CS Foundation

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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.

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….

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 ……….

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 ……………

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

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…

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.
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 1^st 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 1/7^th 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 1^st 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

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

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

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

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:

The value of stock included in the Balance Sheet of the company as on 31^st 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:

Total value = 7.7 Lakh i.e. ₹ 7,70,000

114. Fire Insurance premium paid on 1^st October, 2011 for the year ended on 30^th 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

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)

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 ………..

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

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

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

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)

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.

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 –

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.