CS Foundation Fundamentals of Accounting Notes

Depreciation Accounting – CS Foundation Fundamentals of Accounting Notes

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Depreciation Accounting – CS Foundation Fundamentals of Accounting Notes

Depreciation:

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

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

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

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

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

The fundamental objectives of depreciation are:

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

Causes of Depreciation:

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

Objectives of providing Depreciation:

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

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

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

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

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

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

• Obsolescence i.e. chance of going out of fashion of the asset.
• Working hours of the asset.
• Repairs and Renewals.
• Skills of the operator handling the asset.
• Legal provisions relating to the asset.

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

Note:
Depreciable assets are the assets which:

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

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

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

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

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

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

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

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

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

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

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

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

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

Methods of Providing Depreciation:

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

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

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

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

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

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

Merits of this Method:

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

Demerits of this Method:

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

Declining Charge Method – Diminishing Balance Method:

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

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

Annuity Method:

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

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

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

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

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

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

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

Depreciation Fund Method (Sinking Fund Method):

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

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

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

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

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

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

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

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

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

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

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

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

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

Insurance Policy Method:

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

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

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

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

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

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

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

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

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

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

Merits of this Method:

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

Demerits of this Method:

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

Difference between Straight Line Method and Written Down Value Method:

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

Sum of Years Digit Method:

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

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

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

Note : The depreciation is reducing year by year.

Depreciation Accounting MCQ Questions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Accounting Process-II – CS Foundation Fundamentals of Accounting Notes

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

Accounting Process-II – CS Foundation Fundamentals of Accounting Notes

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

Rectification of Errors:

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

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

Types of Errors:
(i) Error of principle

(ii) Clerical errors

• Errors of omission (partial or complete)
• Error of commission
• Compensating errors
 Type of Error Meaning Effect in Trial Balance 1. Error of principle When there is an error in complying accounting principles. Example: 1. Treating capital expenditure as revenue or vice versa. 2. Recording sale of fixed asset as an ordinary sale. No effect in Trial Balance. It will tally. 2. Error of omission (i) Complete omission (ii) Partial omission 1. When an entry is totally eliminated from being recorded. 2. When an entry is recorded partially i.e. any one aspect (debit or credit) is not recorded. 1. No effect on Trial Balance. 2. Trial Balance will be affected. It will not tally 3. Error of Commission Any type of error committed while recording entries. Example: 1. Writing wrong amount 2. Writing correct amount but on wrong side 3. Wrong casting (totalling) of subsidiary book etc. Trial Balance may or may not agree. 4. Compensating Errors When two errors are committed such that one compensates with that of another. For Example: Rahul’s A/c was debited with ₹ 100 instead of ₹ 1,000 while Ajay’s A/c was debited with ₹ 1,000 instead of ₹ 100. Trial Balance will agree.

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

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

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

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

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

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

Steps to Locate Errors:

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

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

Rectification of Errors:

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

Need for Rectification:

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

Stages of Rectification:

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

Rectification before preparation of Trial Balance:

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

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

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

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

Rectification of such errors:

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

An agreement of Trial Balance does not prove that

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

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

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

In case of two sided error:

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

Errors which affect two or more accounts are as follows :

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

Rectification of these errors

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

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

Rectification –
1. Mohan had to be debited with ₹ 1,000 but he was credited with ₹ 1,000. So for rectifying it he has been debited with 2,000.

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

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

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

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

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

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

Suspense Account:

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

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

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

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

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

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

(i) In case of Nominal Accounts:

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

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

Two sided errors:

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

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

 Rectification before preparation of final A/c’s Rectification after preparation of final A/c’s Machinery A/c                                Dr. 2,000 To Wages A/c                                       2,000 Machinery A/c  Dr. 2,000 To P/L Adjustment A/c 2,000

Note:

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

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

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

Accounting Process-II MCQ Questions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

71. A sold goods of ₹ 500/- to Z which is entered in purchase book as 5,000. What will be the entry after rectification?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Accounting Process-I – CS Foundation Fundamentals of Accounting Notes

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

Accounting Process-I – CS Foundation Fundamentals of Accounting Notes

Accounting is the language of business – Accounting cycle/Accounting process:

Recording – Journal:

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

A journal contains the following columns:

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

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

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

Process of Journalising:

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

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

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

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

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

Note:

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

Points to Note:

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

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

Ledger (Principal Book of Accounts):

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

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

(ii) It has the following columns :

• Date – Date of transaction
• Particulars – Name of other account
• Journal folio (J. F.) – Page number of journal where entry was first recorded
• Amount: Amount of transaction
• Same columns will be there on the other side also.

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

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

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

(iii) Rules for posting:

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

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

Ledger Rent A/c

Difference between Journal and Ledger:

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

For an account credited in the journal entry:

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

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

Posting credit aspect of the entry:
Ledger Cash A/c

Balancing Ledger Account:

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

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

Rent A/c

Debit side was more by ₹ 10,000 so balance has been written on the credit side to make them equal. This is a debit balance since debit side is more.

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

Difference between Journal and Ledger:

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

Subsidiary Book:

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

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

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

2. Sales Day Book:

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

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

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

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

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

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

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

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

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

Cash Book:

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

A cash book has two sides:

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

Types of Cash Book:
It records only one aspect of transaction i.e. cash.

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

Format of simple cash book:
Cash Book (Single Column)

Double (two) column cash book

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

Format of two column cash book

Three column (triple column) cash book:

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

Format of triple column cash book:
Cash Book (Triple Column)

Concept of Contra Entry

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

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

Cash Book (Triple Column)

Petty Cash Book:

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

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

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

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

Format petty cash book
Petty Cash Book

Trial Balance:

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

Objectives of Trial Balance:

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

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

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

Format of Trial Balance
Specimen of Trial Balance
Trial Balance as at _______

Accounting Process-I MCQ Questions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

30. Which is entered on the debit side of cash book?
(c) Cash discount allowed
(c) Cash discount allowed

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

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

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

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

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

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

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

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

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

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

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

42. Journal proper is used to record:
(a) All cash purchases of assets other than goods
(b) All cash sales of assets other than goods
(c) Returns of fixed assets purchased on credit
(c) Returns of fixed assets purchased on credit

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

92. A purchased an old computer costing ₹ 10,000 and incurred ₹ 1,000 on its repairs and ₹ 500 on its packing. He sold the computer at 20% margin on selling price. The sales value will be:
(a) ₹ 12,500
(b) 711,000
(c) 714,375
(d) 713,800.
(c) 714,375
Total cost of computer:
10,000 + 1,000 + 500 = 11,500
Margin is 20% on selling price which means it is 25% on cost.
∴ Sales value will be 11,500 + 25%
= ₹ 14,375/-

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

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

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

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

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

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

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

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

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

• Discount Column
• Cash Column
• Bank Column

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• Cash Column
• Discount Column
• Bank Column

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

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

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

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

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

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

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

135. Which one of the following statement is correct?
(a) Capital of the firm is reduced by borrowing
(b) When there is no change in proprietor’s capital it is an indication of loss in business
(c) Nominal Account refer to false transactions
(d) Real accounts relate to the assets of business.
(d) Real accounts relate to the assets of business.
‘Real Accounts refer to asset of business’. This statement is correct. Balance Sheet consist of Real and Personal A/c only not Nominal A/c

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

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

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

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

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

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

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

141. What comes in same side of Trial Balance?
(a) Capital and Drawing
(b) Furniture and Liability
(c) Asset and Expense
(d) None