CS Foundation

Preparation of Final Accounts for Sole Proprietorship – CS Foundation Fundamentals of Accounting Notes

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Preparation of Final Accounts for Sole Proprietorship – CS Foundation Fundamentals of Accounting Notes

Final Accounts:
The final step of the process of accounting is the preparation of such accounts which depict the end results.

  1. Net Profit of the trading activities in terms of Profit made or loss incurred for a given period.
  2. It’s financial position in terms of asset & liabilities.

These involve the preparation of:

  • Trading Account
  • Profit and Loss Account
  • Balance Sheet

Since the preparation of these accounts is the final stage of accounting, hence these are known as Final Accounts.
Final accounts are prepared from the balance appearing in Trial Balance.

Objectives of maintaining final Accounts:
(i) To ascertain Profit or Loss of the business

(ii) To ascertain the financial position of a business.
Preparation of Final Accounts for Sole Proprietorship – CS Foundation Fundamentals of Accounting Notes 1

Trading Account:

  • The first step in the preparation of final accounts is the preparation of trial balance.
  • Trading Account shows the results of buying and selling of goods and services in the form of gross profit or gross loss for a given accounting year.

Features of Trading Account:

  • It is prepared in the final accounts of a trading concern.
  • It shows the result of trading activities.
  • The balance of this account discloses the gross profit or gross loss.
  • The balance of this account is transferred to the Profit/Loss Account.
  • The trading account is based on the following equation:
  • Gross Profit = Net Sales – Cost of Goods Sold OR
  • Gross Loss= Cost of Goods Sold – Net Sales

Where:

  • Cost of Goods Sold (COGS) = Opening Stock + Purchases + Direct Expenses – Closing Stock.
  • Net Sales = Sales Sales Returns (Return Inwards)
  • Net Purchases = Total Purchase – Purchase Return

This account matches the selling price and cost of goods and services sold during an accounting year.

Items of Trading Account (Debit Side):
(i) Opening Stock:

  • This is the closing stock of the previous year which has been brought forward.
  • In the first year of commencement, there will be no opening stock.

(ii) Purchases Less Purchase Return:

  • It refers to the materials purchased by the business (either on cash or credit)
  • Purchase Returns refers to the material returned to the supplier.
  • Purchase Returns are riot included and hence, are deducted from purchases.
  • Net Purchase = Purchase – Purchase Returns (Return Outward)

Note: Sometimes material or goods are taken for personal use, for giving as charity or by way of samples.
The purpose of these goods is not to earn profits. Hence, these are deducted from purchases.

(iii) Direct Expenses:

  • Expenses directly associated with the goods are called direct expenses.
  • These include the expenses to purchase the goods and to bring them to the business premises.
  • Examples of these expenses are: Freight inwards, clearing charges, custom duty, cartage, octroi etc.

(iv) Gross Profit:

  • This is the balancing figure of the trading account.
  • It shows the excess of Net Sales over Cost of Goods Sold.
  • It is transferred to the credit side of Profit and Loss Account.

Items of Trading Account (Credit Side):
(i) Sales Less Returns –

  • Sales refers to the amount received or to be received from sale of goods.
  • Since it is an income for the business hence, sales always has a credit balance.
  • Sales Returns refers to the returns made by the customers due to detects in goods or any other reason.
  • Sales Returns should be deducted from sales.
  • Net Sales = Sales – Sales Returns

Note:

  • Purchase Returns are also known as Return Outwards as the goods are going out of the business.
  • Sales Return is also known as Return Inwards as the sold goods are coming back to the business.

(ii) Closing Stock –

  • Unsold stock at the end of the accounting period.
  • It refers to the stock unsold at the end of the accounting year.
  • Closing stock appears on the credit-side of trading account as well as on the asset side of Balance Sheet.
  • Closing stock does not appear in the Trial Balance.

Note:
As per the concept of conservatism studied in ch-1, closing stock should be measured at cost or market price whichever is lower.

(iii) Gross Loss:

  • It is the net result of the Trading Account.
  • it occurs when cost of goods sold is in excess of net sales.
  • It is transferred to the debit of Profit and Loss Account.

Format
Trading Account for the year ended….
Preparation of Final Accounts for Sole Proprietorship – CS Foundation Fundamentals of Accounting Notes 2

Profit and Loss Account:

  • The next step after preparation of Trading Account is the preparation of Profit and Loss Account.
  • Profit and Loss Account is prepared to ascertain the net profit or loss from the business.

Note:
Trading Account tells us the profit/loss from the trading activity (i.e. buying and selling of goods). Hence, it is known as Gross Profit/Gross Loss. Whereas, Profit/Loss Account tells us the profit earned or loss incurred from the whole business (i.e. after deducting expenses of the business or indirect expenses).
Hence, it is known as Net Profit/Loss.

Features of Profit and Loss Account:

  • P/L A/c relates to a particular accounting period and is prepared at the year end.
  • It is prepared based on accrual basis of accounting.
  • It helps us to know the net results of the business in the form of Net Profit or Net Loss.
  • The net profit/loss so ascertained is transferred to the capital account of proprietor.
  • Profit and Loss account is also known as the income statement.

Items of Profit and Loss Account [Debit Side]:
(i) Gross Loss :

  • As transferred from the trading account.
  • It has been already discussed earlier.

(ii) Indirect Expenses:
Those expenses which are not directly related to the buying of goods but are necessary for conducting the business are called indirect expenses.

These can be classified as –
(i) Administrative or Office Expenses
(salaries, office rent, electricity, legal expenses, stationery, postage and stamp, etc.)
Net Profit = Total Revenue – Total Expenses Net Loss = Total Expenses – Total Revenue

(ii) Selling and Distribution Expenses
(commission of agents, advertising expenses, salesman salary, freight, cartage on sales, etc.)

(iii) Financial Expenses
(interest on loan, interest on capital, discount allowed, etc.)

(iv) Abnormal Losses
Abnormal Losses include loss of stock by fire, loss by theft, loss on sale of fixed assets etc.

(v) Bad Debts
Bad debts refers to the debts given by the company which will not be recovered. Since it is a loss to the company hence they will be shown in the P/L A/c.

Items of Profit and Loss Account [Credit Side]:
(i) Gross Profit

As transferred from the trading account.
It has been already discussed earlier.

(ii) Indirect incomes
1. Income other than from sale of goods are known as indirect incomes.

2. Some of the examples are

  • Commission received
  • Interest on fixed deposit
  • Rent received
  • Discount received
  • Interest on drawings
  • Income from investment, etc.

Note: The balance of P/L A/c is a Net Profit or Net Loss which is transferred to the Capital A/c.
Net Revenue = Total Revenue – Total expenses Net Loss = Total expenses – Total revenue

Note: Profit and Loss Account is based on the fundamental principle of “matching cost with revenue” of an accounting period.

Format of Profit and Loss Account:
Profit and Loss Account for the year ended ……….
Preparation of Final Accounts for Sole Proprietorship – CS Foundation Fundamentals of Accounting Notes 3

Difference between Trading Account and Profit and Loss Account:

Basis Trading Account Profit and Loss Account
1. Relation Trading Account is a part of Profit and Loss Account. Profit and Loss Account is the main account.
2. Nature The Gross Profit or Gross Loss is ascertained from the Trading Account. The Profit and Loss Account is prepared to ascertain the Net Profit or Net Loss of the business.
3. Transfer of Balance The balance of the Trading Account is transferred to the Profit and Loss Account. The balance of the Profit and Loss Account is transferred to Balance Sheet.
4. Items Items shown in the Trading Account are Purchases, Sales, Stock, direct expenses, etc. Items like indirect expenses related to sales, distribution, administration, finance, etc.. are shown in the Profit and Loss Account.

Balance Sheet:

  • Balance Sheet is a statement which shows the balances of various assets and liabilities of a business on a particular date.
  • It shows the financial position of a business as at a given time.
  • A Balance Sheet is prepared from the balances of the real and personal accounts.
  • Balance Sheet is also known as the position statement as it tells us the financial position of a business on a particular date.
  • The two sides of Balance Sheet should always be equal. If any differences arises then the same should be placed on the deficit side as Suspense A/c.
  • The total of both sides of the Balance Sheet must agree because of the equation, viz. Assets = Liabilities + Capital

Items of Balance Sheet [Left Side]:
(i) Capital (Fixed Liability) –

  • It refers to the amount contributed by the proprietor into the business.
  • Net Profit is added to the capital while drawings are deducted from it.

It can be expressed as –

  • Net Assets of the Business, Or
  • Difference between Assets and liabilities.

(ii) Liabilities:
1. The obligations of the business are known as liabilities.

2. They can be classified into –

  • Long term Liabilities (Fixed Liabilities)
  • Current Liabilities
  • Contingent Liabilities

Long term Liabilities:

  • The obligation which are not to be paid in the near future are termed as long term liabilities.
  • These include long term loans or debentures which are mainly raised for a period of more than one year.
  • These are the fixed liabilities which are payable on the termination of the business. Example – Capital of proprietor

Current Liabilities:

  • Short term obligations of the business are termed as current liabilities.
  • These liabilities are payable within a period of one year.
  • These include trade creditors, bills payable, outstanding expenses, bank overdraft and other short term liabilities.

Contingent Liabilities:

  • These are actually not a liability but their possibility of becoming liability depends upon happening or non happening of an uncertain event.
  • These are not shown in Balance Sheet, but are disclosed by way of footnotes. E.g.- Liability in respect of pending suit, bills discounted with a bank etc.
  • If such events do not occur, no liability is incurred.

Items of Balance Sheet [Right Side]
(i) Assets:
The property or legal rights which are owned by a business are known as assets.

  • Assets can be classified as follows:
  • Fixed Assets:

Assets which are acquired for long term use and not for resale.
Examples: Land and building, plant and machinery, furniture, etc.

Current Assets (floating assets):

  • Assets which have been acquired for resale or for converting into cash are called current assets.
  • Current assets are likely to be realised within one accounting year.
  • Examples: stock, debtors, bills receivable, etc.

Liquid Assets:

  • Assets which are in cash or are readily convertible into cash are known as liquid assets.
  • Example: cash, government securities etc.

Wasting Assets:

  • Assets which have a fixed content and will deplete as and when the content is taken out are called wasting assets.
  • Examples: coal mine, iron ore mine etc.

Intangible Assets:

  • Assets which are intangible in nature (i.e. they cannot be felt or touched) are called intangible assets.
  • Such assets do not have a physical existence but have a value.
  • Example: goodwill of the business.

Fictitious Assets:
1. These assets can be in two forms:

  • Valueless assets (i.e. patents, trademarks)
  • Expenses treated as assets (preliminary expenses)

2. These include deferred revenue expenditure not yet written off.

(ii) Investments:

  • They represent the capital expenditure made on purchase of shares, debentures, bonds or any other security.
  • Investments will earn benefits for the firm in the form of dividend, interest etc.
  • These are shown under a separate head in the right side of balance sheet along with assets.

Marshalling of Balance Sheet:

  • The arrangement of asset and liabilities in a particular order in a Balance Sheet is termed as Marshalling.
    It is also known as grouping.
  • Assets and liabilities can be arranged in the following order
  • Order of liquidity (according to time)
  • Order of permanence (according to purpose)

Order of Liquidity:
1. Liquidity means how quickly an asset or liability will convert into cash.

2. Here the items of Balance Sheet are arranged in descending order of liquidity (i.e. starting from most liquid and ending with least liquid).
Example:
Balance Sheet:

Liabilities Assets
Bills payable

Sundry creditors

……………….

……………….

……………….

……………….

Capital

Cash in hand

Cash at bank

………………..

………………..

………………..

Plant and machinery

Land and building

Order of permanence
1. Order of permanence means starting with those assets which are to be used permanently in business and. those liabilities which are a permanent obligation of the business.
Example:

Liabilities Assets
Capital

……………….

……………….

……………….

……………….

Sundry creditors
Bills payable

Goodwill

Plant and machinery
………………..

………………..

………………..

Cash in hand

Format
Balance Sheet of As at ……………
Preparation of Final Accounts for Sole Proprietorship – CS Foundation Fundamentals of Accounting Notes 4

Difference between Balance Sheet and Trial Balance:

Basis Balance Sheet Trial Balance
1. Purpose The purpose is to portray the financial position. The purpose is to establish the arithmetical accuracy of the books of account.
2. Information about Profits It provides information as to the profitability and financial position of the firm. No such information is possible from the Trial Balance.
3. Headings The two sides are headed as assets and liabilities. The two columns are headed as debit and credit.
4. Coverage Only personal and real accounts appear in the Balance Sheet. In the Trial Balance, all accounts must be written. No account should be left out.
5. Use Prepared for external use (Creditors, shareholders etc.) Prepared for internal use.
6. Period Normally, it is prepared only at the end of the trading period. A Trial Balance is prepared normally every month on whenever desired.

Final Accounts with adjustments:
1. In a business there are certain transactions of expenses and incomes which need to be adjusted.
At the time of preparing final accounts, it is important to take into account these transactions. These are known as adjustments and the entries required to give them effect are called adjusting entries.

2. While bringing out any adjustment, the principle of double entry system should be kept in mind. If any one account is debited, then any other account should be credited.

Some of the items requiring adjustments are as follows:

  • Outstanding expenses
  • Prepaid expenses
  • Bad debts/bad debt recovered etc.

Example:
Business pays salary to Mr. A at the rate of ₹ 10,000 p.m. Actually salary paid during the year is only ₹ 1,10,000. Hence ₹ 10,000 is outstanding. This amount of ₹ 10,000 is an expense related to current year but still not paid. As per the mercantile concept, this expense should be recognized and hence an adjustment entry is required to be passed
Preparation of Final Accounts for Sole Proprietorship – CS Foundation Fundamentals of Accounting Notes 5

Difference between cash discount and trade discount:

Basic Cash Discount Trade Discount
Reason It is granted by supplier from the invoice price in consideration of prompt payment. Granted by supplier to promote sales.
Shown in invoice It is not shown in the invoice. It is shown by way of deduction in the invoice itself.
Ledger posting Cash discount account is opened in the ledger. Trade discount is not opened in the ledger.
Allocation of discount It is allowed on payment of money. It is allowed on purchase of goods.
Time period It vary with the time period of payment within which payment is received It vary with the quantity of goods purchased.

Closing Entries:

  • Closing entries mean entries required for closing the books of accounts.
  • These are the final entries which lead to the preparation of final accounts.

(i) Transfer to Trading Account –
(a) Trading A/c Dr.
To Stock A/c
To Purchases A/c
To Sales returns A/c
To Carriage inwards A/c
(Transfer of various accounts to Trading A/c)

(b) Sales A/c
Purchase Returns A/c Dr.
Closing Stock A/c Dr.
To Trading A/c
(Transfer of sales A/c and purchases return account to trading A/c and recording of closing stock)

(ii) Transfer of gross profit/ gross loss to P/L A/c –
(a) For Gross Profit:
Trading A/c Dr.
To P/L A/c

(b) For Gross Loss:
Profit/Loss A/c Dr.
To Trading A/c

(iii) Transfer entries to P/L A/c –
(a) Transfer of expenses and losses:
Profit/Loss A/c Dr.
To Rent A/c
To Salaries A/c
To Depreciation A/c
To Abnormal Losses A/c
(Transfer of various nominal A/c of Profit & Loss Account)

(b) Transfer of incomes:
Indirect incomes A/c Dr.
To Profit/Loss A/c

(iv) Transfer of Net Profit/Loss to Capital A/c –
(a) Transfer of Net Profit:
Profit/Loss A/c Dr.
To Capital A/c

(b) Transfer of Net Loss:
Capital A/c Dr.
To Profit/Loss A/c.

Manufacturing Account:
1. Trading refers to buying and selling of goods whereas manufacturing means production of goods.

2. Trading A/c does not disclose the cost of goods manufactured hence for this purpose a Manufacturing A/c is prepared.
Cost of goods manufactured = Cost of raw material + expenses incurred on production.

3. Manufacturing account shows cost of production, trading account shows the gross profit or gross loss while, profit & loss a/c shows the net profit earned or net loss suffered by the organisation during a particular period.

4. The cost of goods manufactured calculated from this account is transferred to the Trading A/c.

5. This account is prepared by manufacturing firms in addition to other final accounts which we have studied earlier.

Manufacturing A/c for the year ended…
Preparation of Final Accounts for Sole Proprietorship – CS Foundation Fundamentals of Accounting Notes 6

Limitations of financial statements:
1. Final gain or loss of the business cannot be ascertained as a business is a continuing one.

2. Financial statements are based on figures which may not be exact and accurate.

3. Different firms follow different accounting policies and hence, inter firm comparison is not possible.

4. There may be undisclosed or concealed errors in financial statements which may distort their true picture.

5. Managers resort to window dressing i.e. preparing the financial statements in such a manner that it gives a wrong impression to the users of these statements.

6. Financial statements are basically prepared for the shareholders and may not contain the information required by the third parties. Financial Statements does not consider the non financial factors e.g. employees are the biggest asset of any organisation but are not recorded as assets in the balance sheet.

7. The assets are recorded at the historical cost and does not consider the realisable value or replacement cost of the asset.

Preparation of Final Accounts for Sole Proprietorship MCQ Questions

1. Which one of the following is correct:
(a) Gross profit + Sales + Direct expenses + Purchases + Closing stock – Opening stock
(b) Gross profit + Direct expenses + Purchases + Closing stock – Opening stock = Sales
(c) Gross profit + Direct expenses + Purchases + Opening – Closing stock = Sales
(d) Gross profit + indirect expenses + Purchases + Opening – Closing stock = Sales
Answer:
(c) Gross profit+Direct expenses+Purchases+Opening-Closing stock = Sales

2. The adjustment to be made for interest on capital is:
(a) Debit Profit and Loss account and deduct interest from capital
(b) Credit Profit and Loss account and deduct interest from capital
(c) Debit Profit and Loss account and add interest,to capital
(d) Credit Profit and Loss account and deduct interest from capital
Answer:
(c) Debit Profit and Loss account and add interest,to capital

3. The adjustment to be made for provision for doubtful debt is:
(a) Credit profit and Loss account and deduct the provision from debtors
(b) Debit profit and Loss account deduct the provision from debtors.
(c) Credit profit and Loss account and add the provision to debtors
(d) Debit profit and Loss account and add the provision to debtors.
Answer:
(b) Debit profit and Loss account deduct the provision from debtors.

4. Gross profit is equal to:
(a) Net profit minus expenses
(b) Purchases plus stock minus net sales
(c) Net sales plus selling price of stock minus purchases
(d) Net sales minus cost price of sales.
Answer:
(d) Net sales minus cost price of sales.

5. Net profit is equal to:
(a) Gross profit minus expenses
(b) Net sales plus purchases minus gross profit
(c) Expenses minus gross profit
(d) Gross profit minus net sales plus purchases
Answer:
(a) Gross profit minus expenses

6. Under- statement of closing work in progress in the period will:
(a) Understate cost of goods manufactured in that period
(b) Overstate current assets
(c) Overstate gross profit from sales in that period
(d) Understate net income in that period.
Answer:
(d) Understate net income in that period.

7. A decrease in the provision for doubtful debts would result in :
(a) An increase in liabilities
(b) A decrease in working capital
(c) A decrease in net profit
(d) An increase in net profit.
Answer:
(d) An increase in net profit.

8. Which of the following accounts would be closed by transfer to the Trading and Profit and Loss Account at the end of a period.
(a) Sales
(b) Salary expenses
(c) Both sales and salary expense
(d) Neither sales nor salary expense
Answer:
(c) Both sales and salary expense

9. In a Trading and Profit and Loss Account, the excess of net sales over the cost of goods sold is called:
(a) Operating income
(b) Income from operations
(c) Gross profit
(d) Net income.
Answer:
(c) Gross profit

10. In general, the accounts in the income statement are known as:
(a) Permanent accounts
(b) Temporary accounts
(c) Unearned revenue accounts
(d) Contra-asset accounts
Answer:
(b) Temporary accounts

11. If beginning and ending goods inventories are ₹ 400 and ₹ 700, respectively, and cost of goods sold is ₹ 3,400 net purchase are _________.
(a) ₹ 3,700
(b) ₹ 3,400
(c) ₹ 3,100
(d) Cannot be determined
Answer:
(a) ₹ 3,700

12. Which of the following would appear as an operating expenses in the P/L A/c of trading firm:
(a) Freight inward
(b) Freight outward
(c) Sales returns and allowances
(d) Purchases returns and allowances
Answer:
(b) Freight outward

13. Which one of the following statement is correct?
(a) Gross profit on trading is entered on the right side of the Trading account and carried down to the Left side of the Profit and Loss Account
(b) Gross profit on trading is entered on the Left side of the Trading account and carried down to the right side of the Profit and Loss Account
(c) Net profit on trading is entered on the right side of the Trading account and carried down to the left side of the Profit and Loss Account
(d) Net profit on trading is entered on the left side of the Trading and carried down to the right side of the Profit and Loss Account
Answer:
(b) Gross profit on trading is entered on the Left side of the Trading account and carried down to the right side of the Profit and Loss Account

14. After all closing entries have been posted, the balance of the P&L Account will be:
(a) A debit if a net income has been earned
(b) A debit if a net loss has been incurred
(c) A credit if a net loss has been incurred
(d) Zero
Answer:
(b) A debit if a net loss has been incurred

15. Closing Stock appearing in the Trial Balance is shown:
(a) On the Dr. side of Trading A/c
(b) On the Cr. side of Trading A/c
(c) On the Assets side of Balance Sheet
(d) On the Cr. side of Trading A/c and on the assets side of Balance sheet
Answer:
(c) On the Assets side of Balance Sheet

16. If ‘Prepaid Wages’ is given in Trial Balance, it is shown in :
(a) Debit of Trading A/c
(b) Debit of Trading A/c and Assets side of B/S
(c) Debit of P & L A/c
(d) Assets side of the B/S
Answer:
(d) Assets side of the B/S

17. If the manager is entitled to a Commission of 5% on profits before deducting his commission, he will get a commission of on a profit of ₹ 8,400.
(a) 400
(b) 442.11
(c) 420
(d) None of these
Answer:
(c) 420

18. The Trial Balance Shows Debtors ₹ 2,400; Bad Debts ₹ 221; Bad Debts Reserve ₹ 324; for Creating a Reserve for doubtful debts @ 10% on debtors, the P & L A/c will be debited by :
(a) 137
(b) 240
(c) 343
(d) 9
Answer:
(a) 137

19. Income earned but not received is shown in:
(a) Liabilities
(b) Assets
(c) Foot- note
(d) None of them
Answer:
(b) Assets

20.

Opening capital 50,000
Closing capital 52,000
Net profit during the year 5,000

If the above figures are drawn from the books of a trader, then his drawings, if any, are:
(a) ₹ 5,000
(b) ₹ 3,000
(c) ₹ 1,000
(d) ₹ 6,000
Answer:
(b) ₹ 3,000

21.

Opening capital 80,000
Closing capital 1,20,00
Net profit during the year 20,000

The trader has
(a) Drawings of ₹ 20,000
(b) Brought additional capital of ₹ 30,000
(c) Brought additional capital of ₹ 40,000
(d) Both (a) and (c) above
Answer:
(d) Both (a) and (c) above

22.

Opening Stock 40,000
Closing Stock 50,000
Sales 70,000

Assuming there is no gross profit and direct expenses, the purchases made during the year are:
(a) ₹ 80,000
(b) f 90,000
(c) ₹ 1,10,000
(d) ₹ 1,60,000
Answer:
(a) ₹ 80,000

23. Rent prepaid is shown as:
(a) Current asset
(b) Current liability
(c) Fixed asset
(d) Income
Answer:
(a) Current asset

24. The Balance Sheet gives information regarding the:
(a) Results of Operations for a particular period
(b) Financial position during a particular period
(c) Profit earning capacity for a particular period
(d) Financial position as on a particular date
Answer:
(d) Financial position as on a particular date

25. The Books of Accounts of Z Ltd. shows that the balance of sundry debtors is ₹ 50,000 and reserve for doubtful debts is ₹ 2,000. Later, the management of the company realized that debts to the extent of ₹ 1,000 will become bad and hence decided to create a reserve at 5% on debtors. The amount of reserve for doubtful debts to be shown in Profit and Loss Account is:
(a) ₹ 2,500
(b) ₹ 2,350
(c) ₹ 2,450
(d) ₹ 1,450
Answer:
(d) ₹ 1,450

26. Opening balance of debtors is ₹ 18,000 5% provision for bad debt is required to be provided on debtors. If the debtors balance is increased during the year by ₹ 5,000 and the provision for bad debts has a debit balance of ₹ 350 after transferring bad debts, the charge against the Profit and Loss Account is:
(a) ₹ 1,950
(b) ₹ 1,500
(c) ₹ 650
(d) ₹ 550
Answer:
(b) ₹ 1,500

27. Final Accounts are prepared:
(a) At the end of calender year
(b) At the end of assessment year
(c) On every Diwali
(d) At the end of accounting year.
Answer:
(d) At the end of accounting year.

28. Interest on drawing is:
(a) Expenditure for the business
(b) Expense for the business
(c) Gain for the business
(d) Loss of the business
Answer:
(c) Gain for the business

29. While making an adjusting entry in respect of closing stock, we debit:
(a) Closing Stock
(b) Trading Account
(c) Purchases Account
(d) Sales Account
Answer:
(a) Closing Stock

30. Trading account is a:
(a) Personal account
(b) Nominal account
(c) Real account
(d) None of these
Answer:
(b) Nominal account

31. The withdrawal of goods from the business by the proprietor should be debited to:
(a) Drawings account
(b) Purchases account
(c) Capital account
(d) P&L A/c
Answer:
(a) Drawings account

32. Goods given as charity should be credited to:
(a) Purchases account
(b) Charity account
(c) Sales account
(d) Trading A/c
Answer:
(a) Purchases account

33. The Loss on the sale of old machinery is debited to:
(a) Profit and Loss account
(b) Machinery account
(c) Depreciation account
(d) Trading A/c
Answer:
(a) Profit and Loss account

34. Only personal and real account are shown in:
(a) Trial Balance
(b) Balance Sheet
(c) Profit and Loss A/c
(d) Trading A/c
Answer:
(b) Balance Sheet

35. If Net Loss is ₹ 5,000. General expenses are ₹ 14,500, sales amount to ₹ 25,000, the Gross Profit will be:
(a) ₹ 20,000
(b) ₹ 11,000
(c) ₹ 9,000
(d) ₹ 9,500
Answer:
(d) ₹ 9,500

36. A firm had a Capital Balance of ₹ 1,00,000 at the beginning of a year. At the end of the year, the firm has total assets of ₹ 1,50,000 and total liabilities of ₹ 70,000. If the total withdrawals during the period were ₹ 30,000, what was the amount of net profit/net loss for the year:
(a) ₹ 10,000 Profit
(b) ₹ 20,000 Loss
(c) ₹ 50,000 Loss
(d) 7 10,000 Loss
Answer:
(a) ₹ 10,000 Profit

37. If sales are ₹ 14,900, Gross Profit ₹ 3,300, Net Loss ₹ 500. The operating expenses will be:
(a) ₹ 2,800
(b) ₹ 3,800
(c) ₹ 11,100
(d) ₹ 11,600
Answer:
(b) ₹ 3,800

38. The General Manager is entitled to a commission of 10% on net profit after charging the commission of works manager. The works manager is entitled to a commission of 5% on the net profits after charging the commission of general manager. The profit before charging any commission is ₹ 7,500. The commission of the work manager to the nearest rupee will be:
(a) ₹ 321
(b) ₹ 333
(c) ₹ 337
(d) ₹ 339
Answer:
(d) ₹ 339

39. Which of the following sets of expenses are the direct expenses of the business:
(a) Salaries, wages, and shop rent
(b) Stationery, postage and telephone
(c) Wages, carriage inward, Local taxes
(d) Advertisement, Legal fees, audit fees.
Answer:
(c) Wages, carriage inward, Local taxes

40. If the profit is 1/4 of the sales, then it is:
(a) 1/4 of the cost price
(b) 1/3 of the cost price
(c) 1/5 of the cost price
(d) 1/6 of the cost price
Answer:
(b) 1/3 of the cost price

41. If the profit is 25% of the cost price, then it is:
(a) 25% of the sales price
(b) 33.33% of the sales price
(c) 20% of the sales price
(d) None of these
Answer:
(c) 20% of the sales price

42. Sales are equal to:
(a) Cost of goods sold + Gross profit
(b) Cost of goods sold – Gross profit
(c) Gross profit – Cost of goods sold
(d) None of these
Answer:
(a) Cost of goods sold + Gross profit

43. If the Closing Stock at the end of the year is overstated by ₹ 7,500, the error causes an:
(a) Overstatement of cost of goods sold for the year by ₹ 7,500
(b) Understatement of gross profit for the year by ₹ 7,500
(c) Overstatement of net income for the year by ₹ 7,500
(d) Understatement of net income for the year by ₹ 7,500.
Answer:
(c) Overstatement of net income for the year by ₹ 7,500

44. Discount Allowed appearing in the Trial Balance are shown:
(a) On the debit side of Trading Account
(b) On the debit side of Profit and Loss A/c
(c) On the asset side of the Balance Sheet
(d) On the credit side of P/L A/c
Answer:
(b) On the debit side of Profit and Loss A/c

45. A Trial Balance contains the following information:
Discount received ₹ 2,000, Provision for discount on Creditors ₹ 1,600.
It is desired to maintain a provision for discount of creditors at ₹ 1,100.
The amount to be credited to the Profit and Loss Account is:
(a) ₹ 2,500
(b) 7 3,500
(c) ₹ 2,000
(d) ₹ 1,500
Answer:
(d) ₹ 1,500

46. Capital on 1 January ₹ 65,000, Interest on drawing ₹ 5,000, Interest on capital ₹ 2,000, Drawings ₹ 14,000, Profit for the year ₹ 15,000. His capital as on 31 December will be:
(a) ₹ 67,000
(b) ₹ 63,000
(c) ₹ 77,000
(d) ₹ 89,000
Answer:
(b) ₹ 63,000

47. Return Outwards appearing in Trial Balance are deducted from:
(a) Sales
(b) Purchases
(c) Returns Inwards
(d) Closing stock
Answer:
(b) Purchases

48. Salaries and wages appearing in Trial Balance are shown:
(a) On the debit side of Trading Account
(b) On the debit side of Profit and Loss Account
(c) On the liabilities side of the Balance sheet
(d) On the assets side of the Balance sheet
Answer:
(b) On the debit side of Profit and Loss Account

49. The Trial Balance shows opening stock ₹ 50,000, it is:
(a) Debited to the Trading Account
(b) Debited to the Profit and Loss Account
(c) Deducted from the closing Stock in the Balance Sheet
(d) Shown as an asset
Answer:
(a) Debited to the Trading Account

50. Preparation of Final Accounts for Sole Proprietorship – CS Foundation Fundamentals of Accounting Notes 7
From the above, answer the following –
(i) The value of closing stock is:
(a) ₹ 18,000
(b) ₹ 8,000
(c) ₹ 16,000
(d) ₹ 14,000
Answer:
(d) ₹ 14,000

(ii) Gross profit will be:
(a) ₹ 12,000
(b) ₹ 10,000
(c) ₹ 16,000
(d) ₹ 14,000
Answer:
(a) ₹ 12,000

(iii) Net profit will be:
(a) ₹ 12,000
(b) ₹ 10,000
(c) ₹ 4,000
(d) ₹ 7,000
Answer:
(c) ₹ 4,000

51. Rent paid on 1 October, 2004 for the year upto 30 September, 2005 was ₹ 2,400 Rent paid on 1 October, 2005 for the year upto 30 Sepetember ,2006 was ₹ 3,200. Rent payable as shown in the profit and loss account for the year ended 31 December 2005, would be:
(a) ₹ 6,000
(b) ₹ 3,200
(c) ₹ 2,600
(d) ₹ 3,000
Answer:
(c) ₹ 2,600

52. If sales are ₹ 6,000 and the rate of gross profit on cost of goods sold is 25%, then the cost of goods sold will be:
(a) ₹ 6,000
(b) ₹ 4,500
(c) ₹ 4,800
(d) ₹ None of the above
Answer:
(c) ₹ 4,800

53. Sales for the year ended amounted to ₹ 10,00,000, sales included goods sold to Mr. A for ₹ 50,000 at a profit of 20% on cost. Such goods are still lying in the godown at the buyer’s risk. Such goods should be treated as part of _________.
(a) Sales
(b) Closing stock
(c) Goods in transit
(d) Sales return
Answer:
(a) Sales

54. A’s trial balance provides you the following information: Bad debts ₹ 1,000. It is desired to maintain a provision for bad debts at ₹ 2,000. Amount debited to Profit and Loss A/c will be:
(a) ₹ 1,000
(b) ₹ 3,000
(c) ₹ 4,000
(d) ₹ 2,000
Answer:
(b) ₹ 3,000

55. A new firm commenced business on 1st January, 2006 and purchased goods costing ₹ 90,000 during the year. A sum of ₹ 6,000 was spent on freight inwards. At the end of the year the cost of goods still unsold was ₹ 12,000. Sales during the year ₹ 1,20,000. What is the gross profit earned by the firm?
(a) ₹ 36,000
(b) ₹ 30,000
(c) ₹ 42,000
(d) ₹ 38,000
Answer:
(a) ₹ 36,000

56. From the following figures ascertain the gross profit:

Opening Stock (1.1.2006) 35,000
Goods Purchased during 1,20,000
Freight and packing on above 15,000
Closing stock 25,000
Sales 1,90,000
Office expenses 4,000
Selling expenses on sales 5,000

(a) ₹ 36,000
(b) ₹ 45,000
(c) ₹ 50,000
(d) ₹ 59,000
Answer:
(b) ₹ 45,000

57. Following are the given figures:

Opening Stock 30,000
Closing Stock 28,000
Purchases 85,000
Carriage on Purchases 2,300
Carriage on sales 3,000
Rent of office 5,000
Sales 1,40,700
Selling Expenses 600
Drawings 10,000

(i) Gross profit will be
(a) ₹ 50,000
(b) ₹ 47,600
(c) ₹ 42,600
(d) ₹ 50,600
Answer:
(d) ₹ 50,600

(ii) Net profit will be
(a) ₹ 42,000
(b) ₹ 32,000
(c) ₹ 45,600
(d) ₹ 47,600
Answer:
(a) ₹ 42,000

58. A business concern provides the following details :

Cost of goods sold 1,50,000
Sales 2,00,000
Opening stock 60,000
Closing stock 40,000
Debtors 45,000
Creditors 50,000

The concern’s purchases would amount to (in ₹):
(a) 1,30,000
(b) 2,20,000
(c) 2,60,000
(d) 2,90,000
Answer:
(d) 2,90,000

59. What would be the amount of sales when Opening Stock is ₹ 50,000, purchases ₹ 1,50,000, wages ₹ 20,000, closing stock ₹ 40,000 and gross profit is 1/7th of sales?
(a) ₹ 2,00,000
(b) ₹ 1,86,669
(c) ₹ 1,80,000
(d) ₹ 2,10.000
Answer:
(a) ₹ 2,00,000

60. A had started business with ₹ 20,000 in the beginning of the year. During the year he borrowed ₹ 10,000 from B. He further introduced ₹ 20,000 in the business. He also gave ₹ 5,000 as loan to his son. Goods given away as charity by him was ₹ 2,000. Profits earned by him was ₹ 25,000. He also withdraw:
(a) ₹ 50,000
(b) ₹ 40,000
(c) ₹ 62,000
(d) ₹ 48,000
Answer:
(c) ₹ 62,000

61. The balances in the books of X, a sole proprietor were: Opening stock ₹ 17,000, Purchases ₹ 52,000, Wages ₹ 46,500, Fuel ₹ 15,000, Sales ₹ 1,45,000 and Closing Stock on hand ₹ 25,000, whose net realizable value was ₹ 28,000.
The Gross Profit calculated would be:
(a) ₹ 39,500
(b) ₹ 42,500
(c) ₹ 54,500
(d) ₹ 57,000
Answer:
(a) ₹ 39,500

62. Balance Sheet is prepared by _________ method:
(a) Liquidity Order
(b) Permanently Order
(c) Both (a) and (b)
(d) None of the Above
Answer:
(c) Both (a) and (b)

63. Purpose of preparing manufacturing A/c:
(a) To know cost of production
(b) To know cost of goods sold
(c) To know profit
(d) To know loss
Answer:
(a) To know cost of production

64. Bad debts recovered is shown:
(a) Cr. of Trading A/c.
(b) Dr. of Trading A/c.
(c) Cr. of P/L A/c.
(d) Assets Side of B/S.
Answer:
(c) Cr. of P/L A/c.

65. If sale is ₹ 1,00,000, Operating expenses ₹ 10, 000 and cost of goods sold is ₹ 40,000, the gross profit is:
(a) ₹ 60,000
(b) ₹ 50,000
(c) ₹ 70,000
(d) ₹ 40,000
Answer:
(a) ₹ 60,000

66. If cost of goods sold is 20,000 & profit is 33.33% on S.P. then find S.P. of goods:
(a) ₹ 30,000
(b) ₹ 40,000
(c) ₹ 32,000
(d) ₹ 31,000
Answer:
(c) ₹ 32,000

67. If Opening capital is 50,000, drawings ₹ 10,000 and Net Profit 20,000, then closing capital will be:
(a) ₹ 60,000
(b) ₹ 50,000
(c) ₹ 80,000
(d) ₹ 20,000
Answer:
(a) ₹ 60,000

68. Find additional capital:
Opening Capital – ₹ 5,000
Net Profit – ₹ 3,000
Drawings – ₹ 500
Closing capital – ₹ 10, 000
(a) ₹ 2,000
(b) ₹ 2,500
(c) ₹ 3,000
(d) ₹ 3,500
Answer:
(b) ₹ 2,500

69. Calculate net profit:

Opening Stock 10,000
Sales 1,50,000
Office Exp. 10,000
Bad debts 1,000
Purchase 40,000
Wages 5,000
Disc. Received 3,000
Debtor 5,000

Bad debts
(a) ₹ 97,000
(b) ₹ 87,000
(c) ₹ 67,000
(d) ₹ 59,000
Answer:
(b) ₹ 87,000

70. Provision are considered as:
(a) Charge on profits
(b) Appropriation of Profits
(c) Both (a) and (b)
(d) None of these
Answer:
(a) Charge on profits

71. The bills receivables which are final accounts that are prepared are a:
(a) Liability
(b) Asset
(c) Provision
(d) None of these
Answer:
(d) None of these

72. Trading A/c is a:
(a) Personal account
(b) Real account
(c) Nominal account
(d) All of the above
Answer:
(c) Nominal account

73. Which of the following is NOT considered in calculating the cost of goods sold?
(a) Opening stock
(b) Purchases
(c) Carriage inwards
(d) Carriage outwards
Answer:
(d) Carriage outwards

74. The closing stock appears in:
(a) Trading A/c and P&LA/c
(b) Trading A/c and Balance sheet
(c) Trading A/c, P&LA/c and balance sheet
(d) None of the above
Answer:
(b) Trading A/c and Balance sheet

75. If insurance premium of ₹ 12,000 is paid on 1st August, 2010 for the year ending March 2011, then calculate the amount of prepaid insurance.
(a) ₹ 4,000
(b) ₹ 8,000
(c) ₹ 6,000
(d) None of these
Answer:
(a) ₹ 4,000

76. If opening stock is ₹ 12,000, closing stock is ₹ 10,000, purchases are ₹ 50,000 and carriage inward is ₹ 2,000, then calculate the cost of goods sold:
(a) ₹ 44,000
(b) ₹ 46,000
(c) ₹ 54,000
(d) ₹ 66,000
Answer:
(c) ₹ 54,000

77. If the cost of goods sold is ₹ 1,50,000 and the gross profit is 20% of sale, then calculate the amount of sale:
(a) ₹ 2,00,000
(b) ₹ 2,50,000
(c) ₹ 1,87,500
(d) ₹ 1,80,000
Answer:
(c) ₹ 1,87,500

78. Sale of scrap of raw material appearing in the trial balance appears on the credit side of:
(a) Trading A/c
(b) P & L A/c
(c) Balance Sheet
(d) Manufacturing A/c
Answer:
(d) Manufacturing A/c

79. Bonus paid to employees is to be recorded in:
(a) P & LA/c
(b) Trading A/c
(c) Balance Sheet
(d) All of the above
Answer:
(a) P & LA/c

80. If the profit on cost is 33.33%, then what percentage of profit is on sales:
(a) 30%
(b) 40%
(c) 20%
(d) 25%
Answer:
(d) 25%

81. If the profit is 20% on sales, then find the percentage of profits on cost:
(a) 25%
(b) 16.67%
(c) 33%
(d) 42%
Answer:
(a) 25%

82. Given, opening capitals 10,000, loan from bank on behalf of the firm is ₹ 25,000 and the profit for the year is ₹ 2,000. Then, find out the closing capital:
(a) ₹ 13,000
(b) ₹ 12,000
(c) ₹ 37,000
(d) None of these
Answer:
(b) ₹ 12,000

83. The profit before adjustment is ₹ 10,000 and outstanding salary is ₹ 400 and prepaid insurance is ₹ 550, then the profit after adjustment is:
(a) ₹ 9,850
(b) ₹ 9,900
(c) ₹ 10,150
(d) None of these
Answer:
(c) ₹ 10,150

84. The gross profit of a business is ₹ 21,000. The expenses for the year are opening stock ₹ 2,000, direct expenses 2,000, carriage inwards are ₹ 500, carriage outwards ₹ 700 and salary payable ₹ 3,000. Calculate the Net profit:
(a) ₹ 17,300
(b) ₹ 16,800
(c) ₹ 14,800
(d) ₹ 12,800
Answer:
(a) ₹ 17,300

85. Salary paid in cash is ₹ 1,20,000. Salary payable for the year is ₹ 20,000 and salary paid in advance is ₹ 27,000. The salary paid in the current year also includes ₹ 10,000 which was the salary payable for the last year paid during the year. The amount of salary to be debited to the profit & loss A/c is:
(a) ₹ 1,09,000
(b) ₹ 1,03,000
(c) ₹ 1,13,000
(d) None of the above
Answer:
(b) ₹ 1,03,000

86. Provision for bad debt is made by crediting:
(a) Trading A/c
(b) P & L A/c
(c) Debtors A/c
(d) Provision for debtors
Answer:
(d) Provision for debtors

87. Discount on issue of shares is:
(a) Current asset
(b) Intangible asset
(c) Fictitious asset
(d) Fixed asset
Answer:
(c) Fictitious asset

88. The sundry debtors of ABC & Co. are ₹ 25,000. The bad debts are ₹ 3,000. The provision for doubtful debts amount to 2% and discount on debtors is to be provided @ 5%. Calculate the net debtors to be shown in the balance sheet:
(a) ₹ 21,560
(b) ₹ 25,000
(c) ₹ 21,780
(d) ₹ 20,482
Answer:
(d) ₹ 20,482

89. The opening balance of debtors is ₹ 20,000. Credit sales are ₹ 50,000 and cash sales are ₹ 72,000. Bills received during the year are ₹ 5,000 and cash received from debtors is ₹ 40,000. Then the closing balance of debtors is:
(a) ₹ 25,000
(b) ₹ 37,000
(c) ₹ 42,000
(d) None of the above
Answer:
(a) ₹ 25,000

90. The arrangement of assets and liabilities in a particular order is called:
(a) Arrangement
(b) Classification
(c) Recording
(d) Marshalling
Answer:
(d) Marshalling

91. Which of the following is False?
(a) Closing stock does not appear in trial balance
(b) Trial balance is prepared for external use
(c) Trial balance is prepared to test the arithmetical accuracy of book of accounts
(d) None of these
Answer:
(b) Trial balance is prepared for external use

92. Which of the following is NOT a limitation of financial statements?
(a) Financial statements are interim reports
(b) The assets are valued at replacement cost
(c) Managers resort to window dressing
(d) All of these
Answer:
(b) The assets are valued at replacement cost

93. Which of the following is NOT considered while preparing the manufacturing account?
(a) Wages
(b) Direct expenses
(c) Plant repairs
(d) Depreciation on office equipment
Answer:
(d) Depreciation on office equipment

94. Reserve fund is prepared by debiting:
(a) Cash A/c
(b) Sale A/c
(c) Trading A/c
(d) P&LA/c
Answer:
(d) P&LA/c

95. Income received in advance is a:
(a) Income
(b) Liability
(c) Both (a) & (b)
(d) None of these
Answer:
(b) Liability

96. Which of the following statement is true?
(a) Return Inwards and Return Outwards both appear in trading account
(b) Carriage Inwards and Carriage Outwards both appear in profit and loss account.
(c) Carriage Inwards and Carriage Outwards both appear in trading account.
(d) Neither Carriage Inwards nor Carriage Outwards appear in the trading account.
Answer:
(a) Return Inwards and Return Outwards both appear in trading account.
Return Inwards is also known as sales returns and it appear in the trading account on the credit side.
Return outwards is also known as purchase returns which appear on debit side of Trading A/c.
Carriage Inwards is a direct expenses which is shown on debit side of Trading Account.
Carriage outwards is a indirect expenses which is shown on debit side of profit & loss A/c.
On considering above points we found that option (a) is true.

97. Prakash sells goods at 20% on sales. His sales were ₹ 10,00,000. The amount of gross profit is:
(a) ₹ 1,70,000
(b) ₹ 2,50,000
(c) ₹ 2,40,000
(d) ₹ 2,00,000
Answer:
(d) ₹ 2,00,000
Sales = ₹ 10,00,000
Gross Profit = 20% of sales
Thus, Gross Profit = 10,00,000 x 20% = ₹ 2,00,000
Gross Profit amount is ₹ 2,00,000.

98. Given the following data:
Gross profit ₹ 6,700; Carriage Inwards ₹ 250; Rent received ₹ 575 and other expenses ₹ 3,600. The net profit of the firm would be:
(a) ₹ 3,275
(b) ₹ 3,025
(c) ₹ 3,425
(d) ₹ 3,675
Answer:
(d) ₹ 3,675
Preparation of Final Accounts for Sole Proprietorship – CS Foundation Fundamentals of Accounting Notes 8

99. Ram has been running business from the year 2002. He has paid ₹ 1,650 as rent upto February, 2012 (for financial year 2011-12). Total rent to be debited to profit and loss A/c of financial year 2011 – 12 will be:
(a) ₹ 1,650
(b) ₹ 1,800
(c) ₹ 2,000
(d) ₹ 1,400
Answer:
(b) ₹ 1,800
Rent paid of 11 months (April to February 2012)
= ₹ 1,650
So, one month rent will be = \(\frac{1,650}{11}\) = ₹ 150
For financial year 2011 – 12 rent of March month ₹ 150 will be debited to P/L A/c as outstanding Rent.
Thus, total amount of rent debited to P/L A/c will be (1,650 + 150) = ₹ 1,800.

100. Income tax paid by the sole- proprietor from the business bank account is debited to:
(a) Income tax account
(b) Bank account
(c) Capital account
(d) Provision for taxation account
Answer:
(a) Income tax account
On paying Income Tax from Bank A/c, the following entry will be passed:
Income Tax A/c Dr.
To Bank A/c
(Being Income Tax Paid)
Therefore, income tax paid, is debited to Income Tax Account.

101. Debtors as appearing in Trial Balance are ₹ 25,000. Provision for doubtful debts is to be provided @ 5% and 2% of amount is to be provided for discount. What is the amount of debtors to be shown in balance sheet?
(a) ₹ 23,750
(b) ₹ 23,250
(c) ₹ 23,275
(d) ₹ 1,750
Answer:
(c) ₹ 23,275
Preparation of Final Accounts for Sole Proprietorship – CS Foundation Fundamentals of Accounting Notes 9

102. The net profit of a sole proprietorship firm is ₹ 1,320 (before commission). The manager of the firm gets 10% commission on the net profit after charging such commission. Manager’s commission would be:
(a) ₹ 120
(b) ₹ 132
(c) ₹ 1,188
(d) ₹ 1,200
Answer:
(a) ₹ 120
Commission on net profit after charging such commission
Preparation of Final Accounts for Sole Proprietorship – CS Foundation Fundamentals of Accounting Notes 10
Manager’s commission would be ₹ 120.

103. Which of the following is correct about trade discount?
(a) It is synonymous with cash discount
(b) It is shown by way of deduction in invoice itself
(c) It is calculated on account paid or received
(d) It is allowed to engage the prompt payment
Answer:
(b) It is shown by way of deduction in invoice itself.
Trade discount is allowed by the seller to a buyer who deals in the same goods as that of the seller. Trade discount is not recorded in the books of account because it is shown by way of deduction in invoice itself.

104. Which of the following items would fall under the category of a liability?
(a) Cash
(b) Debtors
(c) Capital
(d) Land
Answer:
(b) Debtors
Trade discount is allowed by the seller to a buyer who deals in the same goods as that of the seller. Trade discount is not recorded in the books of account because it is shown by way of deduction In Invoice itself.

105. If a piece of furniture’s list price is ₹ 28,000 and it is sold at 10% trade discount and 2% cash discount. The cash sale price of furniture would be:
(a) ₹ 25,200
(b) ₹ 24,640
(c) ₹ 24,696
(d) None of the above
Answer:
(c) ₹ 24,696
Preparation of Final Accounts for Sole Proprietorship – CS Foundation Fundamentals of Accounting Notes 11
Cash Sale Price would be ₹ 24,696.

106. What is shown in a balance sheet?
(a) Only those assets which are expressed in monetary terms
(b) Only those liabilities which are expressed in monetary terms
(c) Assets and liabilities expressed in non- monetary terms
(d) Assets and liabilities expressed in monetary terms
Answer:
(d) Assets and liabilities expressed in monetary terms
According to money measurement concept those items which can be interpreted in terms of money are recorded and shown in financial books. In other words, it can be said that those assets and liabilities which expressed in monetary terms is shown in a Balance Sheet.

107. The correct sequence of the following in the preparation of periodical final statements would be:
1. Preparation of Balance Sheet
2. Preparation of Cash Flow Statement
3. Preparation of Trial Balance
4. Preparation of Profit / Loss Statement
The correct option is:
(a) 4, 2, 1,3
(b) 3, 4, 1,2
(c) 2, 4, 3, 1
(d) 1,3, 2, 4.
Answer:
(b) 3, 4, 1,2
The correct sequence of preparation is as follows: Trial Balance, Profit/Loss statement, Balance Sheet and Cash Flow Statement. (3, 4, 1,2)

108. Match list I with list II and select the correct answer using the codes given below the list:

List I List II
X. Discount on Debentures

Y. Forfeited Capital

Z. Income tax payable

W. Debtors acceptance

1. Current Liability

2. Non-Current Assets

3. Current Assets

4. Non Current Liability

The correct option is:

X Y Z W
(a) 2 4 1 3
(b) 4 2 3 1
(c) 2 4 3 1
(d) 4 2 1 3

Answer:
(a) 2 4 1 3

  • Discount on debentures : Non-current assets
  • Forfeited capital: Non-current liability
  • Income tax payable : Current liability
  • Debtor’s acceptance : Current Assets

109. A company sends cars to dealers on ‘sale or return’ basis. All such transactions are however treated like actual sales and are passed through the sales day book. Just before the end of the financial year, two cars which had costed ₹ 55,000 each have been sent on ‘sale or return’ basis and have been debited to customers at ₹ 75,000 each. Cost of goods lying with the customers would be:
(a) ₹ 1,10,000
(b) ₹ 1,50,000
(c) ₹ 75,000
(d) ₹ 55,000
Answer:
(a) ₹ 1,10,000
The two cars still lying with the customer’s unapproved are costing ₹ 55,000 each.
∴ Stock with the customer at cost is ₹ 1,10,000.
The journal entries at the end of year will be:
(a) Sales a/c Dr. 1,50,000
To Debtor’s a/c 1,50,000
(75,000 x 2)

(b) Stock with Customer’s a/c Dr. 1,10,000
To Trading a/c 1,10,000
(55,000 x 2)

110. The total cost of goods available for sale with a company during the current year is ₹ 12,00,000 and the total sales during the period are ₹ 13,00,000. Gross profit margin of the company is 33 113% on cost. The closing inventory for the current year would be:
(a) ₹ 4,00,000
(b) ₹ 3,00,000
(c) ₹ 2,25,000
(d) ₹ 2,60,000.
Answer:
(c) ₹ 2,25,000
Sales is ₹ 13,00,000
G.P. Margin cost is 1/3 and on sales it will be 1/4
Cost of goods sold = 13,00,000 x 3/4
= 9,75,000
Closing Stock = Total goods available for sale – Cost of goods sold
= 12,00,000 – 9,75,000 = ₹ 2,25,000

111. How does an overcasting of purchases day book affect the cost of sales and profit?
(a) Cost of sales is decreased while profit is increased
(b) Cost of sales is increased while profit is decreased
(c) Both cost of sales and profit are increased
(d) Cost of sales is increased; gross profit is decreased but net profit remains unaffected.
Answer:
(b) Cost of sales is increased while profit is decreased
Cost of Sales = Opening stock + Purchases – Closing stock
On the basis of above it may be observed that if purchase is over cost the cost of sales will increase.
If cost of sales will increase the profit will decrease.
Sales – Cost of sales = profit
Therefore, cost of sales is increased while profit is decreased.

112. If outstanding wages appear in the trial balance, while preparing the final accounts, it will be shown in:
(a) Asset side of the balance sheet
(b) Liability side of the balance sheet
(c) Profit and Loss A/c and asset side of the balance sheet
(d) Profit and Loss A/c and Liability side of balance sheet.
Answer:
(b) Liability side of the balance sheet
Outstanding wages appearing in the trial balance cash will be shown on liability side of balance sheet
Wages a/c Dr.
To outstanding wages a/c
It will not be shown in profit and loss account as it has already been adjusted with wages.

113. 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:
Preparation of Final Accounts for Sole Proprietorship – CS Foundation Fundamentals of Accounting Notes 14
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.
Answer:
(b) ₹ 7,70,000
Stock is valued at lower of cost or market price (Net Realizable value) (LCM) Accordingly the value of stock to be included in Balance sheet of the company as on 31st March 2013 will be:
Preparation of Final Accounts for Sole Proprietorship – CS Foundation Fundamentals of Accounting Notes 15
Total value = 7.7 Lakh i.e. ₹ 7,70,000

114. 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) ₹ 2,600
(b) ₹ 3,200
(c) ₹ 2,800
(d) ₹ 3,000
Answer:
(a) ₹ 2,600
Fire Insurance paid for
Preparation of Final Accounts for Sole Proprietorship – CS Foundation Fundamentals of Accounting Notes 16

115. Income earned which is yet to be collected results in:
(a) Increase in capital and increase in liability
(b) Decrease in liability and increase in capital
(c) Increase in asset and increase in liability
(d) Increase in capital and increase in asset.
Answer:
(d) Increase in capital and increase in asset.
Income earned which is yet to be collected:
Accrued Income a/c Dr.
To Income a/c
This results in increase in income and thereby an increase in capital and also an increase in corresponding asset in the name of accrued income.

116. X Limited is in the business of trading. It is to receive ₹ 7,000 from Vinod and to pay ₹ 8,000 to Vinod. Similarly, it is to pay ₹ 8,000 to Sudhir and to receive ₹ 9,000 from Sudhir. Except above but after all the adjustment, the books of X Limited show the debtors balance at ₹ 72,000 (Dr.) and creditors balance at ₹ 39,000 (Cr.). The correct value of debtors and creditors to be shown in balance sheet would be _________.
(a) Debtors (₹ 72,000), Creditors (₹ 39,000)
(b) Debtors (₹ 88,000), Creditors (₹ 55,000)
(c) Debtors (₹ 80,000), Creditors (₹ 47,000)
(d) Debtors (₹ 79,000), Creditors (₹ 46,000)
Answer:
(b) Debtors (₹ 88,000), Creditors (₹ 55,000)
Preparation of Final Accounts for Sole Proprietorship – CS Foundation Fundamentals of Accounting Notes 17

117. If the insurance premium paid is ₹ 1,000 and prepaid insurance is ₹ 300, the amount of insurance premium shown in profit and loss account will be _________.
(a) ₹ 1,300
(b) ₹ 700
(c) ₹ 1,000
(d) ₹ 300
Answer:
(b) ₹ 700
Prepaid insurance premium is not an expense of be not shown in P/L A/c. this year, so it will
Therefore, insurance premium shown in profit and loss A/c will be (1,000 300) = ₹ 700 only.

118. The expired cost of a deferred revenue expense is known as _________.
(a) Asset
(b) Expense
(c) Liability
(d) Provision.
Answer:
(b) Expense
Deferred revenue expenditure is that expenditure for which payment has been made for a liability but which is carried forward on a presumption that it will be of benefit over subsequent period or periods and expired cost of as such expenditure is known as expenses and shown in Profit & Loss A/c.

119. If prepaid rent appears in the trial balance, while preparing the final accounts it will be shown in _________.
(a) Assets side of the balance sheet
(b) Liabilities side of the balance sheet
(c) Profit and Loss A/c and asset side of the balance sheet
(d) Profit and Loss A/c and liabilities side of balance sheet.
Answer:
(a) Assets side of the balance sheet
If prepaid rent appears in the trail balance, on preparation of final accounts it will be shown on assets side of balance sheet only.

120. Gauri paid ₹ 1,000 towards a debt of ₹ 1,050, which was written-off as bad debt in the previous year. Which of the following account will be credited for this amount _________.
(a) Gauri’s personal account
(b) Bad debts account
(c) Bad debts recovered account
(d) None of the above.
Answer:
(c) Bad debts recovered account
When a bad debt is recovered which was written off in the previous year, Bad Debts Recovered A/c will be credited.
Cash A/c Dr. 1,000
To Bad Debts Recovered A/c 1,000

121. While finalising the current year’s profit, the company realised that there was an error in the valuation of closing stock of the previous year. In the previous year, closing stock was valued more by ₹ 50,000. As a result _________.
(a) Previous year’s profit was overstated and current year’s profit is also overstated
(b) Previous year’s profit was understated and current year’s profit is overstated
(c) Previous year’s profit was understated and current year’s profit is also understated
(d) Previous year’s profit was overstated and current year’s profit is understated
Answer:
(d) Previous year’s profit was overstated and current year’s profit is understated
When closing stock is overstated, it will result in net profit for the period to be overstated and COGS to be understated and net profit of preceding year is understated and COGS to be overstated.
Thus option (d) is right.

122. If Capital = ₹ 70,000; Liability = ₹ 40,000. Find Assets –
(a) ₹ 30,000
(b) ₹ 1,10,000
(c) ₹ 40,000
(d) ₹ 70,000
Answer:
(b) ₹ 1,10,000
Assets = Capital + Liability
= 70,000 + 40,000 = 1,10,000

123. If opening stock is 10,000, Purchases 20,000, Direct expenses 10,000, Indirect expenses 30,000. Find value of cost of goods sold:
(a) ₹ 10,000
(b) ₹ 20,000
(c) ₹ 30,000
(d) ₹ 40,000.
Answer:
(d) ₹ 40,000.
Cost of goods sold = Opening Stock + Direct Material + Direct
Expenses
= 10,000 + 10,000 + 20,000
= 40,000

124. P/L A/c balance (before commission) is ₹ 1,320; manager’s commission is 10%. Find the amount of manager’s commission.
(a) 120
(b) 0
(c) 132
(d) 110.
Answer:
(c) 132
P/L a/c balance (before charging commission) = 1,320
Manager’s commission = 10%
Amount of manager’s commission = 1,320 x \(\frac { 10 }{ 100 }\) = 132.

125. Adjusted closing entry affects:
(a) Trading A/c
(b) P/LA/c
(c) Balance Sheet
(d) All of the above
Answer:
(c) Balance Sheet
Adjusted closing entry reflects the entry which are required to be made & not made during the year. These entries require adjustment which affects two financial statements mainly Balance Sheet being one. Hence, adjusting closing entry affects Balance Sheet.

126. The purpose of making trading account:
(a) To know the financial position of business
(b) To ascertain the gross profit / loss
(c) To ascertain the net profit / loss
(d) None of the above.
Answer:
(b) To ascertain the gross profit / loss
Trading A/c is the first part of income statement which is prepared to ascertain the gross profit or gross loss for a given period.
Hence, option (b) is correct.

127. Prepaid Rent is shown as:
(a) Current Asset
(b) Current Liability
(c) Intangible Asset
(d) Fictitious Asset
Answer:
(a) Current Asset
Current assets are those assets having life of more than 1 year. Prepaid rent is the rent paid in advance i.e. benefit has not yet received.
Hence, prepaid rent is treated as current asset.

128. Trial balance of a trader shows the following balances:
Opening Stock ₹ 9,600, Purchases ₹ 11,850, Wages and Salaries ₹ 3,200, Carriage on Purchases ₹ 200, Carriage Outwards ₹ 300, Sales ₹ 24,900, Closing Stock ₹ 3,500 Gross Profit will be:
(a) ₹ 3,550
(b) ₹ 6,750
(c) ₹ 6,500
(d) ₹ 6,550
Answer:
Trading A/c for the year ended ………..
Preparation of Final Accounts for Sole Proprietorship – CS Foundation Fundamentals of Accounting Notes 18
So, Gross profit will be ₹ 3,550.

129. Assets that a company expects to convert to cash to use up within one year are called:
(a) Property plant and equipment
(b) Intangible assets
(c) Long term investments
(d) Current assets
Answer:
(d) Current assets
Current assets are those assets that a company expects to convert to cash within one year. Property, plant and equipment, long-term investments are Capital assets.

130. Closing Stock of a Company, if given in adjustment, appears in:
(a) Balance Sheet only
(b) Trading Account only
(c) Profit and loss account only
(d) Trading account and balance sheet
Answer:
(d) Trading account and balance sheet
Closing stock of a company, if given in adjustment, appears at two places:

  • Credit side of the Trading A/c
  • Closing stock in the Current Assets on the assets side of the Balance Sheet.

Thus, option (d) is the correct answer.

131. Financial data of an entity is given below:
Gross Profit ₹ 6,700, Carriage outwards ₹ 250, Rent received ₹ 575 and Other expenses ₹ 3,600. The net profit would be:
(a) ₹ 3,025
(b) ₹ 2,850
(c) ₹ 3,425
(d) ₹ 3,275
Answer:
(c) ₹ 3,425
Profit & Loss A/c for the year ended

Particulars Amt. ₹ Particulars Amt. ₹
To Carriage Outwards

To Other Expenses

To Net Profit c/d

250

3,600

3,425

By Gross Profit c/d

By Rent Received

6,700
575
7,275 7,25

132. Liability in respect of a pending suit is an example of:
(a) Current liability
(b) Long term liability
(c) Contingent liability
(d) Current asset
Answer:
(c) Contingent liability
Contingent liabilities are not actual liabilities but their becoming actual liability depends on the happening of certain events. Pending suit is a contingent liability because it is only if and when suit is lost that the liability will be incurred.

133. Which of the following item appears in trading account of a business?
(a) Wages and Salaries
(b) Depreciation on buildings
(c) Freight outward
(d) Salaries.
Answer:
(a) Wages and Salaries
Wages and salaries appear in trading A/c whereas Depreciation, Freight outward and Salaries appear in Profit & Loss A/c.

134. Which of the following statements is correct about trial balance?
(a) A Trial balance is a list of all entries made in the books of account
(b) A Trial balance is a list of balances in all assets accounts
(c) A Trial balance is another ledger account
(d) A Trial balance is a list of balances in the cash account and all ledger accounts.
Answer:
(d) A Trial balance is a list of balances in the cash account and all ledger accounts.
Balances of Cash A/c and Ledger A/c are recorded in trial balance, thus it can be said it is list of balances.

135. Generally, in a balance sheet, fixed assets are shown at:
(a) Realisable value
(b) Market value
(c) Written down value
(d) Cost price.
Answer:
(a) Realisable value
Fixed assets in balance sheet are all shown at Realisable Value.

136. In order to prepare the final accounts all accounts are transferred to Trading and Profit and Loss Account:
(a) Personal
(b) Nominal and Real
(c) Nominal
(d) Real.
Answer:
(c) Nominal
In order to prepare the final accounts, all the nominal accounts are transferred to trading and profit and loss account.
Only nominal accounts impact the profits of the business.

137. Sales return is recorded where in trial balance:
(a) Dr. of Trial Balance
(b) Cr. of Trial Balance
(c) Both (a) & (b)
(d) None the above
Answer:
(a) Dr. of Trial Balance
Trial Balance is the list of Dr. and Cr. balances extracted from various accounts in the ledger including cash and bank balances from cash book. Sales return book have Dr. balance. Thus, it will be shown in the Dr. side of trial balance.

138. Cost of floating a company is an example of:
(a) Wasting assets
(b) Intangible assets
(c) Fictitious assets
(d) Liquid assets
Answer:
(c) Fictitious assets
Fictitious Assets are valueless assets but shown as assets in the financial statement (such as useless trade marks) or expenses treated as assets (such as expenses incurred to establish a company). These are not having real value. Cost of floating a company is a fictitious assets, this is not having any real value.

139. If salaries paid appearing in the trial balance for the year ending 2015 is ₹ 7,500 and it is given in the adjustment 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) ₹ 7,500
(b) ₹ 2,500
(c) ₹ 5,000
(d) ₹ 10,000
Answer:
(d) ₹ 10,000
Preparation of Final Accounts for Sole Proprietorship – CS Foundation Fundamentals of Accounting Notes 19
Amount to be debited to P&L 10,000

Note : As per accrual concept an amount should be treated as an expenses in the period in which obligation to pay has a reason, whether cash has been actually paid or not.

140. Which of the following transactions would have no impact on owner’s capital?
(a) Withdrawal of profit
(b) Investment of cash by owner
(c) Net loss
(d) Purchase of land from the proceeds of a bank loan.
Answer:
(d) Purchase of land from the proceeds of a bank loan.
(i) Bank A/c Dr.
To Bank Loan A/c

(ii) Land A/c Dr.
To Bank A/c
This transaction would have no impact on owners capital as no Nominal A/c is involved.

141. A Trader is able to get a margin of about 20% on sales. During the previous year he purchased goods worth ₹ 1,00,000 and sales were ₹ 80,000. The value of closing stock for the previous year will be:
(a) ₹ 20,000
(b) ₹ 40,000
(c) ₹ 36,000
(d) ₹ 50,000
Answer:
(c) ₹ 36,000
Cost of goods sold = 80,000 – 20%
= 64,000
Total Goods Available for Sales – Cost of Goods Sold = Closing Stock
1,00,000 – 64,000 = 36,000

142. If total assets increased by ₹ 20,000 during a period and total liabilities increased by ₹ 12,000 during the same period, the amount increases or decreases in owner’s capital for that period in:
(a) ₹ 8,000 increase
(b) ₹ 32,000 increase
(c) ₹ 20,000 increase
(d) ₹ 12,000 decrease.
Answer:
(a) ₹ 8,000 increase
Assets = Capital + Liabilities
20,000 = Capital + 12,000
Capital = 8,000

143. The closing entry for transfer of commission received, appearing in the trial balance will be:
(a) Debit Commission Received A/c,
Credit P&L A/c
(b) Debit Trading A/c,
Credit Commission Received A/c
(c) Debit P&L A/c,
Credit Commission Received A/c
(d) Debit Commission Received A/c
Credit Trading A/c
Answer:
(a) Debit Commission Received A/c,
Credit P&L A/c
The closing entry for the transfer of commission received A/c to Profit and Loss Account is Commission Received A/c Dr. xxx
To Profit & Loss A/c

144. Which of the following statement is correct in respect to adjusting entries?
(a) Adjusting entries will effect only trading account
(b) Adjusting entries will effect only balance sheet
(c) Adjusting entries may effect Balance Sheet, Trading A/c or Profit & Loss A/c
(d) Adjusting entries will effect only Profit & Loss A/c
Answer:
(c) Adjusting entries may effect Balance Sheet, Trading A/c or Profit & Loss A/c
Adjustment eateries are passed at the end of the year for outstanding, prepaid, Accrual and Unaccrual income/expense Adjusting entries involves Trading, P & L, Balance Sheet. Therefore, it may affect Trading, P & L and Balance Sheet.

145. The purchase as shown in books of accounts of a firm is ₹ 28,000. It includes the goods lost by fire for ₹ 2,800. The insurance claim received on account of this is ₹ 2,500. The amount of net purchases to be shown in Trading A/c will be:
(a) ₹ 28,000
(b) ₹ 30,500
(c) ₹ 27,700
(d) ₹ 25,200
Answer:
(d) ₹ 25,200
The net purchase is amount of goods that is purchased by the firm during the year for the purpose of sales less purchase return and loss of goods via theft or fire.
Net Purchase = Purchase – Purchase Return – Loss of Goods = 28,000 – 2,800 Net Purchase = 25,200

146. The net profit of a sole proprietorship firm is ₹ 1,320 (Before Commission). The manager of the firm gets 10% commission on net profit after charging such commission. Managers commission would be:
(a) ₹ 120
(b) ₹ 132
(c) ₹ 11,880
(d) Nil
Answer:
(a) ₹ 120
Net profit before commission = 1,320
Commission = ₹ 1,320 x \(\frac{10}{100+10}\)
= \(\frac{₹ 1,320 \times 10}{110}\)
= ₹ 120
Manager’s Commission = ₹ 120.

147. Which of the following transactions would have no impact on owners capital:
(a) Purchase of land from the proceeds of a Bank Loan
(b) Net loss
(c) Withdrawal of profit
(d) Investments of cash by owner
Answer:
(a) Purchase of land from the proceeds of a Bank Loan
Purchase of land from the proceeds of a bank loan will have no effect on owner’s equity.
Purchase of land will lead to increment in total Asset and Bank Loan will lead to increase in outside liability.
Thus, from this transaction owner’s equity will remain unaffected.

148. Goods worth ₹ 16,000 were lost by fire. The Insurance company admitted the claim for ₹ 7,500. The Insurance claim as admitted by the company would be:
(a) Added in Sales
(b) Added in Purchases
(c) Shown in liabilities side of Balance Sheet
(d) Shown in assets side of Balance Sheet
Answer:
(d) Shown in assets side of Balance Sheet
In case of loss by fire or theft if the goods are unsecured then the amount of claim admitted by the insurance company will be treated as an asset and is shown in asset side of Balance Sheet.

149. The adjusting entry for accrued expense effect _________.
(a) Expenses and liability
(b) Assets and expenses
(c) Liability and revenue
(d) Assets and revenue
Answer:
(a) Expenses and liability
Expenses which have been incurred during the year and whose benefit has been derived during the year but payment in respect of which has not been made are called outstanding or accrued expenses. At the end of the year, all such expenses must be brought into books, otherwise, the profit will be overstated and liability will be understated. The following journal entry is passed:
Expense Account Dr.
To Outstanding/Accrued Expense Account
Hence option A is correct

150. Gross profit ₹ 6700,carriage inward ₹ 250, rent received ₹ 515 & other expenses ₹ 3,600. Net profit of the firm would be _________.
(a) ₹ 3,275
(b) ₹ 3,025
(c) ₹ 3,425
(d) ₹ 3,675
Answer:
(c) ₹ 3,425
Preparation of Final Accounts for Sole Proprietorship – CS Foundation Fundamentals of Accounting Notes 20

151. The difference between cost of goods sold and selling price is known as _________.
(a) Deficit
(b) Deferred revenue
(c) Loss
(d) Revenue
Answer:
(c) Loss
Gross Loss = Cost of the Goods Sold – Sales.
Hence the difference between the cost of goods sold and selling price is the gross loss.

152. What is surrender value?
(a) Amount receivable to a person when surrenders life insurance policy
(b) Amount payable to a person who surrenders a life insurance policy
(c) Premium policy
(d) Surrender of goodwill
Answer:
(b) Amount payable to a person who surrenders a life insurance policy
Surrender value is the amount that a policy holder receives from the insurer in case he plans to terminate the policy before its maturity. From this amount the insurer deducts the surrender charge and the remaining is transferred to the policyholder. Thus it is the amount payable to a person who surrenders a life insurance policy.

153. Balance sheet is prepared from _________.
(a) Real A/c
(b) Saving A/c
(c) Personal A/c
(d) Both (a) & (c)
Answer:
(d) Both (a) & (c)
Balance Sheet is a Statement showing financial position of the business on a particular date. It has two side one source of funds i.e Liabilities, the left side of the balance sheet and application of funds i.e assets, the right side of the balance sheet. It is prepared after preparing trading and profit and loss account and has balances of real and personal accounts grouped and arranged in a proper way as assets and liabilities. It is prepared to know the exact financial position of the business on the last date of the financial year. Thus it includes real and personal account.

154. Which is an unearned income _________.
(a) Insurance premium received by insurance company
(b) Rent received
(c) Depreciation
(d) Both (a) & (b).
Answer:
(d) Both (a) & (b).
That portion of the revenue which remains received in advance (unearned) at the end of the accounting period is known as unearned income or income received in advance. For example, subscription received in advance by a club, insurance premiums received in advance by an insurance company, rent received in advance, etc. Any income in advance is not actually earned and it rather creates an obligation. Hence, option D is correct.

155. Every day office expenses are charged to _________.
(a) Selling expenses
(b) Administrative expenses
(c) Marketing expenses
(d) Financial expenses.
Answer:
(b) Administrative expenses
Administrative expenses are the expenses that an organization incurs not directly tied to a specific function such as manufacturing, production or sales. These expenses are related to the organization as a whole as opposed to an individual department. Administrative expenses are typically fixed in nature as they incurred to be the foundation of business operations. Thus, option (b) is correct.

156. The net assets of a firm at a beginning of 2007 were ₹ 1,07,700.what were the net assets in the year 2007 if the profit earned by the business _________ in 2007 was ₹ 72,500 and owner withdrew goods for his own private use that had cost ₹ 2,500?
(a) 1,77,200
(b) 1,07,700
(c) 1,77,700
(d) 1,76,700.
Answer:
(c) 1,77,700
Preparation of Final Accounts for Sole Proprietorship – CS Foundation Fundamentals of Accounting Notes 21

157. When closing stock is given in trial balance there, it will effect _________.
(a) Trading A/c only
(b) Balance sheet only
(c) Owner equity only
(d) Both trading A/c &balance sheet.
Answer:
(b) Balance sheet only
All those accounts which appear in Ledger are taken in the Trial Balance. So if closing stock account is to be shown in trial balance, we must have closing stock account in ledger. Closing stock account will come in ledger only if we pass the following journal entry for recording closing stock.
Closing stock A/c Dr.
To Purchase A/c
If Closing stock account appears on the debit side of Trial Balance, (it can never appear on credit side, stock being a debit balance), then you must remember while preparing Trading A/c and Balance Sheet that It will be shown only in the Balance sheet. It will neither be shown on the credit side of Trading A/c nor it will be shown as a deduction from Purchase A/c in Trading A/c because it will amount to double recording of closing stock.

158. If opening stock is ₹ 8,500 purchases ₹30,₹00 Direct Expenses ₹ 4,800, Indirect Expenses ₹ 5,200, closing stock ₹ 9,000 then calculate the cost of goods sold.
(a) ₹ 30,000
(b) ₹ 40,000
(c) ₹ 32,000
(d) ₹ 35,000
Answer:
(d) ₹ 35,000
COGS = Opening Stock + Purchase – Closing Stock + Direct Exp.
= 8,500 + 30,₹00 – 9,000 + 4,800
= 39,200 – 9,000 + 4,800
= 30,200 + 4,800
= 35,000

159. Some balances are given for an entity. Opening debtors ₹ 60,000, Total sales ₹ 2,70,000, Cash sales ₹ 60,000, Cash received from debtors ₹ 60,000, Bad debts ₹ 9,000, Return inwards ₹ 3,000 and Bills receivables received from customers ₹ 30,000. The amount of debtors at the end of the accounting year will be:
(a) ₹ 1,80,000
(b) ₹ 1,68,000
(c) ₹ 1,95,000
(d) ₹ 2,10,000
Answer:
(b) ₹ 1,68,000

Opening Debtor 60,000
Add: Credit Sale 2,10,000
Less: Cash Received from Debtor (60,000)
Less: Bad Debt (9,000)
Less: Ret. Inwards (3,000)
Less: Bill Received (30,000)
1,68,000

160. The closing entry for transfer of Net profit ₹ 6,300 will be:
(a) Debit P&L A/c ₹ 6,300; Credit Capital A/c ₹ 6,300
(b) Debit Trading A/c ₹ 6,300; Credit P&L A/c ₹ 6,300
(c) Debit Capital A/c ₹ 6,300; Credit P&L A/c ₹ 6,300
(d) Debit Capital A/c ₹ 6,300; Credit Trading A/c ₹ 6,300
Answer:
(a) Debit P&L A/c ₹ 6,300; Credit Capital A/c ₹ 6,300
Closing Entry
Profit & Loss A/c Dr. 6,300
To Capital A/c 6,300

161. Assume following items in an accounting equation, cash is ₹ 1,000, Inventories ₹ 4,000, debtors ₹ 5,000, creditors ₹ 4,000 and capital is ₹ 25,000, if there are no other assets than fixed assets then the amount of fixed assets will be:
(a) ₹ 29,000
(b) ₹ 15,000
(c) ₹ 25,000
(d) ₹ 19,000
Answer:
(d) ₹ 19,000
Inventory + Cash + Debtor + Fixed Asset = Creditor + Capital
4.0 + 1,000 + 5,000 + Fixed Asset = 4,000 + 25,000
10,000 + Fixed Asset = 29,000
Fixed Asset = 29,000 – 10,000
Fixed Assets = ₹ 19,000

162. Which term is generally used to express the amount that describes excess of expenses over revenues earned by the business?
(a) Retained earnings
(b) Net loss
(c) Reserve
(d) Net profit
Answer:
(d) Net profit
An Excess of Revenue over Expense can be described as Net Profit.

163. Which of the following statements describes a fixed asset?
(a) It can be converted into cash quickly without any loss in value
(b) It is purchased specifically for resale.
(c) It is likely to be used within the business in the year of purchase itself.
(d) It is likely to be used for more than one accounting period.
Answer:
(d) It is likely to be used for more than one accounting period.
Fixed Asset is an asset which is likely to be used for more than one accounting period.

164. A company sends cars to dealers on sale or return basis. All such transaction are now ever treated like actual sales and are passed through the sales day book. Just before the end of the financial year, two cars which had costed ₹ 55,000 each have been sent on sale or return basis and have been debited to customers at ₹ 75,000 each. Cost of goods lying with the customers would be:
(a) ₹ 1,10,000
(b) ₹ 1,50,000
(c) ₹ 5,000
(d) ₹ 55,000
Answer:
(a) ₹ 1,10,000
At the end of the year, two cars costing ₹ 55,000 each remains with customer and debited with customers at ₹ ₹5,000 each in sales day book. Cost of goods lying with customer would be ₹ 55,000 x 2 = ₹ 1,10,000.

165. If outstanding wages appear in the trial balance while preparing the final accounts, it will be shown in:
(a) Assets side of the balance sheet
(b) Liability side of the balance sheet
(c) Profit and Loss A/c and Assets side of the balance sheet
(d) Profit and Loss A/c and Liability side of balance sheet
Answer:
(b) Liability side of the balance sheet
Outstanding means to be paid in future so it is considered as business liability.
If outstanding wages appear in trial balance and at the preparing final accounts, it will be shown in liability side of Balance Sheet only.

166. Contingent liability is shown in _________.
(a) Balance Sheet
(b) Profit & Loss
(c) Footnotes
(d) None of the above.
Answer:
(c) Footnotes
Contingent Liability: These are not actual liabilities but they become actual liabilities on happening of certain events. Such liabilities are not shown in balance sheet; but to a ‘foot note’ is appended at the balance sheet for such liabilities. Hence, option (c) is correct.

167. Prepaid expense is shown in _________.
(a) Balance Sheet
(b) Income & Expenditure
(c) Both (a) and (b)
(d) None of the above.
Answer:
(a) Balance Sheet
Prepaid Expenses are shown in debit side of Profit and Loss account as well as in Balance Sheet as an Asset. Hence, option (a) is correct.

168. Outstanding expenses are shown in _________.
(a) Balance Sheet
(b) Trial Balance
(c) Profit & Loss A/c
(d) None of the above.
But in both Profit & Loss Account as well as In Balance Sheet.
Answer:
(c) Profit & Loss A/c
Outstanding Expenses are shown in debit side of P/L Account added to related expenses and shown as a liability in Balance Sheet. Thus, option (d) is correct.

169. Gauri paid ₹ 1,000 towards a debt of ₹ 1,050. Which was written off as bad debt in the previous year. Which of the following account will be credited for this amount:
(a) Gauri’s personal account
(b) Bad debts account
(c) Bad debts recovered account
(d) None of the above
Answer:
(c) Bad debts recovered account
Journal entry for recovery of bad debt is:
Cash/ Bank a/c …….. Dr.
To Bad debts recovered a/c

170. X Limited is in the business of trading. It is to receive ₹ 7,000 from Vinod and to pay ₹ 8,000 to Vinod. Similarly, it is to pay ₹ 8,000 to Sudhir and to receive ₹ 9,000 from Sudhir. Except above but after all the adjustment, the books, of X Limited show the debtors balance at ₹ 72,0 (Dr.) and creditors balance at ₹ 39,000 (Cr.). The correct value of debtors and creditors to be shown in balance sheet would be:
(a) Debtors (₹ 72,000), Creditors (₹ 39,000)
(b) Debtors (₹ 88,000), Creditors (₹ 55,000)
(c) Debtors (₹ 80,000), Creditors (₹ 47,000)
(d) Debtors (₹ 79,000), Creditors (₹ 46,000)
Answer:
(b) Debtors (₹ 88,000), Creditors (₹ 55,000)
Preparation of Final Accounts for Sole Proprietorship – CS Foundation Fundamentals of Accounting Notes 22

171. If the insurance premium paid is ₹ 1,000 and prepaid insurance is ₹ 300, the of insurance premium shown in profit and loss account will be:
(a) ₹ 1,300
(b) ₹ 700
(c) ₹ 1,000
(d) ₹ 300
Answer:
(b) ₹ 700
Prepaid Insurance premium is not an expense of the current year, hence will be carried over to next year.
∴ Expense of current year will be 1,000 – 300 = ₹ 700

172. If prepaid rent appears in the trial balance, while preparing the final accounts it will be shown in:
(a) Assets side of the balance sheet
(b) Liabilities side of the balance sheet
(c) Profit and Loss A/c and asset side of the balance sheet
(d) Profit and Loss A/c and liabilities side of balance sheet
Answer:
(a) Assets side of the balance sheet
If prepaid rent appears in trial balance, it means that it has already been journalised and now its balance will be shown on the asset side of the Balance Sheet as an asset.

Accounting Process-III – CS Foundation Fundamentals of Accounting Notes

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

Capital and Revenue Items:
Expenditure – In accounting terms, expenditure means the amount spent or liability incurred for the value received.

Nature of Expenditure:
1. It is important to ascertain the nature of expenditure because the nature determines its treatment in accounts.

2. So based on nature, expenditures can be classified as –
Accounting Process-III – CS Foundation Fundamentals of Accounting Notes 1

Capital Expenditure – An expenditure which provides long term benefit to the business is known as a capital expenditure.

Features of Capital Expenditure:

  • Such expenditure results in an increase in earning capacity of business.
  • It normally yields benefit over a period extending beyond the accounting period.
  • It is of a non recurring nature.
  • It involves a fairly large amount.

Generally the following expenditures are considered as capital expenditures –

  • Acquisition of an asset not for the purpose of resale.
  • All sums spent to the point an asset is ready for use (e.g.- erection of fixed asset etc).
  • Expenditure for extension or improvement of fixed asset.
  • Expenditure incurred to acquire the right to carry on the business [e.g- license etc).
  • Any other expenditure which procures benefit over several years.

Treatment of Capital Expenditure:
Capital Expenditures lead to a creation of an asset and hence, are shown in the Balance Sheet.

Examples:
The following expenditures are capital expenditure:

  • Purchase of furniture worth ₹ 1,00,000 by Mr. A for his office.
  • Mr. B purchased a new machine worth ₹ 50,000. ₹ 500 were paid for its erection. Here, both 50,000 and ₹ 500 are capital expenditures.
  • ₹ 5,000 were spent by Mr. C on purchase of a second hand machinery.

Revenue Expenditure:
Amount spent for running a business is called revenue expenditure.

Features of Revenue Expenditure:

  • Revenue expenditure gives the benefit only for that accounting year in which it is incurred.
  • It generally involves a small amount.
  • This expenditure is done to maintain the earning capacity of the business.
  • It is of a recurring nature (i.e. occurring again and again).
  • It is the expenditure incurred to meet the day to day expenses of the business.

Generally the following expenditures constitute revenue expenditure:

  • Expenses incurred for running the business (like salaries, wages, power etc).
  • Expenditure for maintaining the fixed assets.
  • Expenditure incurred for purchase of material and stock.
  • Charging depreciation on fixed asset.

Treatment of Revenue Expenditure:
These are treated as an expense of regular nature and hence, debited to the Profit/Loss A/c of the year in which it is incurred.

Examples:
1. ₹ 2,000 was spent for white washing of the building. White washing is a regular feature and hence, is a revenue expenditure.
2. Payment of salary, wages, rent, electricity bill etc. are all recurring in nature and hence, revenue expenses.

Distinction between Capital Expenditure and Revenue Expenditure:

Basis Capital Expenditure Revenue Expenditure
1. Purpose It is incurred for acquisition of fixed assets for use in business which is not meant for sale. It is incurred for conduct of business.
2. Capacity It increases the earning capacity of the business. It is incurred for earning profits.
3. Period Its benefit extends to more than one year. Its benefit extends to only one year.
4. Nature of account It is a real account. It is a nominal account.
5. Depiction It is shown in the Balance Sheet. It is a part of the Trading or Profit and Loss Account.
6. Recurring It is normally non-recurring in nature. It is of recurring nature.
7. Examples (a) Cost of Plant and Machinery
(b) Cost of Land and Building.(c) Cost of Furniture and Fixtures.
(a) Depreciation on Plant and Machinery.
(b) Rent
(c) Repairs and Insurance.

Deferred Revenue Expenditure:
There are certain revenue expenditures whose benefit extents to more than one accounting year. Such expenditures are known as deferred revenue expenditures.

Features of Deferred Revenue Expenditures:

  • It is a type of or a part of revenue expenditure.
  • It is of a non-recurring nature.
  • Deferred Revenue Expenditure is to be written off during the years in which its benefits is to be received.
  • The unwritten portion of deferred revenue expenditure is shown on the asset side of Balance Sheet.

The following expenditures are considered as deferred revenue expenditure:

  • Large expenses on advertising on introducing a new product.
  • Cost incurred on experiments, researches.
  • Amount representing loss of an exceptional nature.
  • Example – property confiscated in a foreign country, loss on uninsured assets etc

Comparison between Capital and Deferred Revenue Expenditure:

Basis Capital Expenditure Deferred Revenue Expenditure
1. Benefit It result in a benefit which will accure to business for a long time. (i.e. 10-15 years). It result in a result which will accure to business for mid term (i.e. 3-5 years).
2. Losses In case of loss, capital expenditure is usually capable of being reconverted into cash. (i.e. short term or small loss). At times, heavy loss (such as loss of fire etc.) are treated as deferred revenue expenditure. They are written off over a period of 3-5 years.

Receipts:

  • Amount received in a business is termed as the receipt of the business.
  • Same as in case of expenditure, the treatment of receipt depends upon its nature.
  • Based on nature, receipts can be classified as – Revenue Receipts and Capital Receipts.

Capital Receipts:

  • Receipts of a capital nature are termed as capital receipts.
  • Capital receipts do not affect the Profit/Loss of that accounting period.
  • Amount realised from the sale of a capital asset or investment.
  • Instead of lump-sum payment, the payment is received in instalments.

The following receipts are considered as capital receipts:

  • Payments or contributions into the business by the proprietors, partners or shareholders towards the capital of the firm.
  • Amount received in the form of loans.
  • Proceeds of sale of fixed assets.

2. Revenue Receipts:
If an income received in lump-sum, it is a revenue receipt.

  • Receipts which have occurred due to normal business activity are known as Revenue Receipts.
  • These are the outcomes of firm’s activity in the accounting period.
  • Revenue receipts are shown in the Profit/Loss A/c and hence, affects the Profit/Loss of that accounting year.
  • Following are considered as revenue receipts:
  • Amount received from sale of goods
  • Commission received, fees received, interest received.

Distinction between revenue receipt and capital receipt:

Capital Receipt Revenue Receipt
1. It is the amount realised by sale of fixed assets or by issue of shares or debentures by secured or unsecured loans taken. It is the amount realised by sale of goods or rendering of services.
2. It is an item of Balance Sheet. It is an item of Trading and Profit and Loss Accounts.
3. Capital receipts are normally of non-recurring nature. Revenue receipts are normally of recurring nature.
4. Capital receipts are the receipts which are not obtained in course or normal business activities. Revenue receipts are obtained in the course of normal trading operations.
5. Capital receipts are normally not available for payment as profit to the owner of the business. Revenue receipts net of revenue expenses and expired portion of capital expenditure/differed revenue expenditure are available for distribution to the owner of the business.

Profits:

  • The difference between income and expenditure is termed as profit.
  • Profits can also be classified as – capital profits and revenue profits.

Capital Profits:

  • Profits of capital nature are termed as capital profits.
  • Capital profits are not earned during the ordinary course of business from normal business activities.

Capital profit arises from the following transactions –

  • Sale of fixed assets
  • Premium on issue of shares or debentures
  • Redemption of long term liabilities (like debentures etc.)

Treatment of Capital Profits:

  • These are not shown in the Profit/Loss Account as they are not concerned for any particular accounting year.
  • These are transferred to the Capital Reserve Account which is shown on the liability side of Balance Sheet.
  • Capital Reserve Account is utilized for meeting capital losses.

Revenue Profits:
Profits earned due to normal business activities are termed are revenue profits and are revenue in nature.

Revenue profits can be earned by:

  • Profits on sale of goods.
  • Discount received, commission earned, rent received etc.

Treatment of Revenue Profits:
Since they pertain to a particular accounting year and hence, are transferred to the Profit and Loss account.

Losses:
The difference between expenditure and income is termed as loss. Losses can be classified as capital losses and revenue losses.

Capital Losses:
Capital nature losses are termed as capital losses.

Capital Losses arises due to:

  • Selling of fixed assets (if assets are selling at a loss).
  • Loss on raising capital (issuing of shares etc.)
  • Loss on redemption of long term liabilities (like debentures etc.)

Treatment of Capital Losses
(i) If the amount of loss is large:

  • The loss is spread over a number of years and a part of it is charged in each year.
  • The balance is shown on the asset side of Balance Sheet.

(ii) If the amount of Loss is Small:
They are debited to the Profit/Loss Account of the year in which they occur.

Revenue Losses:
1. Losses of a revenue nature are termed as revenue losses.

2. They arise on account of:

  • Trading Loss (i.e. Loss on sale of goods)
  • Any other loss arising in the normal course of business.

Treatment of Revenue Loss:
Revenue Losses are charged to Profit and Loss Account in the year in which they occur.

Contingent Assets and Contingent Liabilities:
1. A contingent asset may be defined as a possible asset that arises from past events and whose existence will be confirmed only after occurrence or non-occurrence of one or more uncertain future events not within the control of the enterprise.

2. In simple words, when the occurrence of some economic benefit from an asset depends upon some future event, such asset is known as a contingent asset, (i.e. if the event will occur, economic benefit will arise otherwise not)

Example:
A company has a claim of ₹ 5,00,000. But suit is still pending in the legal process.
This is a contingent asset because the economic benefit of ₹ 5,00,000 depends upon an uncertain event i.e. winning of the legal suit. If the company looses the suit, this economic benefit will not arise.

  • Contingent asset will materialize or not depends upon the uncertain future event and hence, they are not shown in the company’s balance sheet.
  • These are shown in financial statements by way of notes only if it is virtually certain.
  • Usually, contingent assets are shown on the reports of approving authority.
  • When realisation of asset becomes certain, it should be recognized in financial statements.
  • Contingent asset are not recognized in financial statement.

Contingent Liability:
1. A contingent liability is a possible obligation arising from past events and may arise in future, depending on the occurrence or non occurrence of one or more uncertain future events.

2. A contingent liability may also be a present obligation that arises from past events.

3. In simple words, contingent liability refers to outflow of resources in future due to happening or non happening of an uncertain future event.

Example:
Income Tax Department imposes a penalty of ₹ 1,00,000 on AB Enterprises. The company files an appeal. Till the matter ¡s resolved in the appeal, it will be treated as a contingent liability because if the decision will not be in favor of the company then, it will lead to outflow of resources. Here, the uncertain event is the decision of the tribunal.

Some other examples of contingent liability can be:

  1. Claims against the company not acknowledged as debts.
  2. Guarantees given in respect of third party or bank guarantee.
  3. Outstanding law suit.
  4. Liability in respect of bill discounted.
  5. Statutory liabilities under dispute.
  6. A contingent liability is not recognized in financial statements, it is shown by way of footnotes.
  7. However if the loss becomes probable then, the contingent liability should be recognized.
  8. Contingent liabilities are recorded in a company’s account & shown in the balance sheet only when the both are probable and reasonably estimable.

Accounting Process-III MCQ Questions

1. An expenditure is capital in nature when:
(a) The receiver of the amount is going to treat it for the purchase of fixed assets
(b) If increases the quantity of fixed assets
(c) It is paid as interest on loans for the business.
(d) None of the above.
Answer:
(b) If increases the quantity of fixed assets

2. An expenditure is revenue in nature, when:
(a) It benefits the current period
(b) It benefits the future period
(c) It belongs to the previous period
(d) None of these.
Answer:
(a) It benefits the current period

3. The installation expenses for a new machinery will be debited to:
(a) Installation Expenses Account
(b) Cash Account
(c) Machinery Account
(d) Profit and Loss Account.
Answer:
(c) Machinery Account

4. The expenditure incurred for enhancing the capacity of an existing equipment is:
(a) A revenue expenditure
(b) A deferred revenue expenditure
(c) A Capital expenditure
(d) A charge on the profit to the business.
Answer:
(c) A Capital expenditure

5. Which of the following transaction is of capital nature?
(a) Purchase of a truck
(b) Replacement of old tyres
(c) Cost of repairing of truck
(d) All the above.
Answer:
(a) Purchase of a truck

6. Immediately after purchasing a new truck, ₹ 1,000 was paid to have the name of the company and other advertisement painted on the truck. This ₹ 1,000 is a:
(a) Capital Expenditure
(b) Deferred Revenue Expenditure
(c) Revenue Expenditure
(d) Loss.
Answer:
(a) Capital Expenditure

7. Expenditure incurred by a publisher for acquiring copy rights is a:
(a) Capital Expenditure
(b) Revenue Expenditure
(c) Deferred Revenue Expenditure
(d) None of the above.
Answer:
(a) Capital Expenditure

8. Cost of goods purchased for resale is an example of:
(a) Capital expenditure
(b) Revenue expenditure
(c) Deferred revenue expenditure
(d) None of these.
Answer:
(b) Revenue expenditure

9. A second hand car is purchased for ₹ 80,000. The amount of ₹ 1,000 is spent on its repairs, ₹ 500 is incurred to get the car registered in owner’s name and ₹ 1,500 is paid as dealer’s commission. The amount debited to car account will be:
(a) ₹ 81,000
(b) ₹ 81,500
(c) ₹ 80,000
(d) ₹ 83,000.
Answer:
(d) ₹ 83,000.

10. If repair cost is ₹ 20,000, white wash expenses are ₹ 10,000, cost of extension of building is ₹ 2,50,000 and cost of improvement in electrical wiring system is ₹ 20,000, the amount of revenue expenses will be:
(a) ₹ 2,70,000
(b) ₹ 3,00,000
(c) ₹ 30,000
(d) ₹.80,000.
Answer:
(c) ₹ 30,000

11. Amount of ₹ 10,000 spent as lawyer’s fee to defend a suit claiming the firm’s factory side is:
(a) Capital Expenditure
(b) Revenue Expenditure
(c) Deferred Revenue Expenditures
(d) None of the above.
Answer:
(b) Revenue Expenditure

12. Entrance fee of ₹ 20,000 received by a club is a:
(a) Capital Receipt
(b) Revenue Receipt
(c) Capital Expenditure
(d) Revenue Expenditure.
Answer:
(a) Capital Receipt

13. The cash price of a machine is ₹ 1,20,000 and its hire purchase price is ₹ 1,50,000 to be paid in five equal yearly installments. If a company purchases the machine on hire purchase basis, the amount of capital expenditure will be:
(a) ₹ 1,20,000
(b) ₹ 1,35,000
(c) ₹ 1,50,000
(d) ₹ 1,60,000.
Answer:
(a) ₹ 1,20,000

14. A sum of ₹ 50,000 was spent by a factory in overhauling its existing plant and machinery. It has enhanced its working life by five years. The aforesaid expenditure is:
(a) Revenue Expenditure
(b) Deferred Revenue Expenditure
(c) Capital Expenditure
(d) Partly Capital and Partly Revenue Expenditure.
Answer:
(c) Capital Expenditure

15. Amount spent on an advertisement campaign, the benefit of which is likely to last for three years is a:
(a) Capital Expenditure
(b) Revenue Expenditure
(c) Deferred Revenue Expenditure
(d) Contingent Expenditure.
Answer:
(c) Deferred Revenue Expenditure

16. Building white washing expenses is:
(a) Capital Expenditure
(b) Revenue Expenditure
(c) Deferred Revenue Expenditure
(d) None of the above.
Answer:
(b) Revenue Expenditure

17. Paper purchased for use as stationery is:
(a) Capital Expenditure
(b) Revenue Expenditure
(c) Deferred Revenue Expenditure
(d) None of the above.
Answer:
(b) Revenue Expenditure

18. When obligation is not probable or the amount expected to be paid to settle the liability cannot be measured with sufficient reliability it is called _________.
(a) Liability
(b) Provision
(c) Contingent Liabilities
(d) Contingent Assets.
Answer:
(c) Contingent Liabilities

19. In the balance sheet, contingent liability should be:
(a) Recognized
(b) Not Recognized
(c) Adjusted
(d) None of the above.
Answer:
(b) Not Recognized

20. Money spent ₹ 10,000 as travelling expenses of the directors on trips abroad for purchase of capital assets is:
(a) Capital Expenditures
(b) Revenue Expenditures
(c) Deferred Revenue Expenditures
(d) None of the above.
Answer:
(a) Capital Expenditures

21. Amount of ₹ 5,000 spent as Lawyer’s fee to defend a suit claiming that the firm’s factory side belonged to the plaintiff’s land _________.
(a) Capital Expenditure
(b) Revenue Expenditure
(c) Deferred Revenue Expenditure
(d) None of the above.
Answer:
(b) Revenue Expenditure

22. Subsidy of ₹ 40,000 received from the government by a manufacturing concern:
(a) Capital Receipt
(b) Revenue Receipt
(c) Capital Expenditures
(d) Revenue Expenditures.
Answer:
(b) Revenue Receipt

23. Insurance claim received on account of machinery damaged completely by fire:
(a) Capital Receipt
(b) Revenue Receipt
(c) Capital Expenditures
(d) Revenue Expenditures.
Answer:
(a) Capital Receipt

24. Interest on investments received from UTI.
(a) Capital Receipt
(b) Revenue Receipt
(c) Capital Expenditures
(d) Revenue Expenditures.
Answer:
(b) Revenue Receipt

25. A bad debt recovered during the year.
(a) Capital Expenditures
(b) Revenue Expenditures
(c) Capital Receipt
(d) Revenue Receipt.
Answer:
(d) Revenue Receipt.

26. Contingent asset usually arises from unplanned or unexpected events that give rise to:
(a) The possibility of an inflow of economic, benefits to the business entity.
(b) The possibility of an outflow of economic benefits to the business entity.
(c) Both (a) and (b)
(d) None of the above.
Answer:
(a) The possibility of an inflow of economic, benefits to the business entity.

27. If an inflow of economic benefits is probable, then a contingent asset is disclosed:
(a) In the financial statements
(b) In the report of the approving authority (Board of directors in the case of a company, and the corresponding approving authority in the case of any other enterprise).
(c) In the cash flow statement
(d) None of the above.
Answer:
(b) In the report of the approving authority (Board of directors in the case of a company, and the corresponding approving authority in the case of any other enterprise).

28. A revenue receipt is a receipt in substitution of:
(a) Source of Income
(b) Income
(c) Either (a) or (b)
(d) None of the these
Answer:
(b) Income

29. A capital receipt is a receipt in substitution of:
(a) Source of Income
(b) Income
(c) Both (a) or (b)
(d) Neither (a) nor (b)
Answer:
(a) Source of Income

30. Which of the following is NOT a source of capital receipt?
(a) Issue of Shares
(b) Loan from Bank
(c) Sale of Fixed Assets
(d) Sale of Goods
Answer:
(d) Sale of Goods

31. Amount received as a compensation under an agreement for the loss of future profits is:
(a) Revenue Receipt
(b) Capital Receipt
(c) Both (a) and (b)
(d) None of these
Answer:
(a) Revenue Receipt

32. Capital profits are generally transferred to:
(a) Capital Reserve
(b) P&LA/c
(c) Miscellaneous Receipts
(d) General Reserve
Answer:
(a) Capital Reserve

33. Capital losses are shown in:
(a) Debit side of P & L
(b) Liability side of B/S
(c) Asset side of balance sheet
(d) None of these
Answer:
(c) Asset side of balance sheet

34. Deferred Revenue Expenditure are considered on the basis of which accounting concept?
(a) Business entity concept
(b) Accrual concept
(c) Cost concept
(d) Revenue matching concept
Answer:
(d) Revenue matching concept

35. Which of the following statement is true?
(a) Capital expenditures are usually capable of being converted into cash
(b) Deferred Revenue expenditure can be converted into cash
(c) Both (a) and (b)
(d) None of these
Answer:
(a) Capital expenditures are usually capable of being converted into cash

36. If a suit is filed against the company and it is very much certain that the company shall have to pay ₹ 1,00,000 as damage charges, then ₹ 1,00,000 is:
(a) Contingent liability
(b) Provision
(c) Contingent asset
(d) All of the above
Answer:
(b) Provision

37. Cement purchased by a construction company for constructing its own factory is:
(a) Capital expenditure
(b) Revenue expenditure
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Answer:
(a) Capital expenditure

38. If a company pays ₹ 20,000 for retaining the title of land purchased by it is:
(a) Capital expenditure
(b) Revenue expenditures
(c) Both (a) and (b)
(d) None of the above
Answer:
(b) Revenue expenditures

39. The profits which are normally available for distribution of dividend are called:
(a) Revenue profits
(b) Capital profits
(c) Both (a) and (b)
(d) None of these
Answer:
(a) Revenue profits

40. Expenses incurred for trial runs of newly installed machinery is:
(a) Capital expenditure
(b) Revenue expenditure
(c) Both (a) and (b)
(d) None of the above
Answer:
(a) Capital expenditure

41. Interest on loan paid to bank which was taken for construction of a factory is:
(a) Revenue expenditure
(b) Capital expenditure
(c) Both (a) and (b)
(d) None of these
Answer:
(b) Capital expenditure

42. Which of the following is a deferred revenue expenditure?
(a) Expenditure paid in advance where a proportion service is taken and balance to be taken in future
(b) Expenditure which are hot allocable to one accounting year
(c) Loss of exceptional nature
(d) All of the above
Answer:
(d) All of the above

43. Advertisement expenses, discount on issue of debentures, cost of research and development etc. are examples of:
(a) Deferred Revenue expenditure
(b) Capital expenditure
(c) Revenue expenditure
(d) None of the above
Answer:
(a) Deferred Revenue expenditure

44. Which of the following expenditures is of capital nature?
(a) Purchase of goods
(b) Cost of repairs
(c) Wages paid for installation of machinery
(d) Rent of a factory.
Answer:
(c) Wages paid for installation of machinery
Capital expenditure is that expenditure which results in acquisition of an asset or which results in an increase in the earning capacity of a business. Thus, the expenditures which are not revenue nature are called capital expenditure e.g. purchase of machinery, wages paid for installation of machinery, etc. Moreover, purchase of goods, cost of repairs. Rent of a factory are revenue expenditures.

45. A liability which arises only on the happening of some event is called:
(a) Current liability
(b) Contingent liability
(c) Outstanding liability
(d) Fixed liability
Answer:
(b) Contingent liability
The possibility of an obligation to pay certain sums dependent on future events is known as contingent liabilities. Contingent liabilities are liabilities that may or may not be incurred by an entity depending on the outcome of a future event.

In other words, we can say that liability which arises only on the happening of some event is called contingent liability.

46. Heavy amounts were spent by Saroj for addition to machinery in order to increase the production capacity. The amount is _________.
(a) Revenue Expenditure
(b) Deferred Revenue Expenditure
(c) Capital Expenditure
(d) Liability
Answer:
(c) Capital Expenditure
That expenditure which results in an increase in production capacity or earning capacity or profitability of a business is known as Capital Expenditure. Thus, in the given case heavy amounts were spent by Saroj for addition to machinery is a Capital Expenditure.

47. What is the nature of expenses incurred on the issue of shares?
(a) Revenue
(b) Capital
(c) Neither (a) nor (b)
(d) Both (a) and (b)
Answer:
(b) Capital
Those expenditures whose benefit lasts for a long period of time is called Capital Expenditure. Thus, nature of expenses incurred on the issue of shares is of capital nature.

48. Which of the following is not a capital expenditure?
(a) Cost of issuing shares and debentures
(b) Wages paid for construction of a new office
(c) Purchase of a new spark plug for ₹ 10
(d) Repair of a second hand vehicle purchased.
Answer:
(c) Purchase of a new spark plug for ₹ 10
Capital Expenditure is that expenditure which results in acquisition of an asset or which results in an increase in the earning capacity of a business. Such expenditure provides benefit fora long time period. All sums spent up to the point an asset is ready to use should also be treated as capital expenditure Revenue Expenditure are the expenses whose benefit expires within a year of expenditure and is incurred to maintain the existing earning capacity of business.

Keeping above in mind:

  • Cost of issuing shares & debentures is Capital Expenditure
  • Wages paid for construction of new office is Capital Expenditure
  • Purchase of a new spark plug for ₹ 10 is a Revenue Expenditure
  • Repair of a second hand vehicle purchased is Capital Expenditure.

49. The cost of supplying uniform to employees is a:
(a) Capital expenditure
(b) Revenue expenditure
(c) Deferred revenue expenditure
(d) None of the above.
Answer:
(b) Revenue expenditure
The cost of supplying uniform to employees is a revenue expenditure as it is an employee welfare measure and there is no long term benefit of this expenditure.

50. Expenses incurred for obtaining a license for starting a factory are _________.
(a) Capital Expenditure
(b) Revenue Expenditure
(c) Deferred Revenue Expenditure
(d) Prepaid Expenses
Answer:
(a) Capital Expenditure
Capital expenditure is that expenditure which results in acquisition of an asset or which results in an increase in the earning capacity of a business. The benefit of such expenditure lasts for a long period of time. Since benefit of expenses incurred for obtaining a license for starting a factory lasts for a long period of time, so it is a Capital Expenditure.

51. Which of the following is not a capital expenditure?
(a) Purchase of land & building
(b) Amount paid for wages.
(c) Improving permanent assets.
(d) None of the above.
Answer:
(b) Amount paid for wages.
An expenditure which provides long term benefit to the business is known as a capital expenditure. In the given question amount paid for wages is the amount spent for running a business and hence is a revenue expenditure instead of capital expenditure.

52. When we get the property registered, then what type of expenditure it is?
(a) Capital
(b) Revenue
(c) Deferred Revenue
(d) None.
Answer:
(a) Capital
Capital expenditure is that expenditure the benefit of which lasts for a long period of time. Since, benefits of registration of property lasts for a long period, so it is capital expenditure.

53. Insurance received by the company is what for the company?
(a) Capital expenditure
(b) Revenue expenditure
(c) Capital receipt
(d) Revenue receipt.
Answer:
(c) Capital receipt
Amount of insurance received by the company is a capital receipt because it is non-recurring in nature & it is not received during the normal course of business.

54. Interest on drawings to be treated as:
(a) Revenue Expenditure
(b) Capital Expenditure
(c) Revenue Income
(d) Capital Income
Answer:
(c) Revenue Income
Interest on drawings is the interest charged on day-to- day routine drawings made by the partners of the partnership firm. Since, it is the income of the firm of recurring nature it will be treated as revenue income.

55. At the time of commencement of business, preliminary expenses incurred are treated as:
(a) Revenue Expenditure
(b) Capital Expenditure
(c) Deferred Revenue Expenditure
(d) None of the above.
Answer:
(c) Deferred Revenue Expenditure

Features of a deferred revenue expenditure:

  • It is a form of revenue expenditure.
  • It is of non-recurring nature.
  • It is written off during the years in which its benefits is to be received.
  • The unwritten off amount is shown at the assets side of Balance Sheet.

Since, preliminary expenses fulfill all the above conditions option (c) is correct.

56. The expired portion of capital expenditure is shown in the:
(a) An expense
(b) An income
(c) An asset
(d) A liability
Answer:
(a) An expense
The cost is distinguished as expired and unexpired. Expired costs are the ones which have to produce revenues. Thus, expired costs are recognised as an expense.

57. A business entity distributed goods worth ₹ 15,000 as free sample. The adjustment to be made is:
(a) Subtracted from purchases A/c and credited to Profit and Loss A/c
(b) Added to Purchase A/c and credited to Profit and Loss A/c
(c) Added to Purchase A/c and debited to Profit and Loss A/c
(d) Subtracted from Purchases A/c and debited to Profit and Loss A/c.
Answer:
(d) Subtracted from Purchases A/c and debited to Profit and Loss A/c.
Adjustment of goods distributed as free sample Free sample/charity A/c. Dr.
To Purchases/Trading A/c.
P/L A/c Dr.
To Free sample/advertisement A/c.
It is deducted from purchase or appear in trading on credit side and on Debit Side of Profit and Loss.

58. Sriram purchased a furniture for ₹ 6,000, the accounts affected from this transaction will be:
(a) Capital account and cash account
(b) Furniture account and cash account
(c) Furniture account and capital account
(d) Capital account and bank account.
Answer:
(b) Furniture account and cash account
Journal entry for purchase of furniture in cash will be:
Furniture A/c ……… Dr.
To Cash A/c
(Hence, the account affected are furniture and cash accounts.)

59. ₹ 25,000 spent on the overhaul of second hand purchased machines would be (x) Revenue expenditure (y) Capital expenditure (z) Deferred revenue expenditure. The options are:
(a) (x) and (y)
(b) (x) only
(c) (y) only
(d) (z) only.
Answer:
(c) (y) only
All the expenses that are incurred in order to bring the asset to its present locations, conditions and use are to be capitalised with the cost of the asset and should not be treated as revenue expenses. Hence, the overhauling expenses incurred on second hand machine purchased in order to bring it to use are to be capitalised with the cost of the asset.

60. Fee paid to the lawyer for the suit against property is a _________.
(a) Capital expenditure
(b) Revenue expenditure
(c) Both (a) & (b)
(d) None of the above
Answer:
(a) Capital expenditure
Capital expenditure is that expenditure which results in acquisition of an asset or which results in an increase in earning capacity of business. The benefit of such expenditure lasts for a long period of time. Fee paid to lawyer is a capital expenditure because suit is against property, property is fixed assets and this expenditure is non-recurring in nature.

61. Purchase of building is:
(a) Capital expenditure
(b) Revenue expenditure
(c) Deferred Revenue expenditure
(d) None of the above
Answer:
(a) Capital expenditure
Capital expenditure is that expenditure which results in acquisition of an asset or which results in an increase in earning capacity of business. Purchase of building will result in increase in the earning capacity of business.

62. Amount paid annually for renewal of patents:
(a) Capital
(b) Revenue
(c) Deferred expenditure
(d) None of the above
Answer:
(b) Revenue
Revenue expenses are those expense whose benefit expires within one year and which are incurred to maintain the earning capacity of existing assets. Amount paid annually for renewal of patents is revenue expenditure because this is incurred to maintain the value of patents.

63. What among the following is capital expenditure?
(i) Fee paid to lawyer for acquiring new property
(ii) Expenses on maintaining machine
(iii) Repairing expenses of acquiring
(a) (i) & (ii)
(b) Only (i)
(c) Only (iii)
(d) (i) & (iii)
Answer:
(d) (i) & (iii)
Capital expenditure is that expenditure which results in acquisition of an asset or which results in an increase in earning capacity of business. Thus, here option (i) i.e. fee paid to lawyer for acquiring new property, option (iii) Repairing expenses of acquiring are capital expenditure.

64. Deferred revenue expenses are?
(a) Shown as contingent liability
(b) Shown in balance sheet
(c) Completely charged to profit and loss account
(d) Completely charged to trading account.
Answer:
(c) Completely charged to profit and loss account
Deferred Revenue Expenses are completely charged to profit and loss account. Charges of these expenses are deferred because expenses benefits more than one accounting period. The basis of charge is usually proportionate to the benefit consumed/reaped.

65. The amount of sales tax collected by a retailer is recorded as:
(a) Asset
(b) Current Liability
(c) Expense
(d) Sales Revenue.
Answer:
(b) Current Liability
The amount of sales tax collected by a retailer Is recorded as Current Liability because it is to be paid within 1 year or in near future.

66. The expired portion of capital expenditure is shown in the financial statement as:
(a) An Income
(b) An asset
(c) An expense
(d) A liability
Answer:
(c) An expense
The expired portion of capital expenditure is shown in the financial statement as an expense and is shown on the debit side of Profit and Loss A/c.

67. Monthly and quarterly time periods are called _________.
(a) Fiscal period
(b) Calendar period
(c) Quarterly period
(d) Interim period.
Answer:
(d) Interim period.
Interim period is a financial reporting period shorter than a full financial year. Thus the monthly and quarterly time periods are called interim period.

68. Which of the following is not a capital expenditure?
(a) Installation charges for second hand machinery
(b) Issuing shares and debentures
(c) Wages paid for construction of a new office
(d) Purchase of a new spark plug for ₹ 10.
Answer:
(d) Purchase of a new spark plug for ₹ 10.
Capital Expenditure is an Expenditure which result in acquisition of an asset or increase in earning capacity of Business. Point d is not a Capital Expenditure.

69. Which of the following is not a capital expenditure?
(a) Cost of issuing shares and debenture
(b) Wages paid for construction of a new office
(c) Purchase of a new spark plug for ₹ 10
(d) Repair of a second hand vehicle purchased.
Answer:
(c) Purchase of a new spark plug for ₹ 10
Purchase of a new spark plug for ₹ 10 is revenue nature not of capital nature. So, it is a revenue expenditure. Purchase of new spark plug does not increase earning capacity of business. So, it is not capital expenditure.

70. The cost of supplying uniform to employee is a:
(a) Capital expenditure
(b) Revenue expenditure
(c) Referred revenue expenditure
(d) None of the above
Answer:
(b) Revenue expenditure
Cost of supplying uniform to employee is not increase in revenue earning capacity so, it is revenue expenditure. Supplying uniform is not a one time supply. It is of recurring nature and considered as revenue expenditure.

71. Commission is _________.
(a) Revenue
(b) Expense
(c) Both (a) and (b)
(d) None of the above.
Answer:
(a) Revenue
Commission received is an income or revenue, shown in credit side of Profit & Loss Account. Option (a) is correct.

72. While finalising the current year’’s profits, the company realised that there was an error in the valuation of closing stock of the previous year, closing stock was valued more by ₹ 50,000. As a result:
(a) Previous year’s profit was overstated and current year’s profit is also overstated
(b) Previous year’s profit was understated and current years profit is overstated
(c) Previous year’s profit was understated and current years profit is also understated
(d) Previous year’s profit was overstated and current year’s profit is understated.
Answer:
(d) Previous year’s profit was overstated and current year’s profit is understated.
Closing stock and profits are directly related i.e. if closing stock is over-stated, the profits will also be over-stated and vice-versa.

Opening stock on the other hand is inversely related to profits i.e. if opening stock is over-stated the profits-will be under-stated. Also closing stock of a year is opening stock of another year. Thus, overstatement of closing stock of previous year will overstate the profits of previous year but understate the profits of current year.

73. Expenses incurred for obtaining a license for Starting a factory are _________.
(a) Capital expenditure
(b) Revenue expenditure
(c) Deferred Revenue Expenditure
(d) Prepaid Expenses
Answer:
(a) Capital expenditure
Expenses incurred on obtaining a licence for starting of a factory are capital expenditure.

74. The expired cost of a deferred revenue expense is known as:
(a) Assets
(b) Expense
(c) Liability
(d) Provision
Answer:
(b) Expense
Expired cost of a deferred revenue expense is known as an expense, and becomes cost of the current year.

Accounting Process-II – CS Foundation Fundamentals of Accounting Notes

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

Accounting Process-II – CS Foundation Fundamentals of Accounting Notes

Accounting Errors:
Accounting Errors are the error committed by the persons responsible for recording and maintaining of a business in the course of accounting process.

Rectification of Errors:

  • Errors means unintentional omission or commission of accounts or amounts while recording entries.
  • Due to errors, the final accounts do not show a true and fair view. So these errors need to be rectified.
  • There can be many types of errors, some may effect trial balance while others may not. Even if they do not affect trial balance, there occurrence may distort the true picture of books and accounts.

We will be first studying these errors and their nature and then in the later part of chapter, we will study how to rectify these errors

Types of Errors:
(i) Error of principle

(ii) Clerical errors

    • Errors of omission (partial or complete)
    • Error of commission
    • Compensating errors
Type of Error Meaning Effect in Trial Balance
1. Error of principle When there is an error in complying accounting principles.
Example:
1. Treating capital expenditure as revenue or vice versa.
2. Recording sale of fixed asset as an ordinary sale.
No effect in Trial Balance. It will tally.
2. Error of omission
(i) Complete omission
(ii) Partial omission
1. When an entry is totally eliminated from being recorded.
2. When an entry is recorded partially i.e. any one aspect (debit or credit) is not recorded.
1. No effect on Trial Balance.
2. Trial Balance will be affected. It will not tally
3. Error of Commission Any type of error committed while recording entries.
Example:
1. Writing wrong amount
2. Writing correct amount but on wrong side
3. Wrong casting (totalling) of subsidiary book etc.
Trial Balance may or may not agree.

 

4. Compensating Errors When two errors are committed such that one compensates with that of another.
For Example:
Rahul’s A/c was debited with ₹ 100 instead of ₹ 1,000 while Ajay’s A/c was debited with ₹ 1,000 instead of ₹ 100.
Trial Balance will agree.

Effect of errors on the Trial Balance:
If a Trial Balance is matched then it does not mean that it is free from errors. Thus, errors can be classified into two types.

  • Errors which effect the Trial Balance, these errors are disclosed by the Trial Balance.
  • Errors which have no effect on the Trial Balance. These errors are not disclosed by the Trial Balance.

Errors disclosed by Trial Balance:
The following are the examples of errors disclosed by Trial Balance:

  • Error in casting subsidiary books
  • Error in carrying forward total of one page to another
  • Error in totalling the trial balance
  • Error in balancing an account
  • Error in preparation of schedules
  • Error in carrying the balance to the trial balance
  • Error of partial omission
  • Double Posting to an account
  • Error of posting from book of subsidiary record to ledger.

Errors not disclosed by Trial Balance:
The following errors are not disclosed by trial balance i.e. the trial matches even if the errors are present.

  • Error of complete omission i.e. when a transaction has been completely omitted from being recorded
  • Errors of commission
  • Compensatory errors
  • Errors of principle
  • Recording wrong amount in subsidiary book
  • Errors of duplication

Steps to Locate Errors:

  • First check whether the Trial Balance is agreeing, if not there is an indication of errors.
  • Even if the,trial balance has agreed still there may be errors (like compensating errors, errors of principle etc.)
  • Ensure that cash and bank balances have been transferred to the Trial Balance.
  • Balance the ledger accounts again and check whether the right totals have been transferred to trial balance.
  • Check the totals of subsidiary books again.
  • Check the opening balances.
  • Check the postings of nominal accounts first.

All above points will locate the errors which are to be rectified.

Rectification of Errors:

  • Errors whether affecting the trial balance or not should be rectified.
  • The process of rectifying the errors is called rectification of errors.

Need for Rectification:

  • To present correct accounting information
  • Ascertaining actual profit or loss
  • To disclose true financial position of the enterprise.

Stages of Rectification:

  • Before preparation of Trial Balance.
  • After preparation of Trial Balance but before preparation of Final Accounts.
  • In the next accounting period (i.e. After preparation of final accounts)

Rectification before preparation of Trial Balance:

  • Errors located before preparation of Trial Balance can be one sided errors or two sided errors.
  • There are different rectification treatments for both.

In case of one sided error:
These are the errors affecting only one side of an Account.
Example: The total of debit side was written as ₹ 1,000 instead of ₹ 10,000. This error will affect only the debit side.

Errors affecting one account may occur on account of following reasons-

  • Wrong casting
  • Wrong balancing
  • Wrong posting
  • Wrong carry forward
  • Omission of an amount in Trial Balance

Rectification of such errors:

  • No journal entry is to be passed.
  • Only the relevant account will be debited or credited.
  • The double entry for this rectification entry will not be complete.

An agreement of Trial Balance does not prove that

  • All transactions have been correctly analyzed and recorded in proper account.
  • All transactions have been recorded in the books of original entry.

Example:
Total of Purchase Book was ₹ 1,00,000 short.

Rectification :
Debit purchase A/c with ₹ 1,00,000 with the words “To short total of purchase book”.

In case of two sided error:

  • When there is an error which affects both aspects of a transaction (i.e. debit and credit) it is known as a two sided error.
  • Example – Complete omission of an entry.
  • Journal entry is required to be passed for these errors.

Errors which affect two or more accounts are as follows :

  • Error of complete omission
  • Error in recording subsidiary books
  • Errors in posting to wrong account with or without wrong amount
  • Error of principle.

Rectification of these errors

  • Step – 1 : Write the correct entry which should be passed.
  • Step – 2 : Write the entry which has been actually passed
  • Step – 3 : Reconcile both and pass the rectifying entry.

Example:
A credit sale of ₹ 1,000 to Mohan has been passed through purchase book.

Rectification –
1. Mohan had to be debited with ₹ 1,000 but he was credited with ₹ 1,000. So for rectifying it he has been debited with 2,000.
Accounting Process-II – CS Foundation Fundamentals of Accounting Notes 1

2. Purchase A/c was wrongly debited so for rectifying, it has been credited.

3. Sale A/c was not credited so for rectifying, it has been credited.

Rectification after preparation of Trial Balance but before preparation of final accounts:

  • If errors are located after preparation of Trial Balance, so they can’t be rectified using the previous methods because now the ledger accounts have already been closed.
  • Like earlier method, these errors can also be – (i) One sided (ii) Two sided.

One sided errors (errors affecting one A/c):

  • Since the ledger accounts are already closed so one aspect of an entry cannot be rectified by posting it in the respective ledger A/c.
  • For rectifying such errors, Suspense A/c is opened.

Suspense Account:

  • Sometimes, it is not possible for the accountant to locate the difference in the Trial Balance. But the books cannot be closed with such difference so he puts the Trial Balance difference to a newly opened account known as Suspense Account.
  • In simple words, it is an account in which the difference of the Trial Balance is put temporarily.
  • If debit side is less, Suspense A/c is debited and if credit side is less, it is credited.
  • When the errors are located, Suspense A/c will be closed.
  • A Suspense A/c is opened in the following cases – (a) to balance the disagreed Trial Balance (b) to post uncertain items. example: payment received from unknown person).

Rectification of errors:
Any difference in trial balance whether debit or credit shall be transferred to the Suspense A/c. This will lead to the agreement of trial balance total and when the error is located, the entry will be reversed and Suspense A/c will be closed.

Example:
Sales book was under cast by ₹ 500.
Due to this, credit side of Trial Balance should be short by ₹ 500.

Rectifying entry :
Suspense A/c Dr. 500
To Sales A/c 500
After this entry the trial balance will tally and final accounts can be prepared easily.

In case of two sided errors:
It will be rectified in the same manner as two sided errors before preparation of Trial Balance were rectified. (i.e. by passing a wrong entry, then right entry and then a rectification entry.)

Rectification of errors after preparation of Final A/c:
One sided errors – When errors are detected after preparation of final accounts, then they are rectified as follows:

(i) In case of Nominal Accounts:

  • Nominal Account balances are transferred to the P/L A/c at the year end.
  • So in the next accounting year, when rectification is to be made, we cannot use these nominal accounts.
  • For this purpose, a new account Profit and Loss Adjustment A/c is opened which substitutes all nominal accounts of the previous year.
  • For rectification, if nominal account is to be debited or credited then instead of nominal account, Profit and Loss Adjustment A/c is debited or credited.

(ii) In case of Real or personal Accounts:
The rectification is done through Suspense account and other concerned account affected by the errors.

Two sided errors:

    • in case of nominal accounts – Rectification is done through Profit & Loss Adjustment A/c and the other A/cs affected.
    • In case of real or personal accounts – The rectification is carried out through two or more concerned accounts affected by the errors without involving Profit and Loss Adjustment A/c.

Examples:
Wages paid ₹ 2,000 for installation of machinery has been charged to Wages Account

Rectification before preparation of final A/c’s Rectification after preparation of final A/c’s
Machinery A/c                                Dr. 2,000

To Wages A/c                                       2,000

Machinery A/c  Dr. 2,000

To P/L Adjustment A/c 2,000

Note:

  • After rectification of all errors of last year the balance of P/L Adjustment A/c is transferred to Capital A/c being the net profit or loss due to rectification of errors of last year.
  • If both accounts are nominal, then no rectification entry is passed.

Ascertainment of true profit of previous year:
To know the correct profit of previous year, the following is to be done:

  • If P/L Adjustment A/c reveals a profit, add this to the profit of the previous year.
  • If P/L Adjustment A/c shows a loss, it should be deducted from the profit of the previous year.

Accounting Process-II MCQ Questions

1. A Trial Balance will not tally if:
(a) Correct journal entry is posted twice
(b) The purchase on credit basis is debited to purchases and credited to cash
(c) ₹ 5,000 cash payment to creditors is debited to creditors for ₹ 500 and credited to cash as ₹ 5,000.
(d) None of the above.
Answer:
(c) ₹ 5,000 cash payment to creditors is debited to creditors for ₹ 500 and credited to cash as ₹ 5,000.

2. Error of commission do not permit:
(a) The Trial Balance to agree
(b) Correct total of Balance Sheet
(c) Correct totalling of Trial Balance
(d) None of the above.
Answer:
(a) The Trial Balance to agree

3. An item of ₹ 72 has been debited to a personal account as ₹ 27, is an error of:
(a) Commission
(b) Omission
(c) Principle
(d) None of the above.
Answer:
(a) Commission

4. Sales to Shyam of ₹ 500 not recorded in the books would affect:
(a) Shyam’s Account
(b) Sales Account
(c) Sales Account and Shyam’s Account
(d) Cash Account.
Answer:
(c) Sales Account and Shyam’s Account

5. Error of commission arises when:
(a) Any transaction is incorrectly recorded either wholly or partially
(b) Any transaction is left either wholly or partially
(c) Any transaction is recorded in a fundamentally incorrect manner
(d) None of these.
Answer:
(a) Any transaction is incorrectly recorded either wholly or partially

6. Errors which affect one account can be:
(a) Errors of Omission
(b) Errors of Principle
(c) Errors of Posting
(d) None of these.
Answer:
(c) Errors of Posting

7. Which of the following errors will not affect the Trial Balance?
(a) Wrong balancing of an account
(b) Wrong totalling of an account
(c) Writing an amount in the wrong account but on the correct side
(d) Omission of an account from Trial Balance.
Answer:
(c) Writing an amount in the wrong account but on the correct side

8. Purchase of office furniture for ₹ 20,000 has been debited to Purchase A/c it is :
(a) An error of omission
(b) An error of commission
(c) Compensating error
(d) An error of principle.
Answer:
(d) An error of principle.

9. In case a Trial Balance does not agree, the difference is put to:
(a) Suspense A/c
(b) Drawings A/c
(c) Capital A/c
(d) Trading A/c
Answer:
(a) Suspense A/c

10. Sale of typewriter that has been used in the office should be credited to:
(a) Sales A/c
(b) Cash A/c
(c) Capital A/c
(d) Typewriter A/c
Answer:
(d) Typewriter A/c

11. Suspense Account in the Trial Balance will be entered in the:
(a) Manufacturing A/c
(b) Trading A/c
(c) Profit & Loss A/c
(d) Balance Sheet.
Answer:
(d) Balance Sheet.

12. Rent paid to landlord amounting to ₹ 500 was credited to Rent A/c with ₹ 5,000. In the rectifying entry, Rent A/c will be debited with ₹ ________.
(a) 5,000
(b) 500
(c) 5,500
(d) 4,500
Answer:
(c) 5,500

13. Purchased goods from Gopal for ₹ 3,600 but was recorded in Gopal’s A/c as ₹ 6,300. In the rectifying entry, Gopal’s A/c will be debited with.
(a) ₹ 9,900
(b) ₹ 2,700
(c) ₹ 2,600
(d) ₹ 6,300
Answer:
(b) ₹ 2,700

14. Sohan returned goods to us amounting ₹ 4,200 but was recorded as ₹ 2,400 in his account. In the rectifying entry, Sohan’s A/c will be credited with.
(a) ₹ 1,800
(b) ₹ 4,200
(c) ₹ 2,400
(d) ₹ 6,600
Answer:
(a) ₹ 1,800

15. Error of principle arises when:
(a) Any transaction is recorded in fundamentally incorrect manner
(b) Any transaction is left to be recorded either wholly or partially
(c) Any transaction recorded but with wrong amount
(d) None of these.
Answer:
(a) Any transaction is recorded in fundamentally incorrect manner

16. Errors of carry forward from one year to another year affects:
(a) Personal Account
(b) Real Account
(c) Nominal Account
(d) Both Personal & Real A/cs.
Answer:
(d) Both Personal & Real A/cs.

17. Purchase of Office furniture ₹ 1,200 has been debited to General Expense Account. It is :
(a) A clerical error
(b) An error of principle
(c) An error of omission
(d) Compensating error
Answer:
(b) An error of principle

18. Goods purchased from A for ₹ 30,000 passed through the Sales Book. The error will result in :
(a) Increase in gross profit
(b) Decrease in gross profit
(c) No effect on gross profit
(d) Either (a) or (b)
Answer:
(a) Increase in gross profit

19. If the amount is posted in the wrong account or it is written on the wrong side of the account, it is called:
(a) Error of omission
(b) Error of commission
(c) Error of principle
(d) Compensating error.
Answer:
(b) Error of commission

20. A sale of ₹ 2,000 wrongly entered in the purchase book. It will:
(a) Decrease the gross profit by ₹ 2,000
(b) Increase the gross profit by ₹ 2,000
(c) Increase the gross profit of ₹ 4,000
(d) None of the above.
Answer:
(a) Decrease the gross profit by ₹ 2,000

21. Wages paid for erecting a machine should be debited to:
(a) Repair account
(b) Machine account
(c) Cash account
(d) Furniture account.
Answer:
(b) Machine account

22. Goods given as charity should be credited to:
(a) Charity account
(b) Sales account
(c) Purchase account
(d) Cash account.
Answer:
(c) Purchase account

23. The preparation of a trial balance is for:
(a) Locating errors of commission
(b) Locating errors of principle
(c) Locating clerical errors
(d) All of the above.
Answer:
(c) Locating clerical errors

24. Sales to Ram of ₹ 336, were not recorded. This will affect:
(a) Only Sales account
(b) Only Ram’s accounts
(c) Both the accounts
(d) None of these accounts.
Answer:
(c) Both the accounts

25. Sales to Ram, ₹ 336 have been debited to Shyam’s account. This will be rectified by:
(a) Debiting Ram’s account and Crediting Shyam’s account
(b) Debiting Shyam’s account and Crediting Ram’s account
(c) Crediting both the accounts.
(d) None of these.
Answer:
(a) Debiting Ram’s account and Crediting Shyam’s account

26. Discount allowed ₹ 93 to Mohan has been credited to his account by ₹ 39. The error will be rectified by:
(a) Crediting Mohan by ₹ 54
(b) Debiting Mohan by ₹ 54
(c) Debiting discount by ₹ 54
(d) None of these.
Answer:
(a) Crediting Mohan by ₹ 54

27. Out of the following the example of error of principle is :
(a) Omitted to record sales in sales book ₹ 500
(b) Under total of purchase book ₹ 100
(c) Purchased furniture ₹ 1, 000 was recorded in Purchase A/c
(d) None of the above.
Answer:
(c) Purchased furniture ₹ 1, 000 was recorded in Purchase A/c

28. While preparing Trial Balance, the head not included in trial balance.
(a) Drawing A/c.
(b) Suspense A/c.
(c) Capital A/c.
(d) Closing stock A/c.
Answer:
(d) Closing stock A/c.

29. ₹ 50,000 received from Ajay credited in the A/c of Abhay. It is an error of:
(a) Principle
(b) Commission
(c) Both (a) and (b)
(d) None.
Answer:
(b) Commission

30. There will be difference in trial balance if:
(a) Repair of ₹ 500 was recorded in Plant A/c
(b) Construction of roof ₹ 10,000 was recorded in Wages A/c instead of Building A/c.
(c) Paid salary to clerk ₹ 3,000 was recorded in Clerk A/c instead of Salary A/c.
(d) Received 5,000 from Manoj was debited to his account.
Answer:
(d) Received 5,000 from Manoj was debited to his account.

31. If rent received from tenant ₹ 5,000 is correctly entered in the trial balance but wrongly debited to the Rent A/c then:
(a) The trial balance will agree
(b) The debit side will exceed the credit side by ₹ 10,000
(c) The debit side total will exceed the credit by ₹ 5,000
(d) The credit side will exceed the debit side by ₹ 5,000
Answer:
(b) The debit side will exceed the credit side by ₹ 10,000

32. The method for preparing the trial balances are:
(a) Balance method
(b) Total method
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Answer:
(c) Both (a) and (b)

33. Wages paid for construction of office building debited to Wages A/c is a:
(a) Error of principle
(b) Error of commission
(c) Error of omission
(d) None of the above
Answer:
(a) Error of principle

34. Suspense Account is a:
(a) Real A/c
(b) Nominal A/c
(c) Personal A/c
(d) It has no nature
Answer:
(d) It has no nature

35. If the sales book is understated by ₹ 500, the rectification entry will be:
(a) Debit sales A/c, Credit debtors A/c
(b) Debit suspense A/c, Creditors sales A/c
(c) Debit debtors A/c, Credit sales A/c
(d) None of the above
Answer:
(b) Debit suspense A/c, Creditors sales A/c

36. In case of error of commission:
(a) The trial balance agrees
(b) The trial balance will not agree
(c) The trial may agree or may not agree
(d) None of the above
Answer:
(c) The trial may agree or may not agree

37. Sale of old car credited to Sales A/c is:
(a) Error of commission
(b) Compensating error
(c) Error of omission
(d) Error of principle
Answer:
(d) Error of principle

38. If the closing stock appears in the trial balance, then it shall be recorded in:
(a) Balance Sheet
(b) Trading A/c
(c) P & L A/c
(d) Both (a) and (b)
Answer:
(a) Balance Sheet

39. Depreciation A/c appearing in the Trial Balance will be recorded in:
(a) Balance Sheet
(b) Trading A/c
(c) P & L A/c
(d) None of the above
Answer:
(c) P & L A/c

40. Difference between the total of debit and credit side of Trial Balance is transferred to:
(a) Suspense A/c
(b) Trading A/c
(c) Miscellaneous A/c
(d) Difference A/c
Answer:
(a) Suspense A/c

41. ________ is used to ensure the arithmetical accuracy of the posting that has been done.
(a) Balance Sheet
(b) Ledger
(c) Trial Balance
(d) Subsidiary Books
Answer:
(c) Trial Balance

42. If the closing stock appears in the trial balance, then it implies that:
(a) It is adjusted against opening stock
(b) It is adjusted against closing stock
(c) It is adjusted against purchase
(d) It is adjusted against sales
Answer:
(c) It is adjusted against purchase

43. Purchase of machinery on credit is recorded in:
(a) Purchase book
(b) Journal proper
(c) Cash book
(d) None of the above
Answer:
(b) Journal proper

44. The balance of various accounts are transferred to:
(a) Trial Balance
(b) Ledger
(c) Balance Sheet
(d) P & L A/c
Answer:
(a) Trial Balance

45. If the Purchase A/c is debited by ₹ 200 in excess and the Sales A/c is credited in excess by ₹ 200, then it is a:
(a) Compensatory Error
(b) Errors of Commission
(c) Error of Principle
(d) None of the above
Answer:
(a) Compensatory Error

46. A mistake in transferring the balance of an account to the trial balance is:
(a) Error of omission
(b) Errors of principle
(c) Compensatory error
(d) Error of commission
Answer:
(d) Error of commission

47. A mistake in casting of a subsidiary book:
(a) Compensating Error
(b) Error of Principle
(c) Error of Omission
(d) Error of Commission
Answer:
(d) Error of Commission

48. If purchases made for cash is correctly entered in the cash book but wrongly credited to the Purchase A/c, then it is:
(a) Compensating Error
(b) Error of Principle
(c) Error of Commission
(d) None of the above
Answer:
(c) Error of Commission

49. If a transaction is entered in the subsidiary book but it is not posted in the respective ledger, then it is:
(a) Error of principle .
(b) Error of commission
(c) Partial omission
(d) Complete omission
Answer:
(c) Partial omission

50. Which of the following error shall NOT be disclosed by the Trial Balance?
(a) Error in casting subsidiary book
(b) Error in totalling the Trial Balance
(c) Errors in preparing schedules
(d) Error of duplication
Answer:
(d) Error of duplication

51. Which of the following error shall be disclosed by the Trial Balance?
(a) Error of complete omission
(b) Error of partial omission
(c) Error of duplication
(d) Recording wrong amount in subsidiary books
Answer:
(b) Error of partial omission

52. If a wrong amount is written in the subsidiary book then:
(a) The trial balance will not agree
(b) The trial balance will agree
(c) Both (a) and (b)
(d) None of these
Answer:
(b) The trial balance will agree

53. If a transaction is entered twice in a subsidiary book then:
(a) The trial balance will agree
(b) The trial balance will NOT agree
(c) Both (a) and (b)
(d) None of these
Answer:
(a) The trial balance will agree

54. If there is an error in carrying forward the total of one page to another, then:
(a) The trial balance will NOT agree
(b) The trial balance will agree
(c) Either (a) or (b)
(d) Neither (a) nor (b)
Answer:
(a) The trial balance will NOT agree

55. If a transaction worth ₹ 215 is written as ₹ 251, then it is:
(a) Error of principle
(b) Error of commission
(c) Partial omission
(d) Complete omission
Answer:
(b) Error of commission

56. If there is transposition in figures, then the difference in trial balance will be divisible by:
(a) Nine
(b) Ten
(c) Five
(d) Three
Answer:
(a) Nine

57. Which of the following errors will affect agreement of trial balance?
(a) Repairs on building have been debited to building account.
(b) The total of purchase book is short by ₹ 10
(c) Freight paid on new machinery has been debited to freight account.
(d) Sales of ₹ 500 to Ram has been debited to Shyam’s account.
Answer:
(b) The total of purchase book is short by ₹ 10

  • Repairs on building have been debited to building account.
  • Freight paid on new machinery has been debited to freight account.
  • Sales of ₹ 500 to Ram has been debited to Shyam’s account.

Above, all three entry was not cause of disagreement of Trial Balance as due to these errors the debit side and credit side of trial balance will remain unchanged. The total of purchase book is short by ₹ 10. Only this error will cause disagreement of trial balance as due to this error the total of debit side of trial balance will be short by ₹ 10 than the total of credit side of Trial Balance.

58. After preparing the Trial Balance, the accountant finds that the total of the debit side of Trial Balance is short by ₹ 1,000. This difference will be:
(a) Credited to suspense account
(b) Debited to suspense account
(c) Adjusted to any of account having debit balance
(d) Adjusted to any of account having credit balance
Answer:
(b) Debited to suspense account
When a trial balance does not agree, efforts are made to locate errors and rectify them. However if reason for disagreement of trial balance cannot be found, the only treatment is that difference will be debited or credited to suspense account.
If total of the debit side of Trial Balance is short by ₹ 1,000 the difference will be debited to suspense account.

59. Overcasting of sales book by ₹ 1,000 is a type of:
(a) One sided error
(b) Two sided error
(c) Compensating error
(d) Error of principle
Answer:
(a) One sided error
Overcasting of sales book by ₹ 1,000 is a type of one sided error because due to this error only credit side of trial balance will be increased by ₹ 1,000 and debit side of trial balance will remain unchanged.

60. Which one of the following is correct about errors?
(a) Errors always have impact on profits
(b) Errors do not have any impact on profits
(c) Errors may or may not have impact on profits
(d) Errors always lead to decrease in profit.
Answer:
(c) Errors may or may not have impact on profits
Unintentional omission or commission or amounts and accounts in the process of recording the transactions are commonly known as errors. Errors may occur as a result of mathematical mistakes, mistakes in applying accounting policies, misinterpretation of facts, or oversight.
Thus, errors may or may not have impact an profits.

61. Whitewash charges of building ₹ 500 have been wrongly debited to building account. It is an example of:
(a) Compensating error
(b) Error of principle
(c) Error of omission
(d) Error of commission
Answer:
(b) Error of principle
Whitewash charges of building is a revenue expenditure and it will be debited to profit and loss A/c. If any amount is debited to building A/c, it will be treated as capital expenditure.
So, ‘whitewash charges of building ₹ 500 have been debited to building account’ is an error of principle.

62. If the effect of an error is cancelled by the effect of some other errors, the errors are known as:
(a) Error of principle
(b) Compensating Error
(c) Error of omission
(d) Error of commission
Answer:
(b) Compensating Error
If the effect of an error is cancelled by the effect of some other error, the trial balance will naturally agree. Thus these type of errors are known as Compensating Error.

63. Which of the following errors will cause the disagreement of Trial Balance?
(a) ₹ 821 received from Ravi has been debited to Kavi
(b) A purchase of ₹ 281 from Sanju has been debited to his account as ₹ 281
(c) An invoice for ₹ 480 is. entered in the Sales Book as ₹ 840
(d) All of the above.
Answer:
(c) An invoice for ₹ 480 is. entered in the Sales Book as ₹ 840
An invoice of ₹ 480 is entered in the sales book as ₹ 840. This error was not cause the disagreement of Trial balance as due to this error the sales a/c will be credited by ₹ 840 and debtor a/c will be debited by ₹ 840 and hence the trial balance will match.

64. Error of principle will not permit:
(a) Correct total of the balance sheet
(b) Correct total of the trial balance
(c) The trial balance to agree
(d) None of the above.
Answer:
(d) None of the above.
Error of principle has no impact on the agreement of trial balance and even after this error the trial balance agrees and hence balance sheet will also be totalled correctly.
Hence, answer is none of the above.

65. Which of the following errors is an error of omission ________.
(a) Sale of ₹ 1,000 was recorded in the purchase journal
(b) Salary paid to Mohan and Vikas have been debited to their personal accounts
(c) The total of sales journal has not been posted to the sales account
(d) Repairs to building have been debited to building account.
Answer:
(c) The total of sales journal has not been posted to the sales account
Error of omission means any transaction or entry is completely or partially omitted from the books of accounts. Thus ‘the total of sales journal has not been posted to the sales A/c’ is an error of omission.

66. Which of the following errors are revealed by the trial balance ________.
(a) Errors of principle
(b) Errors of omission
(c) Errors of commission
(d) None of the above.
Answer:
(c) Errors of commission
Due to the errors of commission like

  • Wrong casting of subsidiary books
  • Posting the wrong amount in the ledger
  • Posting an amount on the wrong side
  • Wrong balancing of an account.

The Trial Balance will not agree and will thus, the error will be revealed by the Trial Balance.

67. Which of the following errors will result into non-agreement of the trial balance?
(a) Totalling the returns inwards journal as ₹ 11,400 instead of ₹ 12,600
(b) Recording a sales invoice for ₹ 5,600 as t 6,500 in the Sales Journal
(c) Failing to record a purchase invoice for ₹ 54,000 in the Purchases Journal
(d) Recording in the Purchases Journal, an invoice, for acquiring a non-current asset for ₹ 60,000.
Answer:
(a) Totalling the returns inwards journal as ₹ 11,400 instead of ₹ 12,600
“Totaling the return inwards journal as ₹ 11,400 instead of ₹ 12,600 “ is an error of commission means that the return inward account will be posted with wrong amount and this mistake will be reflected in the Trial Balance as the Trial Balance will not agree.

68. ₹ 1,000 was paid as rent to the landlord Krishna. This amount was debited to Krishna’s personal account. This error will ________.
(a) Affect agreement of the trial balance.
(b) Not affect agreement of the trial balance
(c) Affect the suspense account
(d) None of the above.
Answer:
(b) Not affect agreement of the trial balance
₹ 1,000 was paid as rent to the landlord, Krishna. This amount was debited to Krishna’s personal account. This error is a error of principle. Since error of principle does not affect agreement of trial balance, therefore option (b) is right.

69. If Sales is done and by mistake A’s account is transferred to Purchase A/c in such a case which accounts are affected?
(a) Purchase a/c
(b) A’s a/c
(c) Both (a) and (b)
(d) None of the above.
Answer:
(c) Both (a) and (b)
If sale is done to A, the accounting entry will be-
A’s A/c Dr.
To Sales A/c
In the given question, accounting entry passed
Purchases A/c Dr.
To Sales A/c.
The rectifying entry for the same will be-
To Purchases A/c
Hence, it affects both, Purchases A/c and A’s A/c.

70. The credit side of trial balance shows:
(a) Bank
(b) Cash
(c) Equipment
(d) None of the above
Answer:
(d) None of the above
The credit side of trial balance resembles the liabilities & income. Bank cash & equipment are assets & shown on debit side, hence, option (d) is correct.

71. A sold goods of ₹ 500/- to Z which is entered in purchase book as 5,000. What will be the entry after rectification?
Accounting Process-II – CS Foundation Fundamentals of Accounting Notes 2
Answer:
Accounting Process-II – CS Foundation Fundamentals of Accounting Notes 3

72. “Wrong Casting of subsidiary book” is which type of error?
(a) Error of Omission
(b) Error of Commission
(c) Error of Principle
(d) Compensating Errors.
Answer:
(b) Error of Commission
An error of commission is a type of error committed while recording entries.
Hence, wrong casting of subsidiary book is an error of commission.

73. When two or more errors are committed in such a way that effect of one error is compensated by another error. Which type of error is this?
(a) Error of Commission
(b) Compensating Error
(c) Error of Principle
(d) None of these.
Answer:
(b) Compensating Error
A compensating error is when two or more errors are committed in such a way that the effect of one error is compensated by another error.
Hence option (b) is correct.

74. If there is any error in trial balance which is not effecting its total, will it affect any accounting procedure?
(a) Yes
(b) No
(c) Don’t know
(d) Partly Yes.
Answer:
(b) No
If there is any error in trial balance which is not affecting its total, for example the compensating errors, there will be no effect on accounting procedure.
Hence, option (b) is correct.

75. Which of the following errors are revealed by the trial balance?
(a) Errors in balancing account
(b) Errors of principle
(c) Errors of complete omission
(d) Compensatory Errors
Answer:
(a) Errors in balancing account
Trial balance do not tally when balances which are posted from Ledger A/c differ. Thus errors in balancing accounts are revealed by trial balance.

76. Which type of error is there in trial balance?
(a) Compensating error
(b) Error of Principal
(c) Error of omission/partial omission
(d) All are applicable
Answer:
(c) Error of omission/partial omission
Trial balance in general, discloses any error which affects one side of the account. These errors are disclosed by the trial balance as both sides of trial balance do not agree.
Compensating errors are group of errors, the total effect of which is not reflected in trial balance. Errors of principle do not affect the agreement of trial balance. Errors of omission/partial omission affects the agreement of trial balance.

77. When an entry is passed correctly but on wrong A/c:
(a) Compensating error
(b) Error of commission
(c) Error of principle
(d) Error of omission
Answer:
(b) Error of commission
If the transaction was debited or credited to a wrong account with correct amount and on the correct side in the books of original entry or in the ledger, it is known as error of commission.

78. Which of the following types of errors effect only one account?
(I) Error casting
(II) Errors of carry forward
(III) Error of posting
(a) (I) and (II)
(b) (I) and (III)
(c) (II) and (III)
(d) (I), (II) and (III)
Answer:
(d) (I), (II) and (III)
Trial balance in general, discloses any error which affects one side of the account. These errors are disclosed by the trial balance as both side of trial balance do not agree.

79. Commission received ₹ 2,500 correctly entered in cash book but posted on debit side of commission account, in trial balance:
(a) Debit total will be greater by ₹ 5,000 than the credit total
(b) Credit total will be greater by ₹ 5,000 than the debit total
(c) The credit total will be greater by ₹ 2,500 than the debit total
(d) The debit total will be greater by ₹ 2,500 than the credit total.
Answer:
(d) The debit total will be greater by ₹ 2,500 than the credit total.
If commission received ₹ 2,500 correctly entered in cash book but posted on debit side of commission account in trial balance then debit total will be greater by ₹ 2,500 than the credit total to make a balance.

80. If a credit sale of ₹ 15,400 to Prem has been entered as ₹ 14,500. The journal entry for rectifying the error would be:
(a) Debit Prem A/c 900
Credit Sales A/c 900
(b) Debit Sales A/c 900
Credit Prem A/c 900
(c) Debit Cash A/c 900
Credit Sales A/c 900
(d) Debit Prem A/c 15,400
Credit Sales A/c 15,400
Answer:
(a) Debit Prem A/c 900
Credit Sales A/c 900
If credit sale of ₹ 15,400 to Prem has been entered as ₹ 14,500. The journal entry for rectifying the error would be:
Prem A/c 900
To Sales A/c 900

81. Which of the following is not a Clerical error?
(a) Error of Partial Omission
(b) Error of Commission
(c) Error of Principle
(d) Error of Omission
Answer:
(c) Error of Principle
Errors other than error of principle are clerical error. Clerical Error include:

  • Errors of Omission
  • Errors of Commission
  • Compensating error.

82. Whitewashing charges ₹ 50,000 were debited to building A/c, it is-
(a) Error of omission
(b) Error of commission
(c) Error of principle
(d) Compensating error
Answer:
(c) Error of principle
Error of principles arise because of the failure to differentiate between capital expenditure and revenue expenditure and capital receipts and revenue receipts. The distinction between capital and revenue is of relevance because any incorrect adjustment or allocation in this respect would falsify the final results shown by the profit and loss account and the balance sheet. These errors do not affect the agreement of trial balance. Hence this is the example of error of principles.

83. Suspense A/c is a ________.
(a) Real A/c
(b) Personal A/c
(c) Nominal A/c
(d) None of the above
Answer:
(d) None of the above
A suspense A/c could be a Personal, Real or Nominal A/c depending on the situation. Let us take an example you have received ₹ 5,000 but are not aware from whom and on what account this amount has been received, you can place this amount at the credit of Suspense A/c.

Later if you come to know that it was received from Ramesh, then suspense account is a personal account. Similarly if you come to know that this amount was received against sale of old computer, suspense account is a real account. In case it was received on account of services you have rendered, it is an income account i.e. a nominal account. So suspense account can be of any type.

84. Commission received ₹ 2,500 correctly entered in the cash book but posted to the debit side of commission account. In the Trial Balance:
(a) The credit total will be greater by ₹ 5,000 than the debit total
(b) The debit total will be greater by ₹ 5,000 than the credit total
(c) The Credit total will be greater by ₹ 2,500 than the debit total
(d) The debit total will be greater by ₹ 2,500 than the credit total.
Answer:
(b) The debit total will be greater by ₹ 5,000 than the credit total
Commission received is posted on the wrong side of the Commission A/c. In the Trial Balance the Debit side total will be greater by ₹ 5,000 than Credit side total.

85. An invoice from a supplier of office equipment has been debited to the stationary account. This error is known as:
(a) An error of commission
(b) A compensating error
(c) An error of principal
(d) An error of omission
Answer:
(a) An error of commission
Supplier of office equipment has been debited to Stationery A/c. This is an Error of Compensation.

86. Which of the following errors will not cause the disagreement of trial balance?
(a) ₹ 821 received from Ravi has been debited to Kavi
(b) A purchase of ₹ 281 from Sanju has been debited to his account as ₹281
(c) An invoice for ₹ 480 is entered in the sales book as ₹ 840
(d) All of the above.
Answer:
(a) ₹ 821 received from Ravi has been debited to Kavi
₹ 821 has been received from Ravi has been debited to Kavi is a compensating error but it does not shown in the trial balance and trial balance will be agreed.

87. Error of principle will not permit:
(a) Correct total of the balance sheet
(b) Correct total of the trial balance
(c) The trial balance to agree
(d) None of the above
Answer:
(d) None of the above
Due to error of principle, trial balance will agree, also Balance Sheet will agree and it is not shown in Trial Balance.

88. Charge legal expenses instead of Machinery A/c is an error of:
(a) Principles
(b) Commission
(c) Partial ommission
(d) None of the above.
Answer:
(a) Principles
Legal expenses are expenditure and machinery is an asset. Whenever there is a failure in differentiating between capital expenditure and revenue expenditure, capital receipts and revenue receipts arise and this is known as an Error of Principle. So, option (c) is correct.

89. ₹ 1,000 was paid as rent to the landlord, Krishna. This amount was debited to Krishna’s personal account. This error will:
(a) Affect agreement of the trial balance
(b) Not affect agreement of the trial balance
(c) Affect the suspense account
(d) None of the above
Answer:
(b) Not affect agreement of the trial balance
Since, the error is an error of principle, hence the agreement of the Trial Balance will not be affected.

90. Which of the following errors is on error of omission:
(a) Sale of ₹ 1,000 was recorded in the purchase journal
(b) Salary paid to Mohan and Vikas have been debited to their personal accounts
(c) The total of sales journal has not been posted to the sales account
(d) Repairs to building have been debited to building account
Answer:
(c) The total of sales journal has not been posted to the sales account
Error of omission arise on account of some act of omission on the part of the person responsible for the maintenance of books of account.

Example : Some transaction is entered in the subsidiary book, but is not posted to the ledger. Thus total of sales journal not posted to the sales account is an error of omission.

91. Which of the following errors are revealed by the trail balance:
(a) Errors of principle
(b) Errors of omission
(c) Errors of commission
(d) None of the above
Answer:
(c) Errors of commission
Errors of commission, generally result in disagreement of the trial balance and hence are reflected by it.

92. Which of the following errors will result into non-agreement of the trial balance?
(a) Totalling the returns inwards journal as ₹ 11,400 instead of ₹ 12,600
(b) Recording a sales invoice for ₹ 5,600 as ₹ 6,500 in the sales journal
(c) Failing to record a purchase invoice for ₹ 54,000 in the purchases journal
(d) Recording in the purchases journal, an invoice for acquiring a non-current assets, for ₹ 60,000
Answer:
(a) Totalling the returns inwards journal as ₹ 11,400 instead of ₹ 12,600
Totalling the returns inward journal as 11,40.0 instead of ₹ 12,600 will affect the agreement of trial balance, as Debit and Credit amounts in ledger will be different.

Accounting Process-I – CS Foundation Fundamentals of Accounting Notes

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

Accounting Process-I – CS Foundation Fundamentals of Accounting Notes

Accounting is the language of business – Accounting cycle/Accounting process:
Accounting Process-I– CS Foundation Fundamentals of Accounting Notes 1

Recording – Journal:

  • A journal is a book of original entry/prime entry wherein transactions are first recorded before being posted to the ledger.
  • A journal is that book of accounts in which transactions are original recorded in a chronological order.
  • An entry done in a journal is called a journal entry and the process of recording a transaction In a journal is known as joumalising.
  • A journal records both debit and credit aspects of a transaction.

A journal contains the following columns:

  • Date : The date on which the transaction took place.
  • Particulars : The two aspects (debit and credit) are recorded here.
  • Ledger Folio (L.F.) : It records the page number in the ledger in which the accounts of the given entry are posted.
  • Amount (Debit) : Debit amount is recorded in the Dr. column.
  • Amount (Credit) : Credit amount is recorded in the Cr. column.

Specimen of Journal:
In the Books of ………
Journal Entries

Date Particulars L.F Debit
Amount (₹)
Credit
Amount (₹)
(i) (ii) (iii) (iv) (v)

Process of Journalising:

  • Step – 1 : Ascertain what accounts are affected in the transaction.
  • Step – 2 : Ascertain the nature of the account (i.e. real, nominal, personal etc.).
  • Step – 3 : Apply the rules of debit and credit to each type of account.
  • Step – 4 : Pass the entry.

Example:
Transaction – Rent paid in cash.
Step – 1 : Ascertain what accounts are affected.
Accounts affected are -Rent A/c and Cash A/c

Step – 2 : Ascertain the nature of account
Rent A/c – Nominal A/c (Expense)
Cash A/c – Real A/c (Asset)

Step – 3 : Apply golden rules of accounting:
Rent (Nominal A/c’s) – Debit all expenses
Cash A/c (Real) – Credit what goes out (as cash is going out of business)

Step – 4 : Pass the entry
Rent A/c Dr. (with the amount of rent)
To Cash A/c (Being rent paid in cash)

Note:

  • The account to be credited is written proceeded by a word “To”.
  • After every entry, a brief, description of the transaction is given in the next line of the entry. This is called narration and is written in brackets.

Points to Note:

  • When goods are purchased “Purchase A/c” is debited, when goods are sold “Sales A/c” is credited.
  • If it is not stated that purchase/sale is on cash/credit, it is assumed to be on credit.
  • In a journal, the amount of debit and credit columns of each page are totaled and carried forward to the next page. Total c/f (carried forward)
  • Sometimes a journal entry may have more than one debit or credit aspects. These types of entries are known as compound entries. The total of debit should be equal to total of credits or vice versa.

Example:
Mohan purchased goods worth ₹ 15,000. He got ₹ 1,000 as discount and paid ₹ 14,000 in cash.
Purchase A/c Dr. 15,000
To Cash A/c 14,000
To Discount received A/c 1,000
(Being goods purchased on discount)
Discount received is an income and is a Nominal A/c.

Ledger (Principal Book of Accounts):

  • A ledger may be defined as a “book or register which contains in a summarized and classified form, a permanent record of all transactions”.
  • It is a book which contains all set of accounts – (real, personal, nominal).
  • Ledger is known as a principal book of account as it helps in the preparation of Trial Balance and financial statements (like P/L, B/S etc.)

Format of ledger
(i) It has two sides left side is the debit side whereas right side is the credit side.

(ii) It has the following columns :

  • Date – Date of transaction
  • Particulars – Name of other account
  • Journal folio (J. F.) – Page number of journal where entry was first recorded
  • Amount: Amount of transaction
  • Same columns will be there on the other side also.Accounting Process-I– CS Foundation Fundamentals of Accounting Notes 2

Ledger posting:
(i) The process of transferring the information contained in a journal to a ledger is called posting.

(ii) Steps for posting:
For account debited in a journal entry:

  • Step – 1 : Identify the ledger account to be debited
  • Step – 2 : In the debit side of that A/c, post the other aspect of the entry in the particular column by writing the word “To ”.
  • Step – 3 : Enter other details like amount J. F. and date.

(iii) Rules for posting:

  • The name of the account in the journal and ledger should exactly be the same.
  • The account debited in journal will be debited in ledger and the account credited in ledger will be credited.
  • The word “To” will be added in the name of the accounts on the debit side and “By” will be added in the accounts on the credit side example : “To Sales”, “By Purchases” etc.
  • The page number of the journal from where the entry is transferred is to be written in the Folio Column.
  • The date of transactions is to be written in the date column.

Example
Rent paid in cash ₹ 10,000
Entry : Rent A/c Dr. 10,000
To Cash A/c 10,000
Posting Debit aspect of the entry – Rent A/c

Ledger Rent A/c
Accounting Process-I– CS Foundation Fundamentals of Accounting Notes 3

Difference between Journal and Ledger:

  1. Journal is book of original entry while ledger is book of second entry.
  2. Journal book is chronological while ledger is analytical.
  3. Process of recording in journal is “journalising” while the process of recording in ledger is known as “Posting”.

For an account credited in the journal entry:

  • Step – 1 : Identify the ledger A/c to be credited
  • Step – 2 : In the credit side of that account post the other aspect of the entry in the particular column by writing the word “By __________”.
  • Step – 3 : Enter other details like date, amount J. F. (if any)

Example:
Taking same example as above
Rent A/c Dr. 10,000
To Cash A/c 10,000

Posting credit aspect of the entry:
Ledger Cash A/c
Accounting Process-I– CS Foundation Fundamentals of Accounting Notes 4
Balancing Ledger Account:

  1. After all entries are posted, both the sides of an account are totalled.
  2. For closing an account, both the side’s total shall be equal.
  3. If any side falls short of another, in order to make them equal, a balance figure is placed on the side which is short. This process is known as balancing of an account.
  4. If debit side total is more – the difference will be placed on credit side and it will be called as a debit balance.
  5. If credit side is more – the difference will be placed on the debit side and it will be called as a credit balance.

Note : The balance of an account is always known by the side which is greater.
Example : Lets take the Rent A/c of the above example

Rent A/c
Accounting Process-I– CS Foundation Fundamentals of Accounting Notes 5
Debit side was more by ₹ 10,000 so balance has been written on the credit side to make them equal. This is a debit balance since debit side is more.

(v) Note that all ledger accounts (except Nominal Accounts) are balanced. The nominal accounts are transferred to P/L A/c.

Difference between Journal and Ledger:

Basis Journal Ledger
Nature of Book It is a book of primary entry. It is a book of final entry.
Basis for Preparation Primary documents (such as vouchers, receipts etc.) are the basis for recording transactions in the journal. Journal is the basis for recording transactions in the ledger.
Stage of Recording Recording in the Journal is the first stage. Recording in the ledger is the second stage.
Process The process of recording in Journal is called journalising. The process of recording in the ledger is called posting.

Subsidiary Book:

  • Subsidiary books are the journals in which transactions of similar nature are recorded at the first instance.
  • Recording all the entries in the journal will make the journal too lengthy and complicated. So for similar nature transactions separate journals are prepared which are known as subsidiary books.
  • The transactions will first time be recorded in subsidiary books.

Types of subsidiary books:
1. Purchase Book – It records the credit purchase of goods traded in.
Ex- Stationery dealer purchased stationery in credit from Ram.

  • Entries in the Purchase Book are made from the Invoice received from supplier at the end of week/month, total of Purchase Book is Debited to Purchases A/c in ledger.
  • Entries in the purchase books are made from the invoice received from the supplier.

2. Sales Day Book:

  • It records the credit sale of goods dealt in (traded in) Ex- Furniture dealer sold furniture on credit.
  • Sales Book is prepared on the basis of copies of invoice sent to customers.

3. Purchase Return Book (Return Outward Book):
It records the goods or material returned to the supplier that have been purchased on credit. When goods are returned to the supplier a debit note is issued to him indicating that his account has been debited with the amount mentioned in the debit note.

4. Sales Return Day Book (Return Inwards Book):
It records the goods or material returned by the purchaser that had been sold on credit. When goods are returned by a customer a credit note is sent to him mentioning that his account has been credited with the value of goods returned.

5. Bills Receivable Book:
It records the bills of exchange or promissory note received by a business entity.

6. Bills Payable Book:
It records the acceptance given to the creditor in the form of bills or promissory notes.

7. Cash Book:
It is used to record all cash transactions of the business.

8. General Journal OR Journal Proper:
All entries which cannot be recorded in the above subsidiary books are recorded in this book.
Example: opening entries, closing entries, rectification entries, purchase and sale of asset etc.

In Journal proper book, following types of transactions are recorded:

  • opening journal entry
  • closing journal entry
  • adjustment entry
  • transfer entry
  • rectification entry
  • purchase of fixed asset/stationary on credit
  • sale of worn out or obsolete assets on credit

Cash Book:

  • Cash book is a book of prime entry in which cash and bank transactions of a business are recorded in a chronological order.
  • Cash book acts as both a book of original entry and a ledger. Hence, it is both a principal book and a subsidiary book. It records transaction concerning cash receipts and cash payments.

A cash book has two sides:

  • Debit: Cash and cheques received are recorded here.
  • Credit: Cash and cheque payments are recorded here.

Types of Cash Book:
It records only one aspect of transaction i.e. cash.
Accounting Process-I– CS Foundation Fundamentals of Accounting Notes 6

Single column or Simple cash book:
It is known as single column cash book because it contains only one amount column of cash.

Format of simple cash book:
Cash Book (Single Column)
Accounting Process-I– CS Foundation Fundamentals of Accounting Notes 7

Double (two) column cash book

  • It is so called because it has two amount columns on both sides cash column and discount column.
  • Discount column on the debit side represents discount allowed while discount column on the credit side represents discount received.

Format of two column cash book
Accounting Process-I– CS Foundation Fundamentals of Accounting Notes 8

Three column (triple column) cash book:

  • It is so called because it contains three amount columns
  • Discount column, Cash column, Bank column
  • Discount column – for discount received and allowed Cash column – cash received and paid
  • Bank column – money deposited and money withdrawn from bank
  • When triple column cash book is prepared there is no need for preparing a bank account in ledger.

Format of triple column cash book:
Cash Book (Triple Column)
Accounting Process-I– CS Foundation Fundamentals of Accounting Notes 9

Concept of Contra Entry

  • An entry which involves both cash and bank transactions is called a contra entry.
  • These entries are posted on both sides of a cash book one in bank column and other in cash column, [on opposite sides]
  • A letter “C” is written in L. F. column showing that the entry is a contra entry.

Example
Cash withdrawn from bank ₹ 5,000 Entry will be –
Cash A/c Dr. 5,000
To Bank A/c 5,000
(Being cash withdrawn from bank)
Showing the above entry in three column cash book

Cash Book (Triple Column)
Accounting Process-I– CS Foundation Fundamentals of Accounting Notes 10

Petty Cash Book:

  • Petty means small. A book which is used to record petty cash expenses of the business is called a petty cash book
  • Petty cash book is maintained by a petty cashier
  • The system by which petty cash book is maintained is known as “Imprest System”
  • Petty cash book is treated either as a part of double entry system or as a Memorandum Book.

Note:
Imprest System:
Under this system, a fixed sum of money is given to the petty cashier for meeting expenses for a prescribed period called as Float. At the end of the period, if all the amount is used for meeting expenses, then the same fixed sum will be given to the petty cashier for the next period. If any balance is left, then the remaining amount will be given to the cashier for the next period.

Example:
If ₹ 500 are given to the cashier every month. For the month of January, he spends only ₹ 300 and 1200 are left with him. So, for the month of Feb, he will be given only additional ₹ 300 to complete ₹ 500.

The balance of petty cash book at the year end is shown as an asset.
Petty cash book has columns showing the amount allocated to various expenses.

Format petty cash book
Petty Cash Book
Accounting Process-I– CS Foundation Fundamentals of Accounting Notes 11

Trial Balance:

  • “A trial balance is a statement prepared with the debit and credit balances of the ledger accounts including cash and bank balances to test the arithmetical accuracy of books”.
  • Trial balance is a statement and not an account and it is not a part of double entry system.
  • As per double entry system, totals of debit shall always be equal to totals of credit. To check this trial balance is prepared.
  • All the accounts showing either a debit balance or a credit balance are placed in the trial balance and the debit and credit balances of the accounts are placed at the debit and credit columns respectively. At last, total of debit and credit columns are done.
  • If both sides are equal – the accounts are arithmetically correct.
    However, there may be some hidden errors.

Objectives of Trial Balance:

  • Check arithmetical accuracy of ledger accounts.
  • Helps in preparation of final accounts.
  • Helps in detection of errors.

Methods of Preparing Trial Balance:
(i) Totals method:
Here totals of debits and credit columns of ledger accounts are taken to the trial balance.

(ii) Balance method:
Here the debit or credit balances of the ledger accounts are taken to the debit or credit column of trial balance respectively.

Format of Trial Balance
Specimen of Trial Balance
Trial Balance as at _______
Accounting Process-I– CS Foundation Fundamentals of Accounting Notes 12

Accounting Process-I MCQ Questions

1. The process of recording a transaction in the journal is called :
(a) Posting
(b) Journalising
(c) Tallying
(d) Casting
Answer:
(b) Journalising

2. Personal accounts are related to:
(a) Assets and liabilities
(b) Expenses, losses and incomes
(c) Debtors, creditors etc.
(d) All of these.
Answer:
(c) Debtors, creditors etc.

3. Goods given away as charity would be credited to :
(a) Sales A/c
(b) Purchase A/c
(c) Charity A/c
(d) Cash A/c.
Answer:
(b) Purchase A/c

4. Which of the following statements is true :
(a) Building account is a nominal account
(b) Outstanding rent account is a non-personal account
(c) Every debit has a corresponding credit
(d) Incomes are debited.
Answer:
(c) Every debit has a corresponding credit

5. Which one of the following is a personal account?
(a) Capital A/c
(b) Livestock Account
(c) Goodwill Account
(d) Outstanding salaries A/c.
Answer:
(d) Outstanding salaries A/c.

6. Payment of salary is recorded by:
(a) Debiting salary A/c crediting cash A/c
(b) Debiting cash A/c crediting salary A/c
(c) Debiting employee A/c crediting cash A/c
(d) Debiting employee A/c crediting salary A/c.
Answer:
(a) Debiting salary A/c crediting cash A/c

7. Debit means:
(a) An increase in asset
(b) An increase in liability
(c) A decrease in asset
(d) An increase in proprietor’s equity.
Answer:
(a) An increase in asset

8. Journal is a book of:
(a) Original entry
(b) Secondary entry
(c) All cash transactions
(d) All non-cash transactions.
Answer:
(a) Original entry

9. Which of the following is a cash transaction?
(a) Sold goods
(b) Sold goods to a customer
(c) Sold goods to a customer on credit
(d) Sold goods to a customer on account.
Answer:
(a) Sold goods

10. Received first and final payment of 60 paise in a rupee from the official receiver of: Mr. Ram who owed ₹ 2,000.
(a) Discount allowed A/c be debited with ₹ 800
(b) Bad debts recovered A/c be debited with ₹ 1,200
(c) Bad debt A/c be credited with ₹ 800
(d) Bad debt A/c be debited with ₹ 800.
Answer:
(d) Bad debt A/c be debited with ₹ 800.

11. Patent Right is :
(a) Personal Account
(b) Real Account
(c) Nominal Account
(d) Expense Account.
Answer:
(b) Real Account

12. The debts written of as bad, if recovered subsequently are :
(a) Credited to Bad Debts Recovered Account
(b) Credited to Debtors Account
(c) Debited to Profit and Loss Account
(d) None of the above.
Answer:
(a) Credited to Bad Debts Recovered Account

13. Insurance unexpired account is a:
(a) Real Account
(b) Personal Account
(c) Nominal Account
(d) None of these.
Answer:
(b) Personal Account

14. A withdrawal of cash from business by the proprietor should be debited to:
(a) Drawing Account
(b) Capital Account
(c) Cash Account
(d) Purchase Account.
Answer:
(a) Drawing Account

15. If the total of debit side of an account exceeds the total of its credit side it indicates:
(a) Debit balance
(b) Credit balance
(c) Either debit or credit
(d) Neither debit nor credit.
Answer:
(a) Debit balance

16. Credit balance of a personal account indicates :
(a) Cash balance
(b) Amount payable
(c) Amount receivable
(d) None of the above.
Answer:
(b) Amount payable

17. Cash account will show :
(a) Debit or credit balance
(b) A credit balance
(c) A debit balance
(d) None of these.
Answer:
(c) A debit balance

18. The words To Balance bIV or ‘By Balance b/f are recorded in the ‘Particulars Column’ of an account at the time of positing of _______.
(a) An opening entry
(b) A closing entry
(c) An adjusting entry
(d) A transfer entry.
Answer:
(b) A closing entry

19. Normally, the following accounts are balanced :
(a) Personal accounts and nominal accounts
(b) Real accounts and nominal accounts
(c) Personal accounts and real accounts
(d) All accounts.
Answer:
(c) Personal accounts and real accounts

20. Ledger Book is popularly known as:
(a) Secondary book of accounts
(b) Principal book of accounts
(c) Subsidiary book of accounts
(d) None of the above.
Answer:
(b) Principal book of accounts

21. Posting refers to the process of transferring information from _______.
(a) Journal to general ledger
(b) General ledger accounts to journals
(c) Source documents to journals
(d) Journals to source documents.
Answer:
(a) Journal to general ledger

22. L. F. (i.e., ledger folio column) in the journal is filled at the time of:
(a) Journalising
(b) Balancing
(c) Posting
(d) Casting.
Answer:
(c) Posting

23. The cash book records :
(a) All Cash Receipts
(b) All Cash Payments
(c) All Cash Receipts and Payments
(d) Cash and Credit Sale of Goods.
Answer:
(c) All Cash Receipts and Payments

24. Cash book is a:
(a) Subsidiary Book
(b) Subsidiary Journal and Ledger
(c) Ledger Account
(d) None of these.
Answer:
(b) Subsidiary Journal and Ledger

25. Which of the following will be recorded as contra entry :
(a) Withdrew from bank for personal use
(b) A cheque received from X lodged into bank on the same day
(c) A cheque received from Y a week earlier lodged into bank
(d) A customer directly deposited the money in our bank account.
Answer:
(c) A cheque received from Y a week earlier lodged into bank

26. Cash book does not record :
(a) Credit Purchases
(b) Credit sales
(c) Outstanding expenses
(d) All the above transactions.
Answer:
(d) All the above transactions.

27. The balance in the petty cash book is:
(a) An expenses
(b) A profit
(c) An asset
(d) A liability.
Answer:
(c) An asset

28. Balance of cash book is posted to the ledger _______.
(a) In the cash account
(b) In bank account
(c) Nowhere
(d) Either (a) or (b)
Answer:
(c) Nowhere

29. A cheque received and deposited in the same day is recorded in the:
(a) Cash column of the cash book
(b) Bank column of the cash book
(c) Credited in the cash book
(d) Debited in the cash book
Answer:
(b) Bank column of the cash book

30. Which is entered on the debit side of cash book?
(a) Trade discount allowed
(b) Trade discount received
(c) Cash discount allowed
(d) Cash discount received.
Answer:
(c) Cash discount allowed

31. In a three column Cash Book :
(a) Only cash column and discount columns are balanced
(b) Only bank column and discount columns are balanced
(c) Only cash column and bank columns are balanced
(d) Cash column, bank column and discount columns are balanced.
Answer:
(c) Only cash column and bank columns are balanced

32. Purchases book is used to record :
(a) All purchases of goods
(b) All credit purchases
(c) All credit purchase of goods
(d) All credit purchases of assets other than goods.
Answer:
(c) All credit purchase of goods

33. Sales returns book is used to record :
(a) Returns of fixed assets sold on credit
(b) Returns of goods sold for cash
(c) Returns of goods sold on credit
(d) Sales of goods.
Answer:
(c) Returns of goods sold on credit

34. Purchase for office furniture on account is recorded in:
(a) General journal
(b) Cash book
(c) Purchases book
(d) Sales book.
Answer:
(a) General journal

35. A periodic total of the purchase book is :
(a) Posted to the debit of the Purchase Account
(b) Posted to the debit of the Sales Account
(c) Posted to credit of the Purchases Account
(d) Posted to the credit of Sales A/c.
Answer:
(a) Posted to the debit of the Purchase Account

36. Acceptances received and recorded in Bills Receivable Book are transferred to ledger:
(a) On the debit side of relevant personal accounts
(b) On the credit side of relevant personal account
(c) Nowhere
(d) Either (a) or (b)
Answer:
(b) On the credit side of relevant personal account

37. Closing entries are recorded in :
(a) Cash Book
(b) Ledger
(c) Journal proper
(d) Balance sheet.
Answer:
(c) Journal proper

38. The following is entered in the journal proper:
(a) Trade discount allowed
(b) Trade discount received
(c) Cash discount allowed
(d) Opening entry.
Answer:
(d) Opening entry.

39. Credit purchase of stationery by a stationery dealer will be recorded in:
(a) Purchase Book
(b) Sales Book
(c) Cash Book
(d) Journal proper (General Journal)
Answer:
(a) Purchase Book

40. A debit note issued to a creditor for goods returned by us is to be recorded in the:
(a) Bills Receivable Bank
(b) Purchases Book
(c) Journal proper (General Journal)
(d) Purchases Return Book.
Answer:
(d) Purchases Return Book.

41. A Return Inwards Book is kept to record:
(a) Returns of goods sold
(b) Returns of anything purchased
(c) Returns of goods purchased
(d) Returns of anything sold.
Answer:
(a) Returns of goods sold

42. Journal proper is used to record:
(a) All cash purchases of assets other than goods
(b) All cash sales of assets other than goods
(c) Returns of fixed assets purchased on credit
(d) Recovery of an amount already written off as bad debts.
Answer:
(c) Returns of fixed assets purchased on credit

43. A second hand motor car was purchased on credit from Mohan will be recorded in the _______.
(a) Journal proper (General Journal)
(b) Sales Book
(c) Cash Book
(d) Purchase Book.
Answer:
(a) Journal proper (General Journal)

44. Which of these is a method of preparation of Trial Balance?
(a) Total method
(b) Balance method
(c) Both (a) and (b)
(d) None.
Answer:
(c) Both (a) and (b)

45. If Trial Balance tallies, it surely means that there are no errors in books of account. This statement is _______.
(a) True
(b) False
(c) Partly True
(d) None.
Answer:
(b) False

46. In a journal, if it is not stated that purchase or sale is on credit or cash, it is assumed to be on _______.
(a) Cash
(b) Credit
(c) Any of the above
(d) None of these.
Answer:
(b) Credit

47. Which of the following is both a principal as well as a subsidiary book?
(a) Sales Book
(b) Purchase Book
(c) Cash Book
(d) Bills Receivable Book
Answer:
(c) Cash Book

48. Goods worth ₹ 25,000 sold to Amit will be recorded in journal as:
(a) Debit the sales A/c & credit Amit A/c
(b) Credit sales A/c & debit Amit A/c
(c) Debit sales A/c & credit cash A/c
(d) None of the above
Answer:
(b) Credit sales A/c & debit Amit A/c

49. Payment of electricity bill of the proprietor’s house will be debited to:
(a) Drawings A/c
(b) Cash A/c
(c) Electricity A/c
(d) None of the above
Answer:
(a) Drawings A/c

50. If goods worth ₹ 10,000 are stolen, then it shall be recorded in:
(a) Purchase Book
(b) Journal Proper
(c) Purchase Return Book
(d) All of the above
Answer:
(b) Journal Proper

51. If the business issues a debit note to the seller of such goods, the entry will be passed in:
(a) Purchase book
(b) Purchase return book
(c) Sales book
(d) Sales return book
Answer:
(b) Purchase return book

52. The total of purchase book will be posted in ledger on:
(a) Debit side of purchase A/c
(b) Credit side of purchase A/c
(c) Credit side of cash A/c
(d) None of the above
Answer:
(a) Debit side of purchase A/c

53. The total of sales book will be posted in ledger in:
(a) Debit side of sales A/c
(b) Credit side of sales A/c
(c) Debit side of cash A/c
(d) None of the above
Answer:
(b) Credit side of sales A/c

54. The total of purchase return will be taken in the ledger in:
(a) Debit side of purchase return A/c
(b) Credit side of purchase return A/c
(c) Debit side of cash A/c
(d) Credit side of cash A/c
Answer:
(b) Credit side of purchase return A/c

55. The total of sales return will be recorded in the ledger by:
(a) Debiting sales return A/c
(b) Crediting sales return A/c
(c) Crediting cash A/c
(d) Debiting cash A/c
Answer:
(a) Debiting sales return A/c

56. Which of the following transactions will be recorded in the sales book of Bharat Furnitures & Co.?
(a) Sold Table for cash ₹ 10,000
(b) Sold Chair to Mehra & Co. for ₹ 12,000
(c) Sold an old Typewriter for ₹ 2,000 to Verma & Co.
(d) Both (a) and (c)
Answer:
(b) Sold Chair to Mehra & Co. for ₹ 12,000

57. Which of the following transactions will be recorded in the purchase book of Sharma Cloth House?
(a) Purchased Cloth worth ₹ 2,000 for cash
(b) Purchased stationery worth ₹ 200 on credit
(c) Purchased cloth worth ₹ 5,000 from Verma Garments
(d) None of the above
Answer:
(c) Purchased cloth worth ₹ 5,000 from Verma Garments

58. _______ is prepared to ensure arithmetical accuracy of the accounts.
(a) Ledger
(b) Balance Sheet
(c) Trail Balance
(d) P & L A/c
Answer:
(c) Trail Balance

59. Which of the following is NOT included in Trial Balance?
(a) Closing stock
(b) Opening stock
(c) Suspense A/c
(d) All of the above
Answer:
(a) Closing stock

60. If the trial balance is NOT reconciled, then it is reconciled by opening:
(a) Suspense A/c
(b) Reconciliation A/c
(c) Miscellaneous A/c
(d) None of the above
Answer:
(a) Suspense A/c

61. The trial balance is a:
(a) Account
(b) List
(c) Subsidiary book
(d) Statement
Answer:
(d) Statement

62. The overdraft balance in the Savings A/c of the bank will be at the _______.
(a) Debit side of Bank column
(b) Credit side of Bank column
(c) Neither (a) nor (b)
(d) Both (a) and (b)
Answer:
(b) Credit side of Bank column

63. The closing balance of Wages A/c is transferred to:
(a) P & L A/c
(b) Trading A/c
(c) Balance sheet
(d) None of the above
Answer:
(b) Trading A/c

64. Which of the following transactions are recorded in purchase book?
(a) All purchases made during the year
(b) Only credit purchases during the year
(c) Only credit purchases of goods traded by the firm
(d) None the above
Answer:
(c) Only credit purchases of goods traded by the firm

65. Goods destroyed by fire will be credited to:
(a) Fire A/c
(b) Purchases A/c
(c) P&LA/c
(d) None of the above
Answer:
(b) Purchases A/c

66. If goods worth ₹ 500 are taken by the proprietor for personal use, the entry will be:
(a) Debit Drawings A/c, Credit Purchases A/c
(b) Debit Purchases A/c, Credit drawings A/c
(c) Debit Proprietor A/c, Credit Purchases A/c
(d) Credit Proprietor A/c, Debit stock A/c
Answer:
(a) Debit Drawings A/c, Credit Purchases A/c

67. The Balance in the bank pass book is:
(a) Debit
(b) Credit
(c) Both Debit & Credit
(d) None of the above
Answer:
(c) Both Debit & Credit

68. If the owner of a business gives his personal car to the business, then which A/c will be debited and credited:
(a) Debit Capital A/c & Credit Car A/c
(b) Debit Car A/c & Credit Capital A/c
(c) Debit Car A/c & Credit Cash A/c
(d) Debit Car A/c & Credit Drawings A/c
Answer:
(b) Debit Car A/c & Credit Capital A/c

69. If the goods are destroyed by fire and the insurance company accepts the full claim, then the entry will be :
(a) Debit Insurance Co., Credit Cash
(b) Debit Insurance Co., Credit Purchase
(c) Debit Cash, Credit Purchase
(d) Debit Purchase, Credit Cash
Answer:
(b) Debit Insurance Co., Credit Purchase

70. If Ajay sells his car and brings the proceeds in the business, then the entry will be:
(a) Debit Car, Credit Cash
(b) Debit Car, Credit Capital
(c) Debit Cash, Credit Capital
(d) None of the above
Answer:
(c) Debit Cash, Credit Capital

71. If goods worth ₹ 1,00,000 are sold at a trade discount of 10%, then the amount to be entered in discount is:
(a) 10,000 (Dr.)
(b) Zero
(c) 10,000 (Cr.)
(d) None of the above
Answer:
(b) Zero

72. Capital A/c is a:
(a) Real A/c
(b) Personal A/c
(c) Nominal A/c
(d) Both (a) & (c)
Answer:
(b) Personal A/c

73. Which A/c is credited in case of bad debts?
(a) Cash A/c
(b) Bad Debts
(c) Debtors A/c
(d) P&LA/c
Answer:
(c) Debtors A/c

74. Goods given on charity will be credited to:
(a) Charity A/c
(b) Goods A/c
(c) Purchases A/c
(d) Sales A/c
Answer:
(c) Purchases A/c

75. Prepaid Salary is a:
(a) Real A/c
(b) Nominal A/c
(c) Personal A/c
(d) None of the above
Answer:
(c) Personal A/c

76. is sent to a supplier on returning the goods:
(a) Debit Note
(b) Invoice
(c) Credit Note
(d) Material Receipt
Answer:
(a) Debit Note

77. Trade discount:
(a) To recorded in the discount A/c
(b) Not recorded in the books at all
(c) Recorded only in case of
(d) Not to be considered in determining special cases the net sales price
Answer:
(b) Not recorded in the books at all

78. The expired portion of capital expenditure is shown in the financial statement is:
(a) An income
(b) An expense
(c) An asset
(d) A liability
Answer:
(b) An expense
The expired portion of capital expenditure is known as depreciation. Since, depreciation is treated as expenses, it is transferred to debit side of P/L A/c. So, expired portion of capital expenditure is shown in financial statement as an expenses.

79. Maintaining petty cash book is:
(a) Mandatory
(b) Necessary
(c) Dependant on nature of business
(d) All of the above.
Answer:
(c) Dependant on nature of business
Payments in cash of small amount like travelling, postage, refreshment etc. are petty cash expenses. In big organisation, it is not possible to maintain petty expenses for main cashier. In small organisation the number of petty expenses is less.
So, maintaining petty cash book is dependent on nature of business.

80. Purchase book records:
(a) All purchases made by the firm
(b) All purchases of fixed asset used by the firm
(c) Credit purchases of goods dealt in by the firm
(d) Cash purchases of goods dealt in by the firm.
Answer:
(c) Credit purchases of goods dealt in by the firm
Purchase book is meant for recording the purchase of goods on credit only. Because cash purchase are recorded in the cash book.

81. Sales Book is prepared:
(a) On the basis of Cash Book
(b) On the basis of copies of invoices.
(c) Both (a) and (b)
(d) On the basis of sales orders.
Answer:
(b) On the basis of copies of invoices.
In the sales book, only credit sale of goods are recorded, sales book is prepared on the basis of copies of invoice sent to customers.

82. Expenses paid in cash and recorded as assets before they are used are called _______.
(a) Accrued Expenses
(b) Interim Expenses
(c) Prepaid Expenses
(d) Unearned Expenses
Answer:
(c) Prepaid Expenses
Expenses paid in cash and recorded as assets before they are used are called prepaid expenses. Those expenses which have been paid in advance and whose benefit will be available in future are called prepaid expenses.
Example : insurance premium, rent etc. paid in advance.

83. In which book does the cash sales will be recorded _______.
(a) Cash Book
(b) Purchase Book
(c) General Journal
(d) Sales Book.
Answer:
(a) Cash Book
In sales book, only credit sales are recorded. Cash sales will be recorded in cash book because all cash receipts are recorded in cash book on credit side.

84. Which of the following transactions would have no impact on owner’s capital?
(a) Purchase of land from the proceeds of a bank loan
(b) Withdrawal of profits
(c) Net loss
(d) Cash brought in by owner as additional capital
Answer:
(a) Purchase of land from the proceeds of a bank loan
Withdrawal of profit is a drawings and drawings is reduced from the owner’s capital. Net loss reduces the capital. Cash brought in by owner as additional capital increase the owner’s capital. Thus these three transaction would have impact on owner’s capital. On taking a bank loan, the following entry will be passed
Cash A/c Dr.
To Bank Loan A/c
On purchase of Land the following entry will be passed –
Land A/c Dr.
To Cash A/c
On considering these entry we found that purchase of land from the proceeds of a bank loan would have no impact on owner’s capital.

85. Which of the following accounts will be credited, when the goods are purchased for cash?
(a) Stock Account
(b) Cash Account
(c) Supplier’s Account
(d) Work in progress Account
Answer:
(b) Cash Account
When the goods are purchased for cash, the following entry will be passed –
Purchase A/c Dr.
To Cash A/c
So, cash A/c will be credited.

86. Which of the following would not be regarded as an asset?
(a) A piece of equipment owned by a business
(b) A sum of money owned by the business
(c) An inventory of goods that is yet to be sold
(d) A building that has been taken on rent by the business for its use.
Answer:
(d) A building that has been taken on rent by the business for its use.
A piece of equipment owned by a business is treated as fixed assets. A sum of money owned by the business is treated as current assets.
An inventory of goods that is yet to be sold is treated as closing stock which is an asset A building that has been taken on rent by the business for its use would not be regarded as an asset because company have no ownership of that building.

87. Withdrawal of cash from bank for official use will result into:
(a) Increase of assets
(b) Increase of expenses
(c) No impact on assets
(d) None of the above.
Answer:
(c) No impact on assets
On withdrawal of Cash from bank for office use the following entry will be passed –
Cash A/c Dr.
To Bank A/c
This entry will have no impact on assets since, on one hand, cash A/c will increase and on the other hand, bank A/c will decrease.

88. Franchise rights, goodwill and patents are the examples of:
(a) Liquid Assets
(b) Tangible Assets
(c) Intangible Assets
(d) Current Assets
Answer:
(c) Intangible Assets
Franchise rights, goodwill and patents are the example of Intangible Assets. As intangible Assets are those assets which cannot be seen or touched or felt and there is no physical form to show it.

89. Which of the following is not an example of current asset?
(a) Prepaid Expenses
(b) Account Receivables
(c) Short term securities
(d) Unearned Income.
Answer:
(c) Short term securities
Current assets are those that are meant to be converted into cash as soon as possible.
Example : stock of goods, prepaid expenses, account receivable, unearned income.
Short term securities are regarded as Liquid Assets and not as current assets.

90. The three columns on each side of a three columnar cash book represent:
(a) Real and personal accounts
(b) Real and nominal accounts
(c) Personal and nominal accounts
(d) Real, personal and nominal accounts.
Answer:
(d) Real, personal and nominal accounts.
The three columns in a three columnar cash book represent Real Personal and Nominal Accounts

  • Discount column : Nominal account
  • Cash column : Real account
  • Bank column : Personal account

91. A chronological record of transaction may be found in:
(a) Balance Sheet
(b) Trial Balance
(c) Ledger
(d) Journal.
Answer:
(d) Journal.
A chronological record of transaction may be found in “Journal” Journal records transactions on a day to day basis and as and when they occur.

92. 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) 711,000
(c) 714,375
(d) 713,800.
Answer:
(c) 714,375
Total cost of computer:
10,000 + 1,000 + 500 = 11,500
Margin is 20% on selling price which means it is 25% on cost.
∴ Sales value will be 11,500 + 25%
= ₹ 14,375/-

93. The imprest system pertains to _______.
(a) Purchase book
(b) Sales book
(c) Cash book
(d) Petty cash book.
Answer:
(d) Petty cash book.
It is convenient to entrust a definite sum of money to the petty cashier in the beginning of a period and to reimburse him for payments made at the end of the period. Thus, he will have again the fixed amount in the beginning of the new period. Such a system is known as the imprest system of petty cash book.

94. The statement showing balance of all the ledger accounts is known as _______.
(a) Trial balance
(b) Balance sheet
(c) Bank reconciliation statement
(d) Profit and loss account.
Answer:
(a) Trial balance
Trial Balance is a statement which shows closing balances of all the ledger accounts.

95. A General Cash book acts as a _______.
(a) Journal
(b) Ledger
(c) Both
(d) None
Answer:
(c) Both
A cashbook is a book of prime entry in which cash and bank transactions of business are recorded. It acts as a book of original entry and a ledger. Hence, it is both Journal and Ledger.

96. Debit note is related with the _______.
(a) Sales book
(b) Sales return book
(c) Purchase return book
(d) Journal proper.
Answer:
(c) Purchase return book
When the goods or material are returned to the supplier that have been purchased on credit, a debit note is issued to him indicating that his account has been debited with the amount mentioned in the debit note. Thus, debit note is related with purchase return book.

97. If assets are increased by 2,000 and liabilities are increased by 1,200. What will be the effect on business equity?
(a) 800
(b) 2,000
(c) 3,200
(d) 1,200.
Answer:
(a) 800
Business Equity = Total assets – Total outside liabilities = 2,000 – 1,200 = 800

98. In case of Trial Balance, balance comes from ___________.
(a) Journal
(b) Ledger
(c) Balance Sheet
(d) Profit & Loss a/c.
Answer:
(b) Ledger
A trial balance is the list of balances of both credit and debit extracted from various accounts in the ledger including cash and bank balances.

99. Cost of goods sold – 60,000.
Sales- 95,000
Expenses – 20,000
Gross Profit will be?
(a) 20,000
(b) 15,000
(c) 35,000
(d) 1,75,000.
Answer:
(c) 35,000
Cost of Goods Sold = ₹ 60,000
Sales = ₹ 95,000
Gross Profit = Sales – Cost of Goods Sold
= 95,000 – 60,000
= 35,000
Hence, option (c) is correct.

100. Why ledger is made?
(a) To classify all items appearing in Journal
(b) To record the transaction
(c) Both (a) and (b)
(d) None of these.
Answer:
(a) To classify all items appearing in Journal
Journalising means recording the transaction while posting means posting & classification of all the items of journal in respective accounts of ledger.
Hence, ledger is made to classify all items appearing in journal.

101. In case of three columnar cash book, contra entry _______.
(a) Bank account only
(b) Cash and discount account
(c) Cash account only
(d) Cash and bank account
Answer:
(d) Cash and bank account
Three columnar cash book contains the following three amounts columns on each side:

  • Discount Column
  • Cash Column
  • Bank Column

In a case of Contra Entry i.e. a transaction involves both cash and bank accounts, it is entered on both sides of the cash book, one in the cash column and other in the bank column, though on opposite sides.

102. The closing entry for transfer of Salaries Paid A/c appearing in the Trial Balance will be:
(a) Debit Salaries A/c, Credit P&L A/c
(b) Debit Salaries A/c, Credit Trading A/c
(c) Debit Trading A/c, Credit Salaries A/c
(d) Debit P&L A/c, Credit Salaries A/c
Answer:
(d) The closing entry for transfer of salaries paid a/c appearing in trial balance will be.
Profit & Loss A/c Dr.
To Salaries A/c

103. Which of the following statement is incorrect with respect to a journal entry?
(a) It is prepared to record all transactions in alphabetical order
(b) It should always end with a narration explaining the need for it
(c) It should be substantiated by appropriate voucher and authority
(d) It should always consist of a debit entry matched by a corresponding credit entry.
Answer:
(a) It is prepared to record all transactions in alphabetical order

  • Journal entry should always end with a narration explaining the purpose for it.
  • It should be recorded on the basis of appropriate voucher and authority.

As a rule, every transaction have two sides i.e. debit and credit side. It is that book of account in which transactions are recorded in a chronological (day to day) order.
So, option (a) is incorrect about Journal entry i.e. to record all the transactions in alphabetical order.

104. Which of the following entries will be entered in the Journal proper?
(a) Sold goods on credit
(b) Goods purchased and paid by cash
(c) Furniture purchased on credit
(d) Purchase goods on credit.
Answer:
(c) Journal proper is used for making the original record of such transaction for which no special journal has been kept in the business. Some entries confined to general journal (or journal proper) are:

  • Opening entries
  • Closing entries
  • Adjustment entries
  • Rectification entries
  • Purchase of fixed assets etc.

Therefore, furniture purchased on credit will be entered in journal proper.

105. Which of the following account will be credited for profit on sale of fixed assets?
(a) Depreciation Account
(b) Cash Account
(c) Fixed Asset Account
(d) Profit and Loss Account.
Answer:
(d) Profit and Loss Account.
When a fixed asset is sold at a profit then the account to be credited will profit and loss account. Suppose furniture of W.D.V ₹ 10,000 is sold for ₹ 12,000.
Cash/Bank A/c Dr. 12,000
To Furniture A/c 10,000
To P/L A/c 2,000

106. A chronological record of transactions may be found in _______.
(a) Trial balance
(b) Journal
(c) Balance sheet
(d) Ledger.
Answer:
(b) Journal
In Journal, which is primary book for recording transactions of business, transactions are recorded in chronological order.

107. The imprest system pertains to:
(a) Purchase book
(b) Cash book
(c) Sales book
(d) Petty Cash book.
Answer:
(d) Petty Cash book.
Imprest system of petty cash book, under this system the petty cashier is given a definite sum at beginning of a certain period. This amount is called imprest amount.

108. After the preparation of income statement, it was discovered that accrued expenses of ₹ 1,000 have been ignored and closing inventory has been overvalued by ₹ 1,300. This will have result in:
(a) An understatement of net profit of ₹ 2,300
(b) An overstatement of net profit of ₹ 300
(c) An understatement of net profit of ₹ 300
(d) An overstatement of net profit of ₹ 2,300.
Answer:
(d) An overstatement of net profit of ₹ 2,300.
If accrued expenses of ₹ 1,000 have been ignored, this will increase the net profit by ₹ 1,000.
If closing inventory is overvalued, it will also result in increasing the net profit by ₹ 1,300.
Thus, net effect will be profit increased by ₹ 2,300.

109. Where Rent prepaid comes in Balance Sheet?
(a) Asset side
(b) Liability side
(c) Does not come in Balance Sheet
(d) None of the above
Answer:
(a) Asset side
Those expenses which have been paid in advance and whose benefit will be available in future are called prepaid expenses. These are shown as assets in the balance sheet.

110. If capital is ₹ 10,000, creditors ₹ 5,000, B/P ₹ 2,000. Machinery ₹ 2,000, Prepaid expenses ₹ 1,000. Land and Building ₹ 5,000. Find the value of Debtors is:
(a) ₹ 7,000
(b) ₹ 12,000
(c) ₹ 9,000
(d) ₹ 8,000
Answer:
(c) ₹ 9,000
Total liabilities = Capital + Creditors + Bills payable
= 10,000 + 5,000 + 2,000
= ₹ 17,000
Memorandum Balance Sheet:

Liabilities Amount Assets Amount
Capital 10,000 Machinery 2,000
Creditors 5,000 Prepaid Expense 1,000
Bills Payable 2,000 Land, Building 5,000
Debtors 9,000
Total 17,000 17,000

As per matching concept Assets should be equal to Total Liabilities.
Total Assets = Machinery + Land + Prepaid expense
= 2,000 + 1,000 + 5,000
= ₹ 8,000
Thus, the difference of ₹ 9,000 is the amount of Debtors.

111. B/P ₹ 20,000, creditors ₹ 10,000, Debtors ₹ 5,000, Investment ₹ 2,00,000 Plant and Machinery is ₹ 1,50,000, closing stock is ₹ 20,000 find the capital:
(a) ₹ 3,55,000
(b) ₹ 2,00,000
(c) ₹ 3,44,000
(d) ₹ 3,45,000
Answer:
(d) ₹ 3,45,000
Total Outside liabilities = Bills Payable + Creditors
= 20,000 + 10,000
= ₹ 30,000
Total Assets = Debtors + Investment + Plant & Machinery + Closing Stock
= 5,000 + 2,00,000 + 1,50,000 + 20,000
= ₹ 3,75,000
Capital = Total Assets – Outside liabilities = 3,75,000 – 30,000
= ₹ 3,45,000

112. What we give at the time of sales return:
(a) Credit Note
(b) Invoice
(c) Debit Note
(d) All of the above
Answer:
(a) Credit Note
We give Credit note at the time of Sales return. The Individual accounts of the customers are credited with the respective amounts while the periodical total of Sales return book is posted to the debit of Sales return account.

113. A cheque received from a customer and deposited on the same day is recorded in the:
(a) Debit side of cash column in the cash book
(b) Credit side of cash column in the cash book
(c) Debit side of bank column in the cash book
(d) Credit side of bank column in the cash book.
Answer:
(c) Debit side of bank column in the cash book
A cheque received from a customer and deposited on the same day is recorded on the debit side of the bank column in the cash book as on the debit side, all cash receipts are recorded while on the credit side, all cash payment are recorded. Cash Book thus serves the purpose of a book of original entry as well as that of ledger account.

114. A building is purchased from office cash for use by the building. Which of these would represent the entry for the transaction?
(a) Debit an asset account, credit a sales account
(b) Debit building account, credit cash account
(c) Debit the bank account, credit on expense account
(d) Debit a liability account, credit on expense account.
Answer:
(b) Debit building account, credit cash account
A building purchased from office cash would end up with the entry for the transaction as:
Building Account Dr.
To Cash Account

115. The trial balance of a proprietary concern shows the following balances: Capital ₹ 2,00,000, Income Tax ₹ 12,000, Income Tax paid in advance ₹ 4,000 and Interest on advance payment of tax ₹ 200. What will be the balance of capital at end?
(a) ₹ 1,83,800
(b) ₹ 1,84,200
(c) ₹ 1,88,000
(d) ₹ 1,84,000
Answer:
(b) ₹ 1,84,200

Capital 2,00,000
(+) Interest on Advance Tax 200
(-) Income Tax Paid 12,000
(-) Income Tax Paid in advance 4,000
Total 1,84,200

116. A debit note for ₹ 2,000/- issued to Mr. F for goods returned. This will be accounted in:
(a) Journal proper (General Journal)
(b) Purchase return book
(c) Bills receivable book
(d) Purchase book.
Answer:
(b) Purchase return book
A debit note for ₹ 2,000 issued to Mr. F for goods returned. This will be accounted in purchase return book. This book records the details of goods returned by the business organisation to the supplier. When the goods are returned to the supplier, a debit note is sent to him indicating that his account has been debited with the amount mentioned in the debit note.

117. The closing entry for transferring purchase return appearing in trial balance will be:
(a) Debit purchase return account, Credit Profit and Loss Account
(b) Debit trading account, Credit purchase return Account
(c) Debit Profit and Loss account, Credit purchase return Account
(d) Debit purchase return account, Credit trading Account.
Answer:
(d) Debit purchase return account, Credit trading Account.
The closing entry for transferring purchase return appearing in trial balance will be: Debit Purchase Return A/c, Credit Trading A/c

118. Ledger book is popularly known as:
(a) Secondary Book of Accounts
(b) Additional Book of Accounts
(c) Subsidiary Book of Accounts
(d) Principal Book of Accounts
Answer:
(d) Ledger book is also known as principal book.

119. A Cash Book does not record:
(a) Purchase of furniture
(b) Rent paid
(c) Salary outstanding
(d) Salary paid
Answer:
(c) Salary outstanding
Cash Book is the book in which all transaction relating to cash receipt and cash payment are recorded. Salary Outstanding will be recorded in Journal Proper, not in Cash Book because it does not include cash payment.

120. A suspense account facilitates the preparation of when the has not been tallied _______.
(a) Trial Balance, Financial Statement
(b) Financial Statement, Trial Balance
(c) Ledger, Trial Balance
(d) Journal, Trial Balance
Answer:
(b) Financial Statement, Trial Balance
A suspense account is opened when total of debit of Trial Balance does not match with the total of credit of Trial Balance and it facilitates the preparation of financial statement when the Trial Balance has not been tallied

121. What will be debited and credited if Mr. A started business with cash ₹ 2,00,000?
(a) Mr. A’s account and capital account respectively
(b) Business A/c and Cash A/c respectively
(c) Capital A/c and Cash A/c respectively
(d) Cash A/c and Capital A/c respectively.
Answer:
(d) Cash A/c and Capital A/c respectively.
Journal Entry for the transaction Cash A/c Dr. 2,00,000
To Capital A/c

122. Goods returned by business organization to suppliers noted in which books of the organization?
(a) Credit note
(b) Sales return book
(c) Debit note
(d) Purchase return book
Answer:
(d) Purchase return book
The purchase returns books records the details of goods returned by the business organization to the supplier(s). The goods purchased for cash and returned are not recorded in this book. When the goods are returned to the supplier, a debit note is sent to him indicating that his account has been debited with the amount mentioned in the debit note.

123. The balance of petty cash is _______.
(a) Expense
(b) Income
(c) Asset
(d) Liability
Answer:
(c) Asset
The general ledger account Petty Cash is reported on the balance sheet as a current asset. Often the balance in the Petty Cash account is combined with the balances in other cash accounts (such as checking accounts) and the total will be reported on the balance sheet as cash.

The Petty Cash account should be replenished just prior to issuing the financial statements so that the amount of currency and coins on hand is equal to the balance in the Petty Cash account. This also ensures that the recent petty cash disbursements are recorded in their appropriate accounts often expense accounts.

124. A firm has to take decision about the nature and extent of product differentiation and’ hence the level of selling expense in _______ market structure.
(a) Monopoly
(b) Monopolistic competitive
(c) Perfectly competitive
(d) Any of the above
Answer:
(c) Perfectly competitive
Perfect competition is a market structure in which the following five criteria are met:

  • All firms sell an identical product;
  • All firms are price takers – they cannot control the market price of their product;
  • All firms have a relatively small market share;
  • Buyers have complete information about the product being sold and the prices charged by each firm;
  • The industry is characterized by freedom of entry and exit.

Perfect competition is sometimes referred to as “pure competition. Thus option b is correct.

125. The trade discount received is:
(a) Real account
(b) Liability account
(c) Revenue account
(d) Not recorded in books of account
Answer:
(d) Not recorded in books of account
The Trade Discount is not recorded in the Books of A/c.

126. After preparing the trial balance the accountant finds that the total of the debit side is short by ₹ 1,000. This difference will be :
(a) Debited to suspense account
(b) Adjusted to any of the debit balance account
(c) Credited to suspense account
(d) Adjusted to any of the credit balance account
Answer:
(a) Debited to suspense account
The difference between the Debit and Credit side is transferred to the Suspense A/c.
If Debit side is short, A/c is debited
If Credit side is short, A/c is credited

127. Which of the following is not a column in a three column cash book?
(a) Petty cash column
(b) Cash column
(c) Discount column
(d) Bank column
Answer:
(a) Petty cash column
The three columns of a Three Column Cash Book are:

  • Cash Column
  • Discount Column
  • Bank Column

128. Journal entry for goods ₹ 50 withdrawn by proprietor for personal use will be:
(a) Debit purchases A/c credit advertisement A/c ₹ 50
(b) Debit sales A/c credit drawings A/c ₹ 50
(c) Debit drawings A/c credit purchases A/c ₹ 50
(d) Debit purchases A/c credit expenses A/c ₹ 50
Answer:
(c) Debit drawings A/c credit purchases A/c ₹ 50
Journal Entry would be
Drawings A/c Dr. 50
To Purchase A/c 50

129. Credit purchase of cotton by cotton dealer worth ₹ 10,000 will be entered in:
(a) Bill Receivable Book
(b) Sales Book
(c) Purchases Book
(d) Journal Proper
Answer:
(c) Purchases Book
Credit Purchase of cotton by cotton dealer will be treated as purchase of good and hence entered in the Purchase Book.

130. The correct sequence of the following in the preparation of periodical final statements would be:
1. Preparation of Balance Sheet
2. Preparation of cash flow statement
3. Preparation of Trial Balance
4. Preparation of Profit/Loss statement The correct option is:
(a) 4, 2,1, 3
(b) 3, 4, 1, 2
(c) 2, 4, 3, 1
(d) 1, 3, 2, 4
(c) Firstly prepare trial balance then with the help of trial balance Trading and Profit and Loss A/c is prepared and then cash flow statement after that at the end Balance Sheet will be prepared.

131. The total cost of goods available for sale with a company during the current year is ₹ 12,00,000 and the total sales’during the period are ₹ 13,00,000. Gross profit margin of the company is 33.33% on cost. The closing inventory for the current year would be:
(a) ₹ 4,00,000
(b) ₹ 3,00,000
(c) ₹ 2,25,000
(d) ₹ 2,60,000
Answer:
(a) ₹ 4,00,000
Cost of goods available for sale is ₹ 12,00,000
Total Sales – 13,00,000
Gross Profit is 33.33% or \(\frac { 1 }{ 3 }\) on cost. (Given)
Closing Inventory for current year = \(\frac { 1 }{ 3 }\) x 12,00,000
= ₹ 4,00,000

132. 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 where 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) ₹ 1,85,000
(b) ₹ 1,83,960
(c) ₹ 1,84,780
(d) ₹ 2,04,400
Answer:
(c) ₹ 1,84,780
Accounting Process-I– CS Foundation Fundamentals of Accounting Notes 13

133. A chronological record of transaction may be found in:
(a) Balance sheet
(b) Trial balance
(c) Ledger
(d) Journal
Answer:
(d) Journal
Journal is primary book in which transactions are record chronologically while transactions are analytically recorder in ledger.

134. How does an overcasting of purchase day book affect the cost of sale and profit?
(a) Cost of sales is decreased while profit is increased
(b) Cost of sales is increased while profit is decreased
(c) Both cost of sales and profit are increased
(d) Cost of sales is increased, gross profit is decreased but net profit remains unaffected
Answer:
(b) Cost of sales is increased while profit is decreased
Cost of sale and profit are directly proportion when sale is increased, profit is increased and when sale is decreased, profit is decreased. So, purchase day book affect the Cost of sale and profit at decreasing point.

135. Which one of the following statement 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 Account refer to false transactions
(d) Real accounts relate to the assets of business.
Answer:
(d) Real accounts relate to the assets of business.
‘Real Accounts refer to asset of business’. This statement is correct. Balance Sheet consist of Real and Personal A/c only not Nominal A/c

136. Which one appear in the trial balance on Debit side.
(a) Cash
(b) Sales
(c) Capital
(d) Sales returns
(i) a, b, c
(ii) b, c
(iii) a, d
(iv) None of these
Answer:
(iii) a, d
Item which are recorded on debit side of a trial balance;

  • Assets
  • Expenses and losses though cash is an asset having debit nature and sales return is a kind of loss having debit nature.

Hence, option (iii) a, d is correct.

137. Inventory book is used to view:
(a) Group Inventory
(b) Stock Items
(c) All of these
(d) None of these
Answer:
(c) All of these
Inventory book is used to see group inventory as well as to stock items. Thus, option (c) is correct.

138. The imprest system pertain to:
(a) Purchase book
(b) Sales book
(c) Cash book
(d) Petty cash book
Answer:
(d) Petty cash book
Petty cash book is maintained on Imprest System.

139. The statement showing balance of all the ledger accounts is known as:
(a) Trial balance
(b) Balance Sheet
(c) Bank reconciliation statement
(d) Profit and loss account
Answer:
(a) Trial balance
Trial Balance is the statement that shows the balances of all ledger accounts at one place.

140. Balance of Petty Cash Book is transferred to _______.
(a) Balance Sheet
(b) P/LA/c
(c) Cash Book
(d) Trading A/c
Answer:
(a) Balance Sheet
Balance of Petty Cash Book is transferred to balance sheet. Petty cash appears within the current assets section of the balance sheet.

141. What comes in same side of Trial Balance?
(a) Capital and Drawing
(b) Furniture and Liability
(c) Asset and Expense
(d) None
Answer:
(c) Asset and Expense
Debit side of trial balance contain Assets and expenses on the others hand credit side of trial balance contains liability, capital and incomes.