
• Make a proper preparation plan as per your requirements.
• Follow the plan and complete preparing all topics.
• Revise the concepts before the exam.

### Final Words

We are thinking that the information given here about CS Foundation Study Material and Notes is helpful for the students who are preparing for the CS Foundation 2023 examination. You can check the preparation tricks, syllabus, and books on this page. Bookmark our site to know related information.

## Bank Reconciliation Statement – CS Foundation Fundamentals of Accounting Notes

Go through this Bank Reconciliation Statement – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

## Bank Reconciliation Statement – CS Foundation Fundamentals of Accounting Notes

Introduction:

• Bank A/c is a personal A/c.
• An institution which deals with money is known as Bank.
• The main business of bank is to accept deposits and lend money.

Services of Banks:

• Accept deposits
• Give loans
• Discounts promissory notes, etc.
• Make payment of premium, etc. on behalf of client
• Allow overdrafts
• Issues letter of credits and many other functions
• Collects money and make Payment on behalf of clients.

Bank Account is a personal account of the clients.

Types of Personal Accounts:

• Current Account
• Savings Account
• Fixed Deposit Account
• Recurring Deposit Account

Current Account:

• These accounts are opened by business concerns.
• The deposits and withdrawals from the accounts can be done as many number of times as required and can be withdrawn without notice.
• Generally, they have very low interest rate on deposits.
• It provides overdraft facilities to its customers.
• Bank credits Client’s A/c when collection is made and debits when making payment.

Overdraft:
Overdraft is a facility where by a customer is allowed to draw more than the amount deposited in his account.

Saving Account:

• These accounts are opened by individuals who wish to save their income.
• It imposes restrictions on the amount and number of withdrawals that can be made.
• Not for business concern but for Individual or Institution which do not need withdrawals very often.
• Number of transactions are less as compared to current account.
• Bank allows a small rate of interest on such deposits.

Fixed Deposit Account:

• Here the money is to be deposited for a particular period of time before which it cannot be withdrawn.
• The bank pays the highest interest rate on such deposits.
• Fixed deposit is evidenced by a receipt called “Fixed Deposit Receipt”’issued by bank in the name of Depositor.

Recurring Deposit Account:

• Here, a fixed amount of money is deposited every month for a fixed period time.
• Bank pays interest on such deposits compounded quarterly at a fixed rate.

Bank Pass Book:

• Pass book is a copy of the clients account in the bank’s ledger.
• Pass book is issued to the client.
• It shows all the transactions entered between the client and the bank.
• The bank balance as per the bank ledger indicated in the bank pass book is called bank balance as per pass book.

Pass Book and Cash Book:

• Pass book is maintained by bank whereas cash book is maintained by customer.
• In pass book, transactions are recorded from the point of view of bank whereas in cash book they are recorded from point of view of client.
• Entries done in the cash book are exactly opposite to that posted in pass book.

Example:

• Mr. A deposited ₹ 4,000 in bank.
• Mr. A withdrew ₹ 2,000.

The above transaction will be shown in cash book and pass book as follows:
1. Debit balance of cash book = Credit balance of pass book
2. Credit balance of cash book = Debit balance of pass book
Generally, the above is always true but sometimes, there is a difference between them, to trace these differences between balances of pass book and cash book a Bank Reconciliation Statement is prepared.

Bank Reconciliation Statement:

• A bank reconciliation statement is a statement which is prepared to reconcile the balance as per cash book with the balance as per pass book.
• It shows the causes of differences between the two.
• Bank Reconciliation Statement (BRS) is prepared at a particular date.

BRS:

• BRS is a statement.
• It is prepared on a particular date to reconcile the bank balance as per cash book with the balance as per pass book by showing the causes of difference between the two.

Causes of difference in Bank Balance of Cash Book and Pass Book:

 Reasons Effect on Cash Book / Pass Book Cash Book Pass Book 1. Cheque issued but not presented for payment lower than PB No effect 2. Cheque Paid / Sent to bank for collection but not collected more than PB No effect 3. Interest & Dividend received by Bank No effect More than CB 4. Direct deposits made by customers No effect More than CB 5. Direct payment made by bank No effect Less than CB 6. Interest credited by bank on account No effect More than CB 7. Interest Debited by bank on overdraft No effect Less than CB 8. Bills collected by bank No effect More than CB 9. Dishonour of bill discounted by bank No effect Less than CB 10. Dishonour of a cheque deposited with bank More than PB No effect 11. Any Error and omission Retrospective effect Retrospective

Significance of BRS:

• Highlights causes of difference, necessary adjustment can therefore be carried out at early date.
• Reduce chances of fraud.
• Act as a moral check.
• Actual position of bank balance can be found.

Methods for BRS:

• Bank Reconciliation Statement without adjusting CB
• Bank Reconciliation Statement after adjusting CB

(i) Proforma of BRS without adjusting Cash Book : BRS (as on../…/….)

 Particulars Amount ₹ Balance as per Pass Book / Cash Book (Dr./Cr.) Add: (a) (b) (c) (d) Sub: (a) (b) (c) (d) …………………….

Balance as per Cash Book / Pass Book (Cr./Dr.)

(ii) BRS with adjusted Cash Book : under this method we make two things:
1. Adjusted Cash book: In adjusted cash book we record only those transaction which have an impact over cash (i.e. increase or decrease) and are correct. Correctly recorded transaction have no need to be adjusted.

Adjusted Cash book neglect following transactions:

• Cheque issued but not presented
• Cheque sent to bank but not collected
• Any mistake by bank

2. BRS : Items which are not considered in adjusted cash book are considered in BRS.

Preparation of Bank Reconciliation Statement:
Step 1 : Start preparing BRS by taking any one balance (either of cash book or pass book).

Note :
There can be four types of balances :

• Debit balance of cash book (Favourable)
• Credit balance of cash book (Unfavourable)
• Debit balance of pass book (Unfavourable)
• Credit balance of pass book (Favourable)

Step 2 : Ascertaining and treating the causes of difference
Case – 1 : Starting with favourable balance of cash book (Dr. balance)
(i) Items of differences which have led to decreased cash book balance – Add them
Example : Cheque issued but not presented for payment. This amount would have been deducted from cash book and not from pass book hence it has led to decreased cash book balance. So it will be added.

(ii) Items of differences which have led to increased cash book balance. – Deduct them
Example: Cheques deposited but not collected. When cheque was deposited, entry would have been in cash book but since they are not collected no entry has been made in pass book. This has led to an increased cash book balance so it is deducted, in order to bring it equal to pass book.

Case – 2 : Starting with unfavourable balance or bank overdraft balance of cash book (credit balance)
(i) Items of differences which have led to increased overdraft Cash Book balance – Deduct them.
Example : Cheques issued but not presented for payment – Entry must have been done in cash book and due to this overdraft balance must have been increased. So, it is deducted.

(ii) Items of differences which have led to decreased overdraft cash book balance — Add them.
Example : Cheques deposited but not yet cleared. Entry has been done in cash book but not in pass book. This means credit balance of cash book would have been reduced, so this item is added.

Case – 3 : Starting with favourable balance of pass book (credit balance)
(i) Items of differences that have led to increased pass book balance – Deduct them
Example : Cheques issued but not presented for payment. Entry has been done in cash book so cash book is showing a reduced balance. No entry done in pass book so pass book is showing increased balance. In order to bring pass book balance equal to cash book, deduct this amount.

(ii) Items of differences that have led to reduced pass book balance – Add them
Example : Cheques deposited but not collected by bank. Entry is made in cash book so it shows an increased balance but no entry has been made in pass book, so pass book balance shows a reduced figure. So, add this item to the pass book credit balance.

Case – 4 : When unfavourable balance as per pass book is given (Debit balance)
(i) Items of differences that have led to increased overdraft (unfavourable) pass book balance – deduct them
Example : Interest charged. This entry would have been done by the bank. So, the overdraft balance of the pass book would have been increased but no entry of it has been done in the cash book so deduct this from pass book balance.

(ii) Items of differences that have led to decreased pass book overdraft balance – Add them
Example : Dividend collected by bank. This entry has been done in pass book so it has reduced overdraft balance. But no such entry is in cash book yet, so this item is added to the pass book balance to bring it equal to cash book balance.

Summary of Bank Reconciliation Statement:
1. Preparation of BRS when favourable balance is given:

 Transactions if starting with bal. as per Pass Book if starting with bal. as per Cash Book Cheque issued but not presented Cheque deposited but not yet collected Cheque received but not deposited Dishonour of cheques (sent for collection) Collection of interest, dividend, direct deposits, Bills Bank charges, interest on overdraft charged Dishonor of Bill discounted Balance Deduct Add Add Add Deduct Add Add Bank balance as per Cash book Add Deduct Deduct Deduct Add Deduct Deduct Bank balance as per Pass book

Note: In case of overdraft balance the treatment will be reverse.

Bank Reconciliation Statement MCQ Questions

1. A bank reconciliation statement is prepared to :
(a) Establish the causes of the difference between the balance shown by the bank columns of the cash book and that shown by the pass book.
(b) Ascertain the causes for the difference between the cash balance and the pass book balance.
(c) Both (a) and (b)
(d) None of the above.
(a) Establish the causes of the difference between the balance shown by the bank columns of the cash book and that shown by the pass book.

2. Difference in bank balance as per pass book and cash book may arise on account of:
(a) Cheque issued and presented
(b) Cheque issued but dishonoured
(c) Cheque deposited but not cleared
(d) Both (b) and (c)
(d) Both (b) and (c)

3. Pass book is the statement of the account of the customer maintained by the:
(a) Bank
(b) Debtors
(c) Creditors
(d) Any one of the above.
(a) Bank

4. Debit balance in the cash book is :
(a) Debit balance as per pass book
(b) Credit balance as per pass book
(c) Debit balance as per cash book
(d) Credit balance as per cash book.
(b) Credit balance as per pass book

5. Bank reconciliation statement is a part of:
(a) Cash book
(b) Ledger
(c) Financial statement
(d) None of the above.
(d) None of the above.

6. Started with cash book balance, interest charged on overdraft by bank is :
(b) Subtracted
(c) No effect
(b) Subtracted

7. An amount of ₹ 5,000 is debited twice in the bank column of cash book. When credit balance as per pass book is taken as starting point, what will be done?
(a) Add ₹ 5,000 to balance as per pass book
(b) Subtract ₹ 5,000 from balance as per pass book
(c) Add 10,000 to balance as per pass book
(d) Subtract ₹ 10,000 from balance as per pass book.
(a) Add ₹ 5,000 to balance as per pass book

8. Overdraft bank balance as shown by the cash book is ₹ 6,000. A cheque for ₹ 10,400 was deposited to bank but omitted in the cash book. In the pass book the amount is wrongly entered in the withdrawal column. Overdraft balance as per pass book:
(a) 16,400
(b) 16,000
(c) 15,900
(d) 13,050.
(a) 16,400

9. Unfavourable balance as per pass book means :
(a) Debit balance in pass book
(b) Credit balance in pass book
(c) Bank overdraft
(d) (a) and (c).
(d) (a) and (c).

10. Cash at bank as shown by cash book ₹ 75,000. Cheque drawn but not presented ₹ 5,000. Cheque paid into bank but not yet credited, ₹ 1,900. Bank charges not yet entered in cash book ₹ 100 find balance as per pass book.
(a) 82,000
(b) 78,000
(c) 75,000
(d) 72,000
(b) 78,000

11. When balance as per pass book is taken, interest allowed by bank is :
(b) Subtracted
(c) No Effect
(d) None.
(b) Subtracted

12. Overdraft as per cash book means :
(a) Credit balance in the pass book
(b) Credit balance in the bank column of the cash book
(c) Debit balance as per pass book
(d) Both (b) and (c)
(d) Both (b) and (c)

13. The bank statement shows an overdraft balance of ₹ 4,000. A cheque for ₹ 1,000 drawn in favour of a creditor has not yet been presented for payment. When the creditor presents the cheque for payment, the bank balance will be :
(a) ₹ 3,000
(b) ₹ 5,000
(c) ₹ 3,000 (overdraft)
(d) ₹ 5,000 (overdraft)
(d) ₹ 5,000 (overdraft)

14. Bank pass book is a :
(a) Copy of customer’s account in bank books
(b) Bank column of cash book
(c) Both (a) and (b)
(d) None of the above.
(a) Copy of customer’s account in bank books

15. The bank pass book showed ₹ 5,000 but the cash book shows a different balance. While analysing the cause of difference, it was noticed that total of debit side of cash book was carried forwarded to next page as ₹ 1,901 instead of 190. What would be the balance as per cash book:
(a) r 6,901
(b) ₹ 6,711
(c) ₹ 1,540
(d) ₹ 6,801
(b) ₹ 6,711

16. Any wrong entry on debit side of the pass book :
(a) Will differ the balances of pass book and cash book.
(b) Will have no effect in the books
(c) Only cash book will be effected
(d) None of the above.
(a) Will differ the balances of pass book and cash book.

17. Bank charges recorded twice in the cash book will be added to the overdraft of in the preparation of the bank reconciliation statement.
(a) Passbook
(b) Cash book
(c) Purchase book
(d) Sales book.
(a) Passbook

18. If transaction of different months in the cash book are given, the transactions will appear in BRS.
(a) Common
(b) Uncommon
(c) All
(d) None.
(a) Common

19. The cash book showed an overdraft of ₹ 1,500 as cash at bank, but the pass book made up to the same date showed that cheques of ₹ 100, ₹ 50 and ₹ 125 respectively had not been presented for payments; and the cheque of ₹ 400 paid in to account had not been cleared. The balance as per the cash book will be.
(a) ₹ 1,100
(b) ₹ 2,175
(c) ₹ 1,625
(d) ₹ 1,375.
(c) ₹ 1,625

20. When drawing up a Bank Reconciliation Statement, if you start with a debit balance as per the Bank Statement, the unpresented cheques should be:
(b) Deducted;
(c) Not required to be adjusted
(d) None of the above.

21. A debit balance in the depositor’s cash book will be shown as :
(a) A debit balance in the bank statement
(b) A credit balance in the bank statement
(c) An overdraft balance in bank statement
(d) None of the above.
(b) A credit balance in the bank statement

22. The difference in the balances of both the cash-book and the pass – book can be because of:
(a) Errors in recording the entries either in the cash-book or pass-book.
(b) Same entry recorded in either of the book earlier and in the other book later.
(c) Debit balance of cash book is the credit balance of pass-book
(d) None of the above.
(a) Errors in recording the entries either in the cash-book or pass-book.

23. Payment done by the account holder through issuing a cheque is entered in:
(a) The pass-book at the time of issuing the cheque
(b) The cash-book at the time of presenting the cheque to the bank for payment
(c) The pass-book at the time of presenting the cheque to the bank for payment
(d) The cash-book at the time of issuing the cheque
(c) The pass-book at the time of presenting the cheque to the bank for payment

24. Direct payment to third party by the bank on behalf of the account holder is entered in:
(a) The cash – book when the amount is paid by the bank
(b) The cash – book when the entry is posted in the pass – book
(c) The pass – book when the amount is paid by the bank
(d) The pass – book when the entry is posted in the pass – book
(e) (a) and (d)
(f) (b) and (c).
(f) (b) and (c).

25. When favourable balance as per cash book is the starting point, wrong debit given by the bank to the firm’s account will be ________.
(b) Deducted
(c) No effect
(d) None of these.
(b) Deducted

26. The credit balance of ₹ 1,000 in the bank column of the cash book was carried forward as its debit balance. When overdraft as per pass book is the starting point:-
(a) ₹ 1,000 will be deducted
(b) ₹ 1,000 will be added
(c) ₹ 2,000 will be deducted
(d) ₹ 2,000 will be added.
(c) ₹ 2,000 will be deducted

27. When overdraft as per pass book is the starting point, bank charges of ₹ 100 recorded twice in cash book will be:
(a) Added by ₹ 100
(b) Added by ₹ 200
(c) Deducted ₹ 100
(d) Deducted by ₹ 200.
(a) Added by ₹ 100

28. When the overdraft as per cash book is the starting point, a cheque of ₹ 500 deposited into bank but not recorded in cash book will be:
(a) Added by ₹ 500
(b) Deducted by ₹ 500
(c) Added by ₹ 1,000
(d) Deducted by ₹ 2,000.
(b) Deducted by ₹ 500

29. Debit balance as per cash book is ₹ 2,000, cheques deposited but not cleared amounts to ₹ 100 and cheques issued but not presented of ₹ 150. The bank allowed interest amounting ₹ 50 and collected divided ₹ 50 balance as per pass book should be:
(a) ₹ 2,100
(b) ₹ 1,950
(c) ₹ 2,350
(d) ₹ 2,150.
(d) ₹ 2,150.

30. The cash book showed an overdraft of ₹ 2,000 as cash at bank, but the pass book made up the same date showed that cheques of ₹ 150 and ₹ 125 respectively had not been presented for payment; and the cheque of ₹ 400 paid into account had not been cleared. The balance as per pass book will be:
(a) ₹ 1,600
(b) ₹ 2,675
(c) ₹ 2,125
(d) ₹ 1,875.
(c) ₹ 2,125

31. The balance shown by bank column of cash book was ₹ 48,000 on 31.1.98. A Cheque issued worth ₹ 24,000 on 16th Jan was not cleared till 31st Jan. Cheque worth ₹ 10,000 received on 20th Jan. and deposited on 21s1 Jan. was cleared on 27-1 -98. The balance as per pass book as on 31st January (assuming opening balance of pass book and cash book are equal) is:
(a) ₹ 14,000
(b) ₹ 24,000
(c) ₹ 72,000
(d) ₹ 82,000.
(c) ₹ 72,000

32. On 31st March, 2007 Ram Kumar Gupta’s pass book showed a credit balance of ₹ 10,300. A comparison of the entries with the cash book revealed that he had paid in cheques amounting to ₹ 1,200 on 27th March 2007, which were not credited in his account. He had issued a cheque amounting to ₹ 1,500 before 31s1 March 2007 which were not presented for payment during the month. There was a debit of ₹ 25 in the pass book in respect of bank charges and a credit of ₹ 35 for interest on current account. Prepare bank reconciliation statement (balance as per pass book) as on 31st March, 2007.
(a) ₹ 12,025
(b) ₹ 9,990
(c) ₹ 10,490
(d) ₹ 10,940.
(b) ₹ 9,990

33. A bank statement at 31.01.2007 showed a balance of ₹ 1,000 (Dr.) The following did not appear on the statement:
(i) Cheques not presented for payment ₹ 230
(ii) A cheque for ₹ 400 banked on 31.1.2007
(iii) Bank charges of ₹ 200 had not been entered in the cash book What was the original balance in the cash book at 31.1.2007, before it was amended?
(a) ₹ 630 (Cr.)
(b) ₹ 630 (Dr.)
(c) ₹ 970 (Cr.)
(d) ₹ 970 (Dr.)
(a) ₹ 630 (Cr.)

34. Your firm’s bank statement on 31.10.2006 shows a balance of ₹ 13,400. You subsequently discover that the bank has dishonoured a customer’s cheque for ₹ 300 and has charged bank charges of ₹ 50, neither of which is recorded in your cash book. There are unpresented cheques totalling ₹ 1,400. You further discover that an automatic receipt from a customer of ₹ 195 has been recorded as credit in your cash book. Your cash book, prior to correcting the errors and omission was:
(a) ₹ 11,455
(b) ₹ 11,960
(c) ₹ 12,000
(d) ₹ 12,155.
(b) ₹ 11,960

35. Who said this statement “All the money’s kind of sitting in a bank account”:
(a) Karl Pearson
(b) Alex Tew
(c) Luco Pacoli
(d) Philip Kotler
(b) Alex Tew

36. ________ is a tool for such comparison and arriving at the causes and amount of difference between the two, if any.
(a) Fund flow statement
(b) Cash flow statement
(c) Bank reconciliation statement
(d) None of the above
(c) Bank reconciliation statement

37. Same pay-in-slips are filled for outstation cheques:
(a) True
(b) False
(c) True, in case of saving account
(d) True, in case of current account
(b) False

38. When deposits are made, form is filled ________.
(a) Account opening form
(b) TDS forms
(c) Preparation of draft form
(d) Pay-in-slips
(d) Pay-in-slips

39. A Bank Reconciliation statement is:
(a) A part of pass book
(b) A statement prepared by bank
(c) Cash book relating to cash column
(d) A statement prepared by customer
(d) A statement prepared by customer

40. Which of these types of errors are not detected during Bank Reconciliation?
(a) Cash embezzlement by cashier
(b) Cheques deposited but not credited by bank
(c) Casting mistakes in bank column of cash book
(d) Interest or commission charged by the bank not accounted in cash book
(a) Cash embezzlement by cashier

41. Balance as per cash book is ₹ 5,000. Cheques issued but not presented for payment ₹ 2,000 and cheques sent for collection but not collected ₹ 1,500. The Bank had wrongly debited the account of firm by ₹ 20. Balance as per pass book will be:
(a) ₹ 5,580
(b) ₹ 5,480
(c) ₹ 4,520
(d) ₹ 5,520
(b) ₹ 5,480

42. Balance shown by:
Cash Book ₹ 10,000
Cheques issued but not Presented for payment ₹ 4,000
Cheques deposited but not yet collected ₹ 3,000
Balance as per Pass Book will be:
(a) ₹ 9,000
(b) ₹ 10,000
(c) ₹ 11,000
(d) None
(c) ₹ 11,000

43. In arriving at adjusted cash balance which of the following is not taken into account?
(a) Amount deposited by our customer directly in our account
(b) Errors in the cash book
(c) Errors in the pass book
(d) All of these
(a) Amount deposited by our customer directly in our account

44. If balance as per Pass Book is the starting point, then uncollected cheques are:
(a) Added in BRS
(b) Subtracted in BRS
(c) Ignored while preparing BRS
(d) None of these
(a) Added in BRS

45. On 31.03.09, the balance of the cash book is ₹ 7,074 (credit) and Balance as per Bank statement is ₹ 3,159 (debit). On scrutiny, it was found that the difference was due to cheques issued but yet not presented for payment. The Bank Balance as on 31.03.09 to be shown in Balance Sheet is:
(a) As Bank overdraft ₹ 3,159
(b) As Cash at bank ₹ 7,074
(c) As Bank overdraft ₹ 7,074
(d) As Cash at bank ₹ 3,159
(c) As Bank overdraft ₹ 7,074

46. A trader issued cheques worth ₹ 7,800 out of which cheques worth ₹ 6,500 only presented into Bank then, on reconciling the Cash Book with the Pass Book, the amount to be added will be:
(a) ₹ 1,300
(b) ₹ 7,800
(c) ₹ 6,500
(d) ₹ 14,300
(a) ₹ 1,300

47. When money is withdrawn from bank, the bank:
(a) Credits customer’s a/c
(b) Debits customer’s a/c
(c) Credits and Debits customer’s a/c
(d) None of these
(b) Debits customer’s a/c

48. Sunita, a customer of Digvijay deposited ₹ 1,000 directly in his Bank A/c. For this Sunita will debit the a/c of:
(a) Sunita
(b) Digvijay
(c) Cash
(d) None of these
(d) None of these

49. The account in which fixed amount is deposited every month is called:
(a) Current Account
(b) Savings Account
(c) Fixed Deposit Account
(d) Recurring Deposit
(d) Recurring Deposit

50. The form used for depositing money in bank is called as:
(a) Pay in slip
(b) Deposit form
(c) Credit slip form
(d) Cash deposit papers
(a) Pay in slip

51. If the balance as per cash book is ₹ 25,000 and cheques of ₹ 10,000 were issued but were not presented for payment then, the balance as per pass book will be:
(a) ₹ 25,000
(b) ₹ 35,000
(c) ₹ 15,000
(d) ₹ 50,000
(b) ₹ 35,000

52. If the cash book shows an overdraft of ₹ 12,000 and cheque of ₹ 2,000 were issued but not presented for payment and a cheque of ₹ 1,000 deposited in bank was not cleared then, the balance as per pass book will be:
(a) ₹ 10,000
(b) ₹ 9,000
(c) ₹ 14,000
(d) ₹ 11,000
(d) ₹ 11,000

53. If the overdraft as per cash book is ₹ 2,000 and the bank deducts bank charges of ₹ 100 and also credits ₹ 500 as bank interest, then the balance as per pass book will be:
(a) ₹ 2,600
(b) ₹ 1,400
(c) ₹ 1,900
(d) ₹ 1,600
(d) ₹ 1,600

54. Unfavourable bank balance means:
(a) Credit balance in cash book
(b) Credit balance in pass book
(c) Debit balance in cash book
(d) None of the above.
(a) Credit balance in cash book

55. Overdraft as per cash book means:
(a) Debit balance in cash book
(b) Credit balance in pass book
(c) Credit balance in cash book
(d) None of the above.
(c) Credit balance in cash book

56. Bank Reconciliation Statement is:
(a) Prepared by customers
(b) Prepared by Bank
(c) Both (a) and (b)
(d) Neither (a) nor (b)
(a) Prepared by customers

57. A Bank Reconciliation Statement is prepared to know the causes for difference between:
(a) Balance as per cash column of cash book & pass book
(b) Balance as per bank column of cash book and pass book
(c) Balance as per cash column and bank column of cash book
(d) None of these
(b) Balance as per bank column of cash book and pass book

58. Bank Balance shown in Trial Balance is:
(a) Balance as per pass book
(b) Balance as per cash book
(c) Balance as per sales book
(d) Both (a) and (b)
(b) Balance as per cash book

59. When money is withdrawn from bank, then the bank will:
(a) Credit customers A/c
(b) Debit customers A/c
(c) Both (a) and (b)
(d) None of the above.
(b) Debit customers A/c

60. When the balance as per pass book is the starting point, direct payment made by the bank will be:
(a) Added in bank reconciliation statement
(b) Subtracted in bank reconciliation statement
(c) No adjustment is required
(d) None of the above.
(a) Added in bank reconciliation statement

61. When balance as per cash book is the starting point, cheques uncollected by the bank will be:
(a) Added in bank reconciliation statement
(b) Subtracted in bank reconciliation statement
(d) None of these.
(b) Subtracted in bank reconciliation statement

62. If the balance as per cash book is ₹ 50,000 and it is undercasted by ₹ 12,000. Also cheques of ₹ 20,000 deposited in bank were dishonoured, then the balance as per pass book will be:
(a) ₹ 32,000
(b) ₹ 58,000
(c) ₹ 82,000
(d) ₹ 42,000
(d) ₹ 42,000

63. If the balance as per cash book is 20,000 and cheques of ₹ 3,000 deposited in bank are not yet collected and cheques issued of ₹ 2,000 were not presented for payment then, the balance as per pass book will be:
(a) ₹ 19,000
(b) ₹ 21,000
(c) ₹ 25,000
(d) ₹ 15,000
(a) ₹ 19,000

64. Who prepares Bank Reconciliation Statement?
(a) Bank employee
(b) Customer of bank or his representative or his accountant
(c) Both (a) and (b)
(d) None of the above.
(b) Customer of bank or his representative or his accountant
Bank Reconciliation Statement is prepared by businessman or customer of bank or his representative or his accountant. Bank Reconciliation Statement is a statement prepared as on a particular date to reconcile. The bank balance as per cash book with balance as per pass book by showing all causes of difference between the two.

65. For the purpose of bank reconciliation statement, only the column of the cash book is to be considered.
(a) Cash
(b) Bank
(c) Cash and Bank
(d) Discount
(b) Bank
Bank Reconciliation Statement is a statement prepared as on a particular date to reconcile the bank balance as per cash book with balance as per pass book. Thus, for the purpose of bank reconciliation statement, only the bank column of the cash book is to be considered.

66. Bank balance as per cash book of ABC Enterprises as on 31st March, 2013 is ₹ 1,500. Cheques deposited with bank but not cleared amount to ₹ 100 and cheque issued.but not presented for payment amount to ₹ 150. The bank allowed interest amounting to ₹ 50 and collected dividend ₹ 50 on behalf of ABC Enterprises. Balance as per pass book should be:
(a) ₹ 1,600
(b) ₹ 1,450
(c) ₹ 1,850
(d) ₹ 1,650
(d) ₹ 1,650

67. Which of the following is true about bank reconciliation statement ________.
(a) Bank reconciliation statement need not to be prepared where the balance of cash book and pass book matches
(b) Bank reconciliation statement is to be prepared necessarily as per the Income tax Act, 1961
(c) Bank reconciliation statement is prepared on yearly basis
(d) Bank reconciliation statement is to be prepared and supplied by bank.
(a) Bank reconciliation statement need not to be prepared where the balance of cash book and pass book matches.
On a particular date when businessman find that bank balance of cash book and bank balance as per pass-book do not tally, he makes efforts for their reconciliation. The reconciliation is prepared and presented in the form of a statement generally known as Bank Reconciliation Statement. Where the balance of cash book and pass book matches, Bank Reconciliation Statement need not to be prepared.

68. Cash book shows Dr. balance ₹ 10,000, cheque issued ₹ 4,000 and cheques presented ₹ 3,000. Calculate the balance as per pass book.
(a) 13,000
(b) 7,000
(c) 6,000
(d) 10,000.
(b) 7,000

 Balance as per cash book 10,000 Less : Cheque issued (4,000) Add : Cheque issued but not presented 1,000 Balance as per pass book 7,000

69. If the cheque is not presented for the payment upto the date of the preparation of the Bank Reconciliation Statement then the balance as per pass book will be:
(a) Higher than the balance shown by the cash book by the amount of unpresented cheque.
(b) Same as shown by the cash book
(c) Twice the balance shown by the cash book
(d) Lower than the balance shown by the cash book by the amount of unpresented cheque
(a) Higher than the balance shown by the cash book by the amount of unpresented cheque.
When a cheque is drawn or issued in favour of a third party, it is immediately recorded in the cash book by debiting the party and crediting the bank and this has the effect of reducing the bank balance in the cash book. But the bank will not debit client’s account until that cheque is presented for payment and honoured.

So long as it is not presented, the balance shown in the pass book is more than the balance shown by the cash book. So, the option (a) is correct. The balance as per pass book will be higher than the balance shown by the cash book by the amount of unpresented cheque.

70. The pass book shows an overdraft of ₹ 2,000. It was discovered that cheques of ₹ 200, ₹ 40 and ₹ 37 respectively has not been presented for payments and a cheque of ₹ 100 paid into account had not been cleared. The balance as per the cash book will be:
(a) ₹ 2,177 (Cr.)
(b) ₹ 1,977 (Cr.)
(c) ₹ 1,977 (Dr.)
(d) ₹ 2,177 (Dr.)
(d) ₹ 2,177 (Dr.)

71. Bank Balance as per cash book of ABC Enterprises as on 31st March, 2013 is ₹ 1,500 cheques deposited with bank but not cleared amount to ₹ 100 and cheques issued but not presented for payment amount to ₹ 150. The bank allowed interest amounting ₹ 50 and collected dividend ₹ 50 on behalf of ABC Enterprises. Balance as per pass book should be:
(a) ₹ 1,600
(b) ₹ 1,850
(c) ₹ 1,450
(d) ₹ 1,650
(d) ₹ 1,650

 (₹) Dr. Bal as per cash book 1,500 Cheque deposit but not cleared -100 Cheque issued but not presented +150 interest allowed by bank + 50 Dividend collected by bank + 50 1,650

72. A credit balance in the bank statement indicates:
(a) Cash at bank
(b) Cash in hand
(c) Bank overdraft
(d) Over payment to creditors.
(a) Cash at bank
Credit balance in bank statement indicates positive balance which means cash balance in account.

73. If cash book balance (Dr.) is given then dividend collected by bank is:
(a) Added on Dr. side of cash book
(b) Added on Cr. side of cash book
(c) Subtracted in cash book
(d) None of the above
(a) Added on Dr. side of cash book
A banker may receive amounts due to the customer by way of dividends, rent, interest etc. directly from the persons concerned on account of standing instruction of the customers to such person. The bank credit the account of customer and same will be added in the Dr. side of cash book.

74. Cash Book (Dr.) Balance is ₹ 54,000. If cheque ₹ 5,000 issue but not presented for payment. What will be the effect in cash book:
(b) Subtracted
(c) Add ₹ 5,000
(d) Subtracted ₹ 5,000
(d) Subtracted ₹ 5,000
When a cheque is drawn or issued in favour of a third party, it is immediately recorded in the cash book by debiting the party and crediting the bank and this has effect of reducing the bank balance in the cash book. The cash book balance will be substracted by 5,000.

75. Dr. Balance of cash book ₹ 20,000, cheque issued but not presented for payment ₹ 5,000, cheques collected but not yet credited ₹ 4,000. What is the balance as per pass book:
(a) ₹ 21,000
(b) ₹ 15,000
(c) ₹ 25,000
(d) ₹ 5,000
(a) ₹ 21,000

 Dr. Balance as per cash book 20,000 (i) Cheque issued but not presented for payment + 5,000 (ii) Cheque collected but not yet presented – 4,000 Cr. Balance as per pass book 21.000

Thus, the option (a) i.e. ₹ 21,000 is the answer.

76. Dr. Balance as per Cash Book ₹ 20,000. Cheque collected of ₹ 5,000 but credited only ₹ 4,000. Balance of pass book:
(a) ₹ 13,000
(b) ₹ 17,000
(c) ₹ 19,000
(d) ₹ 10,000

 Dr. Balance as per cash book 20,000 Cheque collected of ₹ 5,000 but credited only ₹ 4,000, Pass book will reduce by -1,000 Cr. Balance as per pass book 19,000

Thus, the option (c) is correct.

77. The differences arising between bank statement and cash book is reconciled by the preparation of:
(a) Bank Reconciliation Statement
(b) Cash Flow Statement
(c) Funds Flow Statement
(d) Working Capital Statement.
(a) Bank Reconciliation Statement
The differences arising between bank statement and cash book is reconciled by the preparation of Bank Reconciliation Statement by showing all causes of difference between the two.

78. A cash book shows an overdraft of ₹ 2,000 as cash at bank but the pass book made upto the same date shows the cheque of ₹ 200, ₹ 40 and ₹ 37 respectively had not been presented for payment and a cheque of ₹ 100 paid into account had not been cleared. The balance as per the Pass Book will be:
(a) ₹ 1,823 debit
(b) ₹ 1,223 debit
(c) ₹ 1,523 debit
(d) ₹ 1,623 debit
(a) ₹ 1,823 debit

 Balance as per cash book (Cr.) Less: Cheque issued but not presented [200+40+37] Add: Cheque deposited not collected 2,000 277 100 Balance as per Pass book (Dr.) 1,823

79. In which of the following type of accounts, money is generally deposited periodically at a regular interval?
(a) Recurring Deposit Account
(b) Saving Bank Account
(c) Fixed Deposit Account
(d) Current Account
(a) Recurring Deposit Account
In the Recurring Deposit Account, A certain fixed sum of money is deposited affixed or regular interval of time in the account.

80. Credit balance as per Cash Book ₹ 10,000, Bank charged Interest of ₹ 150, cheques issued but not presented for payment ₹ 2,500. Overdraft as per Pass Book will be:
(a) ₹ 12,650
(b) ₹ 12,350
(c) ₹ 12,500
(d) ₹ 7,650
(d) ₹ 7,650

81. Some of the transaction that is dependent on bank statement are ________.
(a) Collection charges
(d) All of above
(d) All of above
A Bank Statement or Account Statement is a summary of financial transactions which have occurred over a given period on a bank account held by a person or business with a financial institution. Thus collection charges, dividend received, rent received are all transactions under the bank statement.

82. Bank Reconciliation Statement is prepared by ________.
(a) Accountant of business
(b) Manager of business
(c) Controller of bank
(d) Accountant of the bank.
(a) Accountant of business
Bank Reconciliation Statement is generally prepared by the company accountant or the bookkeeper with the purpose to compare the bank’s records with your own company records. It is done on monthly basis whenever bank statement arrives.

This statement is required to find out dmissions and mistakes if any and helps in identifying frauds and embezzlements in company funds. A detailed year-end bank reconciliation statement should be retained so that they are readily accessible when needed during the company annual audit. Thus option A is correct.

83. Balance as per cash book (adjusted) = 1000 unpresented cheques = 2000 uncredited cheques = 500. Compute the balance as per bank statement:
(a) 2,000
(b) Zero
(c) 3,000
(d) 2,500
(d) 2,500

 Balance as per cash book 1,000 + Unpresented cheques 2,000 3,000 – Uncredited cheques 500 Balance as per bank statement 2,500

84. Bank Balance as per Cash book of ABC Enterprises as on 31st March, 2016 is ₹ 1500. Cheques deposited with bank but not cleared amount to ₹ 100 and cheques issued but not presented for payment ₹ 150. The Bank allowed interest amounts to ₹ 50 and collect dividend of ₹ 50 on behalf of ABC enterprise Balance as per Pass Book is:
(a) 1850
(b) 1650
(c) 1600
(d) 1450
(b) 1650

 Bank Balance as per Cash Book 1,500 Add: Cheques issued but not presented 150 Less: Cheques deposited but not cleared (100) Add: Bank Interest collected 50 Add: Dividend collected 50 Total 1,650

85. If you start with a debit balance as per the Cash Book, cheques that have been issued by a company but have not been shown in pass book are while preparing bank reconciliation statement.
(a) Not to be adjusted
(c) Subtracted
Cheque issued but not presented are added while preparing Bank Reconciliation statement as per cash book.

86. Bank balance as per cash book at ABC Enterprises as on 31st March, 2013 is ₹ 1,500 Cheques deposited with bank but not cleared amount to ₹ 100 and cheque issued but not presented for payment amount to ₹ 150. The bank allowed interest amounting to ₹ 50 and collected divided ₹ 50 on behalf of ABC Enterprises. Balance as per pass book should be:
(a) ₹ 1.600
(b) ₹ 1,450
(c) ₹ 1,850
(d) ₹ 1,650
(d) ₹ 1,650

87. Cheque issued but not presented for payment are in passbook.
(a) Less
(c) Both (a) and (b)
(d) None of the above
(d) None of the above
Cheque issued but not presented treatment as per passbook: When a cheque is drawn for third party, it indicates that the bank a/c will be credited in cashbook and debited in passbook. If it is not presented for payment in then it has no effect in passbook and add in cashbook (as such amount is not deducted from bank). Hence, option (d) is correct.

88. Which of the following is true about bank reconciliation statement:
(a) Bank reconciliation statement need to be prepared where the balance of cash book and pass book does not match
(b) Bank reconciliation statement is to be prepared necessarily as per the income-tax Act, 1961
(c) Bank reconciliation Statement is prepared on yearly basis
(d) Bank reconciliation statement is to be prepared and supplied by bank
(a) Bank reconciliation statement need to be prepared where the balance of cash book and pass book does not match.
Bank reconciliation statement is a statement which is prepared as on a particular date to reconcile the bank balance as per Cash Book with the balance as per pass book by showing all causes of differences between the two.

## Partnership Accounts-Retirement and Death of a Partner – CS Foundation Fundamentals of Accounting Notes

Go through this Partnership Accounts-Retirement and Death of a Partner – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

1. Retirement of a partner means when a partner leaves the firm.

2. A partner may retire in any of the following ways:

• with consent of all the partners.
• in accordance with an express agreement by the partners.
• where the partnership is at will, by giving notice in writing to all other partners of his intention to retire.

Note: Partnership at will is a type of partnership which does not have any fixed duration and can come to an end according to the will of the partners.

3. Due to retirement, only the old partnership comes to an end but the firm continues (in case of more than two partners).

A partner after retirement, is entitled to his share in the following:

• Share in goodwill
• Share in reserves
• Share in revaluation of assets/liabilities
• Share in accumulated profits
• Share in joint life policy (if any).

Accounting treatment on retirement of a partner involves the following:

• Calculation of new profit sharing ratio.
• Treatment of reserves and undistributed profits.
• Revaluation of assets and liabilities.
• Treatment of goodwill.
• Adjustment of capital by remaining partners.
• Payments to the retiring partner including his interest in the firm.

1. Calculation of New Ratio:

• When a partner retires, his share of profit is distributed among the remaining partners.
• As a result, the remaining partner’s share of profit increases.

Note- Gaining Ratio:
The ratio at which the remaining partners’gain the share of retiring partner, it is known as the gaining ratio.
It is calculated as follows:
Gaining Ratio = New Ratio – Old Ratio

Example:
A, B and C are partners sharing profits and losses in the ratio of 4:3:2. B retires and A and C decide to share profit/losses in future in the ratio of 5:4. Calculate gaining ratio.
Solution:
Gaining Ratio = New Ratio – Old Ratio
A’s gaining share = $$\frac { 5 }{ 9 }$$ – $$\frac { 4 }{ 9 }$$
= $$\frac { 1 }{ 9 }$$
C’s gaining share = $$\frac { 4 }{ 9 }$$ – $$\frac { 2 }{ 9 }$$
= $$\frac { 2 }{ 9 }$$
So gaining ratio between A and C is 1 : 2
This implies that A and C will gain the share of B in the ratio of 1 : 2.

Calculation of new profit sharing ratio:
If the remaining partners purchase the share of retiring partner in some specified proportions, then the fraction of share purchased by them is added to their old share to get the new share.

Example:
A, B and C were partners sharing profits in the ratio of 5:4:3. C retired and his share was taken up by A and B in the ratio of 3:2. Find out the new ratio.
Solution:
C’s share will be divided between A and B in the ratio of 3:2.
A will gain = $$\frac { 3 }{ 5 }$$ of $$\frac { 3 }{ 12 }$$
= $$\frac { 9 }{ 60 }$$
Hence, A’s new share = $$\frac { 5 }{ 12 }$$ + $$\frac { 9 }{ 60 }$$
= $$\frac { 34 }{ 60 }$$
B will gain = $$\frac { 2 }{ 5 }$$ of $$\frac { 3 }{ 12 }$$
= $$\frac { 6 }{ 60 }$$
Hence, B’s new share = $$\frac { 4 }{ 12 }$$ of $$\frac { 6 }{ 60 }$$
= $$\frac { 26 }{ 60 }$$
New Ratio = A $$\frac { 34 }{ 60 }$$ : B $$\frac { 26 }{ 60 }$$ or 17 : 13

Note : If the new profit sharing ratio of remaining partners are not given, it will be assumed that the remaining partners continue to share profits and losses in old ratio.

2. Treatment of undistributed profits and reserves:

• The retiring partner is entitled to the accumulated profits and reserves appearing in the firm.
• At the time of retirement these reserves should be transferred to all the old partners in the old profit sharing ratio.
• Journal Entries:

(i) For distributing reserves and accumulated profits:
General Reserve A/c Dr.
Reserve Fund A/c Dr.
Profit/Loss (Cr. balance) A/c Dr.
To All Partners Capital A/c (in old ratio)

(ii) For distributing accumulated losses:
All Partners Capital A/c Dr.
To P/L A/c (Dr. balance) (old ratio)

(iii) For transferring specific funds:
Workmen Compensation Fund A/c Dr.
Instrument Fluctuation Fund A/c Dr.
To All Partners Capital A/c

Alternatively, instead of transferring full amount to all the partners, only the share of profit of retiring partner shall be transferred to his capital A/c.

Reserves and Profit A/c Dr.
To Retiring Partners Capital A/c.
(share of retiring partner).

3. Revaluation of Assets and Liabilities:

• Retirement of a partner is a form of reconstitution of the firm and hence, revaluation of assets and liabilities is required.
• The purpose of revaluation is that the retiring partner should get the benefits from the change in the value of assets and liabilities.
• Revaluation of assets and liabilities will be carried out in the same way as in case of admission.
• If value of assets and liabilities have to be changed – Revaluation A/c will be prepared.
• If assets and liabilities are to be shown at original figures then Memorandum Revaluation Account is prepared.
• Profit from revaluation will be transferred to old partners in old ratio.
• Revaluation A/c Dr. – To All-Partners Capital A/c (old ratio)
• Loss from revaluation shall be debited to Partners Capital Account.
• All Partners Capital A/c Dr. To Revaluation A/c (old ratio)

4. Treatment of Goodwill:

• Goodwill earned by the firm is the result of the efforts of all partners and the goodwill shall be distributed among all the partners at the time of retirement.
• As already studied in the previous unit, Goodwill A/c cannot be raised in the books of account until it is purchased.
• Hence in case of retirement, adjustment for goodwill will be made through Partner’s Capital A/c.
Continuing Partners Capital A/c Dr.
To Retiring Partners Capital A/c
(in gaining ratio with the share of goodwill of retiring partner)
• Goodwill A/c is not opened only Capital A/c of the partners may be debited and credited with the necessary accounts.

5. Capital in Profit Sharing Ratio:
After retirement of a partner, the remaining partners may decide that their capitals be in their new profit sharing ratio. The adjustments in the capital accounts for this purpose may be made either by bringing in or payment of cash or through current accounts.

6. Purchase of retiring partner’s share by remaining partners:
The retiring partner’s share may be purchased by the remaining partners in an agreed ratio. In such case, retiring partner’s capital account is closed by transfer to the remaining partner’s capital accounts in the ratio in which they agree to purchase his share.

7. Computation of retiring partner’s interest in the firm:
(i) Retiring partner’s interest represents the amount due to retiring the partner in the firm.

(ii) It comprises of the following:

• Balance of the Capital Account of the retiring partner appearing on the date of retirement.
• Share of undistributable profits and reserves.
• Share in firm’s goodwill.
• Share in profit and loss on revaluation of assets and liabilities.
• Share of profit and loss till date of retirement.
• Salary and interest on capital or drawing till the date of retirement.

Payment of Retiring Partner’s interest:
The mode of payment of the amount due to the retiring partner is based on the agreement between the partners. However, if agreement is silent on these terms, the payment shall be made based on mutual agreement between the partners.

Methods of Payments:
(a) Lump Sum Payment Method –

• This method is applied when the firm has adequate funds.
• The whole amount due shall be paid to the partner at first instance.
• Retired partner capital A/c will be debited & Bank A/c will be credited.

(b) Installment Payment Method –

• This method is applied when the firm is not in a position to pay all the amount due to the partner at once.
• Here, the amount is paid to the partner in installments and till the whole amount is paid, the Capital
• Account appears as a Loan A/c in the books of the firm.

Installments may be paid in the following ways –
(i) Decreasing payment method:
Here the total amount due is divided in equal installments and amount of installment plus interest on the outstanding balance is paid out.
It is so called because as and when the payment is made the outstanding balance goes on decreasing. Due to this, interest also reduces.

(ii) Equal Payment Method:
Here the total amount to be paid is divided in number of equal installments such that every payment (installment + interest) is equal.
Hence, it is known as equal payment method.

Death of a Partner:
1. When a partner dies, the firm will be reconstituted and hence, it will require various adjustments as done in case of retirement.

2. On the death of a partner, the amount due to him will be paid to his legal representatives.

3. The deceased partner’s capital a/c will be credited with his share of profits.

4. The deceased partner’s legal representative will be entitled to the following:

• Amount standing to the credit of Capital A/c
• Share in goodwill
• Interest on capital (if any)
• Share in revaluation profit
• Share in undistributed profits and reserves
• Share in Joint Life Policy
• Share in profit upto the date of death.

5. All adjustments will be done in the same manner as in case of retirement.

Joint Life Policy:

• Partners may take joint life policy for setting the claims of the deceased partner at the time of death of a partner.
• Premium is paid by the firm and on the death the amount is received from the insurance company.

Treatment of Joint Life Policy:
(a) When premium paid is treated as an expense:
(i) For payment of premium:
Joint Life Insurance Premium A/c Dr.
To Bank A/c

Profit/Loss A/c Dr.
To Joint Life Insurance Premium A/c

(ii) For receipt of policy money:
Bank A/c Dr.
To All Partners Capital A/c

(b) When premium paid is treated as an asset and surrender value is taken into account:
(i) For payment of premium:
Joint Life Policy A/c Dr.
To Bank A/c

(ii) At the year end, the amount in excess of surrendered value is treated as a loss and transferred to P/L A/c:
Profit and Loss A/c Dr.
To Joint Life Policy A/c
The balance in JLP A/c is shown as asset in the Balance Sheet.

(iii) When amount is received from the insurance company:
Bank A/c Dr.
To Joint Life Policy A/c

(iv) Amount received on maturity in excess of surrender value will be distributed among all the partners in their profit sharing ratio.
Joint Life Policy A/c Dr.
To All Partner’s Capital A/c

(c) When premium is treated as an asset and Life Policy Reserve
Account is maintained.
(i) For payment of premium of Joint Life Policy
Joint Life Policy A/c Dr.
To Bank A/c

(ii) At the year end an amount equal to the premium paid is appropriated and transferred to Policy Reserve Account:
Profit/Loss A/c Dr.
To Joint Life Policy Reserve A/c

(iii) The balance of Joint Life Policy Account and Joint Life Policy Reserve Account shall be made equal to the surrender value, for this purpose Joint Life Policy Account is credited and Joint Life Policy Reserve Account is debited with an amount equal to the difference between balance of Joint Life Policy Account and surrender value.
Joint Life Policy Reserve A/c Dr.
To Joint Life Policy A/c

(iv) When amount is received on maturity Bank A/c Dr.
To Joint Life Policy A/c.

(v) Closing Joint Life Policy Reserve Account by transferring its balance to Joint Life Policy Account.
Joint Life Policy Reserve A/c Dr.
To Joint Life Policy A/c

(vi) Balance remaining in Joint Life Policy A/c is distributed among partners.
Joint Life Policy A/c Dr.
To All Partners Capital A/c

Individual policies on life of each partner:

• Sometimes, instead of taking a joint life policy, policy is taken on life of individual partners.
• When the partner dies, the amount of his policy will be received in cash and other policies will be shown at their respective surrender values.

Repayment of amount due to the deceased partner:
The amount due to the deceased partner shall be paid as follows –

• Whole amount in lumpsum
• Repayment in installments over a period of time and interest paid on outstanding balance.
• Amount due will be treated as a loan to the firm.
• Payment of annuity to the heirs of deceased partner.

Note:
As per Sec. 37 of the Partnership Act, the representatives of the deceased partner would be entitled, at their discretion to interest @ 6% p.a. on amount due from the date of death to the date of payment or to that portion of profit which is earned by the firm with the amount due to the deceased partner.

Partnership Accounts-Retirement and Death of a Partner MCQ Questions

1. Outgoing partner is compensated for parting with firm’s future profits in favour of remaining partners. In what ratio do the remaining partners contribute to such compensation amount?
(a) Gaining Ratio
(b) Capital Ratio
(c) Sacrificing Ratio
(d) Profit Sharing Ratio.
(a) Gaining Ratio

2. Claim of the retiring partner is payable in the following form:
(a) Fully in cash.
(b) Fully transferred to loan account to be paid later on with some interest on it.
(c) Partly in cash and partly as loan repayable later with agreed interest.
(d) Any of the above forms.
(d) Any of the above forms.

3. The balance in the retiring or deceased partner’s capital account is transferred to the _________ capital account in the profit sharing ratio.
(a) Solvent Partners
(b) Insolvent Partners
(c) Remaining Partners
(d) New Partners.
(c) Remaining Partners

4. At the time of retirement of a partner, firms gets _________ from the insurance company against the Joint Life Policy taken severally for each partner.
(a) Policy Amount
(b) Surrender Value
(c) Policy Value for the retiring partner and surrender value for the rest
(d) Surrender Value for all the partners.
(d) Surrender Value for all the partners.

5. As per Section 37 of the Indian Partnership Act, 1932, the executors would be entitled at their choice to the interest calculated from the date of death till the date of payment on the final amount due to the dead partner at _________ percentage per annum.
(a) 7
(b) 4
(c) 6
(d) 12.
(c) 6

6. When premium paid on JLP taken up severally for each partner, the amount received on death of a partner would be firm’s profit. It is also, necessary to credit Partner’s Capital Account with _________ of the policy on the lives of the remaining partners.
(a) Policy Value
(b) Lump-Sum Value
(c) Surrender Value
(d) Actual Value.
(c) Surrender Value

7. To provide funds to pay to the retiring partner or to the representatives of a deceased partner generally partner creates:
(a) Sinking Fund
(b) Joint Life Policy
(c) Reserve Fund
(d) Separate Bank Account.
(b) Joint Life Policy

8. At the time of death of a partner, firm gets _________ from the insurance company against the Joint Life Policy taken jointly for all partners and policies taken severally for each of the partner.
(a) Policy Amount
(b) Surrender Value
(c) Policy Value for the dead partner and surrender value for the rest
(d) Surrender Value for all the partners.
(c) Policy Value for the dead partner and surrender value for the rest

9. A, B and C takes a Joint Life Policy. After five years, B retires from the firm. Old profit sharing ratio is 2:2:1. After retirement, A and C decide to share profits equally. They had taken a Joint Life Policy of ₹ 2,00,000 with the Surrender Value ₹ 30,000. What will be the treatment in the Partner’s Capital Account on receiving the JLP amount if Joint Life Policy A/c is maintained at Surrender Value along with the reserve for JLP?
(a) ₹ 30,000 Credited to all the partners in old ratio.
(b) ₹ 2,00,000 Credited to all the partners in old ratio.
(c) ₹ 1,70,000 Credited to all the partners in old ratio.
(d) Distribute JLP Reserve Account in old profit sharing ratio.
(d) Distribute JLP Reserve Account in old profit sharing ratio.

10. Balance of M/s A, B and C, sharing profits and losses in proportionate to their capitals, stood as follows: Capital Account: ₹ 3,00,000; ₹ 2,00,000 and ₹ 1,00,000 respectively. A desired to retire from the firm and the remaining partners decided to carry on. Joint Life Policy of the partners is surrendered and cash obtained ₹ 50,000. What will be the treatment for JLP?
(a) ₹ 50,000 Credited to Revaluation Account
(b) ₹ 50,000 Credited to Joint Life Policy Account
(c) ₹ 25,000 Debited to A’s Capital Account
(d) Either (a) or (b).
(b) ₹ 50,000 Credited to Joint Life Policy Account

11. A, B and C are the partners sharing profits and losses in the ratio 2:1:1, firm has a Joint Life Policy of ₹ 1,40,000 and in the balance sheet it is appearing at the surrender value i.e. ₹ 40,000. On the death of A, how this JLP will be shared among the partners?
(a) ₹ 50,000 : 25,000 : 25,000
(b) ₹ 60,000 : 30,000 : 30,000
(c) ₹ 40,000 : 35,000 : 25,000
(d) Whole of ₹ 1,20,000 will be paid to A
(a) ₹ 50,000 : 25,000 : 25,000

12. A, B and C were partners sharing profits and losses in the ratio of 3:2:1. A retired and goodwill of the firm is to be valued at ₹ 50,000 and Goodwill Account is to be raised which is not appearing in the balance sheet. What will be the treatment for goodwill?
(a) Credited to Revaluation Account at ₹ 50,000
(b) Credited to Partners Capital Account ₹ 50,000 in Profit Sharing Ratio.
(c) Only A’s Capital Account Credited with ₹ 25,000
(d) Only A’s Capital Account Credited with ₹ 50,000.
(b) Credited to Partners Capital Account ₹ 50,000 in Profit Sharing Ratio.

13. A, B and C are partners with profit sharing ratio 4:3:2. B retires and Goodwill ₹ 30,000 was shown in books of account. If A & C share profits of B in 5:3, then find the new profit sharing ratio.
(a) 47:25
(b) 17:11
(c) 31:11
(d) 14:21.
(a) 47:25

14. A, B and C are partners with profit sharing ratio 4:3:2. B retires and goodwill was valued ₹ 10,800. If A & C share profits in 5:3, find out the goodwill shared by A and C in favour of B.
(a) ₹ 1,850 and ₹ 1,950
(b) ₹ 1,650 and ₹ 1,750
(c) ₹ 2,000 and₹ 1,600
(d) ₹ 1,950 and ₹ 1,650.
(d) ₹ 1,950 and ₹ 1,650.

15. The capitals of A, B and C are ₹ 1,00,000; ₹ 75,000 and ₹ 50,000, profits are shared in the ratio of 3:2:1. B retires on the basis of firm purchased by A and C. The new ratio between A and C is 3:1, find the capital of A and C.
(a) ₹ 1,25,000 and ₹ 1,00,000
(b) ₹ 1,46,250 and ₹ 42,000
(c) ₹ 1,56,250 and ₹ 68,750
(d) ₹ 86,250 and ₹ 46,250.
(c) ₹ 1,56,250 and ₹ 68,750

16. A, B and C take a Joint Life Policy. After five years, B retires from the firm. Old profit sharing ratio is 2:2:1. After retirement A and C decide to share profits equally. They had taken a Joint Life Policy of ₹ 2,00,000 with the Surrender Value ₹ 30,000. What will be the treatment in the partner’s capital account on receiving the JLP amount if, Joint Life premium is fully charged to revenue as and when paid?
(a) ₹ 30,000 credited to all the partners in old ratio
(b) ₹ 2,00,000 credited to all the partners in old ratio
(c) ₹ 1,70,000 credited to all the partners in old ratio
(d) No treatment is required.
(a) ₹ 30,000 credited to all the partners in old ratio

17. A, B and C were partners in a firm sharing profits and losses in the ratio of 2:2:1. The capital balance are ₹ 50,000 for A, ₹ 70,000 for B, 135,000 for C. B declared to retire from the firm and balance in reserve on the date was t 25,000. If goodwill of the firm was valued as ₹ 30,000 and profit on revaluation was ₹ 7,500 then, what amount will be payable to B?
(a) ₹ 70,820
(b) ₹ 76,000
(c) ₹ 75,000
(d) ₹ 95,000.
(d) ₹ 95,000.

18. At the event of retirement, the remaining partners will pay the amount of Goodwill to the retiring partner in:
(a) New Profit Sharing Ratio
(b) Old Profit Sharing Ratio
(c) Gaining Ratio
(d) Sacrificing Ratio.
(c) Gaining Ratio

19. Amar, Akbar, Anthony and Suleman are partners sharing profits and losses in the ratio of 1/3, 1/6, 1/3 and 1/6 respectively. Anthony retires and Amar, Akbar and Suleman decide to share the profits and losses equally in future. Which of the statements hold true.
(a) Amar gains nothing; Akbar and Suleman gains equally
(b) Akbar gains nothing; Amar and Suleman gains equally
(c) Suleman gains nothing; Amar and Akbar gains equally
(d) Akbar, Suleman and Amar gains equally.
(a) Amar gains nothing; Akbar and Suleman gains equally

20. As per which Accounting Standard, goodwill can be recorded in the books only when some consideration in money or money’s worth has been paid for it.
(a) AS-11
(b) AS-12
(c) AS 10
(d) AS 9
(c) AS 10

21. When Memorandum Revaluation Account is opened:
(a) When value of Assets and Liabilities will not be altered in the books of accounts
(b) When value of Assets and Liabilities will be altered in the books of accounts
(c) On Revaluation of Assets and Liabilities
(d) None of these.
(a) When value of Assets and Liabilities will not be altered in the books of accounts

22. Aman, Ashish & Manish are partners in a business and divide profits and losses in the ratio of 15:9:8 respectively. Manish retires. Aman and Ashish decide to share profits in equal proportions. Calculate the gaining ratio.
(a) 1:7
(b) 1:1
(c) 7:1
(d) 1:2
(a) 1:7

23. At the time of retirement of a partner, if the goodwill appears in the Balance Sheet, it must be written off. The Capital Accounts of all partners are debited in:
(a) The old profit sharing ratio
(b) The new profit sharing ratio
(c) The capital ratio
(d) Equal ratio.
(a) The old profit sharing ratio

24. A, B and C are partners with profits sharing ratio 4:3:2. B retires and goodwill of ₹ 10,800 is shown in books of account. If A & C shares profits of B in 5:3, then find the new profit sharing ratio.
(a) 13:11
(b) 17:11
(c) 31:11
(d) 14:21.
(a) 13:11

25. The Capitals of A, B and C are ₹ 1,00,000; ₹ 75,000 and ₹ 50,000, profits are shared in to the ratio of 3:2:1. B retires on the basis that his shares is purchased by other partners keeping the total capital intact. The new ratio between A and C is 3:1. Find the capital of A and C after purchasing B’s share.
(a) ₹ 1,50,000 and ₹ 1,00,000
(b) ₹ 1,46,250 and ₹ 42,000
(c) ₹ 1,56,250 and ₹ 68,750
(d) ₹ 86,250 and ₹ 46,250.
(c) ₹ 1,56,250 and ₹ 68,750

26. Joint Life Policy is taken by the firm on the life(s) of _________.
(a) All the partners jointly
(b) All the partners severally
(c) On the life of all the partners and employees of the firm
(d) Both ‘a’ and ‘b’.
(d) Both ‘a’ and ‘b’.

27. A, B and C are partners sharing profits in the ratio 2:2:1, on retirement of B, goodwill was valued as ₹ 30,000. Find the contribution of A and C to compensate B.
(a) ₹ 20,000 and ₹ 10,000
(b) ₹ 8,000 and ₹ 4,000
(c) They will not contribute anything
(d) Information is insufficient for any comment.
(b) ₹ 8,000 and ₹ 4,000

28. A, B, and C were partners in a firm sharing profits and losses in the ratio of 2:2:1 respectively with the capital balance of ₹ 50,000 for A and B for C ₹ 25,000. B declared to retire from the firm and balance in reserve on the date was ₹ 15,000. If goodwill of the firm was valued as ₹ 30,000 and profit on revaluation was ₹ 7,050 then, what amount will be transferred to the loan account of B:
(a) ₹ 70,820
(b) ₹ 50,820
(c) ₹ 25,820
(d) ₹ 58,820.
(a) ₹ 70,820

29. A, B and C were partners sharing profits and losses in the ratio of 3:2:1. A retired and goodwill of the firm is to be valued at ₹ 24,000 and goodwill Account is to be raise which is not appearing in the Balance Sheet. What will be treatment for goodwill?
(a) Credited to Revaluation Account at ₹ 24,000
(b) Credited to Partners Capital Account ₹ 24,000 in profits sharing ratio
(c) Only A’s Capital Account Credited with 12,000
(d) Only A’s Capital Account Credited with ₹ 24,000.
(b) Credited to Partners Capital Account ₹ 24,000 in profits sharing ratio

30. Balances of M/s Ram, Rahul and Rohit sharing profits and losses in proportionate to their capitals, stood as follows: Capital Accounts: Ram ₹ 3,00,000 Rahul ₹ 2,00,000 and Rohit ₹ 1,00,000. Ram desired to retire from the firm and the remaining partners decided to carry on. Joint Life Policy of the partners surrendered and cash obtained ₹ 60,000. What will be the treatment for JLP?
(a) ₹ 60,000 credited to Revaluation Account
(b) ₹ 60,000 credited to Joint Life Policy Account
(c) ₹ 30,000 debited to Ram’s Capital Account
(d) Either ‘a’ or ‘b’
(b) ₹ 60,000 credited to Joint Life Policy Account

31. Balances of A, B and C sharing profits and losses in proportionate to their capitals, stood as follows: Capital Accounts: A ₹ 2,00,000; B ₹ 3,00,000 and C ₹ 2,00,000 JLP Reserve ₹ 80,000 and JLP ₹ 80,000. A desired to retire from the firm and the remaining partners decided to carry on in equal ratio, Joint Life Policy of the partners surrendered and cash obtained ₹ 80,000. What will be the treatment for JLP?
(a) Cash Received credited to Revaluation Account
(b) JLP Reserve balance credited to Partner’s Capital Account in new profit sharing ratio
(c) JLP Reserve balance credited to Partner’s Capital Account in new profit sharing ratio
(d) Cash Received credited to Partner’s Capital Account in old profit sharing ratio.
(b) JLP Reserve balance credited to Partner’s Capital Account in new profit sharing ratio

32. Balances of A, B, and C sharing profits and losses in proportionate to their capitals, stood as follows: Capital Accounts: A ₹ 2,00,000. B ₹ 3,00,000 and C ₹ 2,00,000. A desired to retire from the firm, B and C share the future profits equally. Goodwill of the entire firm be valued at ₹ 1,40,000 and no Goodwill account being raised.
(a) Credit Partner’s Capital Account with old profit sharing ratio for ₹ 1,40,000.
(b) Credit Partner’s Capital Account with new profit sharing ratio for ₹ 1,40,ooo.
(c) Credit A’s Account with ₹ 40,000 and debit B’s Capital Account with ₹ 10,000 and C’s Capital Account with ₹ 30,000.
(d) Credit Partner’s Capital Account with gaining ratio for ₹ 1,40,000.
(c) Credit A’s Account with ₹ 40,000 and debit B’s Capital Account with ₹ 10,000 and C’s Capital Account with ₹ 30,000.

33. Balance of A, B and C sharing profits and losses in proportionate to their capitals, stood as follows: Capital Accounts: A ₹ 2,00,000. B ₹ 3,00,000 and C ₹ 2,00,000. JLP Reserve and JLP at ₹ 80,000. A desired to retire from the firm. B and C share the future profits equally. Joint Life Policy of the partners surrendered and cash obtained ₹ 80,000. Goodwill of the entire firm be valued at ₹ 1,40,000 and no Goodwill account being raised. Revaluation Loss was ₹ 10,000. Amount due to A is to be settled on the following basis: 50% on retirement and the balance 50% within one year. The total capital of the firm is to be the same as before retirement. Individual capitals to be in their profit sharing ratio. Find the balances of partner’s capital Account:
(a) ₹ 3,50,000 each
(b) ₹ 3,20,000 each
(c) ₹ 1,90,000 each
(d) ₹ 1,30,000 each.
(a) ₹ 3,50,000 each

34. Balance of Ram, Hari & Mohan sharing profits and losses in the ratio 2:3:2 stood as follows: Capital Accounts: Ram ₹ 10,00,000; Hari ₹ 15,00,000 Mohan ₹ 10,00,000 Joint Life Policy ₹ 3,50,000. Hari desired to retire from the firm and the remaining partners decided to carry on with the future profit sharing ratio of 3:2. Joint Life Policy of the partners surrendered and cash obtained ₹ 3,50,000. What would be the treatment for JLP?
(a) ₹ 3,50,000 credited to Partner’s Capital Account in new ratio.
(b) ₹ 3,50,000 credited to Partner’s Capital Account in old ratio.
(c) ₹ 3,50,000 credited to Partner’s Capital Account in capital ratio.
(d) ₹ 3,50,000 credited to JLP account.
(d) ₹ 3,50,000 credited to JLP account.

35. A, B and C are three partners sharing profit and loss in the ratio of 1:2:3 and their capital are 50,000, 1,00,000 and 1,50,000 respectively. The balance in reserve stood at ₹ 20,000 and goodwill is valued at ₹ 10,000. Calculate the amount to be paid to B by the firm _________.
(a) ₹ 1,10,000
(b) ₹ 90,000
(c) ₹ 1,00,000
(d) ₹ 30,000
(a) ₹ 1,10,000

36. Ram, Krishna and Ganesh were sharing profits and losses in the ratio of 5:3:2. Ram retires and Krishna and Ganesh share the future profits & losses equally. Goodwill of the firm is valued at 1,00,000. Calculate the amount of goodwill to be debited to Krishna’s and Ganesha’s capital A/c.
(a) ₹ 60,000 & ₹ 40,000
(b) ₹ 40,000 & ₹ 60,000
(c) ₹ 50,000 each
(d) ₹ 30,000 & ₹ 70,000
(b) ₹ 40,000 & ₹ 60,000

37. P, Q and R are sharing profits and losses equally. R retires and the goodwill is appearing in the books at ₹ 10,000. Goodwill of the firm is valued at ₹ 40,000. Calculate the net amount to be credited to A’s capital A/c.
(a) ₹ 20,000
(b) ₹ 5,000
(c) ₹ 10,000
(d) ₹ 30,000
(c) ₹ 10,000

38. A, B and C are sharing profits equally. C retires from the firm. The new profit sharing ratio will be 1:2. Calculate the gaining ratio of A and B respectively
(a) 0:1/2
(b) 1:1
(c) 1:1/3
(d) 0:1/3
(d) 0:1/3

39. X, Y and Z are sharing profits in the ratio of 3:5:1. Y retires and his entire shares of profits is taken over by Z. Calculate the new profit sharing ratio _________.
(a) 1:2
(b) 1:3
(c) 3:1
(d) 1:1
(a) 1:2

40. A, B and C are sharing profit and losses equally. A dies on 30th September, 2005 and the profits for the year ending 31st March, 2006 are ₹ 3,00,000. Calculate A’s share in profits
(a) ₹ 25,000
(b) ₹ 66,667
(c) ₹ 50,000
(d) None of the above
(c) ₹ 50,000

41. X, Y and Z are partners sharing profits in the ratio of 7:5:8. Z died on 30th November, 2005 and the profits for the year are 4,80,000. Calculate Z’s share in profits
(a) ₹ 1,28,000
(b) ₹ 1,26,000
(c) ₹ 1,24,000
(d) None of the above
(a) ₹ 1,28,000

42. The amount due to the deceased partner is paid to _________.
(a) Father
(b) Executor
(c) Wife
(d) Relatives
(b) Executor

43. The interest rate which is paid to the executors from the date of death to the date of payment is _________.
(a) 7%
(b) 6%
(c) 9%
(d) 12%
(b) 6%

44. The amount which the firm gets from the insurance company on the death of a partner is called _________.
(b) Surrender value
(c) Policy value
(d) None of these
(c) Policy value

45. The premium paid on JLP is debited to _________.
(a) P&L A/c
(b) Insurance company A/c
(c) Partners capital A/c
(d) None of these
(a) P&L A/c

46. The balance of Joint Life Policy appearing in the balance sheet represents _________.
(a) Surrender value
(b) Total premium paid
(c) Annual premium paid
(d) Policy amount
(a) Surrender value

47. The JLP amount received by a firm is distributed in _________.
(a) Old profit sharing ratio
(b) Capital ratio
(c) Gaining ratio
(d) New ratio
(a) Old profit sharing ratio

48. Claim of the retiring partner is payable in the following form _________.
(a) Cash
(b) Loan A/c
(c) Both (a) and (b)
(d) None of the above
(c) Both (a) and (b)

49. If the firm dissolves due to the retirement of one of the partner, then what amount of JLP will be credited in the partners capital A/c _________.
(a) Surrender value
(b) Maturity value
(d) None of these
(a) Surrender value

50. JLP is taken by the firm on the life of _________.
(a) All the partners jointly
(b) All the partners severally
(c) On the life of employees
(d) None of the above
(a) All the partners jointly

51. Retiring partner is compensated for parting with the firm’s future profits in favour of remaining partners. The remaining partner’s contribute to such compensation amount in:
(a) Gaining Ratio
(b) Capital Ratio
(c) Sacrificing Ratio
(d) Profit sharing Ratio
(a) Gaining Ratio
On retirement of a partner, remaining partner contributes amount to retiring partner as compensation for his share in the firm. This compensation is borne by remaining as continuing partners in gaining ratio.
Gaining ratio can be determined as – Gaining ratio = New profit sharing ratio – old profit sharing ratio

52. A, B and C share profits and losses of the firm equally. B retires from business and his share is purchased by A and C in the ratio of 2 : 3. New profit sharing ratio between A and C respectively would be:
(a) 01 : 01
(b) 02 : 02
(c) 07 : 08
(d) 03 : 05
(c) 07 : 08
A’s old ratio = $$\frac { 1 }{ 3 }$$
B’s old ratio = $$\frac { 1 }{ 3 }$$
C’s old ratio = $$\frac { 1 }{ 3 }$$
Gaining ratio of A and C = 2 : 3
Gaining share of A = $$\frac { 1 }{ 3 }$$ x $$\frac { 2 }{ 5 }$$ = $$\frac { 2 }{ 15 }$$
Gaining share of C = $$\frac { 1 }{ 3 }$$ x $$\frac { 3 }{ 5 }$$ = $$\frac { 3 }{ 15 }$$
A’s new ratio = Old ratio + Gaining ratio
= $$\frac { 1 }{ 3 }$$ + $$\frac { 2 }{ 15 }$$ = $$\frac { 7 }{ 15 }$$
New Ratio between A and C = $$\frac { 7 }{ 15 }$$ : $$\frac { 8 }{ 15 }$$ = 7 : 8

53. If a partner goes insolvent and is not able to bring his share of deficiency in cash, then his deficiency should be borne by the remaining solvent partners:
(a) Equally
(b) On the basis of their profit sharing ratio
(c) On the basis of their adjusted capital ratio
(d) On the basis of their original investments.
(c) On the basis of their adjusted capital ratio
In India, if it is mentioned in the Partnership Deed that on the insolvency of a partner deficiency of his capital A/c will be borne in particular ratio, it will be borne accordingly in the case of insolvency of the partner, but if no mention about any ratio is made in this connection in the partnership deed, the deficiency of the insolvent partner’s capital A/c will be shared by the solvent partners in their capital ratio.

54. A, B and C share profits and losses of a firm on 1 : 1 : 1 basis. B retired from business and his share is purchased by A and C in 40 : 60 ratio. New profit and loss sharing ratio between A and C would be _________.
(a) 1 : 1
(b) 2 : 3
(c) 7 : 8
(d) 3 : 5.
(c) 7 : 8
Calculation of New Profit or Loss Sharing Ratio
Old Ratio of A, B and C partners is 1 : 1 : 1
After retirement of B, his share is distributed between A and C in 40 : 60.
Therefore, New Ratio of A’s = $$\frac { 1 }{ 3 }$$ + ($$\frac { 1 }{ 3 }$$x$$\frac { 4 }{ 10 }$$)
= $$\frac { 1 }{ 3 }$$ + $$\frac { 4 }{ 30 }$$ = $$\frac { 14 }{ 30 }$$ = $$\frac { 7 }{ 15 }$$
C’s = $$\frac { 1 }{ 3 }$$ + ($$\frac { 1 }{ 3 }$$ x $$\frac { 6 }{ 10 }$$)
= $$\frac { 1 }{ 3 }$$ + $$\frac {6}{ 30 }$$ = $$\frac {16}{ 30 }$$ = $$\frac {8}{ 15 }$$
New share between A and C is 7:8
Thus option (c) is Right.

55. At the time of retirement of a partner from a partnership firm, the adjustment of goodwill is done in _________.
(a) Old profit sharing ratio
(b) Gaining ratio
(c) Sacrificing ratio
(d) New profit sharing ratio.
(b) Gaining ratio
At the time of Retirement of a partner from a Partnership Firm, the continuing partners will gain in terms of profit sharing ratio. Therefore, the adjustment of goodwill is to be done in the gaining ratio to the retiring partners.
This Option (b) is Right.

56. X, Y, Z capitals are ₹ 80,000, 75,000 and 50,000 respectively. Z retired and is paid ₹ 60,000 and no goodwill is valued. What is the new capital of Y after retirement of Z.
(a) ₹ 71,000
(b) ₹ 74,000
(c) ₹ 75,000
(d) ₹ 86,000
(c) ₹ 75,000
Amount of Z’s Capital – ₹ 50,000
Amount Paid to him = ₹ 60,000
Amount Paid to Z in excess of his capital = ₹ (60,000 – 50,000)
= ₹ 10,000
→ ₹ 10,000 to be borne by X & Y in equal ratio.
→ Y’s initial capital = ₹ 75,000
Less : Amount of capital borne
by him (10,000 x $$\frac { 1 }{ 2 }$$) 5,000
y’s capital after Z’s retirement 70,000/-

57. If at the time of retirement, JLP is received, it will be distributed among which partners _________.
(a) Retiring Partner
(b) Remaining Partner
(c) All Partners
(d) None of these
(c) All Partners
At the time of retirement of a partner, the amount of JLP is distributed among existing partners along with the retiring partner. Hence, it can be said the amount of JLP received is distributed among all partners at the time of retirement

58. X, Y, Z are Partners in a firm, sharing profit and losses in the ratio 3 : 2 : 1. Z retires from the firm what will be the new profit sharing ratio.
(a) 3 : 1
(b) 3 : 2
(c) 2 : 3
(d) 1 : 2
(b) 3 : 2
If the new profit sharing ratio of remaining partners are not given, it will be assumed that the remaining partners continue to share profits and losses in old ratio. Thus, after retirement of Z, new profit sharing ratio will be 3 : 2

59. Which amongst the following is transferred to Partner’s Executor’s A/c at the time of death of the partner?
(a) Interest on Capital
(b) Share in Goodwill
(c) Share in Profit
(d) All of the above.
(d) All of the above
Following particulars are transferred to the Partners’s executor account at the time of death of a partner:

(a) Partner’s Capital A/c
(b) Interest on Partner’s Capital A/c
(c) Share in Goodwill
(d) Share of Profit & Loss

Hence, option all of the above is correct.

60. Calculate Gaining Ratio from following information :
Current Profit Sharing Ratio of A, B & C = 5 : 4 : 3
C retires and his share was taken equally by A and B.
(a) 1 : 1
(b) 1 : 3
(c) 13 : 11
(d) None of these.
(a) 1 : 1
Gaining Ratio = New Share – Old Share.
→ Old Profit Sharing ratio of A, B, C= 5 : 4 : 3.
→ C’s Share = $$\frac { 3 }{ 12 }$$ = $$\frac { 1 }{ 4 }$$
→ A’s Gain = $$\frac { 1 }{ 4 }$$ x $$\frac { 1 }{ 2 }$$ = $$\frac { 1 }{ 8 }$$
→ B’s Gain = $$\frac { 1 }{ 4 }$$ x $$\frac { 1 }{ 2 }$$ = $$\frac { 1 }{ 8 }$$
→ Gaining ratio = $$\frac { 1 }{ 8 }$$ : $$\frac { 1 }{ 8 }$$ = 1 : 1
→ Hence, option (a) is correct.

61. In a partnership firm A, B and C are partners sharing profit and loss in ratio of 3:2:1. They have taken a joint life policy of ₹ 1,00,000 and the Joint Life Insurance premium is treated as an expense. On death of B, the claim amount was received. The amount received on Joint Life Policy will be:
(a) Credited to all partners capital account
(b) Credited to B’s capital account
(c) Debited to B’s capital account
(d) Credited to remaining partners capital account.
(a) Credited to all partners capital account
Partner’s often take out a Joint Life Policy to provide funds for settling the claim of the deceased partner. Annual premium is paid by the firm and on the death of a partner, the amount of the policy is received by the firm from the insurance company. On death of a partner, the amount due to his legal representatives will have to be paid.
So, on the death of B, the amount received of JLP will be credited to all partner’s capital account.

62. On the retirement of a partner any reserve lying in the books of account:
(a) Should be transferred to retiring partner only
(b) Should be transferred to all partner in the old profit sharing ratio
(c) Should not be transferred
(d) Should be transferred to remaining partners in the new profit sharing ratio.
(b) Should be transferred to all partner in the old profit sharing ratio
On the retirement of a partner, any reserve lying in the books of account should be transferred to all partner’s capital account in profit sharing ratio.

63. In a Partnership firm, the Joint Life Insurance premium is treated as an expense. Which of the following account is credited for amount received from Joint Life Insurance Policy on the death of a partner?
(a) Bank Account
(b) All Partners Capital Account
(c) Deceased Partners Capital Account
(d) Remaining Partners Capital Account.
(b) All Partners Capital Account
Joint Life Policy A/c Dr.
To All Partners Capital A/c

64. In a partnership firm, Ram’s Capital is (b) All Partners Capital Account
(b) All Partners Capital Account
(b) All Partners Capital Account
80,000, Sita’s Capital is ₹ 75,000 and Mohan’s Capital is ₹ 50,000. They share income in 3:2:1 ratio respectively. Mohan is retiring from the partnership. Mohan is paid ₹ 60,000 and no goodwill is recorded. What will be the Ram’s Capital balance after the retirement of Mohan?
(a) ₹ 74,000
(b) ₹ 70,000
(c) ₹ 75,000
(d) ₹ 86,000.
(a) ₹ 74,000
Retiring partner Mohan’s capital account is ₹ 50,000 but he is paid ₹ 60,000 in order to settle his account.
Thus, ₹ 10,000 is being paid to him towards the goodwill of the business. This share is 1/6, therefore he will get this goodwill from remaining partner’s in their gaining ratio which will be 3 : 2.
Entry will be:
(3 : 2) Ram’s Capital A/c Dr. 6,000
Sita’s Capital A/c Dr. 4,000
To Mohan’s Capital A/c 10,000
Hence, after this Ram’s Capital Account will be ₹ 80,000 – 6,000 = ₹ 74,000/-

65. A, B and C were in partnership sharing profits in the ratio of 4:2:1 respectively. A guaranteed that is no case C’s share in profit should be less than ₹ 7,500. Profits of the firm for the year 2013 amounted to ₹ 31,500. A’s share in profit will be:
(a) ₹ 15,000
(b) ₹ 18,000
(c) ₹ 16,000
(d) ₹ 3,000
(a) ₹ 15,000
A’s share → 31,500 x $$\frac { 4 }{ 7 }$$ = 18,000
B’s share → 31,500 x $$\frac { 2 }{ 7 }$$ = 9,000
C’s share → 31,500 x $$\frac { 1 }{ 7 }$$ = 4,500
was guaranteed by A that his share will not be less than 7,500. Therefore, A will compensate from his share i.e. 18,000 – 3,000 = 15,000 = A’s share 4,500 + 3,000 = 7,500 ← C’s share.

66. A, B and C are partners in a firm, sharing profits and losses in the ratio of 5:3:2 respectively. The balance of capital is ₹ 50,000 for A & B each and ₹ 40,000 for ‘C’, ‘B’ decides to retire from firm. The goodwill of firm is valued at ₹ 30,000 and profit on revaluation of assets at ₹ 5,000. The firm also have a balance in the Reserve A/c for ₹ 15,000 on that date. What amount will be payable to ‘B’?
(a) ₹ 55,000
(b) ₹ 65,000
(c) ₹ 75,000
(d) ₹ 45,000
(b) ₹ 65,000
B’s share in the profit & loss ratio = $$\frac { 3 }{ 10 }$$
B’s Capital A/c

67. On the death of a partner. Joint life policy amount if company treat JLP as expenses. Then amount is distributed among:
(a) All partner
(b) Gaining partner
(c) Deceived partner
(d) None of these
(a) All partner
If Joint life policy is treated as an expense, then on the death of a partner the amount of policy received by the firm is credited to all partners capital accounts in profit sharing ratio.

68. A, B, C are partners. B retires A & C. Gaining ratio, if profit sharing ratio of A, B, C is 2 : 3 : 1?
(a) 3 : 1
(b) 2 : 4
(c) 2 : 1
(d) 3 : 2
(c) 2 : 1
If nothing is given, it will be assumed that remaining partners will gain in their old profit sharing ratio. Thus, after retirement of B, A & C will gain in their old ratio i.e. 2 : 1.

69. In a partnership firm, Ram’s Capital is ₹ 80,000, Sita’s Capital is ₹ 75,000 and Mohan’s Capital is ₹ 50,000. They share income in 3 : 2 : 1 ratio respectively. Mohan is retiring from the partnership and his share is purchased by the remaining partners equally. Mohan is paid ₹ 60,000 and no goodwill is recorded. The Capital of Ram would be:
(a) ₹ 74,000
(b) ₹ 75,000
(c) ₹ 86,000
(d) ₹ 71,000
(b) ₹ 75,000
Mohan’s share is 1/6 which is taken up equally by Ram and Sita i.e.
1 /12 each therefore Ram’s new ratio will be 3/6 + 1/12 = $$\frac { 6+1 }{ 12 }$$ = 7/12
Sita’s new ratio = $$\frac { 2 }{ 6 }$$ + $$\frac { 1 }{ 12 }$$ = $$\frac { 4+1 }{ 12 }$$ = 5/12
and there gaining ratio is 1 : 1
Mohan is paid ₹ 10,000 over and above his capital which will be borne equally by Ram and Sita i.e. ₹ 5,000 each therefore capital of Ram will be 80,000 – 5,000 = 75,000

70. According to Garner Vs. Murray rule in case of fixed capital, loss arising due to insolvency of a partner is :
(a) Divided among all partner in capital ratio
(b) Divided among all partner in profit and loss ratio
(c) Divided among all solvent partner in capital ratio
(d) Divided among all solvent partner in profit sharing ratio.
(c) Divided among all solvent partner in capital ratio
According to the decisions in Garner Vs. Murray, in case of insolvency of a partner, the loss should be divided among the other partners in the ratio of capitals then standing. The effect of this decision practically is that the deficiency in the capital account of the insolvent partner has to be borne by the solvent partners in the ratio of capitals standing just prior to dissolution.

71. X, Y and Z are partner and sharing profit and losses equally. Y died, X and Z decided to continue with the partnership and Y’s share is purchased by X and Z in 2 : 3 ratio. Goodwill of the firm was valued for ₹ 18,000. The firm also booked revaluation loss of ₹ 9,000. If at the time of death of Y, his capital was ₹ 20,000 the amount payable to Y’s executors would be :
(a) ₹ 23,000
(b) ₹ 20,000
(c) ₹ 38,000
(d) ₹ 29,000
(a) ₹ 23,000
Goodwill = 18,000
Revaluation Loss = $$\frac { (9,000) }{ 9,000 }$$
Share of Y in above = 9,000 x $$\frac { 1 }{ 3 }$$ = 3,000
Total amount to be paid to Y’s executors = 20,000 + 3,000 = ₹ 23,000

72. P, Q and R are partners and having profit and loses equally. The capital balance stood at ₹ 25,000, ₹ 20,000 and ₹ 18,000 respectively. Their last three year’s profit were ₹ 18,000, ₹ 12,000 and ₹ 15,000 Q died. P and R decided to continue with the partnership and Q’s share is purchased by P and R in 2 : 3. As per agreement, the value of goodwill is calculated at 3 year’s purchase price of average profit of last three years. It is decided that no goodwill account is opened in the books of account and it is to be adjusted through Capital Account after adjustment, the Capital of P would be :
(a) ₹ 19,000
(b) ₹ 25,000
(c) ₹ 20,000
(d) ₹ 18,000
(d) ₹ 18,000
Goodwill of the firm
Average Profit = $$\frac { Sum of Profit of years }{ No.of years }$$
= $$\frac{18,000+12,000+15,000}{3}$$
= 15,000
Goodwill = No. of purchase year x Average Profit
= 3 x 15,000 = 45,000
Q’s share of Goodwill = $$\frac{45,000}{3}$$ = 15,000
Goodwill will be contributed by P and R in gaining ratio 7 : 8
P’s share = 15,000 x $$\frac { 7 }{ 15 }$$ = 7,000
Goodwill
Q’s share of Goodwill
R’s share = 15,000 x $$\frac { 8 }{ 15 }$$ = 8,000
P’s Capital A/c Dr. 7,000
R’s Capital A/c Dr. 8,000
To Q’s Executor’s A/c 15,000.
After Adjustment P’s capital would be 25,000 – 7,000 = ₹ 18,000

73. In a partnership firm, Ram’s capital is ₹ 80,000, Sita’s Capital is.₹ 75,000 and Mohan’s Capital is ₹ 50,000. They share income in 3 : 2 : 1 ratio, respectively. Mohan is retiring from the partnership, Mohan is paid ₹ 60,000, and no goodwill is recorded. What will be the Ram’s Capital balance after the retirement of Mohan?
(a) ₹ 74,000
(b) ₹ 71,000
(c) ₹ 75,000
(d) ₹ 86,000
(a) ₹ 74,000
Amount of Goodwill paid = ₹ 10,000
Goodwill contribution ratio = 3 : 2
Ram = 10,000 x $$\frac { 3 }{ 5 }$$ = 6,000
Sita = 10,000 x $$\frac { 2 }{ 5 }$$ = 4,000
Capital After Retirement = 80,000 – 6,000 = ₹ 74,000

74. A, B and C share profits and losses of a firm on 1 : 1 : 1 basis. B retired from business and his share is purchased by A and C is 70 : 90. New profit sharing ratio below A and C would be
(a) 1 : 1
(b) 11 : 13
(c) 1 : 2
(d) 5 : 3
(c) 1 : 2
If on retirement of partner, that remaining partners purchase the share of retiring partner and the new profit sharing ratio will be;
A’s old share : $$\frac { 1 }{ 3 }$$
A’s new share (after purchase of retiring partner) : $$\frac { 70 }{ 160 }$$ – $$\frac { 1 }{ 3 }$$ = $$\frac { 50 }{ 480 }$$
B’s old share : $$\frac { 1 }{ 3 }$$
B’s new shares (after purchase of retiring partner) : $$\frac { 90 }{ 160 }$$ – $$\frac { 1 }{ 3 }$$ = $$\frac { 110 }{ 480 }$$
B’s gain : $$\frac { 110 }{ 480 }$$ = $$\frac { 50 }{ 480 }$$ = $$\frac { 50 }{ 110 }$$ = $$\frac { 1 }{ 2 }$$
Hence, ratio of gain between A & B is 1 : 2; option (c) is correct.

75. A, B and C Share Profits and losses of a firm on 1 : 1 : 1 basis. B retired from business and his share is purchased by A and C in 40 : 60 ratio. New profit and loss sharing ratio between A and C would be :
(a) 1 : 1
(b) 2 : 3
(c) 7 : 8
(d) 3 : 5
(c) 7 : 8

New Ratio between A & C = 7 : 8.

76. At the time of retirement of a partner from a partnership firm, the adjustment of goodwill is done in :
(a) Old profit Sharing ratio
(b) Gaining ratio
(c) Sacrificing ratio
(d) New profit sharing ratio.
(b) Gaining ratio
Due to retirement of one of the partner the other partners will gain in share and hence goodwill adjustment will be done in Gaining Ratio.

77. A, B and C were partner ‘B’ died and his share was taken over by A & C equally and later ‘P’ was enter for ‘1/4’ share. Find the new profit sharing ratio.
(a) 3 : 3 : 2
(b) 1 : 1 : 2
(c) 4 : 3 : 2
(d) None of the above
(a) 3 : 3 : 2
A : B : C
$$\frac { 1 }{ 3 }$$ : $$\frac { 1 }{ 3 }$$ : $$\frac { 1 }{ 3 }$$
B died and his share taken by A & B equally hence
B = $$\frac { 1 }{ 3 }$$ x $$\frac { 1 }{ 2 }$$ → $$\frac { 1 }{ 6 }$$
A’s share = Old Ratio + Gaining Ratio
= $$\frac { 1 }{ 3 }$$ + $$\frac { 1 }{ 6 }$$ → $$\frac { 2+1 }{ 6 }$$ → $$\frac { 3 }{ 6 }$$ = $$\frac { 1 }{ 2 }$$
C’s Share = Old + Gaining
= $$\frac { 1 }{ 3 }$$ + $$\frac { 1 }{ 6 }$$ → $$\frac { 1 }{ 2 }$$
P is admitted for $$\frac { 1 }{ 4 }$$th share.
1 – $$\frac { 1 }{ 4 }$$ → $$\frac { 3 }{ 4 }$$
A’s share = $$\frac { 3 }{ 4 }$$ x $$\frac { 1 }{ 2 }$$ → $$\frac { 3 }{ 8 }$$
C’s share = $$\frac { 3 }{ 4 }$$ x $$\frac { 1 }{ 2 }$$ → $$\frac { 3 }{ 8 }$$
P’s Share = $$\frac { 1 }{ 4 }$$
Hence, new Ratio of A : C : P = $$\frac { 3 }{ 8 }$$ x $$\frac { 3 }{ 8 }$$ → $$\frac { 1 }{ 4 }$$
i.e. 3 : 3 : 2

78. Profit of deceased partner is transfer in his _________.
(a) Loan A/c
(b) P/LA/c
(c) Executors A/c
(d) Both ‘a’ and ‘c’
(d) Both ‘a’ and ‘c’
Profit of deceased partners is transferred in his either loan. All with the interest of @ 6% p.a. or partner’s Executors A/c.

## Depreciation Accounting – CS Foundation Fundamentals of Accounting Notes

Go through this Depreciation Accounting – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

## Depreciation Accounting – CS Foundation Fundamentals of Accounting Notes

Depreciation:

• Depreciation means a fall in the value of asset due to usage, efflux of time or due to obsolescence.
• It is a permanent, continuous or gradual shrinkage in the book value of a fixed asset.
• The annual loss in the value of the asset is taken as the expenditure of the business.
• Depreciation is a process of allocating the cost of a fixed asset over its estimated useful life in a rational and systematic manner.
• “Depreciation is a process of allocation of expired cost and not of valuation of fixed asset”.

Depreciation Accounting:
Definition: “A measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortization of assets whose useful life is predetermined.”

Institute of Charted Accountants of India (ICAI):
“A system of accounting which aims to distribute the cost or other basic value of tangible capital assets less salvage (if any) over the estimated useful life of the unit (which may be a group of assets) in a systematic and rational manner. It is a process of allocation and not of valuation.”

American Institute of Certified Public Accountants (AICPA):
Characteristics of Depreciation –

• Depreciation is the reduction in the book value of an asset.
• Depreciation reduces the book value of an asset and not the market value.
• Depreciation is a charge against profit.
• Depreciation is a process of allocation of cost of an asset over the period of its life.
• The term depreciation is used for tangible fixed assets. For wasting assets (Like mines) it is called depletion and for fictitious assets such as goodwill it is called amortization.
• The amount of depreciation can never be calculated exactly, it can only be estimated.
• Depreciation is must, i.e. it always takes place whether the asset is carefully handled or neglected.
• If market value of fixed asset is fluctuating, the same does not affect the amount of depreciation so made on respective assets.
• Total depreciation cannot exceed its depreciable value or original cost where the scrap value is nil.

The fundamental objectives of depreciation are:

• To maintain the nominal capital invested in fixed assets.
• To allocate the expired cost of fixed assets over a number of accounting years.

Causes of Depreciation:

• Physical wear and tear due to continuous use.
• Efflux (passage of time)
• Physical deterioration
• Obsolescence (asset becoming redundant due to technological changes
• Accidents (fire etc.)
• Depletion

Objectives of providing Depreciation:

• To ascertain correct profit/loss
• To show a true and fair view of financial statements
• To show assets at their proper value
• To make provision for replacement of assets.
• Compliance of legal provisions
• To get tax benefit

Note : Replacement of asset.
Depreciation is a non cash expenditure, hence the amount debited in the profit and loss account are retained In the business. These are available for the replacement of the asset (buying a new asset), when replacement is required.

Factors in Measurement of Depreciation –
Cost of Asset:
Cost of the asset refers to the cost at which the asset is purchased. It includes all expenses incurred upto the point the asset is ready for use. Original cost = Purchase price + freight + installation cost

Useful Life of the Asset:
Useful life of the asset means the period for which an asset can be used productively without incurring extraordinary repairs and maintenance expense.
Determination of useful life is a matter of estimation.

Scrap (Residual value):
Residual value is the estimated sale value of the asset at the end of the economic life. Difference between the cost and the residual value is the depreciable amount which is to be written off over the useful life.

Other factors:
The following are the other factors affecting the measurement of depreciation.

• Obsolescence i.e. chance of going out of fashion of the asset.
• Working hours of the asset.
• Repairs and Renewals.
• Skills of the operator handling the asset.
• Legal provisions relating to the asset.
• The addition if any made during the year.

Depreciation Accounting:
Depreciation Accounting is the process of allocating the cost of depreciable asset less its salvage value over its serviceable useful life.

Note:
Depreciable assets are the assets which:

• Are expected to be used for more than one accounting period
• Have a limited useful life
• Are held by the organisation for use in the production or supply of goods and services.
• Depreciation is not a process of valuation but it is an allocation.
• There are two methods of recording depreciation:
• When depreciation is charged to asset account
• When provision of depreciation/ accumulated depreciation account is created.

(i) When Depreciation is Charged to Asset A/c:

• Depreciation is charged from the asset directly.
• At the year end, depreciation A/c is closed by transferring it to the Profit & Loss Account.
• In Balance Sheet, asset is shown at the written down value (cost less depreciation).
• Depreciation is to be charged whether the business incurs profit or loss.
• Depreciation provides funds for replacing the asset when its useful life ends

Journal Entries:
1. Charging Depreciation from Asset:
Depreciation A/c Dr. (With amount of depreciation)
To Asset A/c
(Being depreciation on asset charged)

2. Transferring Depreciation A/c to P/L A/c :
Profit & Loss A/c Dr. (With amount of depreciation)
To Depreciation A/c (Being depreciation transferred to P/L)

(ii) When Provision for Depreciation A/c is Made:

• Current year’s depreciation will be transferred to Profit/Loss A/c each year.
• In the Balance Sheet, asset will continue to appear at its original cost and total amount of depreciation charged till date will be shown in provision for depreciation or accumulated depreciation A/c.
• The balance is calculated by deducting provision for depreciation from original cost of asset.

Journal Entries:
1. Charging Depreciation:
Depreciation A/c Dr. (With amount of depreciation)
To Provision for depreciation A/c
(Being the depreciation on asset charged)

2. Transfer of Depreciation to P/L A/c at the year end:
Profit/Loss A/c Dr. (With amount of current year depreciation)
To Depreciation A/c
(Being depreciation transferred to P/L Account)

3. When asset is sold/discarded/exchanged accumulated depreciation for that asset in provision for Dep. A/c is transferred to asset account Provision for Dep. A/c Dr.
To Relevant Asset A/c

Notes :
1. Accumulated depreciation means total depreciation provided on an asset till date.

2. If the words “p.a.” i.e. per annum are attached to the rate of depreciation, then depreciation must be calculated only for that period when asset was held. Whereas if the words “p.a.” is not attached then depreciation is to be charged for the full year.

Component Method of Depreciation:
It may be noted that Accounting Standards as well as the Companies Act, 2013 allow depreciation to be charged on a component basis. Each part of an item of Property, Plant and Equipment with a cost that is significant in relation to the total cost of the item should be depreciated separately, eg.: It may be appropriate to depreciate separately the airframe and engines of an aircraft.

Methods of Providing Depreciation:

Uniform Charge Method:
(i) Straight Line Method (Fixed Installment Method):
1. Under this method, a percentage of original cost of the asset is written off every year so that asset account may be reduced to its residual value at end of its estimated economic life.

2. If the percentage of depreciation is not given, then the amount of depreciation to be charged every year shall be calculated as follows:
Amount of Depreciation = $$\frac { Cost-Estimated scrao value }{ Expected life }$$
Percentage of Depreciation = $$\frac { Deprecation × 100 }{ Ongnal cost of assete }$$

Example:
A firm bought an asset for ₹ 2,00,000 on 1st January, 2012. ₹ 10,000 are spent on installation. The life of the asset is estimated to be 5 years. Its scrap value at the end of the period is ₹ 10,000. Find the amount of annual depreciation.
Solution:
Amount of depreciation = $$\frac{\text { Cost – scrapvalue }}{\text { Estimatedlife }}$$
Here;
Cost of asset Original cost + expenses upto installation
= 2,00,000 + 10,000
= ₹ 2,10,000
Scrap value = ₹ 10,000 (given)
Estimated life = 5 years (given)

Applying the above Formula :
Amount of depreciation = $$\frac{\text { Cost – scrapvalue }}{\text { Estimatedlife }}$$
= $$\frac{2,10,000-10,000}{5}$$
= ₹ 40,000.
Therefore, ₹ 40,000 will be charged annually as depreciation.

Note : Calculating rate of depreciation
[Taking figures of above example]
Rate of depreciation = $$\frac{\text { Amount of Annual Depreciation }}{\text { Cost of Asset }}$$
= $$\frac{40,000}{2,10,000} \times 100$$
= 19% (approx)

• The amount of depreciation under this method will remain same every year.
• If the asset is purchased in between the year, depreciation will be charged only for that part of the year when the asset was held by the company.
• If the date on which asset is purchased is not given, depreciation will be charged for half year (assuming that the asset was purchased in the mid of the year).
• Value of asset each year in Balance Sheet is reasonably fair.

Merits of this Method:

• Simple to calculate
• Asset can be completely written off
• Amount and rate of depreciation remains same throughout the useful life.
• Best suited when asset is depreciating due to efflux of time (passage of time).
• The value of the asset each year in the Balance Sheet is reasonably fair.

Demerits of this Method:

• It assumes that the asset should be used equally throughout its life. This is not realistic.
• Charge on asset will not be uniform because in the later years apart from depreciation, repair expenses to the asset will also be incurred.
• It does not take into account the effective utilization of the asset.

Declining Charge Method – Diminishing Balance Method:

• This method is also known as written down value method.
• Under this method, depreciation is charged at a fixed rate on the reducing balance.
• Reducing Balance or Written Down Value = Cost of Asset – Depreciation
• The depreciation charge under this method goes on decreasing gradually.

Hence in the earlier years when there are negligible repairs, depreciation is high and in the later years when repairs are high, depreciation charge is low.

Annuity Method:

• Under this method, depreciation takes into account element of interest on capital outlay.
• Here, along with the value of asset, the interest lost over the life of the asset is also written off.
• The amount of Interest is calculated on Book value of the asset in the beginning of each year.
• Since the amount of interest lost cannot be computed easily, hence we make use of annuity tables for calculating the amount of depreciation.
• Here, the amount written off annually is constant.
• This method is best suited for writing off amount paid for long leases which involve a heavy capital outlay.

Note:
What is the element of interest on capital outlay?
When an amount is invested to purchase a capital asset, it is assumed that if that amount was invested elsewhere, it would have earned interest. This notional income is considered as a cost of the asset. It is a type of opportunity cost.

Journal Entries:
(i) On Purchase of Asset:
Asset A/c Dr.
To Bank A/c

(ii) For Charging Interest on Asset:
Asset A/c Dr.
To Interest A/c

(iii) For Charging Depreciation:
Depreciation A/c Dr.
To Asset A/c

(iv) For Transfer of Interest A/c to P/L A/c:
Interest A/c Dr.
To P/L A/c

(v) For Transfer of Depreciation A/c to P/L:
Profit & Loss A/c Dr.
To Depreciation A/c

Depreciation Fund Method (Sinking Fund Method):

• Under this method, the amount of depreciation is not charged from the assets and remain same year after year.
• Here, the amount annually provided for depreciation is placed to the credit of a special account named as “Sinking Fund A/c”.
• The amount so accumulated in the sinking fund account shall be invested in government securities bearing interest at specified rate.
• When the asset is due for replacement, the securities are sold and the new asset is purchased with the proceeds of their sale.
• The book value of old asset is transferred to the Sinking Fund A/c.
• Any amount realised from sale of old asset as well as Profit/Loss on sale of securities is transferred to Sinking Fund A/c.
• Sinking Fund A/c is closed by transferring the balance to Asset A/c.

Journal Entries:
(a) At the end of First Year:
(i) For setting aside amount of depreciation :
Depreciation A/c Dr.
To Depreciation Fund A/c

(ii) For investing the amount of depreciation :
Depreciation Fund Investment A/c Dr. (with the amount in dep. fund) To Bank

(b) In the Second and Subsequent Years :
(i) For interest received on investment:
Bank A/c Dr.
To Interest on Dep. Fund Investment A/c

(ii) For transferring interest to depreciation fund A/c :
Interest on depreciation fund
Investment A/c Dr.
To Depreciation Fund

(iii) For annual installment of depreciation :
Depreciation A/c Dr.
To Depreciation Fund A/c

(iv) For investing the amount of depreciation and interest received on investment:
Depreciation Fund Investment A/c Dr.
To Bank

At the end of Last Year:
First three entries will be same as in second year.
In the last year, the amount will not be invested because the old asset is replaced by new one for which investments will need to be sold.
(i) For Sale of Investment:
Bank A/c Dr.
To Depreciation Fund Investment A/c

(ii) For Transfer of Profit or Loss on sale of Investment:

 In case of Profit In case of Loss Depreciation Fund Investment A/c Dr. To Depreciation Fund A/c (with the amount of net profit on sale of investment) Depreciation Fund A/c   Dr. To Depreciation Fund Investment A/c (with net loss on sale of investment)

(iii) For Sale of Old Asset:
Bank A/c Dr. (with net amount
To Old Asset A/c

(iv) Transferring Depreciation Fund A/c to Old Asset A/c:
Depreciation Fund A/c Dr.
To Old Asset A/c (with the balance of depreciation fund A/c) The Balance in Old Asset A/c represents Profit or Loss. It will be transferred to P/L A/c.

(v) For Purchases of New Asset
New Asset A/c Dr. (with cash realised on sale of old asset)
To Bank

Insurance Policy Method:

• Under this method, the company takes an insurance policy for replacement of the asset.
• At the beginning of every year, a fixed amount of premium is paid.
• At the end of the term, the agreed sum is received from the insurance company which is used for the replacement of asset.
• Amount will be paid in the beginning of year.

Journal Entries:
(a) First year and Subsequent years:
(i) Insurance premium paid at the beginning of the year:
Depreciation Insurance Policy A/c Dr.
To Bank A/c

(ii) At year end:
P/L A/c Dr.
To Depreciation Reserve A/c

(b) At the end of Last year:
(i) Amount realised from insurance company:
Bank A/c Dr.
To Depreciation Insurance Policy A/c

(ii) For transfer of profit on insurance policy:
Depreciation Insurance Policy A/c Dr.
To Depreciation Reserve A/c

(iii) For transfer of accumulated depreciation to asset A/c:
Depreciation Reserve A/c Dr.
To Asset A/c

(iv) On purchase of new asset:
New Asset A/c Dr.
To Bank A/c

Note:
Sinking Fund Method and Insurance Policy Method:
Under sinking fund, the amount in the reserve is used for buying government securities whereas in insurance policy method an insurance policy is taken for this purpose.

Example : Cost of asset is ₹ 1,00,000 Rate of depreciation to be written off each year is 10% on the reducing balance. Calculate the depreciation charge for the first 3 years.
Solution:

Depreciation under this method can also be determined using the following formula:
Rate of Depreciation = 1 – n$$\sqrt{\frac{N e t \text { Residual Value(Salvage Value) }}{\text { Costof Acquisition }}}$$
Where n = life of the asset

Merits of this Method:

• Uniform weight of charge to P/L A/c for depreciation and repairs
• This method is recognized by the Income Tax Act
• Easier to compute
• Any additions to the asset are depreciated at the same rate.

Demerits of this Method:

• Value of asset can never be reduced to zero.
• Computation of rate of depreciation is a bit complex.
• Depreciation is neither based on use of asset nor a uniform charge is made.

Difference between Straight Line Method and Written Down Value Method:

 Basic Straight Line Method Written Down Value Method 1. Depreciation Charge Depreciation is calculated on the original cost of a fixed asset: Depreciation is calculated on the diminishing balance or written down value of a fixed asset. 2. Amount of Depreciation The amount of depreciation remains the same for all years. The amount of depreciation reduces year after year. 3. Zero Balance At the expiry of the working life of the asset, the balance in the asset account reduces to zero. The balance in the asset account will not reduce to zero. 4. Cost of Depreciation and Repairs The combined cost on account of depreciation and repairs is lower in the initial years and higher in the later years. The combined cost on account of depreciation and repairs are more or less, equal throughout the period. 5. Suitability This method is more suitable for assets which get depreciated on account of expiry of working life of the asset. This method is suitable for such assets which require more and more repairs in the later years of their working life. 6. Calculation Easy or Difficult It is easy to calculate the rate of depreciation. It is difficult to calculate the rate of depreciation.

Sum of Years Digit Method:

• This method is a slight variation of reducing balance method.
• Under this method, the charge for depreciation for an accounting period is calculated in proportion of the remaining life of the asset at the beginning of every accounting year.
• Depreciation = $$\frac { Remaining life of asset including current year × Cost of asset }{ Sum of digits of life of the asset }$$

In the above Formula :
Remaining life of assets Individual digits used in life of asset taken in reverse order
Sum of digits representing life of asset = n$$\frac { (n+1) }{ 2 }$$

Example
Suppose the estimated life of an asset is 10 years and cost of asset is ₹ 1,00,000.
Depreciation for the First year:
$$\frac { Remaining life including C.Y × Cost of asset }{ Sum of digits of life of asset }$$
→ Remaining life including C.Y. =10
→ Sum of digits n$$\frac { (n+1) }{ 2 }$$ = $$\frac { 10×11 }{ 2 }$$ = 55
Depreciation = $$\frac { 10 }{ 55 }$$ x 1,00,000 = ₹ 18,181.
Depreciation for Second Year = $$\frac { 9 }{ 55 }$$ x 1,00,000 = ₹ 16,363

Note : The depreciation is reducing year by year.

Depreciation Accounting MCQ Questions

1. Depreciation is:
(a) a fall in the original cost of an asset
(b) a fall in the book value of an asset
(c) a fall in the market value of asset
(d) a fall in the real value of an asset
(b) a fall in the book value of an asset

2. Depreciation is:
(a) a process of valuation of fixed asset
(b) a process of allocation of the cost of fixed asset
(c) a method of providing funds for replacement
(d) a process of writing off losses
(b) a process of allocation of the cost of fixed asset

3. The amount of depreciation remains constant year after year under:
(a) Written Down Value Method
(b) Straight Line Method
(c) Sinking Fund Method
(d) Annuity Method
(b) Straight Line Method

4. Any Profit of Loss on the sale of Sinking (depreciation)fund investment is transferred to:
(a) Profit and loss account
(b) Asset account
(c) Sinking fund account (depreciation fund account)
(d) Depreciation A/c
(c) Sinking fund account (depreciation fund account)

5. Under annuity method, the amount of depreciation is:
(a) Increasing every year
(b) Decreasing every year
(c) Fixed for all the years
(d) Revalued every year
(c) Fixed for all the years

6. The number of production units expected to be obtained from the use of an asset by an enterprise is called as:
(a) Unit life
(b) Useful life
(c) Production life
(d) Expected life
(b) Useful life

7. In which of the following methods, the cost of the asset is not spread over in equal proportion during its useful economic life?
(1) Straight Line Method
(2) Written Down Value Method
(3) Units of Production Method
(4) All of the above
(a) 2 and 3
(b) 1 and 2
(c) 3 and 4
(d) 1 and 4
(a) 2 and 3

8. For charging depreciation, on which of the following assets, the depletion method is adopted?
(a) Plant & machinery
(b) Land & building
(c) Goodwill
(d) Wasting assets like mines and quarries
(d) Wasting assets like mines and quarries

9. If a concern proposes to discontinue its business from March 31,2006 and decided to dispose off all its assets within a period of 4 months, the Balance Sheet as on March 31,2006 should show the assets at their:
(a) Historical cost
(b) Net realizable value
(c) Cost less depreciation
(d) Cost price or market value, whichever is lower.
(b) Net realizable value

10. Obsolescence of a depreciable asset may be caused by:
I. Technological Changes
II. Improvement in Production Method
III. Change in Market Demand for the Product or Service Output
IV. Legal or Other Restrictions
(a) Only (I) above
(b) Both (I) and (II) above
(c) All (I), (II),(III) and (IV) above
(d) only (IV) above.
(c) All (I), (II),(III) and (IV) above

11. Using the equal instalment method for depreciation the relevant formula is:
(a) Annual charge against profit = $$\frac { Originalcost-Residual value }{ Number of year of active life }$$
(b) Annual charge against profits = $$\frac { Number of year of active life }{ Originalcost-Residualvalue }$$
(c) Annual charge against profits = $$\frac { Originalcost-Residual value }{ Estimated number of year remaining }$$
(d) Annual charge against profits = $$\frac { Estimated number of year remaining }{ Originalcost-Residual value }$$
(a) Annual charge against profit = $$\frac { Originalcost-Residual value }{ Number of year of active life }$$

12. A Second hand machinery was purchased for ₹ 1,00,000 five years ago and was overhauled by carrying out some repairs at a cost of ₹ 10,000. It has also an accumulated depreciation of ₹ 50,000. It has been disposed off in the beginning of the sixth year for ₹ 60,000.Profit /loss on such disposal shall be:
(a) Profit of ₹ 10,000
(b) Loss of ₹ 50,000
(c) Loss of ₹ 40,000
(d) No Profit, no loss
(d) No Profit, no loss

13. An asset was purchased for ₹ 12,500 and under the reducing balance method 20 percent of the reducing value of the asset is written off each year. What is the value of the asset at the end of three years?
(a) ₹ 8,000
(b) ₹ 7,500
(c) ₹ 6,400
(d) ₹ 5,000
(c) ₹ 6,400

14. A machine is purchased for ₹ 200. To achieve a residual value of ₹ 128 at the end of the second year (assuming that depreciation is calculated at the end of each year) the percentage depreciation using the reducing balance method must be:
(a) 72%
(b) 36%
(c) 20%
(d) 12%
(c) 20%

15. The main objective of providing depreciation is to:
(a) Create secret reserves
(b) Reduce the book value of assets
(c) Value the assets property
(d) Allocate cost of the assets
(d) Allocate cost of the assets

16. Charging a period for the proportionate cost of an intangible asset is termed as:
(a) depreciation
(b) diminution
(c) amortisation
(d) expiration
(c) amortisation

17. In the books of D Ltd. machinery account shows a debit balance of ₹ 60,000 as on April 1,2003. The machinery was sold on September 30,2004 for 7 20,000. The Company charges depreciation @ 20% P.a. on diminishing balance method Profit / Loss on sale will be:
(a) ₹ 23,200 Profit
(b) ₹ 23,200 loss
(c) ₹ 7,800 Profit
(d) ₹ 7,800 loss
(b) ₹ 23,200 loss

18. A new machine costing ₹ 1,10,000 was purchased by a company to manufacture a special product. Its useful life is estimated to be 5 years and scrap value of 7 20,000. The production plan for the next 5 years using the above machine is as follows:
Year 1-10,000 units: Year 2-20,000 units: Year 3-24,000 units: Year4- 40,000 units : year 5- 50,000 units.
The depreciation for the 1sl year under units-of-production method will be
(a) ₹ 6,250
(b) ₹ 12,500
(c) ₹ 15,000
(d) ₹ 25,000
(a) ₹ 6,250

19. A Co. purchased a machine on Jan, 1,03 for ₹ 2,20,000. Installation expenses were ₹ 40,000. Residual value after 5 years ₹ 5,000 on 01.07.2003, expenses for repairs were incurred to the extent of ₹ 2,000. Depreciation is provided @ 10% p.a. underwritten down value method. Depreciation for the 4th year will be:
(a) ₹ 52,000
(b) ₹ 26,000
(c) ₹ 21,060
(d) ₹ 18,954
(d) ₹ 18,954

20. Original Cost = ₹ 1,30,000: Salvage Value = 4,000. Useful Life = 6 years.
Depreciation for the first year under sum of years digits method will be:
(a) ₹ 6,000
(b) ₹ 12,000
(c) ₹ 18,000
(d) ₹ 36,000
(d) ₹ 36,000

21. A Co. purchased a machine on Jan 1,2003 for ₹ 1,20,000. Installation expenses were ₹ 10,000. Residual value after 5 years ₹ 5,000. On July 1, 2003 expenses for repairs were incurred to the extent of ₹ 2,000. Depreciation is provided under straight line method. Annual Depreciation will be:
(a) ₹ 13,000
(b) ₹ 24,000
(c) ₹ 21,000
(d) ₹ 25,000
(d) ₹ 25,000

22. Original Cost of a machine was ₹ 1,26,000; Salvage Value was nil, Useful Life was 6 years. Depreciation for the fourth year under sum of years digits method will be:
(a) ₹ 6,000
(b) ₹ 12,000
(c) ₹ 18,000
(d) ₹ 24,000
(c) ₹ 18,000

23. Which of the following statements is / are True?
I. The term ‘depreciation’,’depletion’ and ‘amortization’ convey the same meaning.
II. Provision for depreciation a/c is created.
III. The main purpose of charging the Profit and Loss a/c with the amount of depreciation is to spread the cost of an asset over its useful life for the purpose of income determination.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) All (I), (II) and (III) above.
(d) All (I), (II) and (III) above.

24. Which of the following expenses is not included in the acquisition cost of a Plant and Equipment?
(a) Cost of site preparation
(b) Delivery and handling Charges
(c) Installation costs
(d) Financing costs incurred subsequent to the period after plant and equipment is put to use.
(d) Financing costs incurred subsequent to the period after plant and equipment is put to use.

25. The portion of the acquisition cost of the asset, yet to be allocated is known as:
(a) Written down value
(b) Accumulated value
(c) Realizable value
(d) Salvage value
(a) Written down value

26. Depreciation is charged because of:
(i) Wear & tear
(ii) Deterioration
(iii) Depletion
(iv) Passage of time
(a) Only (i)
(b) Both (i) & (iii)
(c) Only (ii)
(d) All (i), (ii), (iii) & (iv)
(d) All (i), (ii), (iii) & (iv)

27. Objectives of charging depreciation are:
(i) Ascertaining correct profits
(ii) Ascertaining the cost of the product
(iii) To gain tax benefits
(iv) To meet the legal requirements
(a) Both (i) & (ii)
(b) (iii) only
(c) Both (ii) & (iv)
(d) All (i), (ii), (iii) & (iv)
(d) All (i), (ii), (iii) & (iv)

28. If an asset is purchased for ₹ 5,00,000 and installation charges are ₹ 50,000. The estimated scrap value is ₹ 1,00,000 and the useful life of the asset is 5 years, then the amount of depreciation to be charged as per SLM method is:
(a) ₹ 90,000
(b) ₹ 80,000
(c) ₹ 1,11,111
(d) ₹ 1,20,000
(a) ₹ 90,000

29. Scrap value of an asset refers to the amount that it can fetch at the:
(a) Beginning of its life
(b) End of its life
(c) Middle of its life
(d) None of the above
(b) End of its life

30. Obsolescence of a depreciable asset Is caused by:
(a) Change in technology
(b) Innovation
(c) Improvement in the method of production
(d) All of the above
(d) All of the above

31. Depreciation is a process of:
(a) Verification of asset
(b) Degradation of asset
(c) Allocation of cost of asset to the period of its life
(d) All of the above
(c) Allocation of cost of asset to the period of its life

32. Annuity method of depreciation is suitable for:
(a) Tangible assets
(b) Intangible assets
(c) Leasehold assets
(d) None of the above
(c) Leasehold assets

33. A gold mine was taken on lease for ₹ 50,00,00,000. The total production capacity of the mine is 10,000 tonnes. The total production in the year 2010 was 2,000 tonnes. The depreciation for the year 2010 is:
(a) ₹ 10,00,00,000
(b) ₹ 5,00,00,000
(c) ₹ 20,00,00,000
(d) None of the above
(a) ₹ 10,00,00,000

34. Depletion method is normally applied in case of:
(a) Wasting Assets
(b) Intangible Asset
(c) Tangible Asset
(d) None of these
(a) Wasting Assets

35. In the sinking fund method of charging depreciation, the amount debited to P&L A/c is:
(a) More in the initial years
(b) More in the ending year
(c) Remains the same every year
(d) None of the above
(c) Remains the same every year

36. If diminishing value method is used then the amount of depreciation charged to P&L A/c is:
(a) Equal in all years
(b) Decreases year after year
(c) Increases year after year
(d) None of these
(b) Decreases year after year

37. In sinking fund investments method, the profit on sale of investments is transferred to:
(a) Asset A/c
(b) Bank A/c
(c) Depreciation Fund A/c
(d) Depreciation Fund Investment A/c
(c) Depreciation Fund A/c

38. Under the insurance policy method, the fixed premium is paid:
(a) To the beginning of the year
(b) Middle of the year
(c) End of the year
(d) None of the above
(a) To the beginning of the year

39. In group depreciation method:
(a) Assets having similar average life is grouped together
(b) Depreciation is charged on the entire group and not on individual assets
(c) Both (a) and (b)
(d) Neither (a) nor (b)
(c) Both (a) and (b)

40. The effect of change in the method of depreciation is to be taken:
(a) Retrospectively
(b) Prospectively
(c) Both (a) and (b)
(d) Neither (a) nor (b)
(a) Retrospectively

41. Depreciation is charged on the:
(a) Historical cost
(b) Replacement cost
(c) Realisable cost
(d) None of these
(a) Historical cost

42. During inflationary period, which method of depreciation is the most suitable:
(a) Charging depreciation on historical cost
(b) Charging depreciation on realisable value
(c) Charging depreciation on replacement cost
(d) None of the above
(c) Charging depreciation on replacement cost

43. A machine was purchased for ₹ 10,000 on Jan, 2008. Depreciation is to be charged @ 25% on WDV method. It was sold for ₹ 6,000 at the end of the third year. Calculate the profit / loss:
(a) Profit ₹ 1,781
(b) Profit ₹ 2,300
(c) Loss ₹ 3,219
(d) Loss ₹ 3,299
(a) Profit ₹ 1,781

44. Which of the following is depleted?
(a) Land
(b) Goodwill
(c) Machinery
(d) Quarries
(d) Quarries

45. Which method is allowed as per Income Tax Act?
(a) Reducing balance method
(b) Sinking fund method
(c) Annuity method
(d) Straight line method
(a) Reducing balance method

46. Under the annuity method, the asset account is debited by:
(a) Depreciation fund A/c
(b) Interest A/c
(c) Sinking fund A/c
(d) None of these
(b) Interest A/c

47. Which method of depreciation considers the element of interest on capital outlay?
(a) WDV method
(b) Sinking fund method
(c) Annuity method
(d) SLM method
(c) Annuity method

48. The value of an asset is ₹ 50,000. Its working life is 10 years. Firm uses sum of years digits method for providing depreciation. What will be the amount of depreciation for second year?
(a) ₹ 5,000
(b) ₹ 9,091
(c) ₹ 4,500
(d) ₹ 8,181
(d) ₹ 8,181
Sum of year digits = 10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 55
Depreciation for the second year will be:
= 50,000 x $$\frac { 9 }{ 55 }$$
= ₹ 8,181

49. Decrease in value of a fixed asset due to normal wear and tear is known as:
(a) Depreciation
(b) Obsolescence
(c) Appropriation
(d) Spoilage.
(a) Depreciation
Depreciation means a fall in the value of asset due to usage, efflux of time or due to obsolescence. In other words we can say, that decrease in value of a fixed assets due to normal wear and tear is known as Depreciation.

50. Dinesh Garments purchased a machine for ₹ 50,000 and spent ₹ 6,000 on its erection. On the date of purchase, it was estimated that effective life of the machine will be ten years and after ten years its scrap value will be ₹ 6,000. The amount of depreciation for second year on straight line basis
is:
(a) ₹ 5,000
(b) ₹ 5,600
(c) ₹ 6,000
(d) ₹ 6,200
(a) ₹ 5,000
Cost of Machine = 50,000 + 6,000 = ₹ 56,000
Depreciation as per Straight line basis = $$\frac { Cost of Machine-Scrap value }{ Estimated Life of year }$$
= $$\frac{56,000-6,000}{10}$$
= ₹ 5 000
Depreciation for each year will be ₹ 5,000
Thus, Second year Depreciation = ₹ 5,000

51. A firm charges depreciation on straight line method. The rate of depreciation is reduced from 25% to 10%. What will be the impact of this change on profits?
(a) Decrease in profits
(b) Increase in profits
(c) Decrease in assets
(d) Increase in expenses.
(b) Increase in profits
Depreciation is transferred to debit side of profit & loss A/c. If depreciation rate is reduced from 25% to 10%, depreciation amount will be less than other past years. The less amount of depreciation will be transferred to profit & loss A/c while will result in increase in profits.

52. Under straight line method, depreciation is calculated on:
(a) Written Down Value
(b) Salvage Value
(c) Original Cost
(d) Market Value
(c) Original Cost
Under straight line method, a fixed proportion of the original cost of the asset is written off each year so that asset account may be reduced to its residual value at the end of its estimated economic useful life. Thus, it can be said that under this method, depreciation is calculated on Original Cost.

53. Which of the following assets are shown at written down value in Balance Sheet?
(a) Current Assets
(b) Liquid Assets
(c) Floating Assets
(d) Fixed Assets
(d) Fixed Assets
Depreciation is charged only on fixed assets and depreciation is a permanent, continuous and gradual shrinkage in the book value of fixed assets. So, it can be said that Fixed Assets are shown at written down value in Balance Sheet.

54. On 1st April, 2012 in Sethi’s Ledger, furniture account showed a balance of ₹ 2,00,000. On 1st October, 2012 Sethi purchased new furniture by paying ₹ 5,000 and giving old furniture whose book value on 1st April, 2012 was ₹ 12,000 to the seller. Sethi provides depreciation on furniture @ 10% per annum on diminishing balance method. The net value of furniture in Sethi’s books as on 31st March, 2013 would be:
(a) ₹ 1,85,080
(b) ₹ 1,83,960
(c) ₹ 1,84,780
(d) ₹ 2,04,400.
(c) ₹ 1,84,780
In Books of Sethi
Furniture Account

55. The written down value of machine on 31st March, 2013 is ₹ 72,900. The machine was purchased on 1st April, 2010. Depreciation is being charged @ 10% p.a. by diminishing balance method. The cost price of the machine would be:
(a) ₹ 1,00,000
(b) ₹ 90,000
(c) ₹ 81,000
(d) ₹ 72,900.
(a) ₹ 1,00,000
Cost price of machine = $$\frac{72,900}{90 \% \times 90 \% \times 90 \%}$$
= ₹ 1,00,000

56. A company purchased plant for ₹ 50,000. The useful life of the plant is 10 years and the residual value is ₹ 5,000. The management wants to depreciate it by straight line method. Rate of depreciation will be:
(a) 8%
(b) 9%
(c) 10%
(d) None of the above.
(b) 9%

57. Madhur and Company purchases a machine for a certain sum. The company has a policy of charging 8% depreciation on written down value. The depreciated value of the machine after three years in the books of Madhur and Company is ₹ 3,89,344. What was the purchase value of machine.
(a) ₹ 5,00,000
(b) ₹ 4,60,000
(c) ₹ 4,23,000
(d) ₹ 5,52,000.
(a) ₹ 5,00,000

58. The value of a fixed asset after deducting depreciation is known as its __________.
(a) Book value
(b) Market Value
(c) Face Value
(d) Realisable value.
(a) Book value
The value of a fixed asset after deducting depreciation is known as written down value or book value.

59. Dinesh Garments purchased a machine for ₹ 50,000 and spent ₹ 6,000 on its creation. On the date of purchase it was estimated that the effective life of the machine will be ten years and after ten years its scrap value will be ₹ 6,000. The amount of depreciation for each year on straight line basis is __________.
(a) ₹ 5,000
(b) ₹ 5,600
(c) ₹ 6,000
(d) None of the above.
(a) ₹ 5,000
Total cost of machinery will be = 50,000 + 6,000 = ₹ 56,000
Scrap value after 10 years will be = ₹ 6,000
Dep. on the basis of straight line
= $$\frac { Cost of machinery – Scrap Value }{ Life of machinery }$$
= $$\frac{56,000-6,000}{10}$$
= ₹ 5,000
Thus, Option (a) is right.

60. An equipment was purchased on 1st January, 2012 for ₹ 25,000 and is to be depreciated at 30% based on reducing balance method. If the company closes its books of account on 31st December every year, what would be the net book value of the equipment as at 31st December, 2013 __________.
(a) ₹ 12,250
(b) ₹ 10,000
(c) ₹ 17,750
(d) ₹ 12,545.
(a) ₹ 12,250
Calculation of Net Book Value of the Equipment

61. Coal mine is which type of asset __________.
(a) Fixed Asset
(b) Current Asset
(c) Wasting Asset
(d) Fictitious Asset.
(c) Wasting Asset
Coal mines are wasting assets as their value loses because they get exhausted on account of continuous extractions.

62. If the original and current price of machinery is given, it will be recorded at which value?
(a) Historical value
(b) Market value
(c) Realisable value
(d) Original cost.
(d) Original cost.
Due to the cost concept, we record the fixed assets at cost price and not at market price.

63. An equipment was purchased on 1st January, 2012 for ₹ 25,000 & is to be depreciated at 30% based on WDV method. If the company closes its books of account on 31st March every year. What would be the net book value of the equipment as at 31st December 2013:
(a) ₹ 12,250
(b) ₹ 10,000
(c) ₹ 17,750
(d) ₹ 12,545
(a) ₹ 12,250
Calculation of Net Book Value of the Equipment

64. Which of the following are amortised :
(a) Patent
(c) Goodwill
(d) All of these
(d) All of these
Amortization is nothing but the name given to the depreciation charged on intangible assets such as goodwill, patents, copyright, trademark, etc.
Hence, all of the above are amortized.

65. The WDV of machine is ₹ 72,900, rate of depreciation @ 10%, period 3 years. Calculate the original cost of machinery.
(a) ₹ 72,900
(b) ₹ 80,000
(c) ₹ 1,20,000
(d) ₹ 1,00,000.
(d) ₹ 1,00,000.

66. Valueless assets are treated as:
(a) Tangible Asset
(b) Intangible Asset
(c) Fictitious Asset
(d) Current Asset.
(c) Fictitious Asset
Fictitious assets are those assets which have no value but are recognised as an asset. Thus, the valueless assets are treated as fictitious assets.

67. A company purchased a mine of ₹ 50,000. Its scrap value is ₹ 5,000 and expected working life is 9 years. 1,00,000 units were expected to be produced during its working life. Units produced in first 3 years are 7,000, 15,000 and 19,000 respectively. Calculate the amount of depreciation for the third year by using depletion method.
(a) ₹ 3,150
(b) ₹ 8,550
(c) ₹ 3,000
(d) ₹ 6,750
(b) ₹ 8,550
Rate of depreciation = $$\frac { Total cost of mine }{ Total Units }$$
= $$\frac{50,000-5,000}{1,00,000}$$
= 45
= 45%
Depreciation = Quantity extracted during the year x Rate of depreciation
= 19000 x 45%
= ₹ 8,550 is the depreciation for third year.
Hence option (b) is correct.

68. The value of a fixed asset after deducting depreciation is known as its __________.
(a) Face Value
(b) Market Value
(c) Realisable Value
(d) Book Value
(d) Book Value
Depreciation is a process of allocating the cost of a fixed asset over its estimated useful life in a rational and systematic manner. The value of a fixed asset after deduction of depreciation is said as book value of the respective asset.

69. Samar purchased a machinery worth ₹ 1,00,000 and spent ₹ 20,000 on its repairs and ₹ 15,000 on its carriage. He decided to sell the machinery at 25% margin on selling price. What will be the expected sale value of machinery?
(a) ₹ 1,25,000
(b) ₹ 1,53,000
(c) ₹ 1,80,000
(d) ₹ 1,33,000
(c) ₹ 1,80,000
Cost of machinery = ₹ 1,00,000 + 20,000 + 15,000
= ₹ 1,35,000.
25% on selling price = $$\frac { 25 }{ 100-25 }$$ on cost.
$$\frac { 25 }{ 75 }$$ x ₹ 1,35,000 = ₹ 45,000
₹ 1.35,000 + ₹ 45,000 = ₹ 1,80,000

70. A decrease in value of fixed asset due to age, wear and tear:
(a) Appreciation
(b) Written down value
(c) Depreciation
(d) Accumulated depreciation.
(c) Depreciation
Depreciation is decrease in value of fixed asset due to physical wear and tear, obsolescence, passage of time.

71. Depletion is charged on:
(a) Fixed Assets
(b) Wasting Assets
(c) Current Assets
(d) All of the above
(b) Wasting Assets
Depletion method is applicable in case of wasting assets, example – mines, quarries, oil well etc. from which a certain quantity of output is expected to be obtained.

72. An asset becomes useless because of technical changes this is because of:
(a) Obsolescence
(b) Physical Deterioration
(c) Depletion
(d) Passage of time
(a) Obsolescence
Sometimes an asset becomes useless because of technical changes within the industry, technical progress in other industry, change in supply etc., this is known as Obsolescence.

73. Which of the following is not considered while calculating depreciation under straight line method?
(a) Salvage value of asset
(b) Annual repair cost of the asset
(c) Life of the asset
(d) Cost of the asset.
(b) Annual repair cost of the asset
Under straight line method, a fixed proportion of the original cost of the asset is written off each year, so that asset account may be reduced to its residual value at the end of its estimated economic useful life. It ignores annual repair cost of the asset.
The formula is:

74. On 14th April, 2014 tools account showed a balance of ₹ 12,960. On 31st March, 2015 closing balance of tools was ₹ 14,040. The tools purchased during the year were for ₹ 4,320. Depreciation on loose tools for the year would be:
(a) ₹ 3,240
(b) ₹ 1,080
(c) ₹ 3,600
(d) ₹ 3,000
(a) ₹ 3,240

75. As per Income Tax Act, which method of providing depreciation is recognised?
(a) Replacement method
(b) Depletion method
(c) Diminishing balance method
(d) Sum of the year digit method.
(c) Diminishing balance method
Diminishing Balance Method is recognised by the income tax authorities. Under this depreciation is calculated at a certain percentage each year on the balance of the assets which is brought forward in the previous year. Thus, amount of depreciation becomes higher in the earlier periods and becomes gradually lower in subsequent periods, while repairs and maintenance charges increase gradually.

76. A company purchased plant for ₹ 50,000. The useful life of the plant is 10 years and the residual value is ₹ 5,000. The management wants to depreciate it by straight line method. Rate of depreciation will be:
(a) 9%
(b) 8%
(c) 10%
(d) 7%
(a) 9%

77. On April 1,2013 the debit balance of the Machinery A/c of A Ltd. was ₹ 7,29,000. The machine was purchased on April 1,2010. The company charged depreciation @ 10% p.a, under diminishing balance method. The value of machinery on April 1,2012 was:-
(a) ₹ 10,00,000
(b) ₹ 9,00,000
(c) ₹ 8,10,000
(d) ₹ 12,00,000
Let the Original Cost be 100 Dep. @ 10% under WDV
Cost after 1 year = 100 – 10 = 90
Cost after 2 year = 90 – 9 = 81
Cost after 3 year = 81 – 8.1 = 72.9
Original Cost = $$\frac { 100 }{ 72.9 }$$ x 7,29,000 = 10,00,000
Cost on 1 April, 2010 = ₹ 10,00,000
Cost on 1 April, 2011= ₹ 9,00,000
Cost on 1 April, 2012 = ₹ 8,10,000

78. The amount of depreciation charged on machinery will be debited to __________.
(a) Machinery A/c
(b) Depreciation A/c
(c) Cash A/c
(d) Repair A/c.
(b) Depreciation A/c
The amount of depreciation charged on machinery will be debited to depreciation account. Hence, option (b) is correct.

79. A company purchased a mine of ₹ 50,000. Its scrap value is ₹ 5,000 and expected working life is 9 years. 1,00,000 units were expected to be produced during its working life. Units produced in first 3 years are ₹ 7,000, ₹ 15,000 and ₹ 19,000 respectively. Calculate the amount of depreciation for the third year by using depletion method.
(a) ₹ 3,150
(b) ₹ 8,550
(c) ₹ 3,000
(d) ₹ 6,750
(b) ₹ 8,550

80. The written down value of machine on 31st March 2013 is ₹ 72,900. The machine was purchased on 1st April, 2010. Depreciation is being charged @ 10% p.a. by diminishing balance method. The cost price of the machine would be:
(a) ₹ 1,00,000
(b) ₹ 90,000
(c) ₹ 81,000
(d) ₹ 72,900
(a) ₹ 1,00,000
Cost price of Machine would be ₹ 1,00,000 on 1st April, 2010.
Written down Value of Machine on 1st April, 2011 is ₹ 90,000 (1,00,000 – 1,00,000 x 10%).
Written down Value of Machine on 1st April, 2012 is (90,000 – 90.0 x 10%) = ₹ 81,000.
Written down Value of Machine on 31st March, 2013 is (81,000 – 81.0 x 10%) = ₹ 72,900.

81. E Ltd. a dealer in second-hand machinery has the following five machines of different models and makes in their stock, at the end of the financial year 2012-13?

The value of stock included in the Balance Sheet of the company as on 31st March, 2013 was:
(a) ₹ 7,62,500
(b) ₹ 7,70,000
(c) ₹ 7,90,000
(d) ₹ 8,70,000
(b) ₹ 7,70,000

So, Closing Stock included in Balance Sheet by following Golden Rule ‘Cost or NRV whichever is lower’.
Machine cost or NRV whichever is less taken
A – 90,000, C – 2,65,000, E – 2,00,000
B – 1,15,000, D-1,00,000
Total Stock included in Balance Sheet is
90,000 + 1,15,000 + 2,65,000 + 1,00,000 + 2,00,000 = ₹ 7,70,000

82. Fire Insurance premium paid on 1st October, 2011 for the year ended on 30th September, 2012 was ₹ 2,400 and Fire Insurance Premium paid on 1st October, 2012 for the year ending on 30th September, 2013 was ₹ 3,200. Fire Insurance Premium paid as shown in the profit and loss account for the accounting year ended 31st December, 2012 would be:
(a) ₹ 2,400
(b) ₹ 2,600
(c) ₹ 2,800
(d) ₹ 3,000
(b) ₹ 2,600
Premium paid as follows:
1.10.11 – 30.9.12 2,400
1.10.12 – 30.9.13 3,200
Premium to be shown in P/L A/c for the year ending on 31.12.12 would be:

83. A company purchased plant for ₹ 50,000. The useful life of the plant is 10 years and the residual value is ₹ 5,000. The management wants to depreciate it by straight line method. Rate of depreciation will be:
(a) 8%
(b) 9%
(c) 10%
(d) None of the above
(b) 9%
Plant purchased for ₹ 50,000 Residual Value = ₹ 5,000
So, Plant Cost after Residual Value is ₹ 45,000 (50,000 – 5,000)
Useful life = 10 years.
Rate of Depreciation = ?
Amount of Depreciation = $$\frac{50,000-5,000}{10}$$
= $$\frac{45,000}{10}$$
= 4,500
Amount of depreciation = Original Cost x $$\frac{Rate of Deprecation}{100}$$
4,500 = 50,000 x $$\frac{Rate of Deprecation}{100}$$
Rate of Depreciation = $$\frac{4,500 \times 100}{50,000}$$ = 9%

84. An equipment was purchased on 1st January, 2012 for ₹ 25,000 and is to be depreciated @ 30% based on written down value method. If the company closes its books of accounts on 31st March every year. What would be the net book value of the instrument /equipment as at on 31st December, 2013.
(a) ₹ 12,250
(b) ₹ 10,000
(c) ₹ 17,750
(d) ₹ 12,545
(d) ₹ 12,545
Purchase Price of Asset: ₹ 25,000 (Jan. 2012)
Depreciation = $$\frac{Price of on Asset }{100 }$$ x Rate of Depreciation
Jan 2012 – March 2012 = $$\frac{25,000}{100} \times 30 \times \frac{9}{12}$$ = ₹ 1,875
Value of an asset on 1st April, 2012 = 25,000 – 1,875 = ₹ 23,125
Dep. for 1st April, 2012 to 31st March, 2013 = 23,125 x $$\frac{ 30 }{100}$$ = ₹ 6,938
Value of an asset on 1st April, 2013 = 23,125 – 6,938 = ₹ 16,187
Dep. for 1st April, 2013 to 31st Dec. 2013 = 16,187 x $$\frac{ 30 }{100}$$ x $$\frac{9}{12}$$ = ₹ 3,642
Book Value of An Asset = Purchase Price of Asset – Sum of all depreciation.
Purchase Price : ₹ 25,000
Sum of All depreciation = 1,875 + 6,938 + 3,642 = 12,455
= 25,000 – 12,455 = ₹ 12,545, hence, option (d) is correct.

85. Dinesh Garments purchased a machine for ₹ 50,000 and spent ₹ 6,000 on its erection. On the date of purchase it was estimated that the effective life of the machine will be ten years and after ten years its scrap value will be ₹ 6,000. The amount of depreciation for each year on straight line basis is:
(a) ₹ 5,000
(b) ₹ 5,600
(c) ₹ 6,000
(d) None of the above
(a) ₹ 5,000
Depreciation = $$\frac{Cost-Scrap Value}{Estimated useful life}$$
= $$\frac{56,000-6,000}{10}$$
= ₹ 5,000 p.a.

86. An equipment was purchased on 1st January, 2012 for ₹ 25,000 and is to be depreciated at 30% based on reducing balance method. If the company closes its book of accounts on 31st March every year, what would be the net book value of the equipment as at 31st December, 2013:
(a) ₹ 12,250
(b) ₹ 10,000
(c) ₹ 17,750
(d) ₹ 12,545
(d) ₹ 12,545

87. Madhur and company purchases a machine for a certain sum. The company has a policy of charging 8% depreciation on written down value. The depreciated value of the machine after three years in the books of Madhur and company is ₹ 3,89,344 what was the purchase value of machine:
(a) ₹ 5,00,000
(b) ₹ 4,60,000
(c) ₹ 4,23,000
(d) ₹ 5,52,000
(a) ₹ 5,00,000
Cost of Machine = $$\frac{3,89,344}{92 \% \times 92 \% \times 92 \%}$$
= ₹ 5,00,000.

88. The value of a fixed asset after deducting depreciation is known as its:
(a) Book value
(b) Market value
(c) Face value
(d) Realisable value
(a) Book value
Value of an asset, less its depreciation is known as its book value or written down value.

89. Under which method of depreciation value can be zero __________.
(a) SLM
(b) WDV
(c) Both ‘a’ and ‘b’
(d) None of the above
(a) SLM
As the book value reduces every years, it is also known as the Reducing Balance Method or written down value reduces every year, hence the amount of depreciation also reduces every year. Under this method, the value of asset never reduces to zero.

90. Depreciation is provided under which AS?
(a) AS-1
(b) AS-6
(c) AS-10
(d) AS-4
(c) AS-10
Deprecation under AS 10 Property, Plant and Equipment Depreciable amount of any asset should be allocated on a methodical basis over the useful life of asset. Every part of property or P&E (Plant and Equipment) whose cost is substantial with respect to the overall cost of the item must be depreciated separately

91. Among which of the following is changed in depreciation?
(a) SLM or WDV
(b) WDV or SLM
(c) Both
(d) None
(c) Both
Method of Deprecation are:

• WDV
• SLM
• Depletion method
• Double dealing method
• Annuity method
• Machine hours method etc.

92. Which of the following is common method of charging depreciation
(a) SLM
(b) WDV
(c) Annuity
(d) None
(a) SLM
The most commonly used method for calculating depreciation under generally accepted accounting principles, or GAAP, is the straight line method. This method is the simplest to calculated results in fewer errors, stays the most consistent and transitions well from company prepared statements to tax returns.

## Introduction to Company Accounts-Issue of Debentures – CS Foundation Fundamentals of Accounting Notes

Go through this Introduction to Company Accounts-Issue of Debentures – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

Meaning:

• A debenture is a bond issued by a company acknowledging a debt and containing provisions for repayment of interest and principal.
• It refers to the loan capital of the company or a source of long-term borrowing.
• The interest on debentures is a charge against profits of the company.
• The holders of debentures are known as the debenture holders.
• Debenture holders are not the owner of the company and hence, do not have voting rights.
• Debentures may or may not create a charge on the assets of the company.
• Debentures may be issued at par, premium or discount.
• Interest on debenture is to be paid even if the company does not earn any profits i.e. at loss also.

Distinction between Shares and Debentures:

 Shares Debentures 1. Shareholders are owners of company. Debenture holders are creditors of the company. 2. Shareholders have voting rights. Debenture holders do not have voting rights. 3. Dividend on equity shares is not fixed and is an appropriation of profit. Interest on debentures is at a fixed rate and is a charge against profit. 4. Shares are owned capital of the company. Debentures are the loan capital of the company. 5. In Balance Sheet, shares are shown under Shareholders fund. Debentures are shown in the Balance Sheet under the head Non-Current liabilities.

Types of Debentures:

• Secured Debentures: These are secured by a charge on the assets of the company.
• Unsecured Debentures: These are not secured by any charge on the assets of the company.
• Convertible Debentures: Debentures which have an option of conversion into equity shares at some point of time are called convertible debentures.
• Non-convertible Debentures: These can never be converted into equity shares.
• Redeemable Debentures: These debentures have to be redeemed after a fixed period of time.
• Irredeemable Debentures: Also known as perpetual debentures, these are not redeemable and will be repaid only at the time of liquidation.
• Registered Debentures: These debentures are payable only to that person whose name is present in the Register of Debenture holders. These are not transferred by mere delivery.
• Bearer Debentures: Debentures which are transferred by mere delivery and not entered in Register are bearer debentures.

Issue of Debentures:

1. Issue of Debentures for cash:
(a) Debentures issued at par and redeemable at par –
→ If full amount is paid at once:
(i) Bank A/c                                   Dr.
To Debenture Application A/c (Being receipt of application money)

(ii) Debenture Application A/c      Dr.
To Debentures A/c (Being debentures allotted)

→ If payment is made in installments:
(i) Bank A/c                                    Dr.
To Debenture Application A/c (Being amount received on application)

(ii) Debenture Application A/c       Dr.
To Debenture A/c (Being debentures allotted)

(iii) Debenture Allotment A/c         Dr.
To Debenture A/c (Being allotment due)

(iv) Bank A/c                                   Dr.
To Debenture Allotment A/c (Being allotment money received)

(v) Debenture Calls A/c                   Dr.
To Debenture A/c (Being call due)

(vi) Bank A/c                                    Dr.
To Debenture Call A/c (Being call amount received)

(b) Issue of Debentures at a premium:
If premium is to be received at the time of allotment:
Debenture Allotment A/c                Dr.
To Debenture A/c To Securities Premium A/c

(c) Issue of Debentures at discount:
Debenture Allotment A/c                Dr.
Discount on issue of debenture A/c Dr.
To Debentures A/c
(Being Debentures issued at a discount)
All other entries will be same.

Note:
Discount on issue of debenture being a Capital Loss must be shown specifically on the asset side under the heading Non-Current Assets. Discount on issue of debentures should be written off as quickly as possible. However, it can be treated as deferred revenue expenditure and written off over the life of the debentures.

Introduction to Company Accounts-Issue of Debentures MCQ Questions

1. Unless written off, the loss on issue of debentures is shown:
(a) On the assets side of Balance Sheet
(b) On the debit side of Profit and Loss Account
(o) By way of deduction from the amount of debentures
(d) On the liabilities side of Balance Sheet.
(a) On the assets side of Balance Sheet

2. If debentures are issued as consideration for purchase of any fixed asset, the entry is:
(a) Debit Asset A/c; Credit Vendor A/c
(b) Debit Asset A/c; Credit Bank A/c
(c) Debit Asset A/c; Credit Debentures A/c
(d) Debit Debenture A/c; Credit Asset A/c.
(c) Debit Asset A/c; Credit Debentures A/c

3. When debentures are issued as collateral security, the final entry for recording the transaction in the books is:
(a) Credit Debentures A/c and Debit Cash A/c
(b) Debit Debenture Suspense A/c and Credit Cash A/c
(c) Debit Debentures Suspense A/c and Credit Debenture A/c
(d) Debit Cash A/c and Credit the Loan A/c for which security is given.
(c) Debit Debentures Suspense A/c and Credit Debenture A/c

4. Interest payable on debentures is:
(a) an appropriation of profits of the company
(b) a charge against profit of the company
(c) transferred to sinking fund investment account
(d) transferred to general reserve.
(b) a charge against profit of the company

5. A company issues 14%, debentures of ₹ 10,00,000 at a discount of 10%. The discount allowed will be treated in the account books as:
(a) Capital Expenditure
(b) Revenue Expenditure
(c) Deferred Revenue Expenditure
(d) Capital Loss
(d) Capital Loss

6. Which of the following statements is false?
(a) At maturity, debenture holders get back their money
(b) Debentures can be forfeited for non – payment of call money.
(c) In company’s balance sheet, debentures are shown under the head Secured Loans.
(d) Interest on debentures is charged against profits.
(b) Debentures can be forfeited for non – payment of call money.

7. Discount on issue of debentures is a:
(a) revenue loss to be charged in the year of issue
(b) capital loss to be written off from capital reserve
(c) capital loss to be written off over the period of the debentures
(d) capital loss to be shown as goodwill.
(c) capital loss to be written off over the period of the debentures

8. When debentures are issued at par and are redeemable at premium, the credit given to Premium of Redemption of Debenture Account is in the nature of:
(a) Personal Account
(b) Real Account
(c) Nominal A/c – Exps.
(d) Nominal Account – Income
(a) Personal Account

9. Loss on issue of debentures is treated as:
(a) Intangible Asset
(b) Non Current Asset
(c) Non Current Liability
(d) Miscellaneous Expenditure
(b) Non Current Asset

10. Which of the following is false?
(a) A Company can issue redeemable debentures.
(b) A Company can issue debentures with voting rights.
(c) A Company can issue convertible debentures.
(d) A Company can buy its own debentures and shares.
(b) A Company can issue debentures with voting rights.

11. The following journal entry appears in the books of X Co. Ltd:
Bank A/c Dr. ₹ 4,75,000
Loss on Issue of Debenture A/c Dr. ₹ 25,000
To 12% Debentures A/c 5,00,000
Debentures have been issued at a discount of:
(a) 15%
(b) 5%
(c) 10%
(d) 20%.
(b) 5%

12. X Co. Ltd. purchased assets worth ₹ 28,80,000. It issued debentures of ₹ 100 each at a discount of 4% in full satisfaction of the purchase consideration. The number of debentures issued to the vendors of asset are:
(a) ₹ 30,000
(b) ₹ 28,000
(c) ₹ 32,000
(d) ₹ 35,000
(a) ₹ 30,000

13. How many debentures will a company be required to issue for satisfying the purchase consideration of ₹ 28,80,000, if debentures of ₹ 100 are issued at a premium of ₹ 20 per debenture?
(a) ₹ 24,000
(b) ₹ 28,000
(c) ₹ 36,000
(d) ₹ 32,000
(a) ₹ 24,000

14. F Ltd. purchased machinery from G company for a book value of ₹ 4,00,000. The consideration was paid by issue of 10% debentures of ₹ 100 each at a discount of 20%. The debenture account will be credited by:
(a) ₹ 4,00,000
(b) ₹ 5,00,000
(c) ₹ 3,20,000
(d) ₹ 4,80,000.
(b) ₹ 5,00,000

15. T Ltd. has issued 15% Debentures of ₹ 20,00,000 at a discount of 10% on April 01,2004 and the company pays interest half-yearly on June 30 and December 31 every year. On March 31,2006, the amount shown as “interest accrued but not due” in the Balance Sheet will be:
(a) ₹ 75,000
(b) ₹ 2,25,000
(c) ₹ 1,50,000
(d) ₹ 3,00,000.
(a) ₹ 75,000

16. When debentures of ₹ 1,00,000 are issued as Collateral Security against a loan of ₹ 1,50,000, the entry for issue of debentures will be:
(a) Credit Debentures ₹ 1,50,000 and debit cash A/c ₹ 1,50,000
(b) Debit Debenture Suspense A/c ₹ 1,00,000 and Credit Cash A/c ₹ 1,00,000
(c) Debit Debenture Suspense A/c ₹ 1,00,000 and Credit Debentures A/c ₹ 1,00,000
(d) Debit Cash A/c ₹ 1,50,000 and Credit Bank A/c ₹ 1,50,000.
(c) Debit Debenture Suspense A/c ₹ 1,00,000 and Credit Debentures A/c ₹ 1,00,000

17. P Ltd. issued 10,000, 12% debentures of ₹ 100 each at a premium of 10%, which are redeemable after 10 years at a premium of 20%. The amount of loss on redemption of debentures to be written off every year will be ________.
(a) ₹ 1,60,000
(b) ₹ 80, 000
(c) ₹ 20,000
(d) ₹ 16,000
(c) ₹ 20,000

18. On May 01, 2003, Y Ltd. issued 7%, 40,000 convertible debentures of ₹ 100 each at a premium of 20%. Interest is payable on September 30 and March 31, every year. Assuming that the interest runs from the date of issue, the amount of interest expenditure debited to profit and loss account for the year ended March 31,2004 is:
(a) ₹ 2,80,000
(b) ₹ 2,33,333
(c) ₹ 3,36,000
(d) ₹ 2,56,667
(d) ₹ 2,56,667

19. W Ltd. issued 20,000, 8% debentures of ₹ 10 each at par which are redeemable after 5 years at a premium of 20%. The amount of loss on redemption of debentures to be written off every year is:
(a) ₹ 40,000
(b) ₹ 10,000
(c) ₹ 20,000
(d) ₹ 8,000
(d) ₹ 8,000

20. Which of the following statements is false ________.
(a) Debenture is a form of public borrowing.
(b) It is customary to prefix debentures with the agreed rate of interest.
(c) Debenture interest is a charge against profits.
(d) The issue price and redemption value of debentures cannot differ.
(d) The issue price and redemption value of debentures cannot differ.

21. Which of the following is not a characteristic of Bearer Debentures?
(a) They are treated as negotiable instruments.
(b) Their transfer requires a deed of transfer.
(c) They are transferable by mere delivery.
(d) The interest on it is paid to the holder irrespective of identity.
(b) Their transfer requires a deed of transfer.

22. The debentures which are secured by a charge upon some or all assets of the company are known as:
(a) First mortgage debenture
(b) Second mortgage debenture
(c) Bearer debenture
(d) Secured debenture
(d) Secured debenture

23. When debentures are to be redeemed at premium an extra entry has to be made at the time of issue of debentures, which a/c should be credited in this entry?
(a) Loss on issue of debentures A/c
(b) Debenture redemption premium A/c
(c) Bank A/c
(d) Debenture holder’s A/c
(b) Debenture redemption premium A/c

24. When debentures are issued at par and are redeemable at premium, the credit given to premium on redemption of debentures account is in nature of:
(a) Personal A/c
(b) Real A/c
(c) Nominal A/c
(d) None of the above
(a) Personal A/c

25. When debentures are issued at a discount, it is prudent to write off the discount:
(a) In the year of the issue of debentures
(b) During the life of the debentures if it is treated as deferred revenue expenditure.
(c) Within 3 years of the issue of debentures
(d) In the year of redemption of debentures
(b) During the life of the debentures if it is treated as deferred revenue expenditure.

26. Ansh Ltd. issued 5,000 Debentures of ₹ 10 each for subscription. 4,000 Debentures were subscribed by the public by paying ₹ 3 as application money. Number of debentures allotted to public by Ansh Ltd. will be:
(a) 5,000 shares
(b) 4,000 shares
(c) 3,000 shares
(d) 1,000 shares
(b) 4,000 shares

27. Interest received on debenture redemption fund investment is:
(a) Capital reserve a/c
(b) General reserve a/c
(c) Debenture redemption fund A/c
(d) None of the above
(c) Debenture redemption fund A/c

28. Puru Ltd. issued 10,000 12% Debentures of ₹ 100 each at a discount of 10% payable in full on application by 31st March, 2007. Application were received for 12,000 debentures. Debentures were allotted on 9th June, 2007. The amount of excess money refunded on the same date will be:
(a) ₹ 1,80,000
(b) ₹ 1,00,000
(c) ₹ 1,10,000
(d) ₹ 1,50,000
(a) ₹ 1,80,000

29. “Non-convertible” debentures is inferred as:
(a) Owner’s capital
(b) Loan capital
(c) Short term debts
(d) None of these
(b) Loan capital

30. Tahil Ltd. has issued 14% Debentures of ₹ 20,00,000 at a discount of 10% on April 01, 2005 and the company pays interest half-yearly on June 30, and December 31 every year. On March 31,2007, the amount shown as “interest accrued but not due” in the balance sheet will be:
(a) ₹ 70,000 shown along with Debentures
(b) ₹ 2,10,000 under current liabilities
(c) ₹ 1,40,000 shown along with Debentures
(d) ₹ 2,80,000 under current liabilities
(a) ₹ 70,000 shown along with Debentures

31. XYZ Ltd. purchased a machinery for ₹ 10,00,000 from Mohan Ltd. and the consideration was paid by the issue of 18% debentures of ₹ 100 each at a discount of 20%. Calculate the number of debentures to be issued:
(a) 12,500
(b) 10,000
(c) 9,333
(d) None of the above
(a) 12,500

32. Yadav Ltd. purchased a building from Gandhi Ltd. for ₹ 50,00,000 and the consideration was paid by the issue of debentures of ₹ 100 each at a premium of ₹ 25 each. Calculate the number of debentures to be issued to Gandhi Ltd.
(a) 50,000
(b) 40,000
(c) 66,667
(d) None of the above
(b) 40,000

33. Debenture holders are called the ________ of a company.
(a) Banker
(b) Owner
(c) Creditor
(d) Debtor
(c) Creditor

34. ABC Ltd. purchased a machinery from Microtee Ltd. for ₹ 50,00,000 and the consideration was paid by issuing debentures of ₹ 100 each at a discount of 20%. Calculate the amount to be credited to the debenture account:
(a) ₹ 50,00,000
(b) ₹ 43,00,000
(c) ₹ 75,00,000
(d) ₹ 62,50,000
(d) ₹ 62,50,000

35. Ram Ltd. purchased a car from Harish Ltd. for ₹ 10,00,000 and the consideration was paid by issuing debentures of ₹ 10 each at a premium of ₹ 2.5 each. Calculate the amount to be credited to Debentures Account:
(a) ₹ 8,00,000
(b) ₹ 13,33,000
(c) ₹ 12,50,000
(d) None of these
(a) ₹ 8,00,000

36. Morseny Ltd. issued 2,000,15% debentures of ₹ 100 each at a premium of 10% which are redeemable after 10 years at a premium of 20%. Thus the discount of loss on debenture is to be written off:
(a) ₹ 20,000
(b) ₹ 10,000
(c) ₹ 40,000
(d) None of these
(c) ₹ 40,000

37. ABCD Ltd. issued 1,000, 9% debentures of ₹ 100 each at a discount of 10%, which will be redeemed after 5 years at a premium of 10%. Calculate the discount on loss of issue of debentures to be written off each year:
(a) ₹ 40,000
(b) ₹ 20,000
(c) ₹ 10,000
(d) ₹ 5,000
(c) ₹ 10,000

38. When the debentures are issued as a collateral security then what entry will be passed?
(a) No entry
(b) Debit Debenture Suspense A/c and Credit Debentures A/c
(c) Both (a) & (b)
(d) Neither (a) nor (b)
(c) Both (a) & (b)

39. Which of the following statement is NOT true?
(a) On maturity the debenture holders get back their money
(b) Debentures can be forfeited for non payment of call money
(c) In the balance sheet, debentures are shown under secured loans
(d) Interest on debentures is payable even in case of loss
(b) Debentures can be forfeited for non payment of call money

40. Interest on debentures issued as a collateral security is paid on:
(a) Nominal value of debentures
(b) No interest is paid
(c) Face value of debentures
(d) Paid up value of debentures
(b) No interest is paid

41. A debenture holder is entitled to:
(a) Fixed dividend
(b) Share in profits
(c) Voting rights in the company
(d) Interest at the fixed rates
(d) Interest at the fixed rates

42. If the debentures allotted for consideration other than cash are more than the agreed purchase price, the difference shall be debited to:
(a) Goodwill Account
(b) P&LA/c
(c) Securities Premium A/c
(d) Debentures A/c
(a) Goodwill Account

43. If the debentures allotted for consideration other than cash are less than the agreed purchase price, the difference is credit to:
(a) Goodwill A/c
(b) Capital Reserve A/c
(c) P&LA/c
(d) None of these
(b) Capital Reserve A/c

44. Shares may be issued ________.
(a) For cash
(b) For consideration other than cash.
(c) For both (a) and (b)
(d) None of the above
(c) For both (a) and (b)
Generally a company issue shares to raise his capital for cash but company may also issue shares for consideration other than cash to vendor who sell some assets to the company.
Thus, shares can be issued both for cash or consideration other than cash.

45. Which of the following will be the journal entry for recording the issue of shares at par against purchase of Machinery?
(a) Debit Machinery A/c, Credit Share Capital A/c
(b) Debit Share Capital A/c, Credit Machinery A/c
(c) Debit Bank A/c, Credit Share Capital A/c
(d) Debit Machinery A/c, Credit Cash A/c
(a) Debit Machinery A/c, Credit Share Capital A/c
Following entry will be passed for recording the issue of shares at par against purchase of Machinery –
Machinery A/c Dr.
To Share Capital A/c

46. Debentures of a company can be issued ________.
(a) For cash
(b) For consideration other than cash
(c) As a collateral security
(d) Any of the above.
(d) Any of the above.
Debentures are issued for cash by a company. A company may allot debentures to the vendors for acquiring some assets as payment for purchase consideration. A company obtains a loan from a bank or insurance policy, it may issue its own debentures to the lender as collateral security against the loan in addition to any other security that may be offered.
Thus, answer is all of the above.

47. On issue of debentures as a collateral security, which account is credited?
(a) Debentures Account
(b) Bank Loan Account
(c) Debenture holdings Account
(d) Debenture Suspense Account
(a) Debentures Account
On issue of debentures as a collateral security, the following entry will be passed –
Debentures Suspense A/c Dr.
To Debentures A/c
Here, Debentures A/c will be credited

48. G Ltd. purchased land and building from H Ltd. at a book value of ₹ 2,00,000. The consideration was paid by issue of 12% debentures of ₹ 100 each at a discount of 20%. For this transaction, the debentures account would be credited with ________
(a) ₹ 2,60,000
(b) ₹ 2,50,000
(c) ₹ 2,40,000
(d) ₹ 1,60,000
(b) ₹ 2,50,000
No. of Debentures will be

Debentures A/c will be credited by = No. of debentures x Face value of debentures = 2,500 x 100 = 2,50,000

49. A limited company issued a prospectus inviting application for 2,000 shares of ₹ 10 each at premium of ₹ 2 per share payable as follows:
On application – ₹ 2
On allotment – ₹ 5
On Ist call – ₹ 3
On IInd final call – ₹ 2
Application were received for 3,000 shares and allotment was made on pro-rata basis to applicant of 2,400 shares. Money received in excess on application was adjusted towards allotment.
Ramesh whom 40 shares were allotted, failed to pay allotment money & first call his shares were forfeited. Find the number of shares Ramesh has applied for₹
(a) 52
(b) 50
(c) 42
(d) 48
(d) 48
Allotment to applicants of 2,400 shares = 2,000.
Ramesh applied for some shares.
He is allotted 40 shares.
He applied for shares = $$\frac{2,400}{2,000}$$ x 40
= 48 shares
Hence, option (d) is correct.

50. T Ltd. has issued 14% Debentures of ₹ 20,00,000 at a discount of 10% in April 2013 and the company pays interest half- yearly on June 30 and December 31 every year. On March 31, 2014, the amount shown as ‘interest accrued but not due’ in the balance sheet will be:
(a) ₹ 70,000
(b) ₹ 2,80,000
(c) ₹ 1,40,000
(d) ₹ 2,10,000
(a) ₹ 70,000
Accrued but not due means amount of interest computed as per the period of the computation but the payment of amount of installment is not due. So, on March, 31,2014, the amount shown as interest “accrued but not due” in the Balance sheet will be:
20,00,000 x $$\frac{14}{100}$$ x $$\frac{3}{12}$$ = ₹ 70,000

51. T Ltd. has issued 14% debentures of ₹ 20,00,000 at a discount of 10% in April, 2013 and the company pays interest half yearly on June 30, and December 31, every year. On March 31, 2014 the amount shown as interest accrued but not due in the balance sheet will be:
(a) ₹ 1,40,000
(b) ₹ 2,10,000
(c) ₹ 2,80,000
(d) ₹ 70,000
(d) ₹ 70,000
Accrued interest but not due is that interest which has been earned since the last coupon payment. Because the bond hasn’t expired yet or the next payment is not yet due, the owner of the bond hasn’t officially received the money.
∴ Interest accrued but not due as on 31st March, 2014
→ $$\frac{20,00,000 \times 14 \% \times \frac{6}{12}}{2}$$
→ ₹ 70,000

52. The holder of debentures issued as collateral security to a loan is entitled to interest on:
(a) The amount of loan only
(b) On the face value of debentures
(c) Neither loan nor debentures
(d) Both the loan amount and debentures.
(a) The amount of loan only
Where a company obtains a loan from a bank or insurance company, it may issue its own debentures to the lender as collateral security against the loan in addition to any other security that may be offered. The holder of such debentures is entitled to interest only on the amount of loan, but not on the debentures. Such an issue of debenture is known as “Debentures issued as collateral security.”

53. K Ltd. Issued ₹ 15,000, 12% Debentures of ₹ 50/- each at premium of 10% payable as ₹ 20/- on application and balance on allotment Debentures are redeemable at per after 6 years. All the money due on allotment was called up and revised. The amount of premium will be:
(a) ₹ 3,00,000
(b) ₹ 2,25,000
(c) ₹ 75,000
(d) ₹ 5,25,000
(c) ₹ 75,000
K Ltd. issued deb = 15,000
Face Value = ₹ 50/-
Premium = 10% on face value
Amount of premium = $$\frac { 10 }{ 100 }$$ x 50 = ₹ 5
Total premium = ₹ 5 x 15,000
= ₹ 75,000

54. Debenture is issued as a collateral security to a loan, interest will be given on ________.
(a) On debentures only
(b) Both loan & debentures
(c) On loan but not on debentures
(d) None of the following
(c) On loan but not on debentures
The term ‘Collateral Security’ implies additional security given for a loan. Where a company obtains a loan from a bank or insurance company, it may issue its own debentures to the lender as collateral security against the loan in addition to any other security that may be offered. In such a case, the lender has the absolute right over the debentures until and unless the loan is repaid.

On repayment of the loan, however, the lender is legally bound to release the debentures forthwith. But in case the loan is not repaid by the company on the due date or in the event of any other breach of agreement, the lender has the right to retain these debentures and to realise them. The holder of such debentures is entitled to interest only on the amount of loan, but not on the debentures. Such an issue of debentures is known as “Debentures issued as Collateral Security”.

55. Which of the following statement is true?
(a) A Debenture holder is an owner of the company.
(b) A Debenture is issued at a discount and can be redeemed at a premium.
(c) A Debenture Holder can get his money back only on liquidation.
(d) A Debenture Holder receives interest only in the event of profit
(b) A Debenture is issued at a discount and can be redeemed at a premium.

A Shareholder is the owner of the company.
A Debenture is issued at discount and redeemed at premium.
A Debenture holder can get his money back on redemption also.
A Debenture holder gets profit irrespective of the fact that the company is earning profit or not.

56. Match list l with list II and select the correct answer using the codes given below the list:

(d) 4 2 1 3
Discount on debenture is non-current liability because debenture cannot be redeemed within a year so, discount on debenture is not a current liability.

57. If shares are reissued, then they are issued at:
(a) Par
(c) Discount
(d) All of the above.
(d) All of the above.
If shares are reissued the would be issued at:
Forfeited share can be issued at Par, Premium and discount any of these. Hence, option (d) is correct.

58. G Ltd. purchased land and building from H Ltd. at a book value of ₹ 2,00,000. The consideration was paid by issue of 12% debentures of ₹ 100 each at a discount of 20%. For this transaction, the debentures account would be credited with:
(a) ₹ 2,60,000
(b) ₹ 2,50,000
(c) ₹ 2,40,000
(d) ₹ 1,60,000
Journal entries would be as follows:
(a) Land and Building A/c Dr. 2,00,000
To H Ltd. 2,00,000

(b) H Ltd.’s A/c Dr. 2,00,000
Debenture Discount A/c Dr. 50,000
To 12% Debentures A/c 2,50,000
($$\frac { 2,00,000 }{ 80 }$$ = 2,500 debentures of ₹ 100/each on)

59. Total amount issued for shares is ₹ 3,60,000 at the rate of ₹ 10 each and premium of 20%. What is the number of issued shares.
(a) 36,000
(b) 2,460
(c) 3,000
(d) 4,000
(a) 36,000
The Amount Issued for Share = ₹ 3,60,000
It issued @ 10 each.
Hence no. of shares issued = $$\frac {Amount issued }{ issued price }$$
= $$\frac { 3,60,000 }{ 10 }$$
= 36,000 shares.

## Theoretical Framework – CS Foundation Fundamentals of Accounting Notes

Go through this Theoretical Framework – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

## Theoretical Framework – CS Foundation Fundamentals of Accounting Notes

Introduction:

1. A description of proper Accounts is also found in “Arthashastra” written by Kautilya.
2. Modern day accounting concept was originated by “Luca Pacioli” in Italy.
3. Accounting is the process of collecting, recording, summarizing and communicating financial information.
4. This financial information is communicated to the users i.e. proprietor, creditors, investors, government etc.
5. As per the definition of American Institute of Certified Public M Accountants
6. Accounting is “the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least, of a financial character and interpreting the results thereof”.

Characteristics (attributes) of Accounting:
(i) Accounting records transactions and events which are of financial nature.

(ii) Accounting is an art.
A subject is an art, if it helps us in attainment of a given objective. The main aim of accounting is to ascertain financial result and hence it is an art.

(iii) It involves the following activities: recording, classifying and summarizing

• Recording: Writing down the transactions and events in the book systematically and chronologically.
• Classifying: Process of grouping transactions of similar nature.
• Summarizing: Preparation of reports or results from the classified data.

(iv) Accounting helps in determining the financial position of an enterprise by analysing and interpreting the summarized records and communicating them to users.

(v) Accounting information can be manipulated and thus cannot be considered as the true test of performance.

(vi) It records transactions in terms of money.

Objectives of Accounting:

• Maintaining accounting records
• Ascertaining profit/loss of the enterprise
• Ascertaining the financial position of the enterprise
• Providing accounting information to the users.

Functions of Accounting:

• Maintaining systematic records
• Protecting and controlling business properties
• Ascertaining the operational profit/loss
• Ascertaining financial position
• Facilitating rational decision making.

Process of Accounting/Stages of Accounting:

Branches or sub fields of Accounting:

• Financial Accounting: It is concerned with recording of financial data and ascertaining results thereof. It is directed towards preparation of trial balance, P/L A/c and-Balance Sheet.
• Cost Accounting: Accounting for the cost of the product is known as cost accounting. It helps in cost ascertainment and cost control.
• Management Accounting: It helps the management in decision making, increasing efficiency and maximizing profit.

• Provides financial information about the business to interested parties
• Helps in comparison of financial results – Comparison of its own results of different years, Comparison of financial results with other firms in the industry.
• Helps in decision making
• Accounting information can be used as an evidence in legal and taxation matter
• Helps in valuation of the business
• Maintenance of business record
• Preparation of financial statements

Disadvantages (Limitations) of Accounting:

• Accounting ignores non monetary transactions
• Accounting information is sometimes based on estimates which may be unrealistic
• Window Dressing may lead to faulty results.
• Accounting ignores the effect of price level changes as the recordings are done at historical costs. Fixed assets are recorded at historical cost.
• Accounting information can be manipulated and thus can not be considered as the true test of performance, i.e. it. may be biased. Money as measurement unit changes in value.
• Accounting information may be biased. Accounting information is not without personal influence or bias of accountant.

Note:
Window Dressing:
The term window dressing means manipulation of accounts in such a way so as to conceal the important facts and show a rosy picture of the financial statements. It is mainly done to attract investors.

Book Keeping:

• Book keeping is a branch of knowledge that educates us how the financial records are maintained. Due to being clerical in nature, it is done by junior employees.
• It is concerned with recording financial data of the business in a significant and orderly manner.
• It is meant to show the effect of all the transactions made during the accounting period on the financial position of the business.
• Book keeping is a clerical work which covers procedural aspects of accounting work and includes record keeping function. It is science and art both.
• Book keeping is mechanical and repetitive.

Book Keeping and Accounting:
1. Book keeping and accounting are often used interchangeably but they are different from each other
Book keeping is a part of accounting. Accounting requires more skill, experience and imagination.

2. Book keeping involves only recording of financial data whereas accounting also involves analysing, interpreting and communicating financial information to users.

3. We can say, book keeping is the first stage of accounting or in simple words “Accounting begins where book keeping ends”.

 Basis Book Keeping Accounting 1. Scope Book keeping is concerned with identifying financial transactions, measuring them in money terms, recording and classifying them. Accounting is concerned with summarising the recorded transactions, interpreting them and communicating the results. 2. Stage It is a primary stage and constitutes the base for accounting. It is the secondary stage. It begins where book keeping ends. 3. Performance Junior staff performs this function. Senior staff performs this function. 4. Nature of Job This job is clerical and routine in nature. This job is analytical and dynamic in nature. 5. Objective The objective of Book keeping is to maintain systematic records of financial transactions. The objective of accounting is to ascertain net results of operations and financial position and to communicate information to the interested parties. 6. Structure Done in accordance with basic accounting concepts and conventions. Method and procedure for analysis and interpretations may vary from firm to firm.

Accountancy:

• Accounting include design of accounting system which book-keepers use.
• This work requires more skill, experience and imagination.
• Accountancy refers to the systematic knowledge of accounting.
• Accountancy is an area of knowledge whereas accounting is a process of recording data.
• The application part of accountancy is known as accounting.
• Relationship between book keeping, accounting and accountancy.

Systems of Accounting:

Cash System:

• Accounting is done not when the transaction takes place but when cash is paid or received.
• No entry is made when a payment or receipt is due.

Example:
If the transaction took place in the previous year but the cash is received in the current year, the recording will be done in the current year.

For example : In case of professionals i.e. doctor, CA, CS etc. In such the financial statements prepared by them for determination of their income is termed as receipt and expenses A/c.

Merits of Cash System:

• This method is less complex as the recording is to be done when cash is received or paid, (concepts of accrued or due not used).
• It is most suited where credit transactions are almost negligible and collections are uncertain and where the organisation is small.

Demerits of Cash System:

• Cash system of accounting violates the matching principle which states that expenses should be matched with their revenues and should be shown in the same year.
• Financial statements prepared under cash system do not show a true and fair view of books of account.

Accrual or Mercantile System of Accounting:

• Under this system, transactions are recorded when they occur and not when cash is realised.
• Accrual system of accounting complies with the matching principle which means it relates the revenue earned to the cost incurred during a given period.
• Mercantile system of accounting is widely used and recognized by the business enterprises.
• Costs which are not charged to income are carried forward and are kept under continuous review.

Accounting Information:

• Accounting helps in communicating financial information of the business to the users, hence accounting is known as the language of business.
• Accounting information collects the reports and interprets financial information about the activities of the organisation.
• Example : Organisations have to submit its financial details to the banks for applying for loans or to the government while paying taxes.
• Therefore, accounting is concerned with communicating results of an organisation to its various users.
• Many law requires financial information like income tax, sales tax, department company board etc.

Characteristic of accounting information:
Relevant – The accounting information should be relevant enough to help the users to evaluate the events while taking economic decisions. The relevance of information depends upon the materiality and nature.

Reliable – An information is said to be reliable if it is faithful complete, prudent, free from material errors and non-biased. Thus, the accounting information should be reliable. The key aspects of reliability are:

• faithful representation
• substance overform
• neutrality
• prudence
• ompleteness

1. Comparability – Accounting information should be capable in facilitating comparison of results of different periods of the same enterprise or comparing the results of different enterprises at same time.

2. Understandability – The information should be readily understandable to the users

3. Timeliness – The accounting information should be communicated to its user within an appropriate time period to facilitate quick decision making.

4. Cost Benefit – The benefits of using the accounting information should be more than the cost of preparing it and preparation of that information. It must not be costly and time consuming.

5. Verifiability – The information should be capable of being verified by a person other than the accountant himself.

6. Neutrality – The accounting information should be free from any bias and should not support any particular person or group.

7. Completeness – The information should be complete and contain all necessary information which is required by the users to take their decisions.

Users of accounting information:

Accountant – Accounting is a clerical work and the person involved in this work is known as an accountant.

Role of Accountant – An accountant performs the following functions:

1. Maintenance of books of accounts
2. Performing audits (conducted by Chartered Accountant)
(i) Statutory Audit
(ii) Internal Audit
3. Performs budgeting – Budgeting means planning of business activities and after the completion of activities comparing the actual results with the planned results to know the variations.
4. Handling taxation matters
5. Carrying out investigations
6. Giving advices to the management
7. Any other business work.

Accounting Principles, Accounting Concepts and Accounting Conventions:

 Accounting Principles Accounting Concepts Accounting Conventions Scientifically laid down guidelines to establish standard for sound accounting practices and procedure. Accounting principles are a body of doctrines commonly associated with the theory and procedures of accounting, serving as an explanation of current practices and as a guide for selection of conventions or procedures where alternative exists. Accounting concepts define the assumption on the basis of which financial statements of an entity are prepared. Accounting conventions emerge out of accounting principles which are adopted by the enterprises over a period of time. These are derived by usage and practice. 1. Profit loss and Balance Sheet are prepared according to it.

Accounting Concepts:
1. Going Concern Concept
It is on this concept that a clear distinction is made between assets and expenditure. This concept assumes that business shall continue for an indefinite period. The proprietor has no intention to close it in the near future and would be able to meet its obligations according to plan.

Due to this concept:

• Assets are valued at cost and then depreciated every year.
• Expenses and incomes are classified into capital and revenue.

2. Business Entity Concept:

• According to this concept, business and its owners are separate entities.
• The owner is treated as the creditor of the company to the extent of capital contributed by him.
• All transactions of the business are recorded in the books of business from the point of view of business.
• This concept keeps the personal affairs of the owner away from the business affairs.
• Income or profit is the property of the business unless distributed among the owners.

3. Money Measurement Concept:

• As per this concept, only those transactions which can be expressed in terms of money can be recorded.
• Transactions and events which cannot be expressed in terms of money, even if they affect the business, are not recorded in the books.
• Income or profit is the property of the business unless distributed among the owners.

Example: Death of the director, disputes within the organisation, strikes, etc. may affect the working and profits of the business, but are not recorded in books of accounts. Measuring unit for money is the currency of the ruling country.

Note:
Entity and money measurement are considered as the basic concepts on which other procedural concepts depend.

4. Cost Concept:

• According to this concept, the value at which the various assets shall be recorded in the books shall be the historical cost or acquisition cost.
• This concept says that the assets shall be recorded at cost at the time of its purchase and its value shall be reduced systematically by charging depreciation.
• This concept helps to keep the statements free from personal bias or judgements.
• This concept is not beneficial for new investors as they are more interested in knowing the present worth of the business rather than its historical cost.

5. Dual Aspect Concept

• According to this concept, every transaction has two aspects, a debit aspect and a credit aspect.
• Due to these two aspects, the total amount debited is always equal to the total amount credited (i.e. total assets are equal to total liabilities).

Note: Concept of Accounting Equation:
Accounting equation is based on the dual aspect concept.

Assets: These are the resources owned by the business.

Liabilities: These are the claims against the assets.

• Liability to owners – capital
• Liability to outsiders – liabilities.

As per the dual aspect concept, at any point of time, total assets of a business are equal to total liabilities.
Hence, based on above, the following equation can be framed :
Assets = Liabilities + Capital
OR
Capital = Asset – Liabilities

Example:
1. Owner contributed ₹ 1,00,000 as cash into the business. The two aspects will be:
(i) Bringing cash in business – increase in asset.
(ii) Owner is treated as a creditor – increase in liability Asset = Capital + Liability
1,00,000 = 1,00,000
(Cash) = (Owner)

2. Purchased furniture on credit from Mr. X for ₹ 30,000.
(i) Purchase of furniture – increase in asset
(ii) Mr. X will become creditor – increase in liability
Assets = Capital+ Liabilities
30,000 = +30,000
(furniture) (Mr. X Creditor)
From, the above it is clear, that every transaction has two aspects and due to this accounting equation always balances.

6. Realisation Concept:

• According to this concept, revenue is recognized only when sale is made.
• This concepts says that any change in the value of an asset is to be recorded only when business realises it.
• This concept prevents business firms from inflating their profits by showing expected incomes, (which have not yet materialised)
• Example: An increase in the value of asset cannot be considered as a profit until and unless the asset is sold and profit is realised.

Note : Going concern + Cost Concept + Realization Concept = Valuation criteria criteria.

7. Accrual Concept:

• It is fundamental to the usefulness of financial accounting information.
• According to this concept, a transaction should be recorded at the time when it takes place and not when the cash is realised.
• Every transaction and event effects, one or more or all the three aspects, assets, liabilities and capital.
• They have their impact on both the Profit & Loss A/c and Balance Sheet.
• This concept implies that income should be measured as a difference between revenue and expenditure.

Example:
Mr. A purchases furniture on 1st January, 2012 of ₹ 1,00,000. The amount is agreed to be paid on 15th April, 2012. Here, although the payment is made in financial year 2012-13 but entry will be done in 2011-12 (i.e. the date of transaction).

8. Accounting Period Concept:

• This is also known as the concept of periodicity.
• According to this principle, the life of an enterprise is broken into smaller periods (generally one year) know as accounting period.
• The main objective of this concept is to know the performance of the enterprise at regular intervals.
• Accounting period is an interval of time at the end of which the income or revenue statement and balance sheet are prepared in order to show the results of the operations.

9. Matching Concept/Revenue match Concept:

• Based on accounting period concept
• As per this concept, expenses of a period should be matched with the revenues of that period.
• It says, the cost incurred to earn the revenue should be recognized as expenses in the period when revenue is recognized.
• Matching principle requires that all revenues earned during an accounting year, whether received or not and all cost incurred, whether paid or not, have to be taken into account while preparing Profit/Loss Account.
• In the same manner all amounts received or paid during the current year but pertaining to the previous year or the next year should be excluded from current year’s revenue and cost.
• The term matching means appropriate association of related revenues and expenses.

Accounting Conventions:
1. Consistency:

• According to this convention, accounting practices once selected and adopted should be applied consistently year after year.
• This convention helps in comparison of financial statements.
• Consistency does not mean that accounting principles once adopted can never be changed. They can be changed, if the change is desirable.

Example:
If a company follows written down value method of depreciation, it shall continue to follow it year after year.

2. Disclosure:

• This is also known as the “Full disclosure” principle.
• According to this convention, all significant information should be fully and fairly disclosed in the financial statements.
• Ensuring this convention increases the relevance and reliability of financial statements. The companies act make ample provision for disclosure of essential information.

3. Conservatism:

• The concept of conservatism states that we should not anticipate a profit but should provide for all possible losses while preparing financial statements.
• It enables the financial statements to show a realistic picture of the state of affairs of the enterprise.
• This convention understates the assets and overestimates the liabilities.
• Financial statement are usually drawn up on a conservative basis.
• Choice between two methods of valuing an asset, the accountant should choose a method which leads to lesser value.

Example:
Valuing stock at lower of cost or market value, making provision for doubtful debts in anticipation of debts becoming bad, are done to comply with the convention of conservatism.

4. Materiality:

• According to the convention of materiality, accountant should record only those items which are material and ignore all insignificant items.
• An item is said to be material if it is likely to influence the decision of the users, (like investors etc.)
Judgement of materiality depends from organisation to organisation and on the basis of professional experience and judgement.

Example
An item of expense of ₹ 1,00,000 may be material for a small organisation but immaterial for a large firm.

Accounting Standards:

• Accounting standards are the written policy documents guiding the measurement, treatment and disclosure of financial transactions.
• Accounting standards are issued by the regulatory body known as the “Institute of Chartered Accountants of India”.
• The Institute of Chartered Accountants of India constituted Accounting Standard Board (ASB) on 21st April, 1977 for making these standards.
• The main objective of setting standards is to bring uniformity and harmony in the financial statements and enabling consistency and comparability in the data established by the enterprise.

Accounting Policies:
1. Accounting policies refers to specific accounting principles and the methods of applying those principles.

2. Accounting policies are based on accounting concepts, principles and conventions.

3. Choice of accounting policy is an important decision and hence, the following basis should be considered while choosing accounting policies:

• Prudence
• Substance over form
• Materiality.
 Accounting Concept Accounting Conventions 1. Theoretical idea forming a set of practices Method or procedure accepted by general agreement 2. Not based on accounting conventions Based on Accounting concept 3. Non internally consistent Internally inconsistent 4. Personal judge has no role in adoption Personal judgment may play crucial role 5. Established by law Established by common accounting practices 6. Uniform Not so in conventions

Note:
Areas where different accounting policies are used:

• Methods of depreciation/depletion/amortization.
• Valuation of inventories
• Treatment of goodwill
• Valuation of investments
• Valuation of fixed assets, etc.

Accounting as a Measurement of Discipline:
1. Measurement means assigning numerical values to specific attributes. In accounting, we take money as a measurement tool.

2. There are three elements of measurement:

• Identification of objects and events
• Selection of standards or scale
• Evaluation of dimensions of measurement standard or scale.

3. Value refers to the benefits to be derived from objects, abilities or ideas.

4. Measurement and valuation do not mean the same thing. Valuation is a part of measurement.

5. Measurement is a broader concept than valuation.

6. Valuation is an economic concept.

7. In Accounting. monetary unit is used to value an object.

Accounts:
An account is an individual records of a person, firm, thing and item of an income or expense.

Classification of Accounts:

Personal Accounts:
(i) Natural personal account: It relates to transactions of human beings like Ram, Shyam etc.

(ii) Artificial (legal) personal account: Business entities have a separate identity from that of its owners. These business entities are said to be artificial legal person. For example: companies, clubs, co-operative societies.

(iii) Representative personal accounts: These accounts are not in the name of any person but are represented as personal accounts. For e.g: outstanding liability, prepaid account, capital account, drawings account etc.

Impersonal Accounts:
(i) Real Account: Accounts which relate to the assets of the firm are known as real accounts e.g – Cash A/c, Building A/c, Investment A/c etc.

(ii) Nominal Accounts : Accounts which relate to expenses, losses, gains, revenue etc. are nominal accounts e.g – salary account, interest paid account, dividend-received account etc.

Notes:
1. Real Accounts can be divided into tangible real accounts and intangible real accounts.

• Tangible Real Accounts – Land, building etc.
• Intangible Real Accounts – Goodwill, patent, copyright etc.

2. Bank balance is an asset but bank account is not a real account but a personal account because it is an account of some banking company which is an artificial person.

3. According to Kohler Dictionary for Accounts, an account has been defined as a formal record of a particular type of transaction expressed in money.

Systems of Record Keeping
There are two system of record keeping:

• Single Entry System
• Double Entry System

Single Entry System:

• Under this system some entries are recorded partially and some are entirely eliminated.
• It is also known as accounting from incomplete records.
• This system is economical and time saving but is unscientific and not reliable.

Double Entry System:
(i) Under this system, every transaction has two aspects – debit and credit and at the time of recording a transaction, it is written once on the debit side and again on the credit side of another account.

(ii) This is a system which recognizes and records both aspects of a transaction.

Features of Double Entry System:

• Complete record of transactions
• Recognizes dual aspect of every transaction.
• Under this, one aspect is debited and other is credited.
• The accounts will always balance.

Merits of Double Entry System:

• Keeps complete record of transactions.
• Keeps a check on arithmetical accuracy of accounts. Helps in the preparation of final accounts.
• Chances of frauds and errors are less.

Rules of Accounting
1. Rules of accounting are also known as the rules of debit or credit or Golden Rules of Accounting.

Example:

 Transaction Entry Type of A/c Reason 1. Cash deposited for opening an account Bank A/c Dr. To Cash A/c Personal Real Debit the receiver, credit what goes out. 2. Cash withdrawn Cash A/c Dr. To Bank A/c Real Personal Debit what comes in, credit the giver 3. Payment of Expenses (Say Rent) Rent A/c Dr. To Bank A/c Nominal Personal Debit all expenses and losses, credit the giver 4. Interest allowed by the bank Bank A/c Dr. To Cash A/c Recevied A/c Personal Nominal Debit the receiver, credit all incomes and gains

2. Rules of debit and credit can be explained under:

• Traditional classification of accounts.
• Modern classification of accounts.

Debit and Credit relating to various accounts:

 Personal Accounts Debit: The person has become a debtor of company. Credit: The person has become a creditor of company. Real Accounts Debit: Increase in asset, Decrease in liability Credit: Increase in liability, Decrease in asset Nominal Accounts Debit: Expenses or losses Credit: Incomes or gains

Accounting Equation:
All business transactions are recorded as having a dual aspect. Thus,

• Total Assets = Total Liabilities, or
• Capital + Liabilities = Assets, or
• Capital = Assets – Liabilities, or
• Assets = (Capital at the begining + Incomes – Expenditures) = Capital at the end.

This equation is known as accounting equation. This is based on the concept that for every debit, there is an equivalent credit.

Bills of Exchange: Negotiable Instrument Act, 1881 : Section 5:
“A bills of exchange is an instrument in writing containing an unconditional order signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.”

Features of BoE:

1. It must be in writing
2. It must contain an order to make payment
3. It must be unconditional
4. Date of payment should be certain
5. Must be signed by the drawer
6. Must be accepted by the drawee by signing on it
7. Amount specified in the bill is payable either on demand or on the expiry of a fixed period.
8. Bill is payable either to a certain person or to his order or to the bearer of the bill.
9. The amount of bill of exchange must be certain
10. It must be stamped as per legal requirements.

Parties to a Bill of Exchange:

1. Drawer : Writer of bill of exchange, drawer is entitled to receive money from the drawee.
2. Drawee : Acceptor of the bill, drawee is liable to pay money to the creditor/drawer.
3. Payee : Payee is the person who receives the payment from the drawee. Usually, drawer and payee are the same person. In the following cases, they are two different persons
4. When bill is discounted from bank.
5. When bill is endorsed by the drawer to his creditors.

Contents of Bill of exchange:

• Date
• Term/Tenure
• Amount
• Stamp
• Name of Parties
• For value received.

Theoretical Framework MCQ Questions

Question 1.
Double Entry Principle means:
(a) Having debit for every credit and similarly, credit for each debit
(b) Writing all the entries twice in the book
(c) Maintaining the double account for all business transactions
(d) Writing two times the same entry.
(a) Having debit for every credit and similarly, credit for each debit

Question 2.
Which of the following is not a function of accounting _________.
(a) Keeping systematic record
(b) Protecting properties of business
(c) Maximising the results
(d) Meeting legal requirements
(c) Maximising the results

Question 3.
The system of recording transactions based on dual concept is called _________.
(a) Double account system
(b) Double entry system
(c) Single entry system
(d) Cash system.
(b) Double entry system

Question 4.
According to money measurement concept, the following will be recorded in the books of account.
(a) Health of the chairman of the company
(b) Quality control in the business
(c) Value of the building
(d) All of those
(c) Value of the building

Question 5.
Which of the following is not dependent on accounting₹
(a) Management accounting
(b) Cost accounting
(c) Financial accounting
(d) Book-keeping.
(d) Book-keeping.

Question 6.
Which is not function of accounting₹
(a) Decision making
(b) Measurement
(c) Forecasting
(d) Ledger posting.
(d) Ledger posting.

Question 7.
The practice of appending note regarding contingent liabilities in the accounting statements is in pursuant to:
(a) Convention of consistency
(b) Money measurement concept
(c) Convention of disclosure
(d) None of these.
(c) Convention of disclosure

Question 8.
The proprietor is treated as a creditor to the extent of his capital, accounting to:
(a) Cost concept
(b) Business entity concept
(c) Going concern concept
(d) All of these.
(b) Business entity concept

Question 9.
The accounting equation is based on _________
(a) Going concern concept
(b) Dual aspect concept
(c) Money measurement concept
(d) All of these.
(b) Dual aspect concept

Question 10.
Market value of investment is shown as a footnote according to _________.
(a) Convention of disclosure
(b) Convention of consistency
(c) Convention of conservatism
(d) All of these.
(a) Convention of disclosure

Question 11.
Making the provision for doubtful debts in anticipation of actual bad debts is on the basis of _________.
(a) Convention of disclosure
(b) Convention of consistency
(c) Convention of conservatism
(d) None of these.
(c) Convention of conservatism

Question 12.
Which of the following is accounting equation₹
(a) Capital = Assets + Liabilities
(b) Capital = Assets – Liabilities
(c) Assets = Liabilities – Capital
(d) Liabilities = Assets + capital.
(b) Capital = Assets – Liabilities

Question 13.
Recording of capital contributed by the owner as liability ensures the adherence of principle of _________
(a) Double entry
(b) Going concern
(c) Separate entity of business
(d) Materiality.
(c) Separate entity of business

Question 14.
Contingent liability is shown in the balance sheet because of _________.
(a) Convention of consistency
(b) Convention of materiality
(c) Convention of disclosure
(d) All of these.
(c) Convention of disclosure

Question 15.
Two primary qualitative characteristic of financial statements are _________.
(a) Understandability and materiality
(b) Relevance and reliability
(c) Relevance and understandability
(d) Materiality and reliability.
(b) Relevance and reliability

Question 16.
A purchased a car for ₹ 10,00,000, making a down payment of ₹ 1,00,000 and signing a ₹ 9,00,000 bill payable due in 60 days. As a result of this transaction.
(a) Total assets increased by ₹ 10,00,000
(b) Total liabilities increased by ₹ 9,00,000
(c) Total assets increased by ₹ 9,00,000
(d) Total assets increased by ₹ 9,00,000 with corresponding increase in liabilities by ₹ 9,00,000.
(d) Total assets increased by ₹ 9,00,000 with corresponding increase in liabilities by ₹ 9,00,000.

Question 17.
On sale of old furniture, owner’s equity would _________.
(a) Increase
(b) Decrease
(c) Remain unchanged
(d) May or may not change.
(d) May or may not change.

Question 18.
On 31st Dec, 2006 assets of the business are ₹ 3,00,000 and its capital is ₹ 1,00,000. Its liabilities on that date will be _________.
(a) ₹ 4,00,000
(b) ₹ 2,00,000
(c) ₹ 1,00,000
(d) None of the above.
(b) ₹ 2,00,000

Question 19.
Revenue is generally recognized at the point of sale. Which principle is applied.
(a) Consistency
(b) Matching
(c) Revenue recognition
(d) Cost principle.
(c) Revenue recognition

Question 20.
Economic life of an enterprise is split into the periodic interval as per _________.
(a) Periodicity
(b) Matching
(c) Going concern
(d) Accrual.
(a) Periodicity

Question 21.
A machinery is purchased on 1st April, 2005 for ₹ 10,00,000. Its installation charges were ₹ 1,00,000. But its market value as on 3181 March, 2006 was ₹ 13,00,000. If the company shows the machinery at ₹ 13,00,000 in its B/S, which of the following concepts is not followed by the company?
(a) Cost concept
(b) Matching concept
(c) Realisation concept
(d) Periodicity concept
(a) Cost concept

Question 22.
A business man purchased goods for ₹ 30,00,000 and sold 20% of such goods during the accounting year ended 31st March, 2005. The market value of the remaining goods was ₹ 5,00,000. He has not valued the closing stock at market price, he has violated the concept of _________.
(a) Money measurement
(b) Conservatism
(c) Cost
(d) Periodicity.
(b) Conservatism

Question 23.
Which of the following is not a subfield of accounting?
(a) Management accounting
(b) Cost accounting
(c) Financial accounting
(d) Book-Keeping.
(d) Book-Keeping.

Question 24.
Book- keeping is mainly concerned with _________.
(a) Recording of financial data
(b) Designing the systems in recording, classifying and summarizing the recorded data.
(c) Interpreting the data for internal and external users.
(d) None of the above.
(a) Recording of financial data

Question 25.
Users of accounting information include _________.
(a) Creditors
(b) Lenders
(c) Customers
(d) All of the above.
(d) All of the above.

Question 26.
Financial statements only consider.
(a) Assets expressed in monetary terms.
(b) Liabilities expressed in monetary terms.
(c) Assets expressed in non-monetary terms.
(d) Assets and liabilities expressed in monetary terms.
(d) Assets and liabilities expressed in monetary terms.

Question 27.
_________ is a primary stage.
(a) Accounting
(b) Managing.
(c) Book keeping
(d) Auditing
(c) Book keeping

Question 28.
External users of accounting informations are :
(a) Investors and Lenders 1
(b) Management 1
(c) Both (a) & (b)
(d) Owners
(a) Investors and Lenders 1

Question 29.
Which method of accounting is commonly adopted by business concerns:
(a) Cash method of accounting
(b) Mercantile method of a accounting
(c) Special method of accounting
(d) Systematic method accounting.
(b) Mercantile method of a accounting

Question 30.
The job of accounting is :
(a) Routine in nature
(b) Clerical in nature
(c) Analytical in nature
(d) All of the above.
(c) Analytical in nature

Question 31.
Accounting cycle starts with ends with :
(a) Recording of transactions, preparation of final accounts
(b) Recording of transactions, posting them in ledger.
(c) Recording & posting of transaction, preparation of final accounts
(d) None of the above.
(a) Recording of transactions, preparation of final accounts

Question 32.
According to Dual aspect concept, which of the following is incorrect:
(a) Increase in one asset & decrease in other asset
(b) Decrease in one liability & increase in other liability
(c) Decrease in both liability & asset
(d) None of the above.
(d) None of the above.

Question 33.
Which concept holds that a transaction is recorded at the time when it takes place & not when the settlement takes place :
(a) Verifiable objective concept
(b) Matohing concept
(c) Accrual concept
(d) Revenue recognition concept.
(c) Accrual concept

Question 34.
The basic concepts related to P & L Account are _________.
(a) Realization concept
(b) Matching concept
(c) Cost concept
(d) Both (a) and (b) above.
(d) Both (a) and (b) above.

Question 35.
The underlying accounting principle (s) necessitating amortization of intangible asset (s) is are _________.
(a) Cost concept
(b) Realization concept
(c) Matching concept
(d) Both (a) and (c) above.
(c) Matching concept

Question 36.
The accounting measurement that is not consistent with the going concern concept is:
(a) Historical cost
(b) Realization
(c) The transaction approach
(d) Liquidation value.
(d) Liquidation value.

Question 37.
Omission of paise and showing the round figures in financial statements is based on:
(a) Conservatism concept
(b) Consistency concept
(c) Materiality concept
(d) Realization concept.
(c) Materiality concept

Question 38.
Accounting does not record non-financial transactions because of:
(a) Entity concept
(b) Accrual concept
(c) Cost concept
(d) Money measurement concept.
(d) Money measurement concept.

Question 39.
Mr. Rohit, owner of Rohit Furniture Ltd. owns a personal residence that cost ₹ 6,00,000, but has a market value of ₹ 9,00,000. During preparation of the financial statement for the business, the entire value of property was ignored and was not shown in the financial statements. The principle that was being followed was :
(a) The concept of the business entity
(b) The concept of the cost principle
(c) The concept of going concern principle
(d) The concept of realisation principle.
(a) The concept of the business entity

Question 40.
The expenses and incomes pertaining to full trading period are taken to the profit and loss account of a business, irrespective of their payment of receipt. This is in recognition of:
(a) Time period concept
(b) Business entity concept
(c) Going concern concept
(d) Accrual concept
(d) Accrual concept

Question 41.
What does ‘AICPA’ stands for:
(a) American Institute of Certified Public Accountants
(b) Anglo Institute of Certified Public Accountants
(c) African Institute of Certified Public Accountants
(d) American Institute of Certified Private Accountants
(a) American Institute of Certified Public Accountants

Question 42.
Which organisation defined this statement:
‘The art of recording, classifying and summarizing in a significant manner and in terms of money, transaction and events which are, in part atleast, of a financial character and interpreting the result there of _________.
(a) IASB
(b) ISB
(c) AICPA
(d) None of the above
(c) AICPA

Question 43.
“The system of book keeping by double entry is, perhaps the most beautiful one in the wide domain of literature or science. Were it less common, it would be the administration of the learned world” is spoken by:
(a) Luca Pacioli
(b) Edwin T. Freedly
(c) Warren Buffet
(d) Richard Notebaert
(b) Edwin T. Freedly

Question 44.
Who originated the double entry system of accounting:
(a) Alfred Marshall
(b) Edwin T. Freedly
(c) Luca Pacioli
(d) Warren Buffet
(c) Luca Pacioli

Question 45.
_________ is the process of grouping transaction and entries of the same type at one place.
(a) Analysing
(b) Summarizing
(c) Recording
(d) Classifying
(d) Classifying

Question 46.
_________ involves the preparation of reports and statements from the classified data (ledger) understandable and useful to management and other interested parties.
(a) Analysing
(b) Summarizing
(c) Recording
(d) Classifying
(b) Summarizing

Question 47.
_________ is the art of interpreting the results of operation to determine the financial position of the enterprise, the progress it has made and how well it is getting along.
(a) Accounting
(b) Costing
(c) Presentation
(d) None of the above
(a) Accounting

Question 48.
_________ is done in manner which identifies the different classes and types of transaction.
(a) Identification
(b) Classification
(c) Both (a) & (b)
(d) Recording
(d) Recording

Question 49.
The statement prepared by the summarizing process is known as:
(a) Fund Flow Statement
(b) Financial Statement
(c) Cash Flow Statement
(d) None of the above
(b) Financial Statement

Question 50.
Which of the following is not a branch of accounting?
(a) Financial Accounting
(b) Cost Accounting
(c) Strategic Accounting
(d) Management Accounting
(c) Strategic Accounting

Question 51.
_________ is concerned with record-keeping directed towards the preparation of trial balance, profit and loss account and balance sheet.
(a) Cost Accounting
(b) Financial Accounting
(c) Management Accounting
(d) None of the above
(b) Financial Accounting

Question 52.
The main function of Cost Accounting are to:
(a) Ascertain cost
(b) Help management in controlling cost
(c) Help in reduction of cost
(d) All of the above
(d) All of the above

Question 53.
Which of the following is not the function of accounting?
(a) Keeping systematic records
(b) Protecting and controlling business properties
(c) Protecting user interest
(d) Facilitating rational decision making
(c) Protecting user interest

Question 54.
Which of the following is not the advantage of accounting:
(a) Ascertaining financial position of a business
(b) Comparison of results
(c) Evidence in legal matters
(d) Help in taxation matters
(a) Ascertaining financial position of a business

Question 55.
Which of the following is not the limitation of accounting?
(a) Accounts can be manipulated
(b) Provide information to interested parties
(c) Money as a measurement unit changes in value
(d) Fixed Assets are recorded at original cost
(b) Provide information to interested parties

Question 56.
_________ is incompatible with the matching principle of income determination.
(a) Cash System of Accounting
(b) Accrual System of Accounting
(c) Both (a) & (b)
(d) None of the above
(a) Cash System of Accounting

Question 57.
In which system of accounting “cost are matched against revenue on the basis of relevant time period to determine relevant income”.
(a) Mercantile System of Accounting
(b) Accrual System of Accounting
(c) Cash System of Accounting
(d) Both (a) & (b)
(d) Both (a) & (b)

Question 58.
_________ work is clerical in nature.
(a) Summarizing
(b) Analysing
(c) Both (a) & (b)
(d) Book keeping
(d) Book keeping

Question 59.
_________ is the science and art of correctly recording in the books of accounts all those business transaction that result in the transfer of money or money’s worth.
(a) Accounting
(b) Auditing
(c) Book keeping
(d) None of the above
(c) Book keeping

Question 60.
Which organisation uses cash system of Accounting?
(a) Company
(b) NPO’s
(c) Partnership Firms
(d) None of the above
(b) NPO’s

Question 61.
Any cost that appears to have lost its utility or its power to generate future revenue is written off as a _________.
(a) Expenditure
(b) Deferred Expenditure
(c) Loss
(d) None of the above
(c) Loss

Question 62.
Primary aim of accounting is:
(a) Providing necessary information to the owners related to their business
(b) To earn profit
(c) Both (a) & (b)
(d) None of the above
(a) Providing necessary information to the owners related to their business

Question 63.
_________ ensures the truthfulness of the recorded transaction.
(a) Neutrality
(b) Verifiability
(c) Cost-benefit
(d) Timeliness
(b) Verifiability

Question 64.
What are the key aspects of reliability:
(a) Neutrality
(b) Prudence
(c) Completeness
(d) All of the above
(d) All of the above

Question 65.
‘Free from Bias’ is the feature of which characteristics of accounting.
(a) Reliability
(b) Relevance
(c) Neutrality
(d) Completeness
(c) Neutrality

Question 66.
What is the full form of GAAP:
(a) Generally Accepted Accounting Parts
(b) Generally Accepted Accounting Provisions
(c) Generally Accepted Accounting Principals
(d) Generally Accepted Accounting Principles
(d) Generally Accepted Accounting Principles

Question 67.
_________ means the planning of business activities before they occur.
(a) Budget
(b) Policy
(c) Objectives
(d) All of the above
(a) Budget

Question 68.
_________ have been defined as “the body of doctrines commonly associated with the theory and procedure of accounting, serving as an explanation of current practices and as a guide for the selection of conventions or procedure where alternative exist.”
(a) Accounting principles
(b) Accounting concept
(c) Accounting convention
(d) None of the above
(a) Accounting principles

Question 69.
Death, Dispute, Sentiments etc. are not recorded in the books in which accounting concept is followed. This is as _________.
(a) Cost concept
(b) Relevant match concept
(c) Money measurement concept
(d) Dual aspect concept
(c) Money measurement concept

Question 70.
_________ & _________ are independent variables.
(a) Asset, Capital
(b) Capital, Liabilities
(c) Asset, Liabilities
(d) None of the above
(c) Asset, Liabilities

Question 71.
_________ concept means that fixed assets are valued on the basis of cost less proper depreciation keeping in mind their expected useful life ignoring fluctuation in the prices of the asset.
(a) Cost
(b) Going concern
(c) Dual aspect
(d) Realisation
(a) Cost

Question 72.
_________ concept implies the income measured by the difference between cash received and disbursement:
(a) Matching Revenue
(b) Accrual
(c) Cash
(d) Accounting period
(a) Matching Revenue

Question 73.
_________ concept is based on Accounting Period Concept.
(a) Accrual
(b) Going concern
(c) Realisation
(d) Matching Revenue
(d) Matching Revenue

Question 74.
_________ denotes custom or tradition or practices based on general agreement between the accounting bodies which guides the accountant while preparing the financial statement.
(a) Convention
(b) Principle
(c) Both (a) & (b)
(d) None of the above
(a) Convention

Question 75.
Who defined this statement “An account has been defined as a formal record of a particular type of transaction expressed in money” _________.
(a) Luca Pacioli
(b) Warren Buffet
(c) Philip Kotler
(d) Kohler
(d) Kohler

Question 76.
Which of the following is NOT a characteristic of Accounting?
(a) Accounting is an art
(b) It records transactions only in monetary terms
(c) It is concerned with interpretation of results
(d) None of the above
(d) None of the above

Question 77.
Which of the following is NOT a branch of Accounting?
(a) Financial Accounting
(b) Cost Accounting
(c) Corporate Accounting
(d) Management Accounting
(c) Corporate Accounting

Question 78.
Which of the following is NOT an advantage of Accounting?
(a) Decision making
(b) Helps in taxation matters
(c) Valuation of Business
(d) Increasing the profits and sales
(d) Increasing the profits and sales

Question 79.
“Book keeping starts where accounting ends”:
(a) True
(b) Partly True
(c) False
(d) Partly False
(c) False

Question 80.
Accrual System of accounts is also called as:
(a) Merchantile system
(b) Hybrid system
(c) Cash system
(d) None of the above
(a) Merchantile system

Question 81.
Which of the following is NOT an accounting concept?
(a) Business Entity Concept
(b) Money Measurement Concept
(c) Consistency Concept
(d) Realisation Concept
(c) Consistency Concept

Question 82.
Which of the following is NOT an accounting convention?
(a) Disclosure
(b) Consistency
(c) Going Concern
(d) Conservatism
(c) Going Concern

Question 83.
If the transactions are recorded as per the current cost measurement, then the assets are recorded:
(a) At the cost of acquisition
(b) Amount that would be realised by selling the asset
(c) The value of cash required to be paid to acquire the asset
(d) None of the above
(c) The value of cash required to be paid to acquire the asset

Question 84.
If the transactions are recorded as per the historical cost measurement, then the assets are recorded at _________.
(a) The value at which they are acquired
(b) The amount required to purchase the asset
(c) The amount that would be realised by selling the asset
(d) None of the above
(a) The value at which they are acquired

Question 85.
As per the realisation value measurement base, the liabilities are valued _________.
(a) At the value of amount received in exchange of obligation
(b) At the present value
(c) The amount required to settle the liability
(d) None of the above
(c) The amount required to settle the liability

Question 86.
As per the current cost measurement, the liabilities are valued at _________.
(a) Discounted value of cash required to settle the obligation currently ,
(b) Undiscounted value of cash required to settle the obligation currently
(c) At the amount received to settle the obligation –
(d) None of the above
(b) Undiscounted value of cash required to settle the obligation currently

Question 87.
As per the present value measurement base, the liabilities are valued at _________.
(a) Sum of present discounted value of future cash outflows
(b) Value of future net cash outflows
(c) At the present settlement value
(d) None of the above
(a) Sum of present discounted value of future cash outflows

Question 88.
As per the present value measurement base, the assets are recorded or valued at _________.
(a) Sum of present discounted net cash inflows
(b) Present value of the asset
(c) Cost of acquisition of the asset
(d) All of the above
(a) Sum of present discounted net cash inflows

Question 89.
Adjustments of outstanding expenses, accrued income, unexpired income etc. is done to ensure compliance with:
(a) Realisation concept
(b) Cost concept
(c) Revenue match concept
(d) None of the above
(c) Revenue match concept

Question 90.
If the proprietor of a business takes goods for his personal use, then which of the following will not be affected:
(a) Assets
(b) Liabilities
(c) Capital
(d) None of the above
(b) Liabilities

Question 91.
Which of the following is not a form of personal account?
(a) Natural Personal Account
(b) Artificial Personal Account
(c) Representative Personal Account
(d) Nominal Personal Account
(d) Nominal Personal Account

Question 92.
As per the conservatism principle _________.
(a) The accountant should not anticipate income but provide for all losses
(b) The accountant should use a valuation method which leads to taking less value of an asset
(c) Both (a) and (b)
(d) Neither (a) noi (b)
(c) Both (a) and (b)

Question 93.
Goodwill, trade marks, patent, rights are examples of:
(a) Personal Account
(b) Real Account
(c) Nominal Account
(d) None of the above
(b) Real Account

Question 94.
Profit & Loss Account is prepared because of:
(a) Cost concept
(b) Going concern concept
(c) Dual aspect concept
(d) Accounting period concept
(d) Accounting period concept

Question 95.
The assets are recorded as per their book value to ensure compliance with:
(a) Historical cost
(b) Current cost
(c) Present value
(d) None of the above
(a) Historical cost

Question 96.
In order to determine whether a transaction or item is material or not, the accountant should consider:
(a) The nature of transaction
(b) The amount of transaction
(c) Both (a) and (b)
(d) Neither (a) nor (b)
(c) Both (a) and (b)

Question 97.
Inclusion of personal expenses of using car in the business expenses would violate the concept of:
(a) Separate business entity
(b) Consistency
(c) Going concern
(d) Dual aspect
(a) Separate business entity
In accounting for every type of business organization, be it sale trader ship or partnership or joint stock company, business is treated as a separate accounting entity.
Thus, inclusion of personal expenses of using car in the business expenses would violate the concept of Separate Business Entity.

Question 98.
“Assets should be valued at the price paid to acquire them” is based on _________.
(a) Accrual concept
(b) Cost concept
(c) Money Measurement concept
(d) Matching concept
(b) Cost concept
According to cost concept: The various assets acquired by a concern or firm should be recorded on the basis of the actual amounts or the price paid to acquire them.

Question 99.
A businessman purchases goods worth ₹ 25,00,000 and sold 80% of such goods during the accounting year ending on 31st March, 2011. The market value of the remaining goods was ₹ 7,50,000. He valued the closing stock @ ₹ 5,00,000 and not at ₹ 7,50,000 due to _________.
(a) Money Measurement concept
(b) Convention of conservatism
(c) Cost concept
(d) Accounting period concept
(b) Convention of conservatism
Purchase ₹ 25,00,000; 80% of the goods have been sold. So, cost of goods sold is ₹ 20,00,000 stock remains at cost of ₹ 5,00,000. Since, market value of the stock left is ₹ 7,50,000 which is higher than the cost of stock. So, stock is valued at ₹ 5,00,000.

This is due to conservatism concept as this concept says that accountant should not anticipate income and should provide for all possible losses. The rule of ‘Lower of cost or market value’ for inventory valuation is due to conservatism (Prudence) concept.

Question 100.
Revenue from sale of products is generally accounted in the period in which:
(a) Cash is collected
(b) Sales is made
(c) Products are manufactured
(d) None of the above.
(b) Sales is made
According to accrual concept, if any transaction are not settled in cash then it is proper to record the transaction or the event concerned into the books. So, due to Accrual Concept Revenue from the sale of products is recorded in the period in which Sales is made.

Question 101.
Which of the following is not the purpose of accounting?
(a) Providing information about the assets, liabilities and capital of business entity
(b) Maintaining record of business
(c) Providing information about the performance of business
(d) Providing details about the personal assets and liabilities of the owners of business entity.
(d) Providing details about the personal assets and liabilities of the owners of business entity.

The purpose of accounting are as follows :

• Maintaining systematic records of business.
• Providing all information about assets, liabilities etc.
• Meeting legal requirements.
• Providing and communicating financial result or performance.
• Facilitating rational decision making.

On considering the purpose of accounting, it is found that ‘Providing details about the personal assets and liabilities of the owner of business entity’ is not purpose of accounting.

Question 102.
Which accounting concept is applicable to record a transaction entered between owner and business?
(a) Productivity
(b) Going concern
(c) Prudence
Business entity concept is applicable to record a transaction entered between owner and business. As according to this concept business is treated as a separate entity from its owner, creditors, managers and others. In accounting, for every type of business organization, be it sole tradership or partnership or joint stock company, business is treated as a separate accounting entity.

Question 103.
Ashok a cloth merchant buys cloth for ₹ 50,000 paying cash ₹ 20,000. What is the amount of expense as per accrual concept?
(a) 50,000
(b) 20,000
(c) 30,000
(d) Nil
(a) 50,000
According to accrual concept, all business transaction are recorded when they occur and not when the related payment are received or made. So, here amount of expenses is ₹ 50,000 and not ₹ 20,000.

Question 104.
Which of the following is an accepted method of accounting?
(a) Cash Accounting
(b) Accrual or Mercantile Accounting
(c) Both Accrual Accounting and Cash Accounting
(d) None of the above
(b) Accrual or Mercantile Accounting
In cash accounting system, accounting entries are made only when cash is received or paid and no entry is made when a payment or receipt is merely due but in accrual or mercantile accounting system, all transactions are recorded on the basis of amounts having become due for payment or receipt. Since, cash basis accounting ignore accrual concept and revenue match concept.

So, Accrual or Mercantile Accounting system is more acceptable method of accounting. ,

Question 105.
Accounting transactions are recorded in terms of:
(a) Money
(b) Purpose
(c) Characteristics
(d) None of the above
(a) Money
According to money measurement concept of accounting, only such transactions and events which can be interpreted in terms of money are recorded. Those transactions which cannot be expressed in money terms do not find place in the books of account though they may be very important for the business.

So, Accounting transactions are recorded in terms of Money.

Question 106.
A businessman purchased goods for ₹ 25,00,000 and sold 70% of such goods during the accounting year ended on 31st March, 2013. The market value of the remaining goods was ₹ 5,00,000. He valued the closing stock at ₹ 5,00,000 and not at ₹ 7,50,000 due to:
(a) Money measurement concept
(b) Conservatism concept
(c) Cost concept
(d) Periodicity concept.
(b) Conservatism concept
Purchases ₹ 25,00,000
70% of the goods have been sold
∴ cost of goods sold is ₹ 17,50,000
Stock remaining at cost ₹ 7,50,000
Since, market value of the stock left is ₹ 5,00,000
which is lower than the cost the stock is valued at ₹ 5,00,000.
This is due to conservatism concept as this concept says that accountant should not anticipate income and should provide for all possible losses. The value of “lower of cost or market value” for inventory valuation is due to conservatism (Prudence) concept.

Question 107.
Match List I with List II and select the correct answer using the codes given below the lists.

(c) The rules are as follows:

• Real Account : Debit what comes in and credit what goes out
• Nominal Account : Debit all Expenses and losses credit all income & gains
• Personal Account : Debit the receiver credit the giver

Therefore the correct matching is x : 2; y : 3 and z : 1

Question 108.
If capital at the end of the year is ₹ 7,000, capital introduced during the year is ₹ 5,000, drawings during the year are ₹ 8,000, loss incurred during the year is ₹ 10,000, then capital in the beginning would be equal to:
(a) ₹ 12,000
(b) ₹ 16,000
(c) ₹ 20,000
(d) ₹ 30,000.
(c) ₹ 20,000

 Capital at end of year ₹ 7,000 Less: Capital introduced during the year 5, 000 Add: Drawings made during the year 8, 000 Add: Loss incurred during the year 10, 000 Capital at beginning of the year 20, 000

Question 109.
Which one of the following statements is correct?
(a) Capital of the firm is reduced by borrowing
(b) When there is no change in proprietor’s capital, it is an indication of loss in business
(c) Nominal accounts refer to false transactions
(d) Real accounts relate to the assets of a business.
(d) Real accounts relate to the assets of a business.
The correct statement is Real accounts relate to the assets of a business both tangible and intangible.
Example : plant & machinery, furniture, goodwill, copyrights, etc.

Question 110.
A concern proposes to discontinue its business from March 2013 and decides to dispose of all its assets within a period of 4 months. The Balance Sheet as on 31st March, 2013 should indicate the assets at their:
(a) Historical cost
(b) Net realisable value
(c) Cost less depreciation
(d) Cost price or market value whichever’is lower
(b) Net realisable value
When a concern proposes to discontinue its business operations then balance sheet should indicate assets at their Net Realizable value rather than the Historical Cost.
This is so because the going concern of the organisation is lost.

Question 111.
The convention of conservatism is likely to lead to an in the balance sheet.
(a) Understatement of liabilities
(b) Overstatement of assets
(c) Overstatement of capital
(d) Understatement of assets.
(d) Understatement of assets.
The convention of conservatism is likely to lead to an understatement of assets in the Balance Sheet. The concept of conservatism states that an accountant should not anticipate income and should provide for all possible losses. This will lead to understatement of income, wealth and assets.

Question 112.
The rule every transaction affects two or more ledger accounts is based on the concept of _________.
(a) Going concern
(b) Double entry system of book-keeping
(c) Money measurement
(d) Periodicity.
(b) Double entry system of book-keeping
Double entry system is based on scientific principles therefore, it is used by most of the business houses. This system recognises the fact that every transaction has two aspects and records both aspects of each and every transaction. Thus, we can say that the rule ‘every transaction affects two or more ledger accounts’ is based on the concept of double entry system of book-keeping.

Question 113.
Which of the following is correct about ‘Accounting Concept’ _________.
(a) Accounting concepts are based on accounting conventions
(b) Accounting concepts are established by common accounting practices
(c) Accounting concepts are methods or procedures accepted by general agreement
(d) Personal judgement has no role in the adoption of accounting concepts.
(d) Personal judgement has no role in the adoption of accounting concepts.
Accounting concepts are defined as basic assumptions on the basis of which financial statements of a business entity are prepared. Accounting concepts are used as a foundation for formulating various methods and procedures for recording and presenting the business transactions. In brief we can say that personal judgement has no role in the adoption of accounting concepts.

Question 114.
Which of the following accounting equation is correct:
(a) Capital (₹ 15,000) = Fixed Assets (₹ 12,000) +Cash (₹ 4,000)
(b) Trade payables (₹ 3,000) + Capital (₹ 17,000) + Bills Payable (₹ 4,000) = Fixed Assets (₹ 20,000)
(c) Capital (₹ 15,000) = Cash (₹ 3,000) + Fixed Assets (₹ 9,000)
(d) Trade payables (₹ 8,000) + Capital (₹ 7,000) = Fixed Assets (₹ 8,000) + Cash at Bank (₹ 4,000) + Cash (₹ 3,000).
(d) According to accounting equation:
Capital + Trade Liabilities = Assets (or)
Capital + Trade Liabilities = Fixed Assets + Current Assets There, we find that option (D) is right answer because in this equation
Capital (7,000) + Trade Payable (8,000) = ₹ 15,000 is equal to Fixed Assets (8,000) + Cash at Bank (4,000) + Cash (3,000) = ₹ 15,000.

Question 115.
General reserve is created on the basis of convention of:
(a) Conservatism
(b) Uniformity
(c) Materiality
(d) Full disclosure.
(a) Conservatism
According to conservatism convention, accountant should not anticipate income and should provide for all possible losses.

Examples:

• Making provisions for Bad Debts
• Making General Reserve
• Valuing the stock at lower of cost or market value

Question 116.
Revaluation account is a:
(a) Nominal account
(b) Real account
(c) Personal account
(d) None of the above.
(a) Nominal account
Since Revaluation A/c shows the profit or loss on revaluation, so it is a Nominal Account.

Question 117.
Atul purchased a car for ₹ 5,00,000, by making a down payment of ₹ 1,00,000 and signing a ₹ 4,00,000 bill payable due in 60 days. As a result of this transaction:
(a) Total assets increased by ₹ 5,00,000
(b) Total liabilities increased by ₹ 4,00,000
(c) Total assets increased by ₹ 4,00,000
(d) Total assets increased by ₹ 4,00,000 with a corresponding
(d) Total assets increased by ₹ 4,00,000 with a corresponding
On purchase of a Car, total assets of balance sheet will be increased by ₹ 5,00,000 and on making of down payment of ₹ 1,00,000 total assets will decrease by ₹ 1,00,000. The result will be that total assets of B/S will increase by ₹ 4,00,000.
On other hand on signing a B/P of ₹ 4,00,000 liability side of Balance Sheet will be increased by ₹ 4,00,000.
Thus, option (d) is right.

Question 118.
Number of accounting standards presently issued by ICAI and notified by CG _________.
(a) 29
(b) 32
(c) 31
(d) 19
(a) 29
Presently these are 32 accounting standards issued by ‘ICAI’ out of which 29 are notified by Central Government.

Question 119.
_________ is an art of recording, classifyIng, summarising transactions and events which are of financial character ¡n terms of money and interpreting the result thereof:
(a) Accountancy
(b) Accounting
(c) Book-Keeping
(d) None of these.
(b) Accounting
“Accounting is an art of recording, classifying, summarising transactions and events which are of financial character in terms of money and interpreting the result there of.”

Question 120.
Contingent liability is shown as _________.
(a) Liability
(b) Equity Shareholders fund
(c) Footnote
(d) None of these
(c) Footnote
As per Schedule 111 of Companies Act 2013, Contingent liabilities are shown as footnote in the Balance Sheet.

Question 121.
Closing entry means:
(a) All income & expenses
(b) All assets & liabilities
(c) All assets
(d) All liabilities.
(b) All assets & liabilities
Closing entry means all assets and liabilities are revalued and closed.

Question 122.
In which of the book cash purchase is recorded?
(a) Cash book
(b) Purchase book
(c) Both (a) and (b)
(d) None of these.
(a) Cash book
Cash book is a book of prime entry which records cash and bank transactions includes only cash purchases made.

Question 123.
In case of three column cash book, contra entry is related with:
(a) Cash; Discount
(b) Cash; Bank
(c) Bank; Discount
(d) None of these.
(b) Cash; Bank
The entry which involves both cash and bank transactions is called contra entry. These entries are posted on both the sides of cash book one in bank column and the other in cash column.

Question 124.
Which of the following is not considered as an accounting concept?
(a) Conservation
(c) Accrual
(d) Going Concern.
(a) Conservation
Accounting concepts are defined as basic assumptions on the basis of which financial statements of a business entity are prepared. Since, conservatism is an accounting convention & not a concept, option (a) is correct.

Question 125.
Which convention implies that the accounting practices should remain same from one year to another year.
(a) Going Concern
(b) Materiality
(c) Accrual
(d) Consistency.
(d) According to consistency concept, it is assumed that the accounting practices will be followed continuously over a period of time until & unless there is required a need for change.
Hence, option (d) is correct.

Question 126.
______ and ______ are independent variables.
(a) Asset and Liability
(b) Income and Expenses
(c) Both (a) and (b)
(d) None of these.
(d) None of these.
(a) Asset and Liability
Independent variables are those variables which has no effect on each other.
The asset & liability are dependent variables while the income & expenses are independent variables.
Hence, option (a) is correct.

Question 127.
Accounting Transactions are recorded in terms of:
(a) Money
(b) Purpose
(c) Characteristics
(d) None of these.
(a) Money
According to money measurement concept, each & every accounting transaction is to be recorded in books of accounts in terms of money.
Hence, option (a) is correct.

Question 128.
Double Entry principle means:
(a) Writing all entries twice in the book
(b) Having debit for every credit and similarly, credit for every debit
(c) Maintaining the double account for each business transactions.
(d) Writing two times the same entry.
(b) Having debit for every credit and similarly, credit for every debit
Double entry is a principle in which there is a debit for every credit & similarly a credit for every debit.
Hence, option (b) is correct.

Question 129.
Which one of the following statements is Correct?
(a) Capital of the firm is reduced by borrowing
(b) Nominal accounts refer to false transactions
(c) When there is no change in proprietors capital. it is an indication of loss in business
(d) Real accounts relate to the assets of a business.
(d) Real accounts relate to the assets of a business.
Capital of the firm is not reduced by borrowing because both are the different heads of the liabilities side of the balance sheet. Nominal accounts relates with the expenses and incomes, not with false transactions. When there is no change, in proprietor’s capital, it does not mean that it shows a loss, it may be a profit situation in the business.
Thus, option (d) is the correct answer that real account relate to the assets & liabilities of a business.

Question 130.
Which of the following statement is correct?
(a) Assets are equal to liabilities minus capital
(b) Capital is equal to assets minus liabilities
(c) Liabilities are equal to capital plus assets
(d) Capital is equal to assets plus liabilities
(b) Capital is equal to assets minus liabilities
According to Accounting Equation.
Capital = Assets – Liabilities.
So, option (b) is correct answer, i.e. Capital is equal to assets minus liabilities.

Question 131.
The convention of conservatism is likely to lead to an __________ in the balance sheet.
(a) Understatement of assets
(b) Overstatement of assets
(c) Overstatement of capital
(d) Understatement of liabilities
(a) Understatement of assets
The concept of conservatism states that we should not anticipate profit but should provide for all possible losses while preparing financial statements. This convention understates the assets and over estimates the liabilities.

Question 132.
Mr. Ashish purchased a machinery costing ₹ 3,00,000 on 1st October, 2012. Transportation and installation charges were incurred amounting to ₹ 30,000 and ₹ 12,000 respectively. Dismantling charges of the old machine in place of which new machine was purchased amounted to ₹ 30,000. Market value of the machine was estimated at ₹ 3,60,000 on 31st March, 2013. While finalising the annual accounts, Ashish values the machinery at ₹ 3,60,000 in his books. Which of the following concepts was violated by Ashish?
(a) Cost Concept
(b) Matching Concept
(c) Realisation Concept
(d) Periodicity Concept
(a) Cost Concept
Mr. Ashish violated the cost concept. According to this concept, the value at which the various assets shall be recorded in the books shall be the historical cost or acquisition cost.
This concept says that the assets shall be recorded at cost at the time at its purchase and its value shall be reduced systematically by charging depreciation at book value.

Question 133.
The provision for discount on debtors is often provided in keeping with the concept of:
(a) Conservatism
(b) Going Concern
(c) Materiality
(d) Consistency.
(a) Conservatism
Conservatism convention states that all anticipated profits should be ignored but all losses anticipated should be accounted and method of valuing asset should be chosen which leads to lesser value.

Example:

1. Create provision for doubtful debts
2. Provisions for discount on debtors
3. Value stock at cost or market price which ever is less.

Question 134.
Which of the following statements describe objectives of accounting?
(i) providing details of the personal assets and liabilities of the owner
(ii) providing information about the assets, liabilities and capital of business entity
(iii) maintaining records of business
(iv) providing information about the performance of business entity:
(a) (ii) and (iii)
(b) (ii), (iii) and (iv)
(c) (i), (iii) and (iv)
(d) (i), (ii) and (iv).
(b) (ii), (iii) and (iv)
Objectives of accounting:

1. Maintaining the accounting records
2. Ascertaining profit & loss and financial position of business
3. Providing accounting information to users.

Question 135.
According to which concept, practices once selected and adopted should be applied consistently year after year:
(a) Cost concept
(b) Consistency convention
(c) Conservatism convention
(d) None of the above
(b) Consistency convention
The consistency convention implies that the accounting practices should remain the same from one year to another. The results of different years will be comparable only when accounting rules are continuously adhered to from year to year.

Question 136.
The money taken by the proprietor for personal use:
(a) Capital
(b) Interest
(c) Prepaid Expenses
(d) Drawing
(d) Drawing
The money taken by the proprietor for personal use is known as Drawing. This will reduce the capital of proprietor.

Question 137.
Money borrowed to start business:
(a) Venture capital
(b) Debt financing
(c) Dividend
(d) Shares
(d) Shares
The proportion of capital to which each member is entitled is called his share, the capital of the company is known as Share Capital. This money is borrowed from its members or shareholders. Personal

Question 138.
Bank A/c is which of the following:
(a) Personal A/c
(b) Real A/c y
(c) Nominal A/c
(d) Representative Personal A/c
(a) Personal A/c
Accounts are those accounts which shows the transaction with customer, suppliers, money lenders, the banks and the owners. Bank Account is the account of some banking company which is an artificial person.

Question 139.
Opening capital ₹ 80,000, Drawing ₹ 2,000 per month in the middle of the month @ 5% p.a. Additional capital ₹ 10,000, profit ₹ 7,000, calculate closing capital:
(a) ₹ 72,400
(b) ₹ 10,000
(c) ₹ 80,000
(d) ₹ 12,094
(a) ₹ 72,400
Opening Capital = 80,000
Drawings = 2,000 per month in middle of month
Additional Capital = 10,000
Profit = 7,000
Drawings = 2,000 x 12
= 24,000 x $$\frac { 6 }{ 12 }$$ x $$\frac { 5 }{ 100 }$$
= 600
Closing Capital = Opening Capital – Drawings + Additional Capital + Profit
= 80,000 – 600 – 24,000 + 10,000 + 7,000 = ₹ 72,400

Question 140.
Which one of the following are correct (i) Debit the giver, credit the receiver (ii) Debit the receiver credit the giver (iii) what comes in debit, what goes out credited:
(a) I & II
(b) II & III
(c) I, II & III
(d) I & III
(b) II & III

• Rule of Personal A/c – ‘Debit the receiver, Credit the giver.
• Rule of Real A/c – ‘Debit what comes in, Credit what goes out.
• Rule of Nominal A/c – ‘Debit all expenses and Losses and Credit all Incomes’. and gains

Thus, only options (II) & (III) are correct.

Question 141.
M/s. Son Exports purchased a computer worth ? 25,000. While preparing the final accounts the proprietor valued the computer at ? 20,000, which he can realize by selling the computer anytime. Which basis of measurement has been used by the proprietor?
(a) Historical cost
(b) Realisable value
(c) Present value
(d) Current cost.
(b) Realisable value
The basis of measurement used by the proprietor is realisable value. As per this valuation basis, assets are recorded at the amount of cash or cash equivalent that would be realised by selling the assets in a routine manner. Similarly, liabilities are recorded at their settlement values.

Question 142.
Inventories should generally be valued at lower of cost price or _________.
(a) Fair market value
(b) Present value
(c) Replacement value
(d) Net realizable value
(d) Net realizable value
As per the conservatism concept, the golden rule of inventory valuation is lower of cost or net realisable value. Accordingly inventory should be valued at cost or net realisable value whichever is lower.

Question 143.
Revenue should be recognised as recorded when the goods are sold or service are rendered to customer, this concept is known as:
(a) Revenue recognition concept
(b) Matching concept
(c) Materiality concept
(d) Consistency concept
(a) Revenue recognition concept
Revenue Recognition concept is based on accounting period concept. Adjustment should be made for all outstanding expenses, accrued incomes, unexpired expenses and unearned income.

Question 144.
Revenue should be recognised/recorded when the goods are sold or services are rendered to the consumer, this concept is known as:
(a) Matching Concept
(b) Consistency Concept
(c) Materiality Concept
(d) Revenue Recognition Concept
(d) Revenue Recognition Concept
According to Revenue Recognition Concept, Revenue is deemed to be realised or recorded when the goods are sold or services are rendered.

Question 145.
If owner’s equity of a business is ₹ 70,000 and liabilities are of ₹ 40,000, total assets of the business will be:
(a) ₹ 1,10,000
(b) ₹ 40,000
(c) ₹ 30,000
(d) ₹ 74,000
(a) ₹ 1,10,000
Accounting equation states
Total Assets = Liabilities + Owners equity = 40,000 + 70,000
= 1,10,000

Question 146.
A business unit follows the straight line method of depreciation for depreciating its furniture every year which accounting convention is being followed in this case:
(a) Materiality
(b) Consistency
(c) Conservatism
(d) Disclosure
(b) Consistency
The business unit follows same method of depreciation year after year because of consistency convention of accounting. The consistency convention implies that the accounting practice should remain the same from one year to another in order to facilitate comparison between result of different years.

Question 147.
ASSET = capital + liability is what?
(a) Ledger
(b) Linear equation
(c) Journal
(d) Accounting equation
(d) Accounting equation
The sum of resources (assets) = obligations (capital + liabilities) Therefore, Capital + Liabilities = Assets; or Capital = Assets – Liabilities.
This equation is known as accounting equation. This equation is based on the concept that for every debit, there is an equivalent credit. The entire system of double entry book-keeping is based on this concept.

Question 148.
Which of the following should not be called ‘sales’?
(a) Office fixtures sold
(b) Goods sold for cash
(c) Goods sold on credit
(d) Sale of item previously included in ‘purchases’.
(a) Office fixtures sold
Office fixtures will include the desks, chairs, work-stations and the other fittings in the work-station in your office. These include the things which are already attached with work place. Thus the office fixtures sold is not considered as sales.

Question 149.
The Results of Diff. years will be comparable only when accounting rules are continuously adhered to from year to year. This consistency is :
(a) Accounting standard
(b) Accounting convention
(c) Accounting concept
(d) Accounting policy
(b) Accounting convention

Various accounting conventions were:

• Consistency
• Materiality
• Disclosure
• Conservatism

Question 150.
A concern proposes to discontinue its business from March 2015 and decides to dispose of all its assets within a period of 4 months. The Balance Sheet as on 31st March, 2015 should indicate the assets at their:
(a) Net realisable value
(b) Historical cost
(c) Cost less depreciation
(d) Cost price or market price which ever is lower.
(a) Net realisable value
Since going concern is no more there, hence assets should be brought down to their realisable values i.e. shown at net realisable valud.

Question 151.
If salaries paid appearing in the trial balance for the year ending 2015 is ₹ 7, 500 and it is given in the adjustments that the salary unpaid for the year ending 2015 is ₹ 2, 500. The total amount to be debited to the Profit and Loss Account under the head salaries will be:
(a) ₹ 10, 000
(b) ₹ 5, 000
(c) ₹ 2, 500
(d) 7, 500
(a) ₹ 10, 000
According to Revenue matching concept. The Expenses are charged to the revenue of the same period and that way both paid and unpaid salary are charged to Profit & Loss A/c.

Question 152.
Mr. Ashok buys stationary of ₹ 50,000 and pays cash ₹ 20,000. What is the amount of expense as per the accrual concept?
(a) Nil
(b) ₹ 50,000
(c) ₹ 20,000
(d) ₹ 30,000
(b) ₹ 50,000
As per Accrual Concept, Expense and Income are considered to be incurred when they occur not when their payment is done or received.

Question 153.
A concern proposes to discontinue its business from March 2013 and decides to dispose of all its assets within a period of 4 months. The Balance Sheet as on 31st March, 2013 should indicate the assets at their:
(a) Historical cost
(b) Net Realiable value
(c) Cost less depreciation
(d) Cost price or market value whichever is lower
(b) Net Realiable value
If a concern proposes to discontinue its operation i.e. going concern is cost, then fixed assets should be shown at net realisable values rather than at fixed cost.

Question 154.
The convention of conservatism is likely to lead to an in the balance sheet:
(a) Understatement of Liabilities
(b) Overstatement of Assets
(c) Overstatement of Capital
(d) Understatement of Assets
(d) Understatement of Assets
There is an accounting convention of conservatism which is likely to lead an ‘understatement of assets’ and ‘overstatement of liabilities’ in balance sheet.

Question 155.
Atul purchased a car for ₹ 5,00,000 by making a down payment of ₹ 1,00,000 and signing a ₹ 4,00,000 bill payable due in 60 days. As a result of this transaction:
(a) Total assets increased by ₹ 5,00,000
(b) Total liabilities increased by ₹ 4,00,000
(c) Total assets increased by ₹ 4,00,000
(d) Total assets increased by ₹ 4,00,000 with a corresponding increase in liabilities by ₹ 4,00,000.
(d) Total assets increased by ₹ 4,00,000 with a corresponding increase in liabilities by ₹ 4,00,000.
As per Accounting Equation:
Assets = Capital + Liabilities
Accordingly, asset purchased for ₹ 5,00,000 will increase the asset side by ₹ 5,00,000 but down payment of ₹ 1,00,000 will also reduce it by ₹ 1,00,000. Hence asset side will increase by net ₹ 4,00,000. Since, a bill amount of ₹ 4,00,000 has been signed in obligation, the liability also increases by ₹ 4,00,000.

Question 156.
The rule every transaction effects two or more ledger accounts is based on the concept of:
(a) Going concern
(b) Double entry system of book-keeping
(c) Money Measurement
(d) Periodicity
(b) Double entry system of book-keeping
Due to Double Entry Book keeping system, every transaction effects two or more ledger accounts at the same time.

Question 157.
Which of the following is correct about “Accounting concept”:
(a) Accounting concepts are based on accounting conventions
(b) Accounting concepts are established by common accounting practices
(c) Accounting concepts are methods or procedures accepted by general agreement
(d) Personal judgement has no role in the adoption of accounting concepts
(d) Personal judgement has no role in the adoption of accounting concepts
Accounting Concepts are universally applicable and personal judgement has no role in their adoption.

Question 158.
Which of the following accounting equation is correct:
(a) Capital (₹ 15,000) = Fixed Assets (₹ 12,000) + Cash (₹ 4,000)
(b) Trade payables (₹ 3,000) + Capital (₹ 17,000) + Bills payable (₹ 4,000) = Fixed Assets (₹ 20,000)
(c) Capital (₹ 15,000) = Cash (₹ 3,000) + fixed Assets (₹ 9000)
(d) Trade payables (₹ 8,000) + (Capital (₹ 7,000) = Fixed Assets (₹ 8,000) + Cash at Bank (₹ 4,000) + Cash (7 3,000)
(d) Trade payables (₹ 8,000) + (Capital (₹ 7,000) = Fixed Assets (₹ 8,000) + Cash at Bank (₹ 4,000) + Cash (7 3,000)
As per dual entry System, Accounting Equation is:
Assets = Capital + Liabilities
F.A (8,000) + Cash (3,000) + Bank (4,000) = Capital (7,000) + Trade payables (8,000)

Question 159.
General reserve is created on the basis of convention of:
(a) Conservatism
(b) Uniformity
(c) Materiality
(d) Full disclosure
(a) Conservatism
As per conservatism, an accountant should not anticipate income but provide for all possible losses.
General reserve is also an outcome of this concept i.e. to provide for future.

Question 160.
Revaluation account is a:
(a) Nominal account
(b) Real account
(c) Personal account
(d) None of the above
(a) Nominal account
The nature of Revaluation Account is Nominal Account because it is created to ascertain Profit or Loss.

Question 161.
Purchase A/c is a _________?
(a) Real A/c
(b) Nominal A/c
(c) Personal A/c
(d) None of these
(b) Nominal A/c
The purchase account is a general ledger account in which is recorded the inventory purchases of a business. This account is used to calculated the amount of inventory available for sale in a periodic inventory system. Hence it is a Nominal A/c.

Question 162.
Prepaid Rent is recorded in _________.
(a) Balance Sheet
(b) Receipt and Payment A/c
(d) None
(a) Balance Sheet
Prepaid expenses are not recorded on an income statement initially. Instead, prepaid expenses are initially recorded on the balance sheet, and then, as the benefit of the prepaid expense is realized, or as the expense is incurred, it is recognized on the income statement.

Question 163.
Trade Mark comes under _________?
(a) Tangible Asset
(b) Intangible Asset
(c) Both
(d) None
(b) Intangible Asset
An intangible asset is an asset that is not physical in nature. Goodwill, brand recognition and intellectual property, such as patents trademarks and copyrights are all intangible assets. Intangible assets exit in opposition to tangible assets, which include land, vehicles, equipment and inventory.

## Accounting for Non-Profit Organisation – CS Foundation Fundamentals of Accounting Notes

Go through this Accounting for Non-Profit Organisation – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

## Accounting for Non-Profit Organisation – CS Foundation Fundamentals of Accounting Notes

Meaning of Not-for-profit Organisation:
1. There are certain organisation which are formed not to earn profits but to render services to its members and to the public. Such organisations include clubs, hospitals, libraries, schools, religious institutions, charitable institutions and literary societies.

2. These organisations exists with the- primary motive of providing services.

Some Important Items Relating to Non-Profit Seeking Organisations:
1. Subscription:

• It is the main source of income of non-profit entity.
• It will be appearing on the debit side of Receipts and Payments Account.

2. Life-Membership Fees:
These could be taken as capital receipts and every year a charge is debited based on some logic.

3. Endowments:

• Sometimes, donations are also in the form of endowments to be’ used as per instructions of the donor.
• These are to be treated as capital receipts.

4. Legacy:

• It is the amount which a non-profit entity receives as per the ‘WILL’ of a deceased person.
• It appears on the debit side of Receipt and payments A/c.
• This amount is not of recurring nature, and such it treated as capital receipt and shown on the liabilities side.

5. Donation:

• They could be used for meeting capital or revenue expenses.
• It donations are received for a specific purpose, the amount is credited to a fund from which the amounts are distributed.
• The fund may be invested in specific securities.
• Income from such investment is credited to the Fund A/c only.
• Small donation amounts which are not embarked for any specific purpose may be treated as revenue receipt.

6. Entrance Fees:

• It is received from the new members apart from the amount of annual subscriptions.
• Some people favour capitalising the entrance fee on the ground that it is collected once for all and as such it is not of the recurring nature.
• It is treated as revenue income.

Final Accounts or Financial Statements:
1. The Non-Profit Organisations are also required to prepare financial statements at the end of the each accounting period.

2. Although these organisation are non-profit making entities and they are not required to make Trading and Profit & Loss A/c but it is necessary to know whether the income during the year was sufficient to meet the expenses or not.

3. The final accounts of a ‘non-profit organisation’ consist of the following

• Receipts and Payments A/c.
• Income and Expenditure A/c.
• Balance Sheet.

Preparation of Financial Statements of a Non-Trading Concern:
There are certain organisations that are not established for making profit but to provide some service. These services are generally given to members who make subscriptions to avail them. These are also called as non-trading entities. The examples of such organisations are:

1. Gymkhana / sports clubs
2. Educational institutions
3. Public hospitals
4. Libraries
5. Cultural clubs like Rotary or Lions club
6. Religious institutions
7. Charitable trusts

Receipt and Payment Account:
This is similar to cash book. Entries are made on cash basis and items pertaining to previous year or current year or subsequent years are also recorded. Receipts are shown on debit side and payments are shown on credit side. Capital as well as revenue items are entered in the R & P Account. This account is real account in nature. No provisions are recorded in this account.

Features of Receipts and Payment Account:

1. It is an Account which contains all Cash and Bank transactions made by a nonprofit organization during a particular financial period.
2. It starts with the opening balances of Cash and Bank. All Cash Receipts both capital and revenue during the period are debited to it.
3. All Cash Payments both capital and revenue during the period are credited to this Account. It ends with the Closing Cash and Bank Balances.
4. While recording the Cash and Bank transactions all entries are made on Cash Basis.
5. It is a summary of Cash Book.
6. It follows Real Account.

Income and Expenditure Account:
This is similar to the Profit and Loss Account and is prepared exactly based on same principles. As the name suggests only revenue items are recorded herein. Incomes are recorded on the credit side while the expenses on the debit side. Both incomes and expenses must be taken on the basis of accrual concept.

Features of Income and Expenditure Account:

1. It follows Nominal Account.
2. All expenses of revenue nature for the particular period are debited to this Account on accrual basis.
3. Similarly all revenue incomes related to the particular period are credited to this account on accrual basis.
4. All Capital incomes and Expenditures are excluded.
5. Only current year’s incomes and expenses are recorded. Amounts related to other periods are deducted. Amounts outstanding for the current year are added.
6. Profit on Sale of Asset is credited. Loss on Sale of Asset is debited. Annual Depreciation on Assets is also debited.
7. If income is more than expenditure, it is called a Surplus, and is added with Capital or General Fund etc. in the Balance Sheet.
8. If expenditure is more than income, it is a deficit, and is deducted from Capital or General Fund etc, in the Balance Sheet.

Fund Asset Accounting and its peculiarities:
Following are the concepts of some funds which are generally maintained by organizations:
(i) Capital Fund: It is also called “General Fund” or “Accumulated Fund.” It is actually the Capital of a non-profit concern. It may be found out as the excess of assets over liabilities. Usually “Surplus” or “Deficit” during a period is added with or deducted from it.

(ii) Special Fund: It may be created out of special donation or subscription or out of a portion of the “Surplus”. For example a club may have a “Building Fund”. It may be used for meeting some specific expenses or for acquiring an asset.

 Basic of Distinction Receipts and Payment A/c Income and Expenditure 1. Nature It is the summary of cash book. It is like a profit and loss account. 2. Side Debit side of this account records receipt and credit side payment. Debit side of this account records receipt and credit side payment. 3. Types of Account It is a real account. It is a nominal a/c. 4. Opening Balance It starts with the opening balance of cash and bank. It has no opening balance. 5. Closing Balance Balance at the end represents cash in hand at the end and balance of bank overdraft. Balance at the end represents excess of income over expenditure vice – versa. 6. Period Receipts and payments may also relate to preceding and succeeding period. Income and expenditure items relate only to the current period.

Accounting for Non-Profit Organisation MCQ Questions

In each of the following one of them is correct. Indicate the correct answer:

1. Subscription received in advance is shown in ________.
(a) Liabilities side of the Balance Sheet
(b) Assets side of the Balance Sheet
(c) Receipt Item
(d) None of the above
(a) Liabilities side of the Balance Sheet

2. Non-Recurring Expenses mean ________.
(a) Expenses incurred at regular intervals
(b) Expenses incurred at irregular intervals
(c) Expenses not incurred more than once
(d) Expenses not incurred at all
(c) Expenses not incurred more than once

3. Organisations established for the purpose of providing services to members and beneficiaries are ________.
(a) Private Limited Companies
(b) Public Limited Companies
(c) Partnership Firms
(d) Non Profit Making Organisations
(d) Non Profit Making Organisations

4.

 No. of Members of Hare Ram Club 250.00 Annual subscription ₹ 500.00 Subscription received ₹ 97,500.00 Subscription receivable as on 31.03.2007 ₹ 47,500.00 Subscription received in Advance ₹ ?

(a) ₹ 27,500.00
(b) ₹ 77,500.00
(c) ₹ 20,000.00
(d) ₹ 25,000.00
(c) ₹ 20,000.00

5. Life membership fees received by a non-profit organisation is treated as:
(a) Revenue receipt.
(b) Capital receipt.
(c) Deferred revenue
(d) Both revenue & capital receipt
(b) Capital receipt.

6. Subscription received for current year ₹ 50,000; Subscription of current year received in the previous year ₹ 5,000; Subscription received in advance in the current year ₹ 2500 and Subscription of previous year received in current year ₹ 10000. The amount of subscription to be shown in receipts and payments account is
(a) ₹ 50,000
(b) ₹ 62,500
(c) ₹ 60,000
(d) ₹ 55,000
(b) ₹ 62,500

7. On 31st December 2011, a club had subscription in arrears of ₹ 16,000 ‘ and in advance ₹ 4,000 respectively. During the year ended 31.12.2012, the club received subscription of ₹ 2,08,000 which includes ₹ 10,400 relating to 2013. What amount of subscription will be recognized as income for the year 2012?
(a) 2,12,000
(b) 1,96,000
(c) 1,81,600
(d) 1,85,600
(d) 1,85,600

8. Which one of the following financial statements is not prepared by a Non-profit organization?
(a) Balance Sheet
(b) Income and Expenditure Account
(c) Cash Flow Statement
(d) Receipt and Payment Account
(c) Cash Flow Statement

9. Donations received by Gymkhana club in the form of endowment are treated as ________.
(a) Revenue receipts
(b) Deferred revenue receipts
(c) Capital receipts
(d) General income
(c) Capital receipts

10. Subscription fees paid: 4,000; Prepaid fees at end: 1,000; Outstanding fees at end: 500. Profit & loss account is to be debited with:
(a) ₹ 3,500
(b) ₹ 4,500
(c) l 5,500
(d) ₹ 2,500
(a) ₹ 3,500

11. Any donation received for a specific purpose is a:
(a) Liability
(b) Assets
(c) Revenue receipts
(d) Capital receipts.
(b) Assets

12. Endow fund received by a club is a:
(a) Revenue Receipt
(b) Capital Receipt
(d) Revenue Payment.
(b) Capital Receipt

13. Non profits organisations do not have:
(a) Income
(b) Share holders
(c) Tax-exempt
(d) Employees.
(b) Share holders

14. The subscription details of club are given below:
Received during the year ₹ 1,080
Subscription is advance on 31.12.2014 ₹ 300
Subscription in advance on 31.12.2014 ₹ 50.
What amount will be entered in the income & expenditure account for the year ended 31st Dec., 2014?
(a) ₹ 1,330
(b) ₹ 830
(c) ₹ 1,080
(d) ₹ 1,380
(a) ₹ 1,330

15. What does a credit balance of Income & Expenditure Account show at the end of a year?
(a) Surplus
(b) Loss
(c) Deficit
(d) Gross profit
(a) Surplus

16. Non profits organisations do not have:
(a) Income
(b) Share holders
(c) Tax-exempt
(d) Employees.
(b) Share holders

17. The capital of a non-profit organization is generally known as :
(a) Equity
(b) Accumulated fund
(c) Finance Reserve
(d) Cash Fund
(a) Equity

18. The capital of non – profit organisation is generally known as ________.
(a) Equity
(b) Accumulated fund
(c) Finance Reserve
(d) Cash Fund.
(a) Equity

19. Endowment fund receipt is treated as ________.
(a) Capital Receipt
(b) Revenue Receipt
(c) Loss
(d) Expenses
(a) Capital Receipt

20. Income and Expenditure Account shows subscriptions at ₹ 10,000. Subscriptions accrued in the beginning of the year and at the end of the’ year were ₹ 1,000 and ₹ 1,500 respectively. The figure of subscriptions received appearing in receipts and payments account will be ________.
(a) ₹ 9,500
(b) ₹ 11,000
(c) ₹ 10,000
(d) None of the above
(a) ₹ 9,500

21. Receipts and Payments Account generally shows:
(a) A Debit Balance
(b) A Credit Balance
(c) Surplus or Deficit
(d) Capital Fund.
(a) A Debit Balance

22. Income and Expenditure Account records transactions of:
(a) Revenue nature only;
(b) Capital nature only;
(c) Both revenue and capital nature.
(d) Income of only revenue nature and expenditure of revenue and capital nature.
(a) Revenue nature only;

23. Income and Expenditure Account reveals:
(a) Surplus or Deficiency
(b) Cash in Hand
(c) Net Profit
(d) Capital Account.
(a) Surplus or Deficiency

24. Donation received for special purpose:
(a) Should be credited to Income and Expenditure Account.
(b) Should be credited to separate A/c and shown in the Balance sheet.
(c) Should be shown on the asset side.
(d) Should not be recorded at all.
(b) Should be credited to separate A/c and shown in the Balance sheet.

25. Subscription received by a school for organising annual function is treated as ________.
(a) Capital Receipt (i.e. liability)
(b) Revenue Receipt (i.e. Income)
(c) Assets
(d) Earned Income.
(a) Capital Receipt (i.e. liability)

26. Amount received from sale of grass by club should be treated as :
(a) Capital Receipt
(b) Revenue Receipt
(c) Asset
(d) Earned Income.
(b) Revenue Receipt

27. If there is a ‘Match Fund’ then match expenses and income are transferred to ________.
(a) Income and Expenditure A/c
(b) Assets side of Balance sheet.
(c) Liabilities side of Balance sheet.
(d) Both Income and Expenditure A/c and to Balance Sheet.
(c) Liabilities side of Balance sheet.

28. Subscription received in cash during the year amounted to ₹ 40,000 subscription outstanding at the end of previous year was ₹ 1,500 and outstanding at the end of current year was ₹ 2,000. Subscription received in advance for next year was ₹ 800. The amount credited to Income and Expenditure Account will be ________.
(a) ₹ 38,700
(b) ₹ 39,700
(c) ₹ 40,300
(d) ₹ 41,300
(b) ₹ 39,700

29. Subscription received in cash during the year amounted to ₹ 60,000 subscription received in advance for next year was ₹ 3,000 and received in advance during previous year was ₹ 2,000. Subscription in arrear at the end of the current year was ₹ 5,400. The amount credited to Income and Expenditure account will be ________.
(a) ₹ 53,600
(b) ₹ 66,400
(c) ₹ 55,600
(d) ₹ 64,400
(d) ₹ 64,400

30. The opening balance of Price fund was ₹ 32,800. During the year, donations received towards this fund amounted ₹ 15,400; amount spent on prizes was ₹ 12,300 and was ₹ 4,000. The closing balance of Prize fund will be:
(a) ₹ 56,500
(b) ₹ 67,500
(c) ₹ 39,900
(d) ₹ 31,900
(c) ₹ 39,900

31. Salary paid in cash during the current year was ₹ 80,000; outstanding salary at the end was ₹ 4,000; Salary paid in advance last year pertaining to the current year was ₹ 3,200; paid in advance during current year for next year was ₹ 5,000. The amount debited to Income and Expenditure Account will be :
(a) ₹ 85,800
(b) ₹ 77,800
(c) ₹ 82,200
(d) ₹ 74,200
(c) ₹ 82,200

32. Subscription received in advance during the current year:
(a) An income
(b) An asset
(c) A liability
(d) None of these.
(c) A liability

33. Which of the following is generally considered as non-profit oriented ________.
(a) Charitable Organization
(b) Corporation
(c) Audit Firm
(d) Insurance Companies.
(a) Charitable Organization

34. Outstanding Subscription for non-profit organization is considered as/an ________.
(a) Expense
(b) Liability
(c) Equity
(d) Asset.
(d) Asset.

35. Expenditure greater than Income of non-profit organization given rise to a ________.
(a) Loss
(b) Profit
(c) Surplus
(d) Deficit
(d) Deficit

36. Income earned which is yet to be collected results in:
(a) Increase in capital and increase in liability
(b) Decreases in liability and increase in capital
(c) Increase in assets and increase in liability
(d) Increase in capital and increase in assets.
(d) Increase in capital and increase in assets.
Income earned but not received is accrued income so, when it will be collected, it will result in increase in assets with increase in capital also.

37. Receipt and Payment Account is based on ________.
(a) Cash Book
(b) Profit and Loss A/c
(c) Both a and b
(d) None of the above
(a) Cash Book
Receipts and Payments Account is prepared at the end of the accounting year on the basis of cash receipt and cash payments recorded in the Cash Book. It is a summary of cash and bank transactions under various heads.

38. Income and Expenditure is which account ________.
(a) Real A/c
(b) Nominal A/c
(c) Personal A/c
(d) Cash A/c
(b) Nominal A/c
Income and Expenditure Account is a Nominal Account, Therefore, the rule of Nominal Account debit all expenses and losses and credit all incomes and gains is followed while preparing it while preparing the account, only items of revenue nature are recorded and all items of capital nature are ignored.

## Partnership Accounts-Goodwill – CS Foundation Fundamentals of Accounting Notes

Go through this Partnership Accounts-Goodwill – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

## Partnership Accounts-Goodwill – CS Foundation Fundamentals of Accounting Notes

Goodwill:

• Goodwill means the reputation of the firm.
• In other words, Goodwill is the value of reputation earned by a firm which helps it to yield more than normal profits.

Features of Goodwill:

• It is an intangible asset i.e. cannot be seen or touched, (it is not a fictitious asset).
• The value of Goodwill fluctuates from time to time.
• It is a valuable asset and placed on the asset side of Balance sheet.

Factors affecting Goodwill of a firm:

• Location of business.
• Quality of goods sold/services given.
• Reputation of owners of the firm.
• Risk involved in business.
• Efficiency of management.
• Trends of profits etc.
• Monopolistic nature of the business.
• Possibility of competition.
• Government attitude.
• Possession of special contract for availability of material.

Need for valuation of Goodwill:

• On admission of new partner.
• On retirement or death of a partner.
• When there is a change in profit sharing ratio.
• When the business is sold.
• When a firm is amalgamated with another firm.

Goodwill is the present value of a firm’s anticipated super normal | earnings. Super normal earnings means earnings over and above the normal rate of return.

Calculation of Goodwill:
1. Average Profit Method
It is a very simple and widely followed method.
Formula:
Value of Goodwill = Average profit x Number of years of purchase
Here:
(i) Average profits are the past profits after adjustments.
The following adjustments are made from the past profits.

• Abnormal income should be deducted
• Abnormal losses should be added back
• Income from investments should be deducted as it is not earned from the business.

Note: These adjustments are made because average profit is a figure which represents a profit of all past years. Hence, all abnormal items should be removed/adjusted.

(ii) Number of year of purchase – The number of year of purchase are the years for which the goodwill is expected to remain in the business i.e. the years for which the benefits of goodwill can be taken.

Weighted average profit method:

• This method is a slight modification of average profit method.
• Under this method, weights are allotted to each year’s profit.
• Weights are multiplied by the product to get the product.
• The total product is then divided by the total weight to get the weighted average profit
• The method is used when the profits are increasing year after year.
Goodwill = Weighted average profit x No. of years of purchase.

2. Super Profit Method
1. Under this method, goodwill is calculated on the basis of excess profit earned by a firm over and above normal profits.

2. There are three methods for calculating goodwill using super profit method –

• Purchase of super profit.
• Annuity method.
• Capitalization of super profit.

(i) Purchase of super profit:
Goodwill is calculated as follows
Goodwill = Super profit x No. of years of purchase

(ii) Capitalization of super profit method:
Under this method, goodwill is calculated by capitalizing super profits as follows:
Goodwill = $$\frac { Super Profits × 100 }{ Normal Rate of Return }$$

(iii) Annuity method: Under this method, goodwill is calculated by taking the present value of a terminal annuity of a super profit for a reasonable period.
Goodwill = Super Profit x Annuity
Note: Annuity Rate is generally given in question

Example:
A firm earned net profits during the last seven years as follows:
1992 ₹ 20,000 Profit
1993 ₹ 70,000 Loss
1994 ₹ 40,000 Loss
1995 ₹ 2,50,000 Profit
1996 ₹ 2,70,000 Profit
1997 ₹ 3,00,00 Profit
1998 ₹ 3,20,000 Profit
The capital invested in the firm is ₹ 12,00,000. Normal rate of return in the similar type of business is 10%. Calculate the value of goodwill on the basis of 2$$\frac { 1 }{ 2 }$$ years purchases of average super profits earned during the above mentioned seven year
Solution:
(i) Actual Average Profit:
Total Profits of last Seven Years – ₹ 20,000 – ₹ 70,000 – ₹ 40,000 + ₹ 2,50,000 + 2,70,000 : ₹ 3,00,000 + ₹ 3,20,000 = ₹ 10,50,000
Average Profit = $$\frac{10,50,000}{7}$$ = 1,50,000

(ii) Normal Profit = Capital Invested x $$\frac { Normal Rate of Return }{ 100 }$$
= 12,00,000 x 10/100 = ₹ 1,20,000

(iii) Super Profit = Actual Average Profit – Normal Profit
= ₹ 1,50,000 – ₹ 1,20,000 = ₹ 30,000

(iv) Value of Goodwill = Super Profit x Number of years purchased
= ₹ 30,000 x 2.5 = ₹ 75,000

(3) Capitalization method:
Under this method, goodwill is ascertained by comparing value of whole business (applying normal rate of return) with the actual capital employed of the business. The difference of the above will be termed as goodwill. Goodwill = Value of whole business – capital employed where,

Example : Suppose capital employed by a partnership firm is ₹ 1,00,000. Average profits are ₹ 25,000 and normal rate of return is 10%. Calculate the value of goodwill using capitalization method.
Solution:
Goodwill = Whole value of firm – Capital employed = ₹ 2,50,000 – 1,00,000 = ₹ 1,50,000
Working Note:
Whole value of firm = $$\frac { Average Profits × 100 }{ Normal Rate of Return }$$
= $$\frac{25,000×100}{10}$$ = ₹ 2,50,000

Partnership Accounts-Goodwill MCQ Questions

1. Under super profit basis goodwill is calculated by:
(a) Average profits x years of purchase.
(b) Super profits x Years of purchase.
(c) Total of the discounted value of expected future profits.
(d) Super profit divided with expected rate of return.
(b) Super profits x Years of purchase.

2. Goodwill brought in by incoming partner in cash is taken away by tho old partners in:
(a) Old Profit Sharing Ratio.
(b) New Profit Sharing Ratio.
(c) Sacrificing Ratio.
(d) Capital Ratio.
(c) Sacrificing Ratio.

3. Under capitalization basis goodwill is calculated by:
(a) Average profit x years of purchase.
(b) Super profits x years of purchase.
(c) Total of the discounted value of expected benefits.
(d) Super profit divided with expected rate of return
(d) Super profit divided with expected rate of return

4. Partners are supposed to pay interest on drawing only when provide d by the __________.
(a) Partnership Act
(b) None of these
(c) Agreement
(d) (a) and (c) above
(c) Agreement

5. Weighted average method of calculating goodwill is used when:
(a) Profits are not equal
(b) Profits show a trend
(c) Partners who gave the guarantee
(d) None of the above
(b) Profits show a trend

6. X, Y and Z are partners sharing profits and losses in the ratio 5:3:2. They decide to share the future profits in the ratio 3:2:1. Workmen compensation fund appearing in the balance sheet on the date if no information is available for the same will be:
(a) Distributed to the partners in old profit sharing ratio.
(b) Distributed to the partners in new profit sharing ratio.
(c) Distributed to the partners in capital ratio.
(d) Carried forward to new balance sheet without any adjustment.
(a) Distributed to the partners in old profit sharing ratio.

7. X, Y and Z are partners in a firm. At the time of division of profit for the year there was dispute among the partners. Profits before Interest on partners capital was ₹ 10,000 and X wanted interest on capital @20% as his capital contribution was ₹ 1,00,000 as compared to that of Y and Z which was ₹ 75,000 and ₹ 50,000 respectively. Find the solution.
(a) Profits of ₹ 10,000 will be distributed equally.
(b) X will get the interest of ₹ 20,000 and the loss of ₹ 10,000 will be shared equally.
(c) All the partners will get interest their capital and the loss will be shared equally.
(d) None of these.
(a) Profits of ₹ 10,000 will be distributed equally.

8. A and B are partners sharing profits and losses in the ratio 5:3. On admission C brings ₹ 1,00,000 as Capital and ₹ 50,000 against goodwill. New profit sharing ratio between A, B and C are 7:5:4 Find the sacrificing ratio of A and B:
(a) 3:1
(b) 4:7
(c) 5:4
(d) 2:1
(a) 3:1

9. The following trading results are available in respect of the business carried on by a firm:
2001 – Loss – ₹ 10,000
2002 – Loss – ₹ 5,000
2003 – Profit – ₹ 80,000
2004 – Profit – ₹ 55,000
The value of goodwill on the basis of 5 years purchase of average profit of the business will be:
(a) ₹ 1,25,000
(b) ₹ 1,50,000
(c) ₹ 1,00,000
(d) ₹ 1,20,000
(b) ₹ 1,50,000

10. X and Y share profits and losses in the ratio of 2:1. They take Z as a partner and the new profit sharing ratio becomes 3:2:1 .Z brings ₹ 5,000 as premium for goodwill. The full value of goodwill be:
(a) ₹ 5,000
(b) ₹ 20,000
(c) ₹ 30,000
(d) ₹ 25,000
(c) ₹ 30,000

11. Find the goodwill of the firm using capitalization method from the following information:
Total Capital Employed in the firm ₹ 8,00,000
Reasonable Rate of Return 15%
Profits for the year ₹ 6,00,000
(a) ₹ 80,00,000
(b) ₹ 40,00,000
(c) ₹ 32,00,000
(d) ₹ 42,00,000
(c) ₹ 32,00,000

12. The capital of B and D is ₹ 60,000 and ₹ 30,000 respectively with the profit sharing ratio 3:1. The new ratio admissible after 01.4.2006 is 5:3. Goodwill valued as ₹ 80,000 will be credited to B and D’s capital by ₹:
(a) ₹ 60,000 and 20,000
(b) ₹ 50,000 and 30,000
(c) ₹ 50,000 and 30,000
(d) None of these.
(a) ₹ 60,000 and 20,000

13. A and B are partners sharing profits and losses in the ratio of 3:2 having the capital of ₹ 80,000 and ₹ 50,000 respectively. They are entitled to 10% p.a. interest on capital before distributing the profits. During the year, the firm earned ₹ 17,800 before allowing any interest on capital. Profits apportioned among them excluding interest will be:
(a) ₹ 2,880 and 1,920
(b) ₹ 8,800 and 8,800
(c) ₹ 8,000 and 5,000
(d) None of the above.
(a) ₹ 2,880 and 1,920

14. A and B are partners sharing profit and losses in the ratio 4:1. C was manager who received the salary of ₹ 2,000 p.m. in addition to a commission of 5% on net profits after charging such commission. Profit for the year is ₹ 3,39,000 before charging salary. Find the total remuneration of C:
(a) ₹ 39,000
(b) ₹ 44,000
(c) ₹ 43,500
(d) ₹ 38,000
(a) ₹ 39,000

15. The capital of A and B sharing profits and losses equally are ₹ 90,000 and ₹ 30,000 respectively. They value the goodwill of the firm at ₹ 80,000 which was not recorded in the books. If goodwill is to be raised now, by what amount each partner’s capital account will be debited?
(a) ₹ 20,000 and ₹ 60,000
(b) ₹ 40,000 and ₹ 40,000
(c) ₹ 60,000 and ₹ 20,000
(d) None of these.
(d) None of these.

16. A and B are partners with the capital ₹ 50,000 and ₹ 40,000 respectively. They share profits and losses equally. C is admitted on bringing ₹ 50,000 as capital only and nothing was brought against goodwill. Goodwill in Balance Sheet of ₹ 10,000 is revalued as 80,000. What will be value of goodwill in the books after the admission of C?
(a) ₹ 60,000
(b) ₹ 30,000
(c) ₹ 20,000
(d) ₹ 15,000
(b) ₹ 30,000

17. Formula for calculation of manager’s commission after charging such commission is:
(a) (Diff of P/L app. A/c x r %) / (100+r %)
(b) (Diff of P/L app. A/c x r %) / (100-r %)
(c) Diff of P/L app. A/c x r %
(d) None
(a) (Diff of P/L app. A/c x r %) / (100+r %)

18. The share of profit and loss of partner in absence of oral or written agreement will be:
(a) Equal ratio
(b) Capital ratio
(c) Agreed ratio
(d) No ratio
(a) Equal ratio

19. A, B and C partners in the firm sharing profit ratio 5:3:2. They decided to share profits in the future in 3:2:1 ratio. For the aforesaid purpose, goodwill of the firm is valued as ₹ 60,000. Thus capital account of B will be:
(a) Debited with ₹ 2,000
(b) Credited with ₹ 2,000
(c) Will have no effect.
(d) Debited with ₹ 20,000
(a) Debited with ₹ 2,000

20. When Goodwill is not purchased goodwill account can:
(a) Never be raised in the books
(b) Be raised in the books
(c) Be partially raised in the books
(d) Be raised as per the agreement of the partners.
(a) Never be raised in the books

21. The profits of the last four years are as follows:

 Year Amount (₹) 2000 40,000 2001 50,000 2002 60,000 2003 50,000

Calculate the goodwill on the basis of three purchase of average profits
(a) ₹ 1,00,000
(b) ₹ 1,50,000
(c) ₹ 2,00,000
(d) None of the above
(b) ₹ 1,50,000

22. The profits of the last three years are as follows

 Year Amount (₹) 2004 17,000 2005 20,000 2006 23,000

The capital employed is ₹ 80,000. The return on capital employed is 15%. Calculate the value of goodwill on the basis of two years purchase of average super profit earned.
(a) ₹ 16,000
(b) ₹ 20,000
(c) ₹ 30,000
(d) ₹ 40,000
(a) ₹ 16,000

23. The capital employed in a business is ₹ 1,50,000. The profits are ₹ 50,000 and the normal rate of profits is 20%. Calculate the amount of goodwill as per capitalisation method:
(a) ₹ 2,00,000
(b) ₹ 3,50,000
(c) ₹ 1,50,000
(d) ₹ 1,00,000
(d) ₹ 1,00,000

24. A and B are partners in a firm with capital of ₹ 18,000 and ₹ 20,000. Z is admitted for 1/3rd share in profits and brings ₹ 34,000 as capital, calculate the
amount of goodwill
(a) ₹ 24,000
(b) ₹ 30,000
(c) ₹ 15,000
(d) None of these
(b) ₹ 30,000

25. Ramu and Shamu are partners sharing profits/losses in the ratio of 3:2. They admit Ramesh and the new profit sharing ratio will be 2:2:1 respectively. If Ramesh brings ₹ 50,000 as goodwill, calculate the share of goodwill which Ramu will get?
[Hint → Calculate the sacrificing ratio]
(a) ₹ 25,000
(b) ₹ 30.000
(c) ₹ 50,000
(d) ₹ 15,000
(c) ₹ 50,000

26. The profits and loss for the last three years are:

 Year Amount (₹) 2005 20,000 2006 (10,000) 20071 15,000

Calculate the goodwill on the basis of three years purchase of average profits
(a) ₹ 20,000
(b) ₹ 25,000
(c) ₹ 18,000
(d) ₹ 16,667
(b) ₹ 25,000

27. The capital employed by a firm is ₹ 1,00,000 and the normal rate of return is 15%. The average profits of the firm are:

 Year Profits (₹) 2002 18,000 2003 12,000 2004 15,000 2005 22,000 2006 18,000

Calculate the goodwill on the basis of three years purchase of the super profits
(a) ₹ 6,000
(b) ₹ 10,000
(c) ₹ 8,000
(d) ₹ 12,000
(a) ₹ 6,000

28. Under the capitalisation method, the formula for calculating the goodwill is:
(a) Super profit multiplied by the rate of return
(b) Average profits multiplied by the rate of return
(c) Super profits divided by the rate of return
(d) Average profits divided by the rate of return
(c) Super profits divided by the rate of return

29. When goodwill is to be raised in the books when there is no goodwill in the books, then the entry to be passed is:
(a) Goodwill A/c debit and capital A/c credit
(b) Partner A/c debit and goodwill A/c credit
(c) General Reserve A/c debit and goodwill A/c credit
(d) None of these
(a) Goodwill A/c debit and capital A/c credit

30. The excess amount which the firm can get on selling its assets over and above the saleable value of its assets is called:
(a) Surplus
(b) Superprofits
(c) Reserve
(d) Goodwill
(d) Goodwill

31. Which of the following is NOT true in relation to goodwill?
(a) It is an intangible asset
(b) It is a fictitious asset
(c) It has a realisable value
(d) None of the above
(b) It is a fictitious asset

32. Purchasing year means:
(a) Number of years for which the profits is calculated
(b) Number of years for which the goodwill is expected to remain
(c) Number of years in which the goodwill is to be purchased
(d) None of these
(b) Number of years for which the goodwill is expected to remain

33. The Goodwill of the firm is NOT affected by:
(a) Location of the firm
(b) Reputation of firm
(c) Better customer service
(d) None of the above
(d) None of the above

34. The capital employed in a firm is ₹ 50,000 and the normal rate of return is 20%. The profits for the last three years are:

 Year Profits (₹) 2000 20,000 2001 25,000 2002 15,000

Calculate the goodwill on the basis of capitalisation of super profits:
(a) ₹ 50,000
(b) ₹ 60,000
(c) ₹ 20,000
(d) None of these
(a) ₹ 50,000

35. The net assets of a firm including fictitious assets of ₹ 5,000 are ₹ 85,000. The net liabilities of the firm are ₹ 30,000. The normal rate of return is 10% and the average profit of the firm is ₹ 8,000. Calculate the goodwill as per capitalisation of super profits.
(a) ₹ 20,000
(b) ₹ 30,000
(c) ₹ 25,000
(d) None of these
(b) ₹ 30,000

36. Capital employed by a partnership firm is ₹ 5,00,000. Its average profit is ₹ 60,000. The normal rate of return in similar type of business is 10%. What is the amount of super profits?
(a) ₹ 50,000
(b) ₹ 10,000
(c) ₹ 6,000
(d) ₹ 56,000
(b) ₹ 10,000
Capital Employed = ₹ 5,00,000
Normal rate of return = 10%
Average Profit = ₹ 60,000
Normal Profit = Capital employed x normal rate of return = 5,00,000 x 10%
= ₹ 50,000
Super Profit = Average Profit – Normal Profit
= 60,000 – 50,000
= ₹ 10,000
Super Profit is ₹ 10,000

37. If the new partner brings any additional amount in cash other than his capital contribution then, it is termed as:
(a) Capital
(b) Reserves
(c) Profits
(d) Goodwill
(d) Goodwill
Whenever a new partner is admitted, he is generally expected to pay cash to old partners for his share of goodwill for the right he acquires to share in super profit of the firm in future.
The payment is made to the old partners for the sacrifice they make on their shares of profits for future. In other words, if a new partner brings any additional amount in cash other than his capital contribution then, it is termed as Goodwill:

38. A firm earns profit of ₹ 1,10,000. The normal rate of return in a similar type of business is 10%. The total assets (excluding goodwill) and total outside liabilities are ₹ 11,00,000 and ₹ 1,00,000 respectively. The value of goodwill as per capitalisation method will be:
(a) ₹ 1,00,000
(b) ₹ 10,00,000
(c) ₹ 10,000
(d) None of the above
(a) ₹ 1,00,000
Actual earned profit = ₹ 1,10,000
Normal rate of return = 10%
Total Assets = ₹ 11,00,000
Outside Liabilities = ₹ 1,00,000
Capital Employed = Total Assets – Outside Liabilities = 11,00,000- 1,00,000 = ₹ 10,00,000
Normal Profit = Capital Employed x Normal rate of return = 10,00,000 x 10% = ₹ 1,00,000
Super Profit = Actual Profit – Normal Profit = 1,10,000 – 1,00,000 = ₹ 10,000
Goodwill = $$\frac { Super Profit × 100 }{ Normal rate of return }$$
= $$\frac{10,000 \times 100}{10}$$ = ₹ 1,00,000
Goodwill will be ₹ 1,00,000.

39. Total capital employed in the firm is ₹ 8,00,000, reasonable rate of return is 15% and Profit for the year is ₹ 12,00,000. The value of goodwill of the firm as per capitalization method would be:
(a) ₹ 82,00,000
(b) ₹ 12,00,000
(c) ₹ 72,00,000
(d) ₹ 42,00,000.
(c) ₹ 72,00,000
Calculation of Goodwill according to capitalization method would be:
Notional Capital Employed = $$\frac{12,00,000}{15 \%}$$
= 80,00,000
Less: Actual
Capital Employed 8,00,000
Goodwill (operating in the business) 72,00,000

40. A firm earns a profit of ₹ 1,10,000. The normal rate of return in a similar type of business is 10%. The value of total assets (excluding goodwill) and total outside liabilities are ₹ 11,00,000 and ₹ 1,00,000 respectively. The value of goodwill is _________.
(a) ₹ 1,00,000
(b) ₹ 10,00,000
(c) ₹ 10,000
(d) None of the above
(a) ₹ 1,00,000
Calculation of Value of Goodwill
Profit = ₹ 1,10,000
Normal value of Capital Employed
= $$\frac { Profit }{ Normal rate of return }$$ x 100
Normal Rate of Return = 10%
= $$\frac{1,10,000}{10 \%}$$
= ₹ 11,00,000
Capital Employed = Total Assets Total Liabilities
= 11,00,000 – 1,00,000
= ₹ 10,00,000
Goodwill = 11,00,000 – 10,00,00
= ₹ 1,00,000

41. A firm of X, Y and Z has a total capital investment of ₹ 2,25,000. The firm earned net profit during the last four years ₹ 35,000, 40,000, 60,000, 50,000. The fair return on the net capital employed is 15% . Find the value of goodwill if it is based on 3 years purchase of average super profit of past 4 years.
(a) ₹ 35,000
(b) ₹ 36,500
(c) ₹ 40,000
(d) ₹ 37,500
(d) ₹ 37,500
Average Profit = $$\frac{35,000+40,000+50,000+60,000}{4}$$
= $$\frac{1,85,000}{4}$$ = 46,250
Normal profit = Capital employed x Rate
= 2,25,000 x $$\frac{15}{100 }$$ = 33,750
Super profit = Average profit – Normal profit
= 46,250 – 33,750 = 12,500
Goodwill of 3 years purchase = 12,500 x 3 = 37,500.

42. Goodwill is which type of asset:
(a) Tangible
(b) Intangible
(c) Depleting
(d) Current.
(b) Intangible
An intangible asset is an asset:

• which cannot be touched
• or felt
• but which assists the firm in acquiring long term wealth, ex. goodwill patents, copyrights, etc.

Hence, option (b) is correct.

43. Sona purchased Simmi’s business from 1sl Jan, 1981. The profit disclosed by Simmi’s business for last 3 years:
1985 – ₹ 40,000 [including abnormal gain of ₹ 5,000]
1986 – ₹ 50,000 [after charging abnormal loss of ₹ 10,000]
1987 – ₹ 45,000 [excluding ₹ 5,000 for insurance premium of firms property now to be insured]
Calculate the goodwill on the basis of 2 years purchase of average profit of last 3 years.
(a) ₹ 80,000
(b) ₹ 90,000
(c) ₹ 1,20,000
(d) ₹ 1,00,000
(b) ₹ 90,000
Corrected Actual Profits:

Value of Goodwill = Average Actual Profit x Years of Purchase
= 45,000 x 2 = 90,000

44. The goodwill of a business is to be valued at 3 years purchase of the average profits of the last three years. The profits of the last three years are ₹ 5,000, ₹ 6,000 and ₹ 7,000 respectively. Hence, the goodwill be valued at:
(a) ₹ 12,000
(b) ₹ 15,000
(c) ₹ 18,000
(d) ₹ 6,000
(c) ₹ 18,000
Under this method, goodwill is valued on the basis of a certain years purchases of the average profits of the past years:
Profits for the last year – ₹ 5,000, ₹ 6,000 and ₹ 7,000.
Average profit = $$\frac{5,000+6,000+7,000}{3}$$
= $$\frac{18,000}{3}$$
= ₹ 6,000
Goodwill = Average profit x No. of yrs. purchase
= 6,000 x 3
= ₹ 18,000

45. Find the average profit of last 3 years and the goodwill of the firm for 2 years of purchase. If the profit for last 2 years is 2010 – ₹ 50,000, 2011 – ₹ 30,000, 2012 – ₹ 1,00,000:
(a) ₹ 80,000, 1,20,000
(b) ₹ 60,000, 1,20,000
(c) ₹ 60,000, 1,00,000
(d) ₹ 70,000, 80,000
(b) ₹ 60,000, 1,20,000
Average Profit = $$\frac{50,000+30,000+1,00,000}{3}$$
= $$\frac{1,80,000}{3}$$
= ₹ 60,000
No. of year purchase = 2 years
Goodwill = Average Profit x No. of year purchase
= 60,000 x 2
= ₹ 1,20,000

46. Find the goodwill by super profit method where capital is ₹ 1,00,000, Rate 20%, Average profit is ₹ 25,000:
(a) ₹ 7,000
(b) ₹ 4,000
(c) ₹ 2,000
(d) ₹ 5,000
(d) ₹ 5,000
Capital = ₹ 1,00,000
Rate = 20%
Average Profit = ₹ 25,000
Normal Profit = $$\frac{Capital invested × Rate}{100}$$
= $$\frac{1,00,000×20}{100}$$
= ₹ 20,000
Super Profit = Average Profit – Normal Profit
= 25,000 – 20,000
= ₹ 5,000
Goodwill = Super Profit x No. of year purchase
= 5,000 x 1
= ₹ 5,000

47. The profit of last five years are ₹ 85,000, ₹ 90,000, ₹ 70,000, ₹ 1,00,000 and ₹ 80,000. Find the goodwill if it is calculated on average profit of last five years on the basis of 3 years of purchase.
(a) ₹ 2,85,000
(b) ₹ 85,000
(c) ₹ 2,55,000
(d) ₹ 2,75,000
(c) ₹ 2,55,000
Average Profit = $$\frac{(85,000+90,000+70,000+1,00,000+80,000)}{5}$$
= 85,000
Goodwill = 85,000 x 3
= 2,55,000

48. A firm has total investment of ₹ 2,25,000. The firm earned net profit for the last 4 years as ₹ 35,000, ₹ 40,000; ₹ 60,000 and ₹ 50,000. The fair return on capital employed is 15%. The value of goodwill on the basis of 3 years purchase of average super profits of past 4 years will be:
(a) ₹ 37,500
(b) ₹ 12,500
(c) ₹ 46,250
(d) ₹ 33,750
(a) ₹ 37,500
Profit of last 4 years: 35,000, 40,000, 60,000, 50,000
Average profit = ₹ 46,250
Total Investment = ₹ 2,25,000
Fair Return =15%
Normal Profit = ₹ 33,750
Super profit = Average profit – Normal profit = 46,250 – 33,750 = 12,500
Goodwill = Super profit x No. of purchase year
= 12,500 x 3
= ₹ 37,500.

49. Vales and Wells were in partnership sharing profits and losses equally. They admit Sparks as a partner and decide to share profits equally between the three partner. Goodwill is valued at ₹ 60,000 but is to be immediately written off. What will be the effect of this on Yale’s capital?
(a) Will increase by ₹ 20,000
(b) Will increase by ₹ 30,000
(c) Will increase by ₹ 10,000
(d) Will decrease by ₹ 10,000
(c) Will increase by ₹ 10,000
Goodwill = ₹ 60,000
Sparks Share of Goodwill = ₹ 60,000/3
= ₹ 20,000
This amount of Goodwill will be divided between Yales and Wells in equal ratio and as a result the capital of both will be increased by 10,000.

50. Partners who actively take part in the business?
(a) Active partner
(b) Sleeping partner
(c) Partner by estoppels
(d) All of the above
(a) Active partner
An invested person who is involved in the daily operations of the partnership. An active partner helps run the business to enhance his or her returns and is therefore considered a material participant. This person typically shares more risk and return versus a limited or silent partner.

51. The profits of last three years are ₹ 43,000, ₹ 38,000 and ₹ 45,000. Find out the goodwill of two years purchase of average profits.
(a) ₹ 84,000
(b) ₹ 42,000
(c) ₹ 36,000
(d) ₹ 1,26,000
(a) ₹ 84,000
Avg. profit = $$\frac{43,000+38,000+45,000}{3}$$
Goodwill = 42,000 x 2 = ₹ 84,000

52. P, Q and R are Partners and Sharing profit and losses equally. Their capital balance stood at ₹ 25,000, ₹ 20,000 and ₹ 18,000 respectively. Their last three years profit were ₹ 18,000, ₹ 12,000 and ₹ 15,000. Q died, P and R decided to continue with the partnership and Q’s share is purchased by P and R in 2:3. As per agreement, the value of goodwill is calculated at 3 years purchase price of average profit of last three years. It is decided that no goodwill account is opened in the books of account and if is to be adjusted through capital account. After the adjustment, the capital of P would be:
(a) ₹ 19,000
(b) ₹ 25,000
(c) ₹ 20,000
(d) ₹ 18,000
(a) ₹ 19,000
Avg. profit = $$\frac{12,000+15,000+18,000}{3}$$
= 15,000
Goodwill = 15,000 x 3 = 45,000
Q share of Goodwill = $$\frac{45,000}{3}$$ = 15,000
Q’ share is purchased by P & R is Ratio of 2 : 3
P’ share of contribution in Goodwill = 15,000 x $$\frac{2}{5}$$ = 6,000
Capital After Retirement = 25,000 – 6,000 = 19,000

53. Total capital employed in the firm is ₹ 8,00,000. Reasonable rate of return is 15% and profit for the year is ₹ 12,00,000. The value of goodwill of the firm as per capitalization method would be:
(a) ₹ 82,00,000
(b) ₹ 12,00,000
(c) ₹ 72,00,000
(d) ₹ 42,00,000
(c) ₹ 72,00,000
Normal Profit = $$\frac{Capital Employed × Normal Rate of Return}{100}$$
$$\frac{8,00,000 \times 15}{100}$$ = ₹ 1,20,000
Normal Profits for the year = ₹ 12,00,000
Capitalisation Profit = $$\frac{12,00,000}{15}$$ x 100
= ₹ 80,00,000
Goodwill = Profits – Capital Employed
= 80,00,000 – 8,00,000
= ₹ 72,00,000

54. Calculate the amount of goodwill for 3 years purchase of following 5 years ₹ 2,00,000, 2,80,000, 3,20,000, 2,40,000 (including loss 4,000), (14,000)
(a) ₹ 31,200
(b) ₹ 6,15,600
(c) ₹ 42,000
(d) ₹ 18,200
(b) ₹ 6,15,600
Calculate the Goodwill

55. A firms earns a profit of ₹ 1,10,000. The normal rate of return in a similar type of business is 10%. The value of total assets (excluding goodwill) and total outside liabilities are ₹ 11,00,000 and ₹ 1,00,000 respectively. The value of goodwill is:
(a) ₹ 1,00,000
(b) ₹ 10,00,000
(c) ₹ 10,000
(d) None of the above
(a) ₹ 1,00,000
Net Capital Employed = Assets – Liabilities
= 11,00,000 – 1,00,000
= 10,00,000
Normal Return = 10,00,000 x 10%
= 1,00,000
Super Profit = 1,10,000 -1,00,000
= 10,000
Goodwill = $$\frac{Super Profit}{Normal Rate of return}$$
= $$\frac{10,000}{10 \%}$$
= 1,00,000

56. Find the goodwill of the firm on the basis of 3 years purchase by average profit method from the profit of last 5 years were 32,000; 35,000; 28,000; 26,000; 40,000 respectively.
(a) 32.200
(b) 96,600
(c) 42,000
(d) 32,000
(b) 96,600
Average Profit of last 5 years
= 32,000 + 35,000 + 28,000 + 26,000 + 40,000
= $$\frac{1,61,000}{5}$$
= 32,200 5
G/W of A.P = 32,200 x 3 = 96,600

## Joint Venture and Consignment Account – CS Foundation Fundamentals of Accounting Notes

Go through this Joint Venture and Consignment Account – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

## Joint Venture and Consignment Account – CS Foundation Fundamentals of Accounting Notes

Meaning of Consignment:
The term “Consignment” relates to dealing with a situation where one person or firm sends goods to another person or firm on the basis that the goods will be sold on behalf of and at the risk of the former.

Features of Consignment:

• The party which sends the goods is called consignor.
• The party to whom goods are send is called consignee.
• The ownership of goods remains with the consignor.
• The consignor sends to consignee a Performa invoice, statement that books like an invoice but is really not one.
• The object of perform a invoice is only to convey information to the consignee regarding particulars of the goods sent.
• The consignee recovers from the consignor all expenses in awed by him on the consignment and charge commission on Sales made by him also.

Accounting Entries in the Books of Consignor:
(1) On dispatch of goods:
Consignment A/c (with the cost of goods)
To Goods sent on consignment A/c

(2) On Payment of expenses on dispatch (with the amount spent as expenses)
Consignment A/c To Bank A/c

(3) On receiving advance (with the amount cash or bill)
Cash or bills receivable A/c
To Consignee personal A/c

(4) On the consignee reporting sale (with gross proceeds of sales) Consignee’s personal A/c
To consignment A/c

(5) For expenses incurred by the consignee, (with the amount of expenses)
Consignment A/c
To Consignee’s personal A/c

(6) For commission payable to the consignee (with the amount of expenses)
Consignment A/c
To Consignee’s personal A/c
Assuming that all the goods sent have been sold, the consignment account will show at this stage the actual Profit or loss made on it the same is transferred to profit and loss A/c.

The entry in case of profit is:
Consignment A/c
To Profit and loss A/c In case of loss the entry is:
Profit and loss A/c
To Consignment A/c
When Consignment is Partly Sold.
Stock on Consignment A/c To consignment A/c

Accounting Entries in the Books of Consignee:
(1) When Consignment goods are received:
No Entry

(2) For expenses incurred by the consignee:
Consignor’s personal A/c
To Cash A/c

(3) When advance is given:
Consignor personal A/c
To Cash or bills payable A/c

(4) When goods are sold:
Cash or Bank A/c
To Consignor’s personal A/c

(5) For Commission due:
Consignor’s personal A/c
To Commission A/c

Joint Venture A/c’s:
A Joint venture is a short duration “business” entered in to by two or more persons jointly.
Joint venture may be described as a temporary partnership between two or more persons without the use of the firm name, for a limited purpose.

Features of Joint Venture:

• It is short duration special purpose partnership and also may be described as temporary partnership.
• Parties in venture are called co-ventures.
• Co ventures may contribute funds for running the venture.
• Co-ventures share profit or loss of the venture at the agreed ratio, if agreement is event on this point the equal ratio.
• Generally profit or loss of the venture is computed on completion of the venture.

Difference between Joint Venture and Consignment:

 Basics of Difference Joint Venture Consignment 1. Nature It is a temporary partnership business without a firm name. It is an extension of business by principal through agent 2. Parties The parties involved in joint venture are known as co-ventures. consignor and consignee are involving parties in the consignment 3. Relation The relation between co-ventures is just like the partners in the partnership firm. The relation between the consignor and consignee is ‘principle and agent’. 4. Sharing Profit The profits and losses of joint venture are shared among the co-ventures in their agreed proportion. The profits and losses are not shared between the consigner, and consignee. Consignee gets only the commission. 5. Right The Covertures in the joint ventures have equal right The consignment, the consignor enjoys principals right where as consignee enjoys the right of agent 6. Exchange of Information The Co-ventures exchange the required information among the regularly. The consignor is the owner of the business. 7. Method of Maintaining A/c There are different method of maintaining accounts in joint venture as per agreement the co ventures maintain the account. In consignment there is only one method of maintaining account. 8. Basis of Accounting Cash basis of accounting is applicable in joint venture. Actual basis is adopted in consignment 9. Continuity It is terminated after the particular completion of business. It exist according to the willingness of both consignor and consignee.

Joint Venture and Consignment Account MCQ Questions

1. Consignment Account is a:
(a) Real Account
(b) Nominal Account
(d) Personal Account
(b) Nominal Account

2. A invoiced certain goods so as to show a profit of 20% on invoice price 1/10th of the goods were lost in transit. The cost price of goods lost is ₹ 40,000. The invoice value of goods sent out is:
(a) ₹ 5,00,000
(b) ₹ 4,80,000
(c) ₹ 4,50,000
(d) ₹ 4,00,000
(a) ₹ 5,00,000

3. X sends out 400 bags to Y costing ₹ 200 each, consignor expenses were ₹ 4000. Y’s non selling expenses ₹ 2,000. and selling expenses of ₹ 1000. 300 bags were sold by Y. Value of consignment stock will be :
(a) ₹ 20,400
(b) ₹ 20,700
(c) ₹ 22,000
(d) ₹ 21,500
(d) ₹ 21,500

4. X sends out goods costing ₹ 3,00,000 to Y at cost plus 25%, consignor’s expenses ₹ 5,000. 1/10th of goods were lost in transit. Insurance claim received ₹ 3,000. The net loss on account of abnormal loss is :
(a) ₹ 27,500
(b) ₹ 25,500
(c) ₹ 30,500
(d) ₹ 38,000
(a) ₹ 27,500

5. P sent out goods costing ₹ 45,000 to Y at cost + 331/3%. 1/10th of goods were lost in transit. 2/3rd of the goods are sold at 20% above IP. The amount of sale value will be :
(a) ₹ 54,000
(b) ₹ 43,200
(c) ₹ 60,000
(d) ₹ 36,000
(b) ₹ 43,200

6. Account Sales indicates :
(a) The net amount due from consignor to consignee by way of commission
(b) The net amount due from consignee to consignor
(c) Net sales effected by consignee
(d) None of these
(b) The net amount due from consignee to consignor

7. X sends out goods costing ₹ 2,00,000 to Y. 3/5th of the goods were sold by consignee for ₹ 1,40,000.
Commission 2% on sales plus 20% of gross sales less all commission exceeds cost price. The amount of commission will be :
(a) ₹ 5,667
(b) ₹ 5,800
(c) ₹ 6,000
(d) ₹ 5,600
(a) ₹ 5,667

8. A sends out goods costing ₹ 2,00,000 to B. Consignor’s expenses ₹ 5,000. Consignee’s expenses in relation to sales ₹ 3000. 4/5th of the goods were sold at 20% above cost. The profit on consignment will be:
(a) ₹ 25,000
(b) ₹ 31,000
(c) ₹ 25,200
(d) ₹ 5,000
(a) ₹ 25,000

9. Goods sent on consignment account is a :
(a) Personal account
(b) Real account
(c) Nominal account
(d) Sales A/c
(b) Real account

10. The abnormal loss on consignment is credited to :
(a) Consignment A/c
(b) Profit & Loss A/c
(c) Consignee’s personal A/c
(d) All of the above
(a) Consignment A/c

11. A proforma invoice is sent by :
(a) Consignee to consignor
(b) Consignor to consignee
(c) Debtors to consignee
(d) Debtors to consignor
(b) Consignor to consignee

12. X sends out 200 boxes to Y costing ₹ 100 each. Consignor’s expenses ₹ 4000. Consignee’s non-recurring expenses ₹ 900.1/10th of the boxes were lost in transit. 2/3rd of the boxes received by consignee were sold for ₹ 20,000. The amount of consignment stock will be :
(a) ₹ 7,200
(b) ₹ 7,500
(c) ₹ 7,000
(d) ₹ 6,000
(b) ₹ 7,500

13. X sent out certain goods to Y. 1/10th of goods were lost in transit. Invoice value of goods lost is ₹ 12,500. Invoice value of goods sent out on consignment will be :
(a) ₹ 1,20,000
(b) ₹ 1,25,000
(c) ₹ 1,40,000
(d) ₹ 1,00,000
(b) ₹ 1,25,000

14. Suresh consigned 600 fans to Naresh to be sold at his risk. The cost of each fan is ₹ 300. Suresh paid ₹ 6000 as freight. Naresh paid ₹ 1500 for octroi; ₹ 3500 for godown rent. 500 fans were sold for ₹ 1,80,000. Naresh was entitled to 4% commission on sale @ ₹ 350 per fan and 20% of any surplus price realized Profit on consignment will be :
(a) ₹ 12,250
(b) ₹ 12,000
(c) ₹ 14,000
(d) ₹ 15,000
(a) ₹ 12,250

15. Commission provided by the consignor to the consignee to promote credit sale is know as :
(a) Ordinary commission
(b) Del credere commission
(c) Over – riding commission
(d) Special commission
(b) Del credere commission

16. If no del – credere commission is paid to the consignee, ________ account will be debited for credit sale :
(a) Consignment account
(b) Consignee account
(c) Consignor account
(d) Consignment debtors account
(d) Consignment debtors account

17. On 1st Sept., 2006 goods costing ₹ 33,000 were consigned by X to his agent Y at a proforma price which was cost plus one sixth profit on invoice price. What is the invoice price of goods :
(a) ₹ 39,000
(b) ₹ 39,600
(c) ₹ 40,000
(d) ₹ 45,000
(b) ₹ 39,600

18. Overriding commission is calculated on :
(a) Cash sales
(b) Credit sales Only
(c) Total sales
(d) Credit sales less Cash sale
(c) Total sales

19. X consigns 500 bags to Y costing ₹ 400 each at an inflated price of ₹ 450 each. Consignor’s expenses ₹ 4000. Consignee’s expenses freight ₹ 1000, selling 7 2000,400 bags were sold. The amount of stock reserve will be :
(a) ₹ 5,000
(b) Nil
(c) ₹ 10,000
(d) ₹ 10,200
(a) ₹ 5,000

20. What entry is required to be passed to nullify the effect of Loading:
(a) Goods sent on consignment A/c Dr.
(b) Goods sent on consignment A/c Dr.
To Consignment A/c
(c) Consignment A/c Dr.
To Goods sent on consignment A/c
(d) None
(b) Goods sent on consignment A/c Dr.
To Consignment A/c

21. The risk of stock on consignment lies with ________.
(a) Consignor
(b) Consignee
(d) Seller
(a) Consignor

22. X sends out 4000 boxes to Y costing ₹ 100 each. Consignor’s expenses 10,000.1/10th of boxes were lost in consignee’s godown and treated as normal loss. 2400 boxes were sold by consignee. The value of consignment stock will be :
(a) ₹ 1,36,667
(b) ₹ 1,23,000
(c) ₹ 1,20,000
(d) ₹ 1,20,500
(a) ₹ 1,36,667

23. If the del credere commission is 10%, cash sales is ₹ 5,000 and credit sales is ₹ 10,000. Calculate the amount of del credere commission.
(a) 1,500
(b) 1,000
(c) 500
(d) None
(a) 1,500

24. The Stock lying unsold with the consignee belongs to :
(a) Consignor
(b) Consignee as he bears the risk
(c) Both (a) and (b)
(d) None of these
(a) Consignor

25. J of Jaipur sends 500 radios @ 7 200 each to D of Delhi. All the radios are sold by D at a profit of 25% on cost. D is entitled to a commission of 7 25 per radio sold plus 20% of gross sale proceeds as exceeds an amount calculated @ 20% profit on cost. Calculate commission.
(a) ₹ 12,500
(b) ₹ 13,500
(c) ₹ 11,500
(d) ₹ 10,500
(b) ₹ 13,500

26. Account Sales includes ;
(b) Stock left with consignee
(c) Commission earned
(d) All of above.
(d) All of above.

27. A sends 1000 units @ ₹ 56 to be sold on consignment basis. Consignor expenses amounted to ₹ 1000. 50 units were cost in transit. Find the new price per unit. (Loss is unavoidable).
(a) ₹ 50 per unit
(b) ₹ 60 per unit
(c) ₹ 58.95 per unit
(d) ₹ 57 per unit
(b) ₹ 60 per unit

28. A consigned 1000 litres of coconut oil @ ₹ 50 per It. to B. The normal loss is estimated at 5%. The profit was fixed at 14% on the total cost. What is the sale price per litre?
(a) ₹ 57
(b) ₹ 60
(c) ₹ 70
(d) ₹ 55
(b) ₹ 60

29. X sends goods to Y on consignment, but 15% of the goods were lost in transit. Such loss will be borne by:
(a) Consignee
(b) Consignor
(c) Both (a) and (b)
(d) Insurance company
(b) Consignor

30. Who is owner of the unsold stock left with the consignee?
(a) Consignee
(b) Consignor
(c) Co-venturer
(d) Both (a) and (b)
(b) Consignor

31. The Consignor sends ________ along With the consigned goods to the consignee.
(a) account sales
(b) proforma invoice
(c) both
(d) none
(b) proforma invoice

32. X consigned goods to Y costing ₹ 30,000 at cost plus 25%. These goods are to be sold at invoice value plus 10%. Y sold a part of the goods for ₹ 33,000. What will be the value of stock lying with Y that will be shown by X at the closing of accounts?
(a) ₹ 8,250
(b) ₹ 6,000
(c) ₹ 7,500
(d) ₹ 8,000
(b) ₹ 6,000

33. Del credere commission is fixed in terms of percentage say 10% and credit sales and cash sale are ₹ 10,000 and ₹ 5,000 respectively. Amount of del-credere commission will be?
(a) ₹ 1,000
(b) ₹ 1,500
(c) ₹ 500
(d) None of the above
(b) ₹ 1,500

34. X sends out 400 bags costing ₹ 200 each to Y. Sales are to be made at cost +45%. X draws a bill on Y for an amount equivalent to 60% of sales value. The amount of bill will be:
(a) ₹ 69,600
(b) ₹ 60,300
(c) ₹ 61,250
(d) ₹ 63,000
(a) ₹ 69,600

35. Goods costing ₹ 1,00,000, Invoice Price ₹ 1,20,000, send to consignee. Goods sold by consignee for ₹ 96,000 at Invoice Price. Consignee is entitled to a commission of 5% to cost price of sale made and 10% additional commission on difference of invoice price and cost price of sale made. Amount of commission payable to the consignee will be:
(a) ₹ 4,000
(b) ₹ 5,600
(c) ₹ 1,600
(d) ₹ 9,600
(b) ₹ 5,600

36. Mr. A sold goods amounting to ₹ 30,000 (cost of goods ₹ 24,000) received on consignment, during the month of April, 2009. Half of the sales was on credit. He is entitled for 5% commission on sales. In addition to that he is also entitled for 2% del credere commission. What is the total amount of commission due to Mr. A for the month of April, 2009?
(a) ₹ 4,000
(b) ₹ 1,500
(c) ₹ 1,800
(d) ₹ 2,100
(d) ₹ 2,100

37. ________ Commission is given to consignee for his hardwork in introducing a new product in the market.
(a) del credere
(b) extra salary
(c) over riding commission
(d) commission on total sales.
(c) over riding commission

38. If stock is left with consignee at the end of the year, then it will be credited to ________?
(a) P/L a/c
(b) consignment A/c
(d) none of these.
(b) consignment A/c

39. The revenue for the transaction of consignment sales is recognized ________.
(a) When the goods are sold to customers by consignee.
(b) When the goods are sent to consignee.
(c) When the advance against delivery is received by consignor.
(d) When consignor receives the payment from consignee.
(a) When the goods are sold to customers by consignee.

40. X Ltd. sends 5,000 bags of cement on consignment to Y Ltd. The Cost per bag is ₹ 40. The Carriage Inward in ₹ 25,000. It is estimated that the normal loss rate is 10%. Calculate the cost per bag?
(a) ₹ 45
(b) ₹ 45.50
(c) ₹ 50.00
(d) ₹ 40.00
(c) ₹ 50.00

41. The balances of “goods sent on consignment account” is transferred to:
(b) Profit and Loss Account
(c) Consignment Account
(d) Consignee’s Account
(c) Consignment Account

42. S of Surat sent goods costing ₹ 3,00,000 to C of Chennai at cost + 20%. Half of the goods sent were sold by C at 10% above the invoice value. The sales value of goods will be
(a) ₹ 1,98,000
(b) ₹ 1,50,000
(c) ₹ 1,80,000
(d) ₹ 1,65,000
(a) ₹ 1,98,000

43. Radhika sent goods worth ₹ 1,20,000 on consignment to Sarika. 1 /8th of the goods were lost in transit. No claim was receivable for the same. Sarika sold 2/3 of the goods received for ₹ 1,00,000. What was the cost of the goods lying with Sarika?
(a) ₹ 29,000
(b) ₹ 35,000
(c) ₹ 29,167
(d) ₹ 40,000
(b) ₹ 35,000

44. When the del-credere commission is allowed by consignor to consignee, abnormal loss will be borne by:
(a) Consignor
(b) Consignee
(c) Both, consignor and consignee in equal proportion.
(d) Neither consignor nor consignee.
(a) Consignor

45. 1000 kgs of vegetables were consigned at ₹ 18,000 and freight expenses amounted to ₹ 4,000. During the transit there is a normal loss of 40 kg. If 800 kgs were sold, what will be the value of stock at the end?
(a) ₹ 2,880
(b) ₹ 3,000
(c) ₹ 3,520
(d) ₹ 3,667
(d) ₹ 3,667

46. Mr. X paid commission to his consignee Y, ₹ 25,000 which was @ 5% on sales affected by him. Goods were sold by Mr. Y at a profit of 25% on cost. Stock in hand on 31/3/11 is ₹ 50,000 at cost. So, cost of goods
(a) ₹ 4,50,000
(b) ₹ 75,000
(c) ₹ 5,50,000
(d) ₹ 6,00,000
(a) ₹ 4,50,000

47. Overriding commission is given by consignor to consignee in order to:
(a) to encourage the consignee to overcome bad-debts
(b) to encourage the consignee to promote the sales at a price higher than the specified selling price
(c) to sell the goods sent by consignor
(d) to sell and take care of goods sent by consignor to consignee
(b) to encourage the consignee to promote the sales at a price higher than the specified selling price

48. A loss which is natural and unavoidable is called:
(a) Abnormal Loss
(b) Normal Loss
(c) Contingent Loss
(d) None of these.
(b) Normal Loss

49. Periodical statement sent by consignee to consignor is known as ________:
(a) performa invoice
(b) account sale
(c) bill of exchange
(d) hundi
(b) account sale

50. Goods sent on consignment at cost of ₹ 50,000. 1 /4th of the goods lost in transit and claim received ₹ 10,000. The amount of abnormal loss to be transferred to General P & L account is:
(a) ₹ 12,500
(b) ₹ 10,000
(c) ₹ 2,500
(d) None of the above.
(c) ₹ 2,500

51. Del-credere commission is given for:
(a) Sales at higher price than specified.
(b) Speeding up the collection.
(c) Covering the risk of bad debts.
(d) Prompt payment from consignee.
(c) Covering the risk of bad debts.

52. At the time of valuation of unsold stock on consignment, which of the following expenses will not be included?
(a) Insurance of warehouse of consigner
(b) Carriage
(d) Octroi
(a) Insurance of warehouse of consigner

53. P of Punjab sent goods costing ₹ 6,00,000 to A of Aligarh. Goods were to be sold at cost plus. The consignee had to send advance to the consigner at a fixed percentage of sales value and A sent accordingly ₹ 4,80,000. What is the percentage of such advance on sales value?
(a) 60%
(b) 50%
(c) 45%
(d) 40%
(a) 60%

54. Del-Credere commission is fixed in terms of percentage say 10%. The credit sales is of ₹ 1,00,000 and cash sales is of ₹ 50,000, amount of del-credere commission will be:
(a) ₹ 10,000
(b) ₹ 15,000
(c) ₹ 5,000
(d) None of the above.
(b) ₹ 15,000

55. Overriding commission is a commission:
(a) Based on fixed percentage of the gross sales proceeds made by the consignee
(b) Based on fixed percentage of the cash sales made by the consignee
(c) An extra commission to promote sales of higher price than specified
(d) A commission on credit sales for protection from bad debts
(a) Based on fixed percentage of the gross sales proceeds made by the consignee

56. Yojan Kumar consigned goods of ₹ 1,00,000 at an invoice price of 20% above the cost to Singham Kumar. Consignee is entitled for 5% commission on total sales up to invoice, 20% commission on sale proceeds in excess of invoice price and 2% del credere commission on credit sales. Singham Kumar sold 25% goods for cash at ₹ 40,000; 50% goods at ₹ 70,000 on credit and kept 10% goods at invoice price for himself. Calculate the commission payable to Singham Kumar.
(a) ₹ 10,500
(b) ₹ 9,900
(c) ₹ 10,200
(d) None of the above
(d) None of the above

57. In absence of any agreement in consignment business, the loss of goods by fire in consignees godown is borne by:
(a) Consignor
(b) Consignee
(c) Shared by both consignor and consignee
(d) Insurance company
(a) Consignor

58. On 1.1.2014, Amit of Varanasi consigned goods of the value of ₹ 50,000 to Sumit of Chennai. Amit paid ₹ 2,500 as freight and ₹ 1,500 for insurance. During transit, 1/10th of the goods were totally destroyed by fire. 1 /9th of the remaining goods were again destroyed by fire in godown. On 1.4.2014 half of the original goods were sold for ₹ 30,000. You are required to ascertain the stock:
(a) ₹ 15,000
(b) ₹ 24,000
(c) ₹ 16,200
(d) ₹ 20,000
(c) ₹ 16,200

59. Goods sent on consignment by Kumar to Suresh. Invoice value of goods sent is ₹ 6,00,000 at cost + 25% profit 1/4th of the goods were lost in transit. Insurance claim received ₹ 72,000. The amount of abnormal loss to be transferred to General Profit and Loss A/c will be:
(a) ₹ 40,500
(b) ₹ 48,000
(c) ₹ 1,20,000
(d) ₹ 1,50,000
(b) ₹ 48,000

60. R of Dwarka sends out certain goods at cost + 25%. Invoice value of goods sent out ₹ 2,00,000.4/5,h of the goods were sold by consignee at ₹ 1,76,000. Commission 2% upto invoice value and 10% of any surplus above invoice value. The amount of commission will be:
(a) ₹ 4,800
(b) ₹ 5,200
(c) ₹ 3,200
(d) ₹ 1,600
(a) ₹ 4,800

61. 5,000 metres of cloth sent out on consignment at the invoice price of ₹ 30 per metre which were purchased by consignor at the cost price of ₹ 20 per metre. Consignor’s expenses ₹ 5,500. Consignee’s expenses ₹ 2,000. Consignee sold 4,000 metres ₹ 40 per metre. Consignee is entitled to a commission of 5% on total sales proceeds plus a further 20% of any surplus above ₹ 30 per metre. Owing to a fall in market price, the inventories of cloth in hand is to be reduced by 10%. What will be the profit on consignment?
(a) ₹ 54,500
(b) ₹ 63,500
(c) ₹ 56,490
(d) ₹ 55,490
(d) ₹ 55,490

62. D of Delhi sent out goods on consignment so as to show a profit of 20% on invoice price. 1/5,h of the goods were lost in transit. The cost of goods lost is ₹ 60,000. The invoice value of goods sent out was:
(a) ₹ 3,75,000
(b) ₹ 3,60,000
(c) ₹ 3,50,000
(d) ₹ 3,00,000
(a) ₹ 3,75,000

63. Munnabhai of Mumbai send out certain goods to Chunky of Chennai at cost + 25%. 3/4,h of the goods received by Chunky is sold at ₹ 1,98,000 at 10% above invoice price. Cost value of goods send out is :
(a) ₹ 2,40,000
(b) ₹ 1,44,000
(c) ₹ 1,80,000
(d) ₹ 1,92,000
(d) ₹ 1,92,000

64. Over-riding commission is generally calculated on:
(a) Credit Sales
(b) Total sales excluding invoice value/cost
(c) Cash sales only
(d) Both on Credit and Cash Sale
(b) Total sales excluding invoice value/cost

65. 1000 kgs of bananas are consigned to a wholesaler, the cost being ₹ 8 per kg, plus ₹ 925 of freight. It is considered that a loss of 15% is unavoidable. The cost per kg of banana will be:
(a) ₹ 9.41
(b) ₹ 10.50
(c) ₹ 10.00
(d) ₹ 8.925
(b) ₹ 10.50

66. Gautam of Goa consigned goods for the value of ₹ 74,500 to Rama of Rameshwaram and paid freight etc. of ₹ 7,000. He drew a bill on Rama for 3 months after date for ₹ 25,500 as an advance against consignment and discounted the bill for ₹ 24,500. Further he received Account Sales showing that, part of the goods had realized gross ₹ 83,500 and that his expenses and commission amounted to ₹ 2,500 and ₹ 6,000 respectively. The inventory unsold was valued at ₹ 27,500. Consignee wants to remit a draft for the amount due. The amount of draft will be:-
(a) ₹ 56,500
(b) ₹ 55,500
(c) ₹ 50,500
(d) ₹ 49,500
(d) ₹ 49,500

67. If Del-credere commission is allowed for bad – debt, consignee will debit the bad – debt, amount to:
(a) Commission earned A/c
(b) Consignor A/c
(c) Trade Receivable A/c
(d) General Trading A/c
(a) Commission earned A/c

68. X consigned goods costing ₹ 1,50,000 to Y of Navi Mumbai at cost plus 25%. 1/10th goods are lost in transit. Y sold 3/5th of the remaining goods at 10% above invoice price. The amount of sales will be:
(a) ₹ 1,85,625
(b) ₹ 1,01,250
(c) ₹ 1,23,750
(d) ₹ 1,11,375
(d) ₹ 1,11,375

69. Roy of Chennai sends goods costing ₹ 2,00,000 to Sai of Delhi. 3/5th of the goods were sold by consignee for ₹ 1,40,000. Commission 2% on sales plus 20% of gross sale less all commission as exceeds cost price. The amount of commission will be:
(a) ₹ 5,666
(b) ₹ 5,800
(c) ₹ 6,000
(d) ₹ 5,600
(a) ₹ 5,666

70. Goods sent out on consignment ₹ 2,00,000. Consignor’s expenses ₹ 5,000. Consignee’s expenses ₹ 2,000. Cash sales ₹ 1,00,000. Credit sales ₹ 1,10,000. Consignment inventories ₹ 40,000. Ordinary commission payable to consignee ₹ 3,000. Del-credere commission ₹ 2,000. The amount irrecoverable from customer ₹ 2,000. What will be the profit on consignment?
(a) ₹ 38,000
(b) ₹ 40,000
(c) ₹ 36,000
(d) ₹ 43,000
(a) ₹ 38,000

71. Del-Credere Commission is allowed for bad-debts, consignee will debit the bad-debts amount to:
(a) Commission earned A/c
(b) General P/L A/c
(c) Trade receivables A/c
(d) Consignor A/c
(b) General P/L A/c

72. Consignment Account is a account and consignee account is the nature of ________.
(a) nominal, real
(b) real, nominal
(c) nominal, personal
(d) artificial, personal.
(c) nominal, personal

73. Goods sent on consignment ₹ 50,000. During transit 1/10th of goods were destroyed by fire later, 1/9th of the goods received by consignee were also destroyed by fire in godown. Half of the remaining goods were sold ₹ 30,000. Freight and Insurance paid by consignor ₹ 2,500 and ₹ 1,500 respectively. Calculate closing stock.
(a) ₹ 24,000
(b) ₹ 21,600
(c) ₹ 20,000
(d) None of the above.
(b) ₹ 21,600

74. Mukesh purchased 5000 bags of wheat costing ₹ 250 each and sent them to Manoj on consignment basis. Carriage ₹ 1,500 and Insurance expense ₹ 3,500 were paid by Mukesh. 3/5’h of the stock were sold by Manoj at ₹ 300 per bag. Remaining stock was taken over by Manoj at cost. The amount of stock taken over will be:
(a) ₹ 5,00,000
(b) ₹ 12,55,000
(c) ₹ 5,02,000
(d) ₹ 5,51,000
(c) ₹ 5,02,000

75. Rishi of Kolkata sent out goods costing ₹ 50,000 to Zenith of Mumbai at cost + 20%. 10% of the goods were lost in transit. 70% of the goods received are sold at 15% above invoice price. The amount of sales value will be ________.
(a) ₹ 37,800
(b) ₹ 39,600
(c) ₹ 43,470
(d) ₹ 44,370
(c) ₹ 43,470

76. If consigner draws a bill on consignee and discounted it with the banker, the discounting charges will be debited in:
(a) Trade Debtors Account
(b) Consignment Account
(c) Consignee’s Account
(d) General Profit and Loss Account.
(b) Consignment Account

77. M and N enter into a joint venture where M supplies goods worth ₹ 6000 and spends ₹ 300 on expenses. N sells the entire lot for ₹ 7,800 meeting selling expenses amounting to ₹ 300. Profit sharing ratio equal. N remits to M the amount due. The amount of remittance will be:
(a) ₹ 6,900
(b) ₹ 7,500
(c) ₹ 6,300
(d) ₹ 6,600
(a) ₹ 6,900

78. What is the nature of joint venture with co-venture’s A/c :
(a) Nominal account
(b) Real account
(c) Personal account
(d) None
(c) Personal account

79. When unsold stock is taken away by a co – venturer, then ________ account is debited:
(a) joint stock
(b) joint venture
(c) joint bank account
(d) co – venturers capital account
(d) co – venturers capital account

80. A bought goods costing 2,00,000. B sold 4/5th of goods for ₹ 2,50,000. Balance goods were taken over by B at cost less 20%. Find out profit on venture :
(a) ₹ 82,000
(b) ₹ 90,000
(c) ₹ 50,000
(d) None
(a) ₹ 82,000

81. Joint Venture Accounting follows which concept:
(a) Accrual Concept
(b) Going Concern Concept
(c) Cost Concept
(d) Cash Basis
(d) Cash Basis

82. Joint venture is a ________ Account.
(a) personal
(b) real
(c) nominal
(d) capital
(c) nominal

83. A for joint venture with B, purchased goods costing ₹ 2,00,000. B sold the goods for ₹ 2,80,000. Unsold material costing ₹ 10,000 was taken over by A at ₹ 8,000. A is entitled to get 1 % commission on purchases. B is entitled to get 2% commission on sales, Profit on venture will be :
(a) ₹ 80,000
(b) ₹ 80,800
(c) ₹ 81,200
(d) ₹ 80,400
(d) ₹ 80,400

84. The parties to joint venture are called ________.
(a) Co-venturers
(b) Partners
(c) Principal and agent
(d) Friends
(a) Co-venturers

85. When co-ventures initially contribute for a joint should be debited in case when separate set of books are maintained:
(a) Purchases A/c
(b) Joint ventures A/c
(c) Venture’s Capital A/c
(d) Joint Bank A/c
(d) Joint Bank A/c

86. A and B enter into a joint venture to underwrite the shares of K Ltd. K Ltd. make an issue of 1,00,000 equity shares of ₹ 10 each. 80% of issue are subscribed by the party. The profit sharing ratio between A and B is 3 : 2. The balance unsubscribed shares are purchased by A and B in profit sharing ratio. How many shares are purchased by A?
(a) 80,000 shares
(b) 72,000 shares
(c) 12,000 shares
(d) 8,000 shares
(c) 12,000 shares

87. If separate set of books is maintained and discount is received at the time of purchase of goods then such a discount will be treated as :
(a) Income of Joint Venture hence credited to joint venture account
(b) Expense of Joint Venture hence debited to joint venture account
(c) Will not be recorded in books of account
(d) Credited to co-venturers account
(a) Income of Joint Venture hence credited to joint venture account

88. X and Y enter into a joint venture. X supplied goods to Y worth ₹ 70,000. X incurred expenses amounting to ₹ 6,000 on joint venture. The venture resulted in a total profit of ₹ 15,000 of which their ratio of distribution is 2:1. The entire sale proceeds were received by Y. Amount received by X from Y in final settlement will be :
(a) ₹ 85,000
(b) ₹ 86,000
(c) ₹ 80,000
(d) ₹ 75,000
(b) ₹ 86,000

89. For material supplied from over stock by any of the venture, the correct journal entry will be :
(In case of Separate set of books of a joint venture)
(a) Joint Venture A/c Dr.
To Venturer’s Capital A/c
(b) Joint Venture A/c Dr.
To Joint Bank A/c
(c) Joint Venture A/c Dr.
To Materials A/c
(d) Joint Bank A/c Dr.
To Joint Venture A/c
(a) Joint Venture A/c Dr.
To Venturer’s Capital A/c

90. Memorandum joint venture account is prepared :
(a) When separate set of books is maintained
(b) When each co-venturer keeps record of all the transactions himself
(c) When each co-venturer keeps records of their own joint venture transaction
(d) None of these
(c) When each co-venturer keeps records of their own joint venture transaction

91. X spending a sum of ₹ 10000 on account of joint venture, will be credited to ________ account in case of the records being maintained in the books of X.
(a) memorandum J.V.
(b) joint venture
(c) co – venturers
(d) cash
(d) cash

92. A and B enter into a joint venture sharing profits and losses equally. A bought 5000 Kg of rice @ ₹ 25/Kg. B bought 1000 Kg of wheat @ * 30/Kg. A sold 1000 Kg of wheat @ ₹ 35/Kg and B sold 5000 Kg of rice @ ₹ 30/ Kg. The profit on venture will be :
(a) ₹ 55,000
(b) ₹ 50,000
(c) ₹ 60,000
(d) ₹ 30,000
(d) ₹ 30,000

93. Following are the characteristics of joint venture except:
(a) No common firm name
(b) Contribution of funds
(c) Sharing of profits/losses
(d) None of these
(d) None of these

94. Which of the following methods of valuation of closing stock is followed in joint venture accounting?
(a) Net realizable value
(b) Cost price
(c) Least of cost or Net realizable value
(d) None of these
(d) None of these

95. Karim and Rahim enter a joint venture sharing profits in 2:1. Karim purchases goods of ₹ 2,00,000 and Rahim sells goods of ₹ 2,50,000. Karim gets 1% commission on purchase and Rahim gets 5% commission on sales. Find profit on joint venture.
(a) ₹ 35,500
(b) ₹ 36,000
(c) ₹ 34,000
(d) ₹ 38,000
(a) ₹ 35,500

96. A and B entered into a joint venture. They agreed to share profits and losses equally. A purchased goods worth ₹ 16,000. Goods of ₹ 4,000 were destroyed by fire. Insurance claim of ₹ 3,000 is received. B sold the rest of the goods for ₹ 20,000. A and B share profits equally A’s share of profits is:
(a) ₹ 4,000
(b) ₹ 3,000
(c) ₹ 3,500
(d) None
(c) ₹ 3,500

97. A and B entered into joint venture. A supplied goods worth ₹ 7,000 and incurred expenses of ₹ 300. B sold the goods for ₹ 10,000 and incurred expenses of ₹ 500. What is the amount of final remittance?
(a) ₹ 8,400
(b) ₹ 7.900
(c) ₹ 8,900
(d) None of these.
(a) ₹ 8,400

98. Which of the following is incorrect?
(a) Joint Venture is not based on going concern.
(b) Joint Venture can be formed with minor.
(c) A bill of exchange is a negotiable instrument.
(d) Noting charges are the expenses of drawee.
(b) Joint Venture can be formed with minor.

99. A and B entered into a Joint Venture. A bought goods for ₹ 6,00,000. He sold 80% of the goods for ₹ 5,60,000 and took the remaining goods at cost less 20%. Find the amount of profit.
(a) ₹ 56,000
(b) ₹ 60,000
(c) ₹ 70,000
(d) None
(a) ₹ 56,000

100. When Memorandum Joint Venture Method is followed, in Books of X, “Joint Venture with Y A/C” will be credited with ________, for amount received by X.
(a) y
(b) sales
(c) debtor
(d) cash
(d) cash

101. A & B started a joint venture. After the sales the unsold stock worth ₹ 15,000 was taken over by B at a cost of ₹ 20,000. The amount to be credited to Joint venture Account will be?
(a) ₹ 20,000
(b) ₹ 15,000
(c) ₹ 5,000
(d) ₹ 35,000
(a) ₹ 20,000

102. X and Y entered into a joint venture to sell 1,000 bags of wheat costing ₹ 200 each. X paid ₹ 2,000 for freight and ₹ 3,000 for insurance. 4/5th of the bags were sold by Y at ₹ 250 each bag. Remaining stock was taken over by Y at cost. The amount of the stock taken over by Y will be ________.
(a) ₹ 40,000
(b) ₹ 45,000
(c) ₹ 41,000
(d) ₹ 50,000
(c) ₹ 41,000

103. Tinku and Bunty enter into a joint venture to share profits and losses equally. Tinku supplied 200’Refrigerators costing ₹ 2,00,000 to Bunty incurring freight charges ₹ 10,000. Bunty sold 140 Refrigerators for ₹ 2,40,000. He took over 10 refrigerators himself.
The profit & loss on joint venture will be:
(a) Loss ₹ 40,000
(b) Profit ₹ 30,000
(c) Profit ₹ 40,000
(d) Profit ₹ 40,500
(d) Profit ₹ 40,500

104. In case of Joint Venture, a minor:
(a) Can be a co-venturer for the benefit of the venture.
(b) Can be a co-venturer if all other co-venturers agree.
(c) Can be a co-venturer if permitted by the competent authority.
(d) Cannot be a co-venturer
(d) Cannot be a co-venturer

105. A and B entered in a joint venture and decided to share profits and losses equally.
A supplied goods worth ₹ 7,000 and incurred expenses of ₹ 300. B sold •the goods for ₹ 10,000 and incurred expenses of ₹ 500. What will be the amount of the final remittance to be send by B to A?
(a) ₹ 7,900
(b) ₹ 5,200
(с) ₹ 8,400
(d) ₹ 8,800
(с) ₹ 8,400

106. Which of the following statement is true?
(a) Co-venturers always shares profits and losses equally.
(b) Number of co-venturers can never be more than two.
(c) The relationship between co-venturers is principal & agent.
(d) Co-venturers may contribute funds for running the venture.
(d) Co-venturers may contribute funds for running the venture.

107. A & B has started a joint venture for purchase and sale of garments. Initial capital contribution was ₹25,000 and ₹ 50,000 respectively. There is no written agreement about share of profit/loss amongst them. They purchased garments worth ₹ 50,000 and sold for ₹ 75,000. The profit of ₹ 25,000 shared by them as:
(a) ₹ 8,333 and ₹ 16,667
(b) ₹ 10,000 and ₹ 15,000
(c) ₹ 12,500 and ₹ 12,500
(d) ₹ 20,000 and ₹ 5,000.
(c) ₹ 12,500 and ₹ 12,500

108. Karthik and Dhoni enter into a joint venture sharing profit and loss in the ratio of 2 : 1. Karthik purchased the goods costing ₹ 2,00,000. Dhoni sold the goods for ₹ 2,50,000. Karthik is entitled to get 1 % commission on purchase and Dhoni is entitled to get 5% commission on sales. The profit on venture will be:
(a) ₹ 35,500
(b) ₹ 36,000
(c) ₹ 34,000
(d) ₹ 38,000.
(a) ₹ 35,500

109. The minimum number of co-venture will be atleast ________ in joint venture business.
(a) 2
(b) 5
(c) 7
(d) 4
(a) 2

110. Which of the following is true?
(a) Co-ventures always shares profit equally
(b) Number of co-ventures can never be more than two
(c) The relationship between co-ventures is principal & agent
(d) Co-ventures may contribute funds for running the venture
(d) Co-ventures may contribute funds for running the venture

111. C and D enter into a joint venture to share profit in the ratio 5: 3. Apart from the profit, D is entitled to a commission of 5% of net profit after charging such cpmmission. If net profit of joint venture is ₹ 33,600 before charging such commission. What will be share profit of C and D:
(a) C will get profit ₹ 19,950 and D ₹ 11,970
(b) C will get profit ₹ 20,000 and D ₹ 12,000
(c) C will get profit ₹ 21,000 and D ₹ 12,600
(d) C will get profit 7 21,600 and D ₹ 12,000
(b) C will get profit ₹ 20,000 and D ₹ 12,000

112. Aastha and Shivani entered into a Joint venture sharing profits and losses in the ratio 2:1. Aastha purchased goods costing ₹ 30,000. Shivani sold the goods for ₹40,000. Aastha was entitled to get 1% Commission on purchase and Shivani was entitled for 5% Commission on sales. Aastha’s and Shivani’s share in profit on venture would be:
(a) ₹ 1,467 and ₹ 733 respectively
(b) ₹ 5,133 and ₹ 2,567 respectively
(c) ₹ 4,400 and ₹ 2,200 respectively
(d) ₹ 3,667 and ₹ 1,833 respectively.
(b) ₹ 5,133 and ₹ 2,567 respectively

113. In case of Joint Venture business, the method of accounting to be followed is decided by:
(a) Separate act for Joint Venture
(b) Accounting Standard
(c) Co-ventures as per their convenience
(d) ICAI
(c) Co-ventures as per their convenience

114. In case of Joint Venture, for purchase of machinery from Joint Bank a/c, in case separate set of books are maintained, the correct journal entry will be:
(a) Debit Machinery A/c and Credit Joint Bank A/c
(b) Debit Joint Venture A/c and Credit Joint Bank A/c
(c) Debit Machinery A/c and Credit Venture’s Capital A/c
(d) Debit Joint Venture A/c and Credit Machinery A/c
(b) Debit Joint Venture A/c and Credit Joint Bank A/c

115. Mohit and Rohit entered into a joint venture sharing profits and losses in the ratio 2:1 respectively. Mohit purchased goods costing ₹ 2,00,000 and incurred ₹ 15,000 as freight and sent it to Rohit. Rohit purchased goods to the value of ₹ 56,000 and incurred expenses amounting to ₹ 5,000. Rohit sold the goods on behalf of the joint venture and realized ₹ 4,00,000. He was entitled to 10% commission on sales. How much amount will Rohit pay to Mohit as final settlement?
(a) ₹ 1,85,000
(b) ₹ 2,71,000
(c) ₹ 3,11,000
(d) ₹ 2,99,000
(b) ₹ 2,71,000

116. When the record of transactions relating to joint venture are made in the books of one venturer, then the venturer recording the transactions, records his share of investment by ________.
(a) debiting cash a/c
(b) crediting cash a/c
(c) crediting his personal a/c
(d) no entry required.
(b) crediting cash a/c

117. A and B were partners in joint venture sharing profit and losses in proportion of 3 : 2. A supplies goods to the value of ₹ 60,000 and incurs expenses amounting ₹ 6,000. B supplies to the value of ₹ 14,000 and his expenses amounted ₹ 1,000. B sells goods on behalf of the joint venture and realises ₹ 1,00,000. B is entitled to a commission of 5% on sales. B settles his account by a bank draft. Find out the profit on venture.
(a) ₹ 14,400
(b) ₹ 14,000
(c) ₹ 13,000
(d) ₹ 13,200
(b) ₹ 14,000

118. In a joint venture X contributes ₹ 25,000 and Y contributes ₹ 50,000. Goods are purchased for ₹ 56,000. Expenses amount to ₹ 4,000, sales amount to ₹ 70,000, the remaining goods costing ₹ 3,000 were taken over by Y at an agreed price of ₹ 2,000. X and Y share profit and losses in ratio of 1:2 respectively. As a final settlement, how much X will receive?
(a) ₹ 29,333
(b) ₹ 30,000
(c) ₹ 25,000
(d) ₹ 29,000
(d) ₹ 29,000

119. Memorandum joint venture account is prepared:
(a) When each co-venture keeps records of all the joint venture transactions himself.
(b) When separate set of joint venture books is prepared.
(c) When each co-venture keeps records of their own joint venture transaction.
(d) None of the above.
(c) When each co-venture keeps records of their own joint venture transaction.

120. Raj and Simran enter into a joint venture to sell silk, sharing profits anc losses equally. Raj provides silk from his inventory ₹ 1,00,000. He pay expenses amounting ₹ 10,000. Simran incurs further expenses or carriage ₹ 10,000. She received cash on sale of silk ₹ 1,50,000. She also takes over goods to the value of ₹ 20,000. Profit on venture will be ________.
(a) ₹ 30,000
(b) ₹ 40,000
(c) ₹ 50,000
(d) ₹ 60,000
(c) ₹ 50,000

121. X and Y enter into a joint venture sharing profits and losses equally purchased 1,000 kg. of sugar @ ₹ 25 per kg. Brokerage paid ₹ 1,00 and carriage paid ₹ 500. Y sold 950 kg. of sugar @ ₹ 32 per kc Balance sugar was taken over by Y at cost. The value of sugar take: over to be recorded in joint venture will be ________.
(a) ₹ 1,325
(b) ₹ 1,250
(c) ₹ 1,300
(d) ₹ 1,275
(a) ₹ 1,325

122. A minor can join as a co-ventures in a joint venture business:
(a) Yes, if accepted by all co-ventures
(b) Yes, if accepted by competent authority
(c) Cannot become co-ventures
(d) Yes, for the benefit of joint venture.
(c) Cannot become co-ventures

123. Aar and Bar were partners in a joint venture sharing profits and losses in the ratio of 4/5th and 1/5th respectively. Aar supplies goods to the value of ₹ 50,000 and his expenses amount to ₹ 5,400. Bar supplies goods to the value of ₹ 14,000 and his expenses amount to ₹ 800. Bar sells goods on behalf of the joint venture and realises ₹ 92,000. Bar is entitled to a commission of 5% on sales. Bar settles his account by bank draft. What will be the final remittance?
(a) Bar will remit ₹ 69,160 to Aar
(b) Aar will remit ₹ 69,160 to Bar
(c) Aar will remit ₹ 69,000 to Bar
(d) Bar will remit ₹ 69,000 to Aar.
(a) Bar will remit ₹ 69,160 to Aar

124. Sales made by A and B ________.
(a) ₹ 30,000; ₹ 39,375
(b) ₹ 40,500; ₹ 39,375
(c) ₹ 40,500; ₹ 35,625
(d) ₹ 41,250; ₹ 24,375
(a) ₹ 30,000; ₹ 39,375

125. Profit for the venture will be:
(a) ₹ 7,000
(b) ₹ 7,375
(c) ₹ 8,875
(d) Long ₹ 1,500
(b) ₹ 7,375

126. Which of the following terms are not true with regard to Joint Venture business?
(a) Account Sales
(b) Account Current
(c) Del-Credere Commission
(d) All of the above.
(d) All of the above.

127. Which of the following statement is true?
(a) Memorandum joint venture account is prepared to find out amount due from co-venturer.
(b) In memorandum joint venture account only one venturer’s transaction is recorded.
(c) Memorandum joint venture account is prepared to find out profit on venture.
(d) Memorandum joint venture account is prepared when separate set of books is maintained for joint venture.
(c) Memorandum joint venture account is prepared to find out profit on venture.

128. Which of the following statements is not true?
(a) Joint Venture is a going concern.
(b) Joint Venture is terminable in nature.
(c) Joint Venture does not follow accrual basis of accounting if lasts for less than a year.
(d) The Co-venturer shares the profit in agreed ratio.
(a) Joint Venture is a going concern.

129. Ram and Rahim entered into a joint venture to underwrite the equity shares of M/s Antony Ltd. @ 5% underwriting commission. M/s Antony Ltd. made a public issue of 1,00,000 equity shares of ₹ 10 each. 90% of the issue was subscribed by the public. The profit sharing ratio between Ram and Rahim is 2:3. The balance shares not subscribed by the public are to be purchased by Ram and Rahim in profit sharing ratio. How many shares are to be purchased by Rahim?
(a) 4,000 shares
(b) 2,000 shares
(c) 6,000 shares
(d) 3,000 shares
(c) 6,000 shares

130. Joint Venture Account is the nature of:
(a) Personal A/c
(b) Nominal A/c
(c) Real A/c
(d) None of these
(b) Nominal A/c

131. In banking method, if a co-venture makes payment for the joint venture, the amount is Credited to:
(a) Joint venture A/c
(b) Co- venture’s A/c
(c) Joint Bank A/c
(d) None of these
(b) Co- venture’s A/c

132. In banking method, a co-venture takes over the unsold goods, the amount is credited to.
(a) Joint Bank A/c
(b) Co- ventures’s A/c
(c) Joint venture A/c
(d) None of these
(c) Joint venture A/c

133. Joint Venture with B is the nature of:
(a) Nominal A/c
(b) Real A/c
(c) Personal A/c
(d) None of these
(c) Personal A/c

134. When A advances money to B, in the course of Joint Venture, A debits such money to:
(a) Expenses A/c
(b) B’sA/c
(c) Joint Venture A/c
(b) B’sA/c

135. When a venture supplies goods to the Joint venture from his own stock, he credits the amount to:
(a) Joint Venture Account
(b) Capital A/c
(c) Sales A/c
(d) Purchases A/c
(d) Purchases A/c

136. The amount of discount on the discounting of B/R from the bank by a co-venture will be debited:
(a) Discount A/c
(b) Bank A/c
(c) Joint Venture A/c
(d) None of the above
(d) None of the above

137. In the case of joint venture, when each party records all the transactions in the books, on stock being taken by the other co-venture, debit is made to
(a) Co-ventu re’s A/c
(b) Joint Venture A/c
(c) Stock A/c
(d) Goods A/c
(c) Stock A/c

138. When goods are purchased for Joint Venture out of joint bank, the amount is debited to ________.
(a) Joint- Bank A/c
(b) Joint venture A/c
(c) Purchases A/c
(d) Goods A/c
(a) Joint- Bank A/c

139. When separate set of books are maintained of Joint Venture, the Ledger accounts prepared are:
(a) Memorandum Joint Venture A/c and Joint Venture A/c with the other party.
(b) Joint Venture A/c and the personal A/c of the party.
(c) Joint Bank A/c, joint venture A/c and Co-venture’s capital A/c
(d) Memorandum Joint Venture A/c and Personal account of the other a party.
(b) Joint Venture A/c and the personal A/c of the party.

140. If unsold goods costing ₹ 20,000 is taken over by a co-venture at cost less 25% the joint venture A/c will be credited by
(a) ₹ 20,000
(b) ₹ 15,000
(c) ₹ 5,000
(d) Nil
(c) ₹ 5,000

141. Commission will be shared by:
(a) Consignor and consignee
(b) Only consignee
(c) Only consignor
(d) Third Party
(b) Only consignee

141. Commission will be shared by:
(a) Consignor and consignee
(b) Only consignee
(c) Only consignor
(d) Third party
(b) Only consignee

142. Goods costing ₹ 3,00,000 sent out to consignee at cost + 25% invoice price invoice value of goods will be ________.
(a) ₹ 3,75,000
(b) ₹ 4,00,000
(c) ₹ 4,25,000
(d) None
(b) ₹ 4,00,000

143. A purchased an old computer costing ₹ 10,000 and incurred ₹ 1,000 on its repairs and ₹ 500 on its packing. He sold the computer at 20% margin on selling price. The sales value will be:
(a) ₹ 12,500
(b) ₹ 11,000
(c) ₹ 14,375
(d) ₹ 13,800
(c) ₹ 14,375
Cost of old computer purchased = ₹ 10,000
Repairs on old computer = ₹ 1,000
Packing charges = ₹ 500
Total Cost of old computer = 10,000 + 1,000 + 500 = ₹ 11,500
If 20% or $$\frac { 1 }{ 5 }$$ on selling price then 25% or $$\frac { 1 }{ 4 }$$ on cost price. So, Sales
Value will be = 11,500 + 11,500 x $$\frac { 1 }{ 4 }$$
= 11,500 + 2,875
= ₹ 14,375

144. If there is no agreement between the joint ventures then the profit and loss is shared.
(a) Equally
(b) In capital ratio
(c) In agreed ratio
(d) Any of the above.
(a) Equally
Co-ventures share profits or losses of the venture at the agreed ratio; if there is no agreement on this point then in equal ratio.
Hence, option (a) is correct.

145. Del Credere Commission is given by ________.
(a) Consignee
(b) Consignor
(c) Seller
(b) Consignor
Del Credere Commission is a special kind of commission given by Consignor to Consignee to undertake the risk of any bad debts out of the credit sale; so we can also treat it as insurance premium against bad debts.

146. Consignment A/c is a:
(a) Nominal A/c
(b) Real Nc
(c) Personal A/c
(d) None of the above.
(a) Nominal A/c
Consignment Account is a nominal account.
Hence, option (a) is correct.

147. Commission will be shared by:
(a) Consignor and Consignee
(b) Only Consignee
(c) Only Consignor
(d) Third party.
(b) Only Consignee
Commission is given by consignor to consignee and only borne by consignee. Thus, option (b) is correct.

148. When A advances money to B, in the course of Joint Venture, A debits such money to ________.
(a) Expenses A/c
(b) B’s A/c
(c) Joint Venture A/c
(c) Joint Venture A/c
When A advance money, in the course ot Joint venture, such amount will be debited to:
In case of advanced money by one co-venture to other, the entry will be,
Joint venture A/c Dr.
To A’s Account Hence, option (c) is correct.

149. The consignor sends along with the consigned goods to the consignee.
(a) Account Sales
(b) Proforma Invoice
(c) Both of the above
(d) None of the above.
(b) Proforma Invoice
The consignor sends “Proforma Invoice” along with consigned goods to the consignee. Hence, option (b) is correct.

150. Account Sales includes:
(b) Commission earned
(c) Stock left with consignee
(d) All of the above
(d) All of the above
Sales Account: Contains all sales transactions includes both cash & credit sales. The account total is then paired with the sales returns and allowances account to derive the net sales. Thus, option (d) is correct.

151. The stock lying unsold with the consignee belongs to:
(a) Consignor
(b) Consignee as he bears the risk
(c) Both (a) and (b)
(d) None of these.
(a) Consignor
The stock left unsold with consignee belongs to consigner as he has the ownership of such goods. Thus, option (a) is correct.

152. If the del credere commission is 10% cash sales is ₹ 5,000 and credit + sales is ₹ 10,000. Calculate the amount of del credere commission.
(a) ₹ 1,500
(b) ₹ 1,000
(c) ₹ 500
(d) None of the above.
(b) ₹ 1,000
If the del credere commission is 10%, cash sales ₹ 5,000, credit sales ₹ 10,000. Calculate the amount of commission: Del credere commission is charged on Credit Sales only;
Hence, @ 10% of credit sales = 10,000 x $$\frac { 10 }{ 100 }$$ = ₹ 1,000
Thus, option (b) is correct.

153. Joint Venture calculate their profit ________.
(a) After sale
(b) After purchase
(c) After specific time
(d) After completion of venture
(d) After completion of venture
Profit of Joint Venture is calculated after completion of venture.

154. Consignee A/c is a ________?
(a) Real A/6
(b) Nominal A/c
(c) Personal A/c
(d) All of the above
(c) Personal A/c
Consignee’s Account is a personal account and therefore, in case the consignee has not remitted thebalance due by him in full, he will be a debtor, whereas it has remitted more than the balance due by him, he will be a creditor. Goods sent on consignment account is a real account.

155. Co-venturer are ________?
(a) Partners
(b) Agent
(c) Principal – Agent
(d) Relatives
(a) Partners
The relation between the consignor and consignee is principal and agent. But the relation between co-ventures is just like the partners in partnership firm.

## Concept of Auditing – CS Foundation Fundamentals of Auditing Notes

Go through this Concept of Auditing – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

## Concept of Auditing – CS Foundation Fundamentals of Auditing Notes

Auditing – An introduction:

1. The term “audit” has originated from a Latin word “audire” which means to hear.
2. Authenticity of accounts is assured with the help of Independent audit.
3. Audit is performed to ascertain the validity and reliability of information.
4. Auditing is defined as a systematic and independent examination of data, statements, records, operations or performances (financial or non-financial) of an enterprise for a stated purpose.
5. The goal of an audit is to express an opinion on financial and non financial matters.
6. Audit deals with checking, verification and examination of accounts.
7. Traditionally, Audits were associated with gaining information about financial system and financial records of a company or business, but recently it has begun to include non financial subject areas such as Safety,
8. Security, Information system performance, Environmental concern.
9. Financial statements are said to be true & fair when they are free from material misstatement.

Meaning and Definitions of Auditing:
The word audit means a thorough scrutiny of the books of accounts and its ultimate aim is to verify the financial position disclosed by the balance sheet and the profit and loss account of a company.

The followings are some definitions of audit given by some writers:
Lawrence R. Dicksee: “An audit is an examination of accounting records undertaken with a view to establishing whether they correctly and completely reflects the transactions to which they purport to relate.”

Taylor and Perry: “Audit is defined as an investigation of some statements of figures involving examination of certain evidence, so as to enable an auditor to make a report on the statement.”

F.R.M De Paula: “An audit denotes the examination of Balance Sheet and Profit & Loss Account prepared by others together with the books of accounts and vouchers relating there to in such manner that the auditor may be able to satisfy himself and honestly report that, in his opinion such Balance Sheet is properly drawn up so as to exhibit a true and correct view of the state of affairs of the particular concern according to the information and explanations given to him and as shown by the books.”

Prof. Montgomery: “Auditing is a systematic examination of the books and records of business or other organization, in order to ascertain or verify and to report upon the facts regulating its financial operations and the result thereof.”

Spicer & Pegler: “Audit such an examination of the books of accounts and vouchers of a business, as will enable the auditor to satisfy himself that the Balance Sheet is properly drawn up, so as to give a true and fair view of the state affairs of the business, and whether the profit and loss account gives a true and fair view of the profit or ioss for the financial period according to the best of his information and explanations given to him and as shown by the books, and if,not, in what respect he is not satisfied.”

Institute of Chartered Accountants of India (ICAI) defines Auditing as:
“Auditing is defined as a systematic and independent examination of data, statements, records, operations and performance of an enterprise for a stated purpose. In any auditing situation the auditor perceives and recognizes the propositions before him for examination, collect evidences, evaluates the same and on this basis formulates his judgement which is communicated through his audit report.”

The meaning of an Audit contains:

1. An intelligent and critical examination of the books of accounts of business.
2. It is done by an independent qualified person.
3. It is done with the help of vouchers, documents, information and explanations received from the clients.
4. The auditor satisfies himself with the authenticity of the financial accounts prepared for a particular period.

Features of Auditing:
(i) It is a systematic examination of books of accounts by an independent person.

(ii) Time, extent and nature of audit depends on the effectiveness of internal control system.

• Internal control system refers to the organisational plan and all methods or procedures adopted by management of an entity to achieve efficient conduct of business, safeguarding assets, preventing frauds and errors, accuracy of accounting records etc.
• This control is exercised by the management of the organisation.

(iii) Auditing may be on test basis or in depth checking of books and accounts.

(iv) Various method and procedures can be used for performing audit.

(v) It involves reporting by the auditor on the accounts examined by him and prepared as per GAAP principle and present true and fair view.

(vi) Auditing is not limited only to examination of financial records but it also includes other areas like – operational audit, process audit, tax audit, secretarial audit, efficiency audit, social audit etc.

(vii) Auditing has nothing to do with Accounting.

Objectives of Auditing:

Remember:

• Detection of fraud and error is only a secondary objective of auditing.
• Auditor’s duty is to examine the accounts and report those fraud and errors which comes to his knowledge during such examination.
• Auditor is a watchdog and not a blood hound. In India the Companies Act, 2013 made audit of company account compulsory. Recently Companies Act, 2013 has been implemented w.e.f. 1st April, 2014 and this contain provision about statutory audit, cost audit, internal audit and secretarial audit.

Functions of Auditing:

• Examination of books of accounts to detect and prevent errors and frauds with supporting vouchers and documents.
• Express opinion on financial or non-financial area.
• Safeguarding the financial interest of persons not associated with management like partners, shareholders etc.
• To act as a moral check on the employees and prevents from committing fraud.
• Providing a reasonable assurance that the statements are free from material error.
• To state that whether the books and accounts show a true and fair picture.

Basic Principle Governing Audit:

• Integrity, objectivity and independence
• Confidentiality
• Skill and competence
• Worked performed by other
• Documentation
• Planning
• Audit evidence
• Accounting System and Internal Control
• Auditing conclusions and reporting.

Principal aspects to be covered in Auditing/ Functions of Audit:

• Review of systems and procedures: adopted by the entity – primary function of auditing.
• Review of internal control system: If the internal control system is stronger then the extent of checking can be reduced and vice versa.
• Routine checking/arithmetical accuracy.
• Review of the accounting principles followed by the entity.
• Comparison of financial statements with books and accounts.
• Verification of assets by physically inspecting the assets.
• Verification of liabilities by verifying legal and official documents.
• Ensuring that financial statements shows a true and fair view.
• Ensuring statutory compliances has been complied by the entity.
• Reporting to the authority appointing him for conducting audit.

Benefits of Auditing:

• It provides satisfaction to the owner.
• It detects and prevents occurrence of frauds and errors.
• It helps in verification of books.
• The auditor is independent and hence, his opinion on financial statements is unbiased.
• Auditing keeps a moral check on the employees and prevents them to commit fraud or error.
• Auditing involves examination of all records whereas investigation involves deep & special examination of a particular record.
• It gives assurance to the shareholders that the books and accounts are managed in proper way.
• If the firm is audited, more reliance is placed by the outsiders on it.
• Auditing ensures compliance with legal requirements.
• By keeping a check on internal control system, auditing helps to strengthen internal control system.
• On the basis of audited balance sheet, it becomes easy to obtain loan/credit facility

Limitations of Audit:

• It involves huge cost however, sometimes the benefits from auditing may not make up for the cost.
• When auditing is performed on test check basis, the results may not be reliable.
• There are insufficient time deadlines to complete audit which may leave scope for errors.
• Evidence obtained by auditor are not conclusive rather they are persuasive.
• Certain Information is based on estimates, which cannot be checked by the auditors.
• If information provided by the management is faulty, the result of auditing will also be incorrect.

Investigation:

• It refers to the critical checking of particular records.
• In simple words, it is the deep examination of those points on which auditor’s suspicion has arisen while conducting audit.
• Auditing and investigation have different purposes

Differences between auditing and investigation:

• Investigation is voluntary while auditing is mandatory for companies though voluntary for others.
• Auditing covers generally a period of one financial year whereas investigation has no fixed duration.
• The evidences obtained under auditing are persuasive whereas under investigation are conclusive.
• An investigator can be engaged by owners or management or even by third parties while auditor can be appointed by owners or shareholders.
• Investigation is carried out for the appointing agency while auditing is carried out on behalf of the owners.
• Investigation is not restricted to any number of financial year though auditing is generally for one financial year.
• Scope of auditing is specific and seeks to answer only those questions laid down in the engagement letter whereas investigation in general seeks to form opinion on the financial statement.
• Audit is not based on suspicion unless circumstances exist to arouse suspicion whereas in investigation its essence lies in going into the matter with some pre-conceived notion suited to the objective.

Concept of Auditing MCQ Questions

1. The term audit originated from a __________ word “audire” which means to hear.
(a) Latin
(b) French
(c) Greek
(d) None
(a) Latin

2. The goal of audit is to express an opinion on _________ areas.
(a) Only financial
(b) Financial and operational
(c) Financial or non financial
(d) None of these.
(c) Financial or non financial

3. “Accounting begins where auditing ends” This statements is _________.
(a) True
(b) False
(c) Partly true
(d) None.
(b) False

4. Auditor is a _________ person.
(a) Dependent
(b) Independent
(c) Sometimes dependent sometimes independent
(d) None of these.
(b) Independent

5. Principal aspects covered in an audit refers to the _________ of audit.
(a) Features
(b) Functions
(c) Essentials
(b) Functions

6. Compliance and substantive procedures will determine the:
(a) Effectiveness of internal control system
(b) Extent of errors and frauds
(c) Role of management in the organisation
(d) All of these.
(d) All of these.

7. Principal aspects to be covered in an audit involves.
(a) Review of system and procedures
(b) Review of internal control system
(c) Ensuring statutory compliance
(d) All of these
(d) All of these

8. Stronger the internal control, _________ will be the checking by the auditor.
(a) Stronger
(b) Lesser
(c) Any of these
(d) None of these.
(b) Lesser

9. Verification of assets is done to ascertain.
(a) Existence of asset
(b) Ownership of asset
(c) Possession of asset
(d) All of these.
(d) All of these.

10. Auditor is a _________.
(a) Watchdog
(b) Blood hound
(c) Investigator
(d) All of these.
(a) Watchdog

11. Which of these is not a benefit of auditing?
(a) Moral check on employees
(b) Strengthening internal control
(c) Protection of interest of shareholders
(d) None of these.
(d) None of these.

12. The primary objective of auditing is:
(a) Detection of fraud
(b) Expression of opinion
(c) Checking efficiency of internal control
(d) All of these.
(b) Expression of opinion

13. Evidence obtained by audit are _________ whereas of investigation are _________.
(a) Conclusive, persuasive
(b) Persuasive, conclusive
(c) Persuasive, persuasive
(d) None
(b) Persuasive, conclusive

14. An investigator _________ be a Chartered Accountant.
(a) Must
(b) May or may not
(c) Should
(d) None.
(b) May or may not

15. Investigation is done _________.
(a) Mandatory
(b) Voluntary
(c) As per the statute
(d) None
(b) Voluntary

16. Auditing assures that financial statements are _________.
(a) True and fair
(b) True and correct
(c) Free from errors
(d) None of these
(a) True and fair

17. Time, extent and nature of audit depends upon:
(a) Fees paid to the auditor
(b) Effectiveness of internal control
(c) Report of previous auditor
(d) Time available with the auditor
(b) Effectiveness of internal control

18. Internal Control is exercised by _________.
(a) Management
(b) Auditor
(c) Special investigators
(d) Any of these
(a) Management

19. _________ is the responsibility of management.
(a) Accounting
(b) Auditing
(c) Both (a) and (b)
(d) None
(a) Accounting

20. _________ are the test designed to obtain evidence as to completeness, accuracy and validity of data produced by accounting system.
(a) Substantive procedures
(b) Compliance procedures
(c) In depth examination
(d) None of these.
(a) Substantive procedures

21. _________ is referred as a special purpose examination.
(a) Auditing
(b) Investigation
(c) Test checks
(d) None of these.
(b) Investigation

22. Primary responsibility for the adequacy of financial statements rests with:
(a) Auditor
(b) Management
(c) Auditor’s staff
(d) Central Government.
(b) Management

23. Weakness in internal control system, _________ the risk of fraud and error.
(a) Increases
(b) Decreases
(c) Does not affect
(d) None.
(a) Increases

24. Who appoints internal auditor?
(a) Management
(b) Shareholder
(c) Government
(d) Stock exchange.
(a) Management

25. An audit is _________ examination of financial or non-financial information of any entity.
(a) A true
(b) A true and fair
(c) An independent
(d) A dependent
(c) An independent

26. ‘Investigation’ is done for __________.
(a) Satisfaction
(b) An opinion
(c) Special purpose
(d) None
(c) Special purpose

27. Tick the best statement related to word “Corroborative”
(a) Agreement on a secret plot
(b) An action or motion that stops expression
(c) Improver or developer
(d) To strengthen or support with additional evidence
(d) To strengthen or support with additional evidence

28. The statement “As per my opinion, the books and accounts show a true and fair picture” is a part of _________.
(a) Audit plan
(b) Audit report
(c) Audit programme
(d) Audit evidence
(b) Audit report

29. Which of the following is not a benefit of auditing?
(a) Moral check
(b) Increasing the sales volume
(c) Compliance with legal requirements
(d) Loan facility
(b) Increasing the sales volume

30. Owners or management or even third party may appoint the _________.
(a) Auditor
(b) Investigator
(c) Financial auditor
(d) All of them
(b) Investigator

31. The authenticity of the accounts can be ensured by conducting _________.
(a) Independent audit
(b) Audit by the internal management
(c) Management audit
(d) Cost audit
(a) Independent audit

32. The main objective of audit is to _________.
(a) Gain information about the financial system
(b) Improving the efficiency of the management
(c) Increasing the profitability
(d) Express an opinion on the financial statement
(d) Express an opinion on the financial statement

33. Audit is performed to ascertain _________.
(a) Validity of information
(b) Reliability of information
(c) Both (a) and (b)
(d) Neither (a) nor (b)
(c) Both (a) and (b)

34. Which of the following statement is False?
(a) Audit is conducted by an independent person
(b) Nature, time and extent of audit depends upon the effectiveness of internal control
(c) Audit includes maintenance of books of accounts
(d) All of the above
(c) Audit includes maintenance of books of accounts

35. GAAP stands for _________.
(a) Generally accepted auditing principles
(b) Generally accepted accounting principles
(c) Globally accepted accounting principles
(d) Globally accepted auditing principles
(b) Generally accepted accounting principles

36. The systematic, critical and special examination of the records for a special purpose is called _________.
(a) Auditing
(b) Inspection
(c) Investigation
(d) None of the above
(c) Investigation

37. An investigator can be appointed by __________.
(a) Owners
(b) Management
(c) Third parties
(d) All of the above
(d) All of the above

38. Which of the following statement is correct?
(a) Investigator seeks conclusive and corroborative evidence
(b) Auditor seeks persuasive rather than conclusive evidence
(c) Both (a) and (b)
(d) Neither (a) nor (b)
(c) Both (a) and (b)

39. Auditing provides a complete guarantee that the books of accounts are free from errors and there is no chance of any fraud.
(a) True
(b) Partly true
(c) False
(d) Partly false
(c) False

40. A valuation certificate issued by some authority is _________.
(a) Persuasive audit evidence
(b) Conclusive audit evidence
(c) Both (a) and (b)
(d) Neither (a) nor (b)
(a) Persuasive audit evidence

41. The auditor submits his audit report to the _________.
(a) Government
(b) Appointing authority
(c) Directors
(d) Registrar of companies
(b) Appointing authority

42. _________ are not legally required to get their financial statements audited.
(a) Companies
(b) Banks
(c) Partnership firms
(d) Insurance companies
(c) Partnership firms
Auditing refers to systematic and independent examination of date, statements, records, operations or performances of an enterprise for a stated purpose. Auditing is mandatory for companies whereas it is voluntary for others. Moreover, banks and insurance companies are a form of company form of organisation.
Thus, among the following only partnership firms are not legally required to get their financial statements audited.

43. In audit, investigation exercise is _________.
(a) Mandatory
(b) Recommendatory
(c) Voluntary
(d) Voluntary but recommendatory in all cases
(c) Voluntary
The difference between audit and investigation lies in the fact that- Audit is mandatory for companies but voluntary for others whereas Investigation is a voluntary exercise.

44. The format of investigation report is _________.
(a) Prescribed by law
(b) Not prescribed by any law
(c) Standardized
(d) Neither standardized nor prescribed by any law
(d) Neither standardized nor prescribed by any law
Auditing and investigation differs from each other in point that – The format of audit report has been prescribed by law whereas there is no statutory form of investigation report neither any form has been prescribed by law.

45. Which of the following is true about audit?
(a) Audit starts after accounting ends
(b) Accounting starts after auditing ends
(c) Accounting and auditing exercise are parallel
(d) Accounting is complementary to auditing.
(a) Audit starts after accounting ends
Relationship exists between accounting and auditing :

• Accounting is the art of recording the transactions whereas auditing is the independent examination of such recorded information.
• Accounting is the management’s responsibility whereas auditing is the auditor’s responsibility appointed by the owner.
• Auditing starts where accounting ends.

Thus, only the statement, “Audit starts after accounting ends” is true about audit.

46. Which of the following is a type of persuasive audit evidence for the auditor?
(a) Client’s Bank statements
(b) Documents obtained by auditor directly from third parties
(c) Carbon copies of sales invoices
(d) Computations made by the auditor himself.
(c) Carbon copies of sales invoices
The evidences obtained by the auditor are persuasive rather than conclusive. Persuasive means intended or having the power to induce action or belief. E.g. an architects, certificate of valuation for a newly constructed building of a client is a persuasive evidence of the correct value of building; carbon copies of sales invoice etc.

47. For an auditor, to check arithmetical accuracy is _________.
(a) Not required
(b) Mandatory
(c) Voluntary
(d) Recommendatory
(b) Mandatory
It is the duty of the auditor to check the arithmetical accuracy of the books of accounts by checking the proper posting and balances of the books of accounts. Thus, checking of arithmetical accuracy is mandatory.

48. Verification of assets is done to ascertain _________.
(X) Existence of asset
(Y) Ownership of asset
(Z) Possession of asset
The correct option is:
(a) (X) and (Y)
(b) (Y) and (Z)
(c) (X) and (Z)
(d) (X), (Y) and (Z).
(d) (X), (Y) and (Z).
It is the duty of the auditor to physically inspect the assets and their recording in the books of accounts and verify the legal and official documents to ascertain the existence, ownership, possession, classification and valuation of assets of an entity.

49. Which of the following is not correct about investigation?
(a) Investigation may be done by any person having the knowledge of entity’s business
(b) Investigation is mandatory in nature and needs to be done on yearly basis
(c) The scope of investigation is decided by the appointing authority
(d) There is no standard format of investigation report.
(b) Investigation is mandatory in nature and needs to be done on yearly basis
The investigation is the critical checking of particular records of business for specific purpose.
It has following features:

• It is voluntary in nature.
• It can be conducted by any person who may not be a CA.
• He is appointed by the owners or management or even by third parties.
• Work is carried out from the viewpoint of the appointing agency.
• It answers those questions as laid down in the engagement letter.
• It is not restricted to one financial year,
• It seeks conclusive and corroborative evidence.
• There is no statutory form of investigation report.

Thus, the option that investigation is mandatory in nature and needs to be done on yearly basis is not correct about investigation.

50. Principal aspects to be covered in an audit involves:
(X) Review of system and procedures
(Y) Review of internal control system
(Z) Ensuring statutory compliance The correct option is:
(a) (X) and (Y)
(b) (Y) and (Z)
(c) (X) and (Z)
(d) (X), (Y) and (Z)
(d) (X), (Y) and (Z)
The following principal aspects also known as functions of audit are required to be covered by an auditor while doing audit of an organisation:

• Review of system and procedures
• Review of internal control system
• Routine checking/arithmetical accuracy
• Accounting principles
• Books and statements
• Verification of assets
• Verification of liabilities
• True and fair view
• Statutory compliance
• Reporting.

Thus, the correct option is (d) which means all three are the principle aspects of audit

51. Detection and prevention of fraud is the _________ objective of auditing activity.
(a) Primary
(b) Secondary
(c) Single
(d) Specific.
(b) Secondary
“Auditing is defined as a systematic and independent examination of data, statements, records, operations and performances of an enterprise for a stated purpose, on the basis of which he formulates his judgement which is communicated through his audit report”. Thus, primary purpose of auditing is to examine the company’s financial statement and form an opinion. During this process, auditor comes across various frauds and errors which help in their detection and prevention. This is the secondary objective of audit.

52. Quality of auditor to be free from influence is defined by which term?
(a) Independence
(b) Confidentiality
(c) Skill
(d) Integrity
(a) Independence
Auditing is very useful in obtaining the independent opinion of the auditor about business condition. If the accounts are audited by an independent auditor, the report of the auditor will be true and fair in all respects and it will be of extreme importance for the management of the company. Thus, quality of auditor to be free from influence is defined by Independence.

53. Auditing exercise includes:
(i) Checking of accounts
(ii) Verification of accounts
(iii) Examination of accounts The options are:
(a) I and III
(b) I, II and III
(c) I and II
(d) II and III
(b) I, II and III
Auditing exercise includes:

• Checking of accounts
• Verification of accounts
• Examination of accounts
• Investigation of some statements
• Examination of evidence.

So, the option (b) is correct answer i.e. I, II and III.

54. In case of investigation, the period of investigation coverage _________.
(a) Is 2 years
(b) Is 1 year
(c) Differs on case to case basis
(d) Is 6 months
(c) Differs on case to case basis
In case of investigation, the period of investigation coverage is not necessarily restricted to a financial year. It can be extended for a period consisting of a number of years.
Thus, option (c) is the correct answer i.e. it may differs on case to case basis.

55. The primary objective of statutory auditing is to – (x) detect errors (y) prevent errors (z) express an opinion. The options are:
(a) (x) and (y)
(b) (z) only
(c) (y) only
(d) (x), (y) and (z).
(b) (z) only
Primary objective of statutory auditing is to ascertain whether financial statement present true and fair view of financial position. Therefore, give an opinion. And secondary objective is to detect and present frauds and errors.

56. Audit working papers are the property of _________.
(a) Income Tax Department
(b) Auditor
(c) Owner
(d) Government
(b) Auditor
Audit working papers are property of auditors.

57. Which of the following best describes the primary purpose of audit programme preparation?
(a) To detect errors or fraud
(b) To assets audit risk
(c) Together sufficient appropriate evidence
(d) To comply with GAAP.
(c) Together sufficient appropriate evidence
Audit program contains the measures that are generally employed to determine what, and how much evidence must be collected and evaluated.

58. _________ is an independent person who check the companies book:
(a) Auditor
(b) CS
(c) Shareholder
(d) Board
(a) Auditor
Auditor is an independent person who check the companies book. Auditor is a watchdog and not a blood hound. Auditor’s duty is to examine the accounts and report those fraud and errors which comes to his knowledge during such examination.

59. Meaning of ‘Audire’:
(a) Audit
(b) Investigation
(c) Both (a) & (b)
(d) None of the above
(d) None of the above
Meaning of ‘Audire’ means to hear.

60. _________ evidence are not conclusive.
(a) Investment
(b) Corroboration
(c) Audit
(d) Can’t say
(c) Audit
The auditor should obtain sufficient appropriate evidences through the performance of compliance and other substantive procedure to enable him to draw reasonable conclusion to form an opinion on the financial information. The evidences obtained by an auditor are persuasive rather than conclusive.

61. Which of the following is started with some pre-conceived notion suited to the objective?
(a) Audit
(b) Verification
(c) Vouching
(d) Investigation
(d) Investigation
Investigation is started with some pre-conceived notion suited to the objective as it is done when a lapse already exist to pin point the reason and person involved in it so that responsibility for such lapse could be fixed.

62. The auditing exercise acts as a moral check for?
(I) Management only
(II) Employee only
(III) Regulation. This option are:
(a) (I), (II) and (III)
(b) (I) and (II)
(c) (II) and (III)
(d) (I) and (III)
(b) (I) and (II)
Audit is performed to ascertain the validity and reliability of information. The goal of an audit is to express an opinion on the financial or non-financial areas, as audit safeguards the financial interest of person not associated with the management and thus act as a moral check and prevents from committing fraud.

63. Systematic, critical and special examination of the records of a business for a specific purpose in known as:
(a) Investigation
(b) Audit
(c) Verification
(d) Vouching
(a) Investigation
Investigation is systematic, critical and special examination of the business records for a specific purpose.

64. Which one of the following is primary function of statutory audit? (i) Review of system and procedures (ii) Report whether accounts show true and fair view of entry’s operation (iii) detection of fraud. The options are:
(a) I and II
(b) I, II and III
(c) I and III
(d) II and III
(a) I and II
The functions of Statutory Audit are:

• Review of system and procedure
• Review of internal control system
• Routine checking/Arithmetical Accuracy
• Accounting principle are followed
• Books and statement comply with each other
• Verification of Asset
• Verification of Liabilities
• True and fair view
• Statutory compliance
• Reporting

65. Full form-of MIP _________.
(a) Mandatory Inspection Point
(b) Modification Instruction Package
(c) Mobile Internet Package
(d) Monthly Income Ran
(a) Mandatory Inspection Point
MIP stands for Mandatory Inspection Point.

66. The purpose of Auditing and Investigation is:
(a) Similar
(b) Contrary
(c) Same
(d) Different
(d) Different
Purpose of Auditing + Investigation is Different.

67. The Statutory auditor of a company can act as:
(a) Tax Auditor
(b) Internal Auditor
(c) Concurrent Auditor
(d) Cost Auditor
(a) Tax Auditor
The Statutory Auditor can Act as a Tax Auditor.

68. Which of the following is not correct about investigation?
(a) Investigation may be done by any person having the knowledge of entity’s business
(b) Investigation is mandatory in nature and needs to be done on yearly basis
(c) The scope of investigation is decided by the appointing authority.
(d) There is no standard format of Investigation report.
(b) Investigation is mandatory in nature and needs to be done on yearly basis
It is not mandatory or compulsory to investige on yearly basis, investigation is not needed to be done annually, it is not of compulsory nature.

69. In Audit assignment, who among the following set the level of materiality?
(a) Shareholders
(b) Board of Directors
(c) Auditor
(d) Manager of the entity/department concerned
(c) Auditor
In an audit assignment, the materiality level is set by the auditor of the entity, based on his objectivity and scope of audit. The Management or Board of Director etc. have no role in it.

70. Principals aspect to be covered in an audit involves:
(x) Review of system and procedures
(y) Review of internal control system
(z) Ensuring statutory compliance The correct option is:
(a) (x) and (y)
(b) (y) and (z)
(c) (x) and (z)
(d) (x), (y) and (z)
(d) (x), (y) and (z)
Auditing is done on the basis of some principles and audit covers:

• Review of system and procedures
• Review of internal central system
• Ensuring statutory compliance

71. Verification of Assets is done to ascertain
x. Existence of Assets
y. Ownership of Assets
z. Possession of Assets
The Correct option is:
(a) (x) and (y)
(b) (y) and (z)
(c) (x) and (z)
(d) (x), (y) and (z)
(d) (x), (y) and (z)
Verification of Assets is done every year to know the existence of assets means asset is in business or not, ownership of asset means asset is sold or not, possession of assets mean asset is transferred to anybody or not.

72. Auditing is compulsory for which organisation _________.
(a) Profit organisation
(b) Non-profit organisation
(c) Both (a) and (b)
(d) None of the above.
(c) Both (a) and (b)
Auditing is compulsory for profit organisation as well as for Non¬profit organisation too under certain circumstances, (include capital, turnover limits etc.). Hence, option (c) is correct.

73. In general, the scope of management audit is:
(a) Flexible
(b) Rigid
(c) Prescribed by law
(d) Prescribed by the appointing authority
(a) Flexible
In general, the scope of management audit is flexible and incorporates all the needs of the company.

74. Detection and prevention of fraud is the _________ objective of auditing activity.
(a) Primary
(b) Secondary
(c) Single
(d) Specific
(b) Secondary
Detection and prevention of fraud is the secondary objective of accounting activity.

75. Investigation is for _________.
(a) 1 year
(b) 2 year
(c) Differ case to case
(d) 4 years
(c) Differ case to case
Period covered Under investigation is not necessarily restricted to a financial year. It may be extended to a period more than one year. Even it may be less than one year. It is voluntary and any person, who may not be a Charted Accountant may conduct investigation.

76. Limitations of internal audit _________.
(a) Time log
(b) Duties
(c) Costly
(d) All of the above
(d) All of the above
Limitations of Internal Audit are:

• Staff shortage
• Time Log
• Error
• Responsibility
• Duties
• Lost consuming