1.

INTRODUCTION TO ACCOUNTING

Objective Type Questions

1. State whether the following statements are True or False:

(i) The term Book Keeping and Accounting can be used interchangeably.
(ii) Accounting deals with quantifiable information.
(iii) Accounting is the language of business.
(iv) Accounting aims to communicate financial information to investors only.
(v) Transactions are posted into ledger account from Journal book.
(vi) Cost of goods manufactured is determined by management accounting.
(vii) The objective of book keeping is to maintain complete record of financial transactions.
(viii) Government is the internal user of accounting information.
(ix) Management of the business enterprise is internal user of financial statements.
(x) Two primary qualitative characteristics of financial statements are: Understandability and Materiality.
[Ans.: (i) False; (ii) True; (iii) True; (iv) False; (v) True;
(vi) False; (vii) True; (viii) False; (ix) True; (x) False.]
2. Fill-in-the blanks with appropriate words:
(i) Scope of accountancy is _______________ than that of Book Keeping.
(ii) Book Keeping is a systematic record of _______________ transactions.
(iii) Accounting records can be produced as _______________ in the court of law.
(iv) Information in financial reports is based on _______________ transactions and _______________.
(v) The process of accounting starts with _______________ and ends with _______________.
(vi) Accounting measures the business transactions in terms of _______________ units.
(vii) Identified and measured economic events should be recorded in _______________ order.
(viii) In every transaction, _______________ aspects are involved.
[Ans.: (i) wider; (ii) financial; (iii) evidence; (iv) financial, events; (v) identifying the
transactions, communicating information; (vi) monetary; (vii) chronological; (viii) two.]

Multiple Choice Questions (MCQs)

Select the correct alternative:
1. Book keeping is concerned with
(a) recording financial data relating to business transactions.
(b) designing for systems recording, classifying, and summarizing recorded data.
(c) interpreting data for internal and external users.
(d) All of the above.
2. The last step in accounting as a process of information is
(a) recording the transaction. (b) preparation of financial statements.
(c) communication of information. (d) All of these.

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 3. Basic function of accounting is
(a) to record all business transactions.
(b) to interpret financial data.
(c) to assist the management in performing functions effectively.
(d) None of the above.
4. Which of the following will not be recorded in the books of account?
(a) Purchased a LED TV for personal use, amount paid from personal account
(b) Purchased machinery of ` 1,00,000
(c) Purchased goods for ` 25,000
(d) Paid Salaries and Wages
5. Accounting is
(a) A process concerned with summarising of the recorded transactions.
(b) Not the language of business.
(c) An art of recording, classifying and summarising financial transactions in a significant manner.
(d) All of the above.
6. Which of the following is the objective of Accounting?
(a) Systematic Recording (b) Comparison and Evaluation
(c) Solvency Position (d) Forecasting
7. Which of the following is not the user of accounting information?
(a) Short-term creditors (b) Debtors
(c) Government (d) Owners
8. Which one is the advantage of accounting?
(a) Replacement of memory (b) Shows the present value of the business
(c) Accounting does not record price level changes (d) Accounting is not fully exact
9. Out of the following which is the branch of Accounting?
(a) Financial Accounting (b) Cost Accounting
(c) Management Accounting (d) All of these
10. Two primary qualitative characteristics of financial statements are
(a) Understandability and materiality. (b) Relevance and reliability.
(c) Relevance and Materiality. (d) All of these.
[Ans.: 1. (a); 2. (c); 3. (a); 4. (a); 5. (c); 6. (a); 7. (b); 8. (a); 9. (d); 10. (b).]

2. BASIC ACCOUNTING TERMS

Objective Type Questions

1. State whether the following statements are True or False:
(i) Goodwill is a tangible Asset.
(ii) A person who owes money to the firm against goods sold is a debtor.
(iii) A person to whom money is owed by a firm for purchase of goods is a creditor.
(iv) Stock is valued at Cost or Net Realisable Value (Market Value), whichever is higher.
(v) Machinery used in production is not a fixed asset.
(vi) Rent Payable is a liability.
(vii) Purchases is a revenue.
(viii) Trade discount is recorded in the books.
(ix) Goods taken by the owner for personal use is debited to capital account.
(x) ‘Goods’ means physical item of trade.
(xi) Debtors, Stock, Bank Balances are examples of fictitious assets.
(xii) A person who is not in a position to pay his debts is known as insolvent.
[Ans.: (i) False; (ii) True; (iii) True; (iv) False; (v) False; (vi) True; (vii) False;
(viii) False; (ix) False; (x) True; (xi) False; (xii) True.]
2
 2. Fill-in-the blanks with appropriate words:
(i) A person to whom a firm owes money for purchase of goods is a _______________.
(ii) Amount invested by the owner in business is termed as _______________.
(iii) Amount of debts _______________ from the debtors are termed as bad debts.
(iv) A person who owes money to the firm for sale of goods is a _______________.
(v) The nature of capital is a _______________.
(vi) The nature of accrued income is _______________.
(vii) Bad Debts recovered is a _______________ receipt.
(viii) Purchases means purchase of goods for _______________.
(ix) Bank-Overdraft is a _______________ liability.
(x) Amount at which an asset appears in the books of account is _______________.
(xi) Fall in the value of an asset due to its use is termed as _______________.
(xii) A liability arises because of _______________ transactions.
[Ans.: (i) creditor; (ii) capital; (iii) irrecoverable; (iv) debtor; (v) liability; (vi) asset;
(vii) revenue; (viii) resale; (ix) current; (x) book value; (xi) depreciation; (xii) credit.]

Multiple Choice Questions (MCQs)

Select the correct alternative:
1. Amount paid or payable against purchase of goods is
(a) revenue expenditure. (b) capital expenditure.
(c) Both (a) and (b). (d) None of these.
2. Expenditure of revenue nature that gives benefit for more than one accounting period is categorised as
(a) Capital Expenditure. (b) Revenue Expenditure.
(c) Deferred Revenue Expenditure. (d) None of these.
3. Which of the following is not a business transaction?
(a) Bought furniture of ` 25,000 for business
(b) Paid for salaries of employees, ` 20,000
(c) Cash withdrawn from personal bank account, ` 10,000 for personal use
(d) All of the above
4. Which of the following is not a fixed asset?
(a) Building (b) Plant and Machinery
(c) Balance with bank (d) Goodwill
5. Which of the following is a business transaction?
(a) Goods purchased on credit (b) An employee being dismissed
(c) Proprietor purchasing a car for own use (d) Sale of personal asset by the proprietor
6. Which of the following is not a long-term liability?
(a) Creditors (b) Term loan
(c) Debentures (d) Bank loan
7. Income is
(a) Revenue Less Expense. (b) Expense Less Revenue.
(c) Sales Less Cost of goods Sold. (d) Purchase Less Purchase Return.
8. Prepaid expense is expense
(a) Paid in Advance. (b) Still to be paid.
(c) Both (a) and (b). (d) None of these.
9. Excess of income over its related expenses which arises from its normal business activity is
(a) Gain. (b) Profit.
(c) Revenue. (d) Loss.
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10. Liability in which obligation to pay, depends on happening of an event is
(a) Contingent Liability. (b) Long term Liability.
(c) Short term Liability. (d) None of these.
11. Assets which have a finite life depending upon the value of natural resources extracted is
(a) Fictitious Assets. (b) Wasting Assets.
(c) Fixed Assets. (d) None of these.
12. Reduction in amount payable allowed by the seller of goods after the goods have been sold is
(a) Rebate. (b) Trade Discount.
(c) Cash Discount. (d) None of these.
[Ans.: 1. (a); 2. (c); 3. (c); 4. (c); 5. (a); 6. (a); 7. (a); 8. (a); 9. (b); 10. (a); 11. (b); 12. (a).]

3. THEORY BASE OF ACCOUNTING, ACCOUNTING STANDARDS AND IND-AS

Objective Type Questions

1. State whether the following statements are True or False:
(i) Business Entity Concept is not applicable to sole trading concerns and partnership concerns.
(ii) Money Measurement Concept takes into account changes in the value of monetary unit.
(iii) The principle of consistency is particularly valuable when alternative accounting method is equally
acceptable.
(iv) The essence of Conservatism Concept is to anticipate no profit and provide for all possible losses.
(v) According to the Realisation Concept, revenue should be accounted only when it is received.
(vi) Accounting principles are rules of action or conduct which are adopted by the accountants
universally while recording accounting transactions.
(vii) Accounting Standards are not mandatory in nature.
(viii) According to the Cost Concept, assets are recorded at the value paid for acquiring them.
(ix) According to the Going Concern Concept, assets are recorded at realisable value and are depreciated
over their estimated useful life.
(x) According to the Convention of Consistency, accounting policies and practices once adopted
should be consistently followed.
(xi) According to Principle of Conservatism, closing stock is valued at Historical cost or net realisable
value (market value) whichever is higher.
(xii) Transaction between the firm and proprietor is accounted in the books of account because of
Business Entity Principle.
(xiii) Quality of Manpower is not shown in the Financial Statements because of Revenue Principle.
(xiv) The financial statements under Ind-AS include a statement of financial position.
[Ans.: (i) False; (ii) False; (iii) True; (iv) True; (v) False; (vi) True; (vii) False;
(viii) True; (ix) False; (x) True; (xi) False; (xii) True; (xiii) False; (xiv) True.]
2. Fill-in-the blanks with appropriate words:
(i) Business Entity Concept implies that a business unit is ___________ from the persons who supply
capital to it.
(ii) According to the ___________ Concept, revenue is considered as being earned on the date on
which it is earned.
(iii) The ___________ Concept requires that the same accounting method should be used from one
accounting period to next.
(iv) Transactions between owner and business are recorded due to ___________ Concept.
(v) Going Concern Concept assumes that business will be carried on for ___________ period.
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 (vi) Withdrawal of money by the owner is not an expense but a reduction of ___________ and
___________.
(vii) The ___________ Concept requires that accounting transactions should be free from the bias of
accountants and others.
(viii) Going concern is a ___________ accounting assumption.
(ix) Total of debit side and credit side of trial balance matches because of ___________ principle.
(x) Ind-AS are ___________ based accounting standards.
[Ans.: (i) separate; (ii) Realisation; (iii) Consistency; (iv) Business Entity;
(v) indefinite; (vi) cash; capital; (vii) Verifiable Objective (Evidence);
(viii) Fundamental; (ix) Dual Aspect; (x) Principle.]

Multiple Choice Questions (MCQs)

Select the correct alternative:
1. The Concept of Conservatism takes into account
(a) all prospective profits and all prospective losses.
(b) all prospective profits and leaves all prospective losses.
(c) all prospective losses but not the prospective profits.
(d) None of the above.
2. According to Going Concern Concept, a business is viewed as having
(a) a limited life. (b) a very long life.
(c) an infinite life. (d) None of these.
3. According to which of the following concepts, in determining the net income, all costs which are
applicable to earn the revenue of the period should be charged against that revenue?
(a) Matching Concept (b) Money Measurement Concept
(c) Cost Concept (d) Dual Aspect Concept
4. Lower of cost or net realisable value is an example of
(a) Consistency Concept. (b) Prudence (Conservatism) Concept.
(c) Realisation Concept. (d) Matching Concept.
5. X Ltd. follows the Written Down Value Method of depreciating machinery year after year due to
(a) comparability. (b) convenience.
(c) consistency. (d) All of these.
6. An employee of the enterprise suffers an injury at work and the enterprise decides to pay him
` 50,000 as compensation. Should the enterprise pass an entry even though it has not paid it?
(a) Yes, because of Accrual Concept. (b) No, because it is not paid.
(c) No, because the employee has not accepted. (d) None of these.
7. Ind-AS are based on
(a) Rules. (b) Principles.
(c) Both (a) and (b). (d) None of these.
8. Ind-AS apply to
(a) Companies listed on Stock Exchange.
(b) Companies having net worth of ` 250 crores or more.
(c) Subsidiaries, Holding, Joint Ventures and Associates of above two categories of Companies.
(d) All of the above.
[Ans.: 1. (c); 2. (c); 3. (a); 4. (b); 5. (c); 6. (a); 7. (b); 8. (d).]
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 4. BASES OF ACCOUNTING

Objective Type Questions

1. State whether the following statements are True or False:
(i) Under cash basis of accounting, entries in the books of account are passed when cash is received
or paid.
(ii) Cash basis of accounting is incompatible with the Matching Principle.
(iii) Accrual basis is a more appropriate basis for determining profits as expenses are matched against
revenue earned in relation thereto.
(iv) Accrual basis of accounting gives a true and fair view of the results of operations of business and
financial position of the business.
(v) Cash basis considers the revenue as realised when the goods are sold.
[Ans.: (i) True; (ii) True; (iii) True; (iv) True; (v) False.]
2. Fill-in-the blanks with appropriate words:
(i) There is a need for adjustment of prepaid/outstanding expenses in ___________ basis of accounting.
(ii) Adjustment is made for accrued income/income received in advance under ___________ basis of
accounting.
(iii) Accrual basis of accounting is more reliable than ___________ of accounting.
(iv) Cash basis of accounting does not require adjustment regarding outstanding/prepaid expenses
and ___________.
(v) The profit/loss under ___________ of accounting will be different from profit/loss under Accrual
Basis of Accounting.
[Ans.: (i) accrual; (ii) accrual; (iii) cash basis;
(iv) accrued income/income received in advance; (v) cash basis.]

Multiple Choice Questions (MCQs)

Select the correct alternative:
1. Under Cash Basis of Accounting, expenses are recorded
(a) on payment. (b) on being incurred.
(c) Both (a) and (b). (d) None of these.
2. Under Accrual Basis of Accounting, expenses are recorded
(a) on payment. (b) on being incurred.
(c) Both (a) and (b). (d) None of these.
3. Accrual Basis of Accounting
(a) does not give a true and fair view of profit and financial position.
(b) gives a true and fair view of profit and financial position.
(c) may or may not give a true and fair view of profit and financial position.
(d) None of the above.
4. Accrual Basis of Accounting recognises
(a) Outstanding and Prepaid Expenses. (b) Accrued Incomes and Incomes Received in Advance.
(c) Both (a) and (b). (d) None of these.
5. Under Accrual Basis of Accounting
(a) both Cash and Credit transactions are recorded. (b) only cash transactions are recorded.
(c) only credit transactions are recorded. (d) None of these.
[Ans.: 1. (a); 2. (b); 3. (b); 4. (c); 5. (a).]
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 5. ACCOUNTING EQUATION

Objective Type Questions

1. State whether the following statements are True or False:
(i) Accrued Income will Increase Assets and Capital.
(ii) Purchasing car for personal use by proprietor will Increase Assets and Capital.
(iii) Vinod’s capital is ` 2,30,000 and liabilities are 90,000. His fixed and current assets are in the ratio
of 3 : 1. His fixed and current assets will be ` 1,72,500 and ` 57,500.
(iv) If ` 920 is received from debtors of ` 1,000 in full settlement, Capital will be decreased by ` 80.
(v) Outstanding expenses are shown on Assets side of Balance Sheet.
[Ans.: (i) True; (ii) False; (iii) False; (iv) True; (v) False.]
2. Fill-in-the blanks with appropriate words:
(i) Determine the missing amounts on the basis of the Accounting Equation:
Assets = Liabilities + Capital
(a) ` 20,000 = ` 15,000 + ______
(b) ______ = ` 5,000 + ` 10,000
(c) ` 10,000 = ______ + ` 8,000
(ii) Determine the missing amounts on the basis of the Accounting Equation:
Assets Liabilities Capital
(a) ______ ` 30,000 ` 70,000
(b) ` 1,50,000 ` 30,000 ______
(c) ` 1,75,000 ______ ` 1,00,000
[Ans.: (i) (a) ` 5,000; (b) ` 15,000; (c) ` 2,000; (ii) (a) ` 1,00,000; (b) ` 1,20,000; (c) ` 75,000.]

Multiple Choice Questions (MCQs)

Select the correct alternative:
1. The correct accounting equation is
(a) Assets = Liabilities – Capital. (b) Assets = Liabilities + Capital.
(c) Liabilities = Assets + Capital. (d) Capital= Assets + Liabilities.
2. Payment of Rent to Shekhar will
(a) Decrease Assets and Liabilities. (b) Increase Assets but Reduce Capital.
(c) Decrease Assets and Capital. (d) Increase Assets and Reduce Liabilities.
3. Harshad commenced business with capital of `1,50,000. At the end of the year his assets were
` 2,50,000 and creditors were ` 25,000. His closing capital and profit/loss for the year will be
(a) ` 2,75,000 and ` 75,000. (b) ` 2,25,000 and ` 75,000.
(c) ` 2,75,000 and ` 50,000. (d) ` 2,75,000 and ` 1,25,000.
4. Owner’s capital in beginning was ` 45,000. Creditors at the end were ` 30,000. Revenue during the period
was ` 65,000. Expenses during the period were ` 40,000. Total equity at the year end will be
(a) ` 1,00,000. (b) ` 1,20,000.
(c) ` 80,000. (d) None of these.
5. Financial position of Surbhi as on 1st April, 2022 was as under: Plant ` 22,000; Stock ` 45,000; Creditors
` 12,500; Bank overdraft ` 28,800; Cash ` 15,700; Debtors ` 27,900; Outstanding Expenses ` 9,800;
Investments ` 30,000; Buildings ` 80,000. Her capital at the year end will be
(a) ` 2,57,000. (b) ` 51,100.
(c) ` 3,08,600. (d) ` 1,69,500.
7
 6. Interest on Drawings charged is ` 1,500. In accounting equation, it will be shown as
(a) Increase capital by ` 1,500 and decrease cash by ` 1,500.
(b) Increase and Decrease capital by ` 1,500.
(c) Increase capital and Interest on Drawings by ` 1,500.
(d) Decrease capital and cash by ` 1,500.
7. An expansion of accounting equation is shown as
(a) Profit & Loss Account. (b) Trading Account.
(c) Manufacturing Account. (d) Balance Sheet.
8. Owner’s Equity is
(a) Balance of Capital A/c. (b) Balance of Creditors A/c.
(c) Balance of Cash A/c. (d) Balance of Drawings A/c.
9. Find opening capital when
Assets = ` 4,00,000; Profit = ` 25,000 and Creditors = ` 2,55,000.
(a) ` 1,20,000 (b) ` 1,45,000
(c) ` 1,70,000 (d) ` 3,75,000
[Ans.: 1. (b); 2. (c); 3. (b); 4. (a); 5. (d); 6. (b); 7. (d); 8. (a); 9. (a).]

6. ACCOUNTING PROCEDURES—RULES OF DEBIT AND CREDIT

Objective Type Questions

1. State whether the following statements are True or False:
(i) Debit means an increase in liability.
(ii) Credit means an increase in asset.
(iii) Sale of goods to Ram for cash is debited to Cash Account.
(iv) Withdrawal of cash from business by the proprietor is credited to Drawings Account.
(v) Drawings Account is a Personal Account.
(vi) Goodwill account is a Real Account.
[Ans.: (i) False; (ii) False; (iii) True; (iv) False; (v) True; (vi) True.]
2. Fill-in-the blanks with appropriate words:
(i) Debit the receiver, Credit the ___________ is the rule for Personal Accounts.
(ii) Salary Outstanding A/c on the basis of classification of accounts is a ___________.
(iii) Increase in capital is credited to ___________.
(iv) Dr. stands for ___________ and Cr. stands for ___________.
(v) Debit what comes in and credit what goes out is the rule of ___________ Account.
(vi) Cash or goods withdrawn by the proprietor for his personal use is debited to _______________
Account.
(vii) Debit in relation to Asset Accounts and Expense Accounts means an _______________ but in
relation to Liability Accounts, Capital Accounts and Revenue Accounts means a _______________.
(viii) Debit all expenses and losses and credit all incomes and gains is the rule of _______________ Accounts.
[Ans.: (i) giver; (ii) personal account; (iii) capital account; (iv) debit, credit;
(v) Real; (vi) Drawings; (vii) increase, decrease; (viii) nominal.]

Multiple Choice Questions (MCQs)

Select the correct alternative:
1. Bank account is a
(a) Personal Account. (b) Real Account.
(c) Nominal Account. (d) None of these.
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 2. Which of the following accounts has a credit balance?
(a) Carriage Inward (b) Discount Received
(c) Carriage Outward (d) Discount Allowed
3. Sundry Creditors Account is a
(a) Revenue Account. (b) Capital Account.
(c) Liability Account. (d) None of these.
4. Sales Account is a
(a) Revenue Account. (b) Liability Account.
(c) Capital Account. (d) None of these.
5. Salaries Account is
(a) an Expense Account. (b) an Asset Account.
(c) a Liability Account. (d) None of these.
6. ‘Machinery Purchased’ is a
(a) Real Account. (b) Nominal Account.
(c) Personal Account. (d) None of these.
7. ‘Discount allowed’ is classified as a
(a) Real Account. (b) Nominal Account.
(c) Personal Account. (d) None of these.
8. ‘Patents ‘are classified as a
(a) Asset Account. (b) Liability Account.
(c) Capital Account. (d) Revenue Account.
9. ‘Outstanding Expenses’ are classified as
(a) Liability Account. (b) Asset Account.
(c) Revenue Account. (d) Capital Account.
10. Interest Received is classified as
(a) Asset Account. (b) Revenue Account.
(c) Capital Account. (d) Liability Account.
11. ‘Purchases’ are classified as
(a) Expense Account. (b) Asset Account.
(c) Capital Account. (d) Revenue Account.
12. ‘Carriage Inward’ is classified as
(a) Asset Account. (b) Expense Account.
(c) Capital Account. (d) Liability Account.
[Ans.: 1. (a); 2. (b); 3. (c); 4. (a); 5. (a).; 6. (a); 7. (b); 8. (a); 9. (a); 10. (b); 11. (a); 12. (b).]

7. ORIGIN OF TRANSACTIONS—SOURCE DOCUMENTS AND

PREPARATION OF VOUCHERS

Objective Type Questions

1. State whether the following statements are True or False:
(i) Cash memo is a source voucher for purchaser of goods on credit.
(ii) Invoice is a source voucher for seller of goods on credit.
(iii) Accounting voucher is prepared from source voucher.
(iv) If seller receives back the goods sold, he prepares Credit Note.
(v) Accounting Voucher is prepared for Cash and Credit purchases.
[Ans.: (i) False; (ii) True; (iii) True; (iv) True; (v) True.]
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2. Fill-in-the blanks with appropriate words:
(i) Cash memo is prepared when goods are sold against ___________.
(ii) Invoice is a source voucher for purchaser of goods on ___________.
(iii) If purchaser of goods returns the goods, he will prepare a ___________.
(iv) Cash Memo is a ___________ voucher.
(v) When goods are sold on credit the seller prepares an ___________.
(vi) When goods are purchased against cash, the purchaser will get ___________.
[Ans.: (i) cash; (ii) credit; (iii) Debit Note; (iv) source; (v) invoice; (vi) Cash Memo.]

Multiple Choice Questions (MCQs)

1. Books of Account are written on the basis of
(a) Source Document. (b) Accounting Vouchers.
(c) Both (a) and (b). (d) None of these.
2. Credit Note is prepared
(a) when credit is given to the account. (b) when debit is given to the account.
(c) both (a) and (b). (d) None of these.
[Ans.: 1. (b); 2. (a).]

8. JOURNAL

Objective Type Questions

1. State whether the following statements are True or False:
(i) Sale of old furniture to Paresh for cash should be debited to Paresh’s Account.
(ii) Increases in assets are debited and decreases in assets are credited.
(iii) Cash Discount allowed to customer is an expense for business.
(iv) Increases in capital are credited and decreases in capital are debited.
(v) Debit the giver and credit the receiver is the rule of Personal Accounts.
(vi) Some of the transactions may have only one account.
(vii) For every debit, there is a corresponding credit of equal amount.
(viii) Left hand side of an account is called the debit side.
(ix) Wages, when paid, are credited to Wages Account.
(x) Narration should not be written in a Journal.
[Ans.: (i) False; (ii) True; (iii) True; (iv) True; (v) False; (vi) False; (vii) True; (viii) True; (ix) False; (x) False.]
2. Fill-in-the blanks with appropriate words:
(i) Receiver’s Account is _______________.
(ii) Sold goods to Ram—Ram’s Account will be _______________.
(iii) Received interest—Interest Account will be _______________.
(iv) Trade discount is _______________ in the books.
(v) A Journal is known as a book of _______________ entry.
(vi) Business transactions are recorded in the order in which they _______________.
(vii) A Journal entry may have more than one debit or more than one _______________.
(viii) Journal provides an explanation of the _______________.
(ix) Machinery Account is neither a _______________ Account nor a _______________ Account.
(x) _______________ Discount is allowed to encourage timely payment.
(xi) _______________ Discount is allowed to encourage large purchases.
(xii) _______________ Discount is shown separately in the books of account.
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 (xiii) _______________ Discount is not shown separately in the books of account.
(xiv) _______________ Discount is not reduced from the invoice price.
(xv) _______________ Discount is reduced from the invoice price.
(xvi) Cash Discount is allowed @ 10% on ` 15,500; the amount paid will be _______________.
(xvii) Catalogue price is ` 600. Trade Discount allowed @ 10% will be _______________ and Cash Discount
@ 5% will be _______________.

[Ans.: (i) debited; (ii) debited; (iii) credited; (iv) not recorded; (v) original; (vi) occur; (vii) credit;
(viii) transactions; (ix) Personal, Nominal; (x) Cash; (xi) Trade; (xii) Cash;
(xiii) Trade; (xiv) Cash; (xv) Trade; (xvi) ` 13,950; (xvii) ` 60, ` 27.]

Multiple Choice Questions (MCQs)

1. Journal is called a book of
(a) primary entry. (b) secondary entry.
(c) final entry. (d) None of these.
2. Rent paid is a
(a) Personal Account. (b) Real Account.
(c) Nominal Account. (d) All of these.
3. Robert’s Account is a
(a) Personal Account. (b) Real Account.
(c) Nominal Account. (d) All of these.
4. Business transactions are recorded
(a) in chronological order. (b) weekly.
(c) at the end of the month. (d) All of these.
5. A compound Journal entry
(a) has equal debits and credits. (b) generally extends to several pages.
(c) does not require narration. (d) All of these.
6. Which of the following accounts will be credited on giving cash donation?
(a) Cash A/c. (b) Donation A/c.
(c) Purchases A/c. (d) None of these.
7. Sale of goods to Ram for cash is debited to
(a) Ram’s A/c. (b) Cash A/c.
(c) Sales A/c. (d) None of these.
8. Withdrawal of goods from business by the proprietor is credited to
(a) Drawings A/c. (b) Capital A/c.
(c) Purchases A/c. (d) None of these.
9. Trade Discount allowed is deducted from the gross sales. Sales is recorded in the books of account at:
(a) Gross Sales and Trade Discount separately. (b) Net Sales Invoice.
(c) None of the above. (d) Any of (a) and (b).
10. Trade Discount received on purchases is recorded in the books of account as follows:
(a) Trade Discount is credited to Discount Received Account.
(b) Trade Discount is deducted from the Invoice Price and recorded at net value.
(c) None of the above.
(d) Any of (a) and (b).
11. Cash Discount allowed is recorded in the books of account as follows:
(a) Cash Discount is debited to Discount Allowed Account.
(b) Cash Discount is reduced from the Invoice Price.
(c) None of the above.
(d) Any of (a) and (b).
11
12. Cash Discount received is recorded in the books of account as follows:
(a) Cash Discount is credited to Discount Received Account.
(b) Cash Discount is reduced from the Invoice Price.
(c) None of the above.
(d) Any of (a) and (b).
13. Journal entry for Stock left unsold at the end of the year is:
(a) Dr. Closing Stock A/c and Cr. Trading A/c
(b) Dr. Trading A/c and Cr. Closing Stock A/c
(c) Dr. Profit & Loss A/c and Cr. Closing Stock A/c
(d) Dr. Closing Stock A/c and Cr. Profit and Loss A/c
14. Cheque of ` 1,000 received from Ramesh was dishonored. Journal entry will be:
(a) Dr. Sales Return A/c and Cr. Ramesh by ` 1,000
(b) Dr. Ramesh and Cr. Bank A/c by ` 1,000
(c) Dr. Sales Return A/c and Cr. Suspense A/c by ` 1,000
(d) None of the above
15. Journal entry for wood (goods) of ` 2,000 used for making office furniture is:
(a) Dr. Furniture A/c and Cr. Cash A/c by ` 2,000
(b) Dr Cash A/c and Cr. Furniture A/c by ` 2,000
(c) Dr. Furniture A/c and Cr. Purchases A/c by ` 2,000
(d) None of the above
16. Journal entry for payment of income tax ` 5,000 by the proprietor is:
(a) Dr. Income Tax A/c and Cr. Purchases A/c by ` 5,000
(b) Dr. Purchases A/c and Cr. Drawings A/c by ` 5,000
(c) Dr. Drawings A/c and Cr. Income Tax A/c by ` 5,000
(d) Dr. Drawings A/c and Cr. Cash A/c by ` 5,000
17. Journal entry for selling old machinery with book value ` 5,000 for ` 3,500 is:
(a) Dr. Cash A/c by ` 5,000 and Cr. Profit and Loss A/c by ` 1,500 and Sales A/c by ` 3,500
(b) Dr. Sales A/c by ` 3,500 and Profit and Loss A/c by ` 1,500 and Cr. Cash A/c by ` 5,000
(c) Dr. Cash A/c and Cr. Sales A/c by ` 3,500
(d) Dr. Cash A/c by ` 5,000 and Cr. Machinery A/c by ` 3,500 and Profit and Loss A/c by ` 1,500
[Ans.: 1. (a); 2. (c); 3. (a); 4. (a); 5. (a); 6. (a); 7. (b); 8. (c);
9. (b); 10. (b); 11. (a); 12. (a) 13. (a); 14. (b); 15. (c); 16. (d); 17. (d).]

9. LEDGER

Objective Type Questions

1. State whether the following statements are True or False:
(i) If the Goods are sold or supplied from Delhi to Gurugram, it is Inter-State Supply.
(ii) Ledger is the principal book of account.
(iii) Ledger is not prepared from a Journal.
(iv) A Ledger is called a book of final entry.
(v) Balancing a Ledger is necessary.
[Ans.: (i) True; (ii) True; (iii) False; (iv) True; (v) True.]
12
 2. Fill-in-the blanks with appropriate words:
(i) Ledger provides a true picture of a group of similar _______________.
(ii) Balance of Personal Account is carried _______________.
(iii) Every account has _______________ sides, debit and credit.
(iv) Balances of nominal accounts are transferred to Trading Account or _______________ Account.
(v) The book in which every account is maintained is known as _______________.
[Ans.: (i) transactions; (ii) forward; (iii) two; (iv) Profit and Loss; (v) Ledger.]

Multiple Choice Questions (MCQs)

Select the correct alternative:
1. Ledger is called a book of
(a) primary entry. (b) secondary entry.
(c) final entry. (d) None of these.
2. Ledger Account is prepared from
(a) events. (b) transactions.
(c) Journal. (d) Any of these.
3. Business transactions are recorded
(a) in chronological order. (b) weekly.
(c) at the end of the month. (d) Any of these.
4. Ledger is a book in which
(a) Real and Nominal Accounts are maintained.
(b) Real and Personal Accounts are maintained.
(c) Real, Personal and Nominal Accounts are maintained.
(d) None of the above.
[Ans.: 1. (c); 2. (c); 3. (a); 4. (c).]

10. SPECIAL PURPOSE BOOKS I— CASH BOOK

Objective Type Questions

1. State whether the following statements are True or False:
(i) Cash Book is both a Subsidiary Book and Principal Book.
(ii) Cash Column of Cash Book cannot have a debit balance.
(iii) Payments are shown in the debit side of the Cash Book.
(iv) Receipts are shown in the credit side of the Cash Book.
(v) Contra entries are not posted into Ledger Accounts.
(vi) In case of Bank Overdraft, ‘Bank Column’ in Cash Book will show credit Balance.
(vii) Cheque received but not deposited into Bank on the same day is debited to Cheques-in-Hand Account.
(viii) Bank Column in Cash Book may show Credit Balance.
(ix) In a two-column Cash Book, both Cash column and Bank column are balanced.
(x) Cash withdrawn from bank for personal use is a Contra Entry.
(xi) Cheque received and endorsed is entered in Journal Proper.
(xii) Balance of Petty Cash Book is an expense.
(xiii) Balance in the petty cash book is an asset.
13
 (xiv) Sale of goods by Mohan to Sohan for ` 1,000 will be recorded in the Sales Book.
[Ans.: (i) True; (ii) False; (iii) False; (iv) False; (v) True; (vi) True; (vii) True; (viii) True;
(ix) True; (x) False; (xi) True; (xii) False; (xiii) True; (xiv) True.]
2. Fill-in-the blanks with appropriate words:
(i) Cash Book records _______________ transactions.
(ii) Credit transactions are recorded in _______________ proper.
(iii) Cash Column in the Debit side of Cash Book shows cash _______________.
(iv) Cash Column in the Credit side of Cash Book shows cash _______________.
(v) Balance of Cash Book means _______________.
(vi) Bank Column of Cash Book may have _______________ or _______________ balance.
(vii) Bank Overdraft in Cash Book means _______________ balance.
(viii) Bank Balance in Cash Book means _______________ balance.
(ix) Cash Account is an _______________ Account.
(x) Bank Account may be _______________ Account or _______________ Account.
[Ans.: (i) cash; (ii) Journal; (iii) receipts; (iv) payments; (v) cash in hand;
(vi) debit, credit; (vii) credit; (viii) debit; (ix) Asset; (x) Asset, Liability.]

Multiple Choice Questions (MCQs)

Select the correct alternative:
1. Transaction posted in the ledger from two column Cash Book is
(a) Cash deposited into bank. (b) Cash withdrawn from Bank.
(c) Cash withdrawn from bank for personal use. (d) None of these.
2. Transaction not posted in the ledger from two column Cash Book is
(a) Withdrawal from bank for office use. (b) Withdrawal from bank for personal use.
(c) Cheque issued for purchase of asset. (d) None of these.
3. If both debit and the credit aspects of a transaction are recorded in the cash book itself, it is called
(a) an opening entry. (b) a compound entry.
(c) a transfer entry. (d) a contra entry.
4. A cheque received but not deposited the same day into bank, is entered in
(a) Cash column on the debit side. (b) Bank column on the debit side.
(c) Cash column on the credit side. (d) Journal Proper.
5. Cheque returned dishonored, it is recorded in
(a) Cash column on the credit side. (b) Cash column on the debit side.
(c) Bank column on the Credit side. (d) Journal Proper.
6. Petty Cash Book records
(a) payments of small amounts. (b) receipts of small amounts.
(c) Both (a) and (b). (d) All cash receipts and payments.
7. Payments made through Petty Cash Book
(a) are not posted into Ledger Accounts. (b) are posted into Ledger Accounts.
(c) Both (a) and (b). (d) None of these.
8. Petty Cash Receipts are recorded in
(a) Petty Cash Book. (b) Journal Proper.
(c) Cash Book. (d) None of these.
9. Petty Cash Book will have a
(a) credit balance. (b) debit balance.
(c) debit or nil balance. (d) credit or nil balance.
14
 10. If Shyam has sold goods to Ramesh for cash, the entry will be recorded in the
(a) Cash Book. (b) Sales Book.
(c) Journal. (d) Purchase Book.
11. Ram has purchased goods from Param for cash, the entry will be recorded in the
(a) Cash Book. (b) Sales Book.
(c) Journal. (d) Purchases Book.
12. If Ramesh has sold goods for cash, the entry will be recorded
(a) in the Cash Book. (b) in the Sales Book.
(c) in the Journal Proper. (d) None of these.
13. The Cash Book records
(a) all cash receipts and payments. (b) cash and credit sale of goods.
(c) Both (a) and (b). (d) None of these.
[Ans.: 1. (c); 2. (a); 3. (d); 4. (d); 5. (c); 6. (a); 7. (b); 8. (c); 9. (c); 10. (a); 11. (a); 12. (a); 13. (a).]

11. SPECIAL PURPOSE BOOKS II— OTHER BOOKS

Objective Type Questions

1. State whether the following statements are True or False:
(i) Sales Journal is used for recording cash as well as credit sales.
(ii) Journal Proper records purchase and sales of assets on credit.
(iii) Adjustment entries are passed at the end of the accounting period.
(iv) Closing entries are used for closing of accounts relating to expenses and revenues.
(v) Sales Return Book has a debit balance.
(vi) Purchases Return Book has a debit balance.
[Ans.: (i) False; (ii) True; (iii) True; (iv) True; (v) True; (vi) False.]
2. Fill-in-the blanks with appropriate words:
(i) Total of Purchases Book is posted to the _______________ of Purchases Account.
(ii) Total of Sales Book is posted to the _______________ of Sales Account.
(iii) Journal Proper records transactions of the nature for which ______________ Journal is not
maintained.
(iv) Sales Book is prepared from the _______________ invoice.
(v) Closing entries are passed at the _______________ of the accounting period.
(vi) In Journal Proper, only _______________ discount is recorded.
[Ans.: (i) debit; (ii) credit; (iii) Special; (iv) sales; (v) end; (vi) cash.]
Multiple Choice Questions (MCQs)
Select the correct alternative:
1. Sales Book
(a) is a part of the Journal. (b) is a part of the Ledger.
(c) is a part of the Balance Sheet. (d) None of these.
2. Total of the Sales Book is posted to
(a) credit of the Sales Account. (b) credit of the Purchases Account.
(c) credit of the Capital Account. (d) credit of Customers’ Accounts.
3. Periodic total of Sales Return Journal is posted to the
(a) Sales Account. (b) Goods Account.
(c) Sales Return Account. (d) Any of these.
15
 4. Param purchased goods from Dev. It will be recorded in
(a) Purchases Book. (b) Cash Book.
(c) Purchases Return Book. (d) None of these.
5. Purchase of Machinery by Amit, a dealer in machinery from Yogesh for ` 1,00,000 is recorded in
(a) Cash Book. (b) Sales Book.
(c) Purchase Book. (d) Journal Proper.
6. Purchase of Machinery by Abhay, a dealer in stationery from Yogesh for ` 1,00,000 is recorded in
(a) Cash Book. (b) Sales Book.
(c) Purchase Book. (d) Journal Proper.
7. Sale of Machinery by Amit, a dealer in machinery for ` 1,20,000 is recorded in
(a) Cash Book. (b) Sales Book.
(c) Purchase Book. (d) Journal Proper.
8. Sale of Machinery by Suresh, a dealer in stationery to Sumit for `1,20,000 is recorded in
(a) Cash Book. (b) Sales Book.
(c) Purchase Book. (d) Journal Proper.
9. Purchases Account in the ledger shows
(a) All purchases of goods. (b) Credit purchases.
(c) Cash purchases of goods. (d) Credit purchases of assets other than goods.
10. Sales Account in the ledger shows
(a) All sales of goods. (b) Credit sales.
(c) Cash sales of goods. (d) Credit sales of assets other than goods.
11. Closing entries are recorded in
(a) Cash Book. (b) Ledger.
(c) Journal Proper. (d) Balance Sheet.
12. Debit Note for ` 1,000 issued to Suresh for goods returned by us is accounted in
(a) Sales Book. (b) Purchases Book.
(c) Journal Proper. (d) Purchases Return Book.
13. Rectifying entry for the error of a credit purchase of goods of ` 10,000 recorded as credit sale to Ravi
detected two months later is passed in
(a) Journal Proper. (b) Sales Book.
(c) Cash Book. (d) Purchases Book.
[Ans.: 1. (a); 2. (a); 3. (c); 4. (a); 5. (c); 6. (d); 7. (b); 8. (d); 9. (a); 10. (a); 11. (c); 12. (d); 13. (a).]

12. ACCOUNTING OF GOODS AND SERVICES TAX (GST)

Objective Type Questions

1. State whether the following statements are True or False:
(i) If the Goods are sold or supplied from Lucknow, UP to Kanpur, UP, it is Inter-State Supply.
(ii) If the Goods are sold or supplied from Gorakhpur, UP to Kolkata, West Bengal, it is Intra-State Supply.
(iii) GST paid (Input GST) can be set off against GST Collected (Output GST). It is not a cost but an asset.
(iv) Input Credit of GST paid is not allowed on goods given as donation.
(v) Input Credit of GST paid on Food and Beverages is not allowed. It, therefore, is a cost.
(vi) GST is not levied on Salaries and Wages.
[Ans.: (i) False; (ii) False; (iii) True; (iv) True; (v) True; (vi) True.]
2. Fill-in-the blanks with appropriate words:
(i) GST is an _______________ tax.
(ii) GST is charged by a _______________ tax payer.
16
 (iii) Sale made within the state is _______________ sale.
(iv) GST paid by the purchaser of Goods and/or Services is _______________ GST.
(v) GST collected by the seller of Goods and/or Services is _______________ GST.
(vi) GST paid on purchase of assets to be used in business is allowed as _______________ credit.
(vii) When GST is not charged by the seller of Goods and/or Services but is paid into the Government
Account directly by the purchaser of Goods and/or Services, it is termed as _______________.
(viii) GST collected is a _______________.
[Ans.: (i) indirect; (ii) registered; (iii) intra-state; (iv) Input; (v) Output;
(vi) input; (vii) Reverse Charge; (viii) liability.]

Multiple Choice Questions (MCQs)

Select the correct alternative:
1. Out of the following, which is the objective of GST?
(a) Developing Common National Market by having One Indirect Tax.
(b) Ease of Doing Business.
(c) Simplifying Compliance of Indirect Taxes.
(d) All of the above.
2. On intra-state (i.e., within the state) purchase of goods, which of the following GST is levied?
(a) CGST and IGST (b) CGST and SGST
(c) SGST and IGST (d) None of these
  3. On inter-state (i.e., outside the state) purchase of goods, which of the following GST is levied?
(a) IGST. (b) IGST and CGST.
(c) CGST and IGST. (d) None of these.
4. Input Credit of GST paid directly into Government Account under Reverse charge is
(a) not allowed. (b) allowed.
(c) may or may not be allowed. (d) None of these.
[Ans.: 1. (d); 2. (b); 3. (a); 4. (b).]

13. BANK RECONCILIATION STATEMENT

Objective Type Questions

1. State whether the following statements are True or False:
(i) Bank Reconciliation Statement is not a part of the Double Entry System.
(ii) Bank balance as per Bank Statement is shown in the Balance Sheet at the end of the year.
(iii) Bank Reconciliation Statement is prepared at the end of the accounting year only.
(iv) Cheque issued but not presented for payment will reduce the balance as per the Pass Book.
(v) Pass Book is the Statement of Account of the customer maintained by the bank.
(vi) Bank Reconciliation Statement is prepared by the account holder and not by the bank.
(vii) Bank Reconciliation Statement is a part of Cash Book.
(viii) Bank Reconciliation Statement is a part of Bank Account.
(ix) Bank Reconciliation Statement may be prepared at any time of the accounting period.
(x) Bank Reconciliation Statement brings out the reasons for difference in the Pass Book and
Cash Book balances.
[Ans.: (i) True; (ii) False; (iii) False; (iv) False; (v) True; (vi) True;
(vii) False; (viii) False; (ix) True; (x) True.]
17
 2. Fill-in-the blanks with appropriate words:
(i) Cheques deposited but not yet cleared are _______________ when Bank Reconciliation Statement
is prepared starting with debit bank balance as per Cash Book.
(ii) Cheques issued but not yet presented are _______________ to Debit Cash Book balance when
Bank Reconciliation Statement is prepared.
(iii) Charges charged by bank and not recorded in the books of account are _______________ to Credit
Cash Book balance when Bank Reconciliation Statement is prepared.
(iv) Interest allowed by bank and not recorded in the books of account are _______________ from
Credit Cash Book balance when Bank Reconciliation Statement is prepared.
(v) Interest allowed by bank and not recorded in the books of account are _______________ to Debit
Cash Book balance to prepare Bank Reconciliation Statement.
(vi) A Bank Reconciliation Statement is prepared to ____________________________.
(vii) When bank column of a Cash Book shows a debit balance, it means _______________.
(viii) When Pass Book shows a credit balance, it means _______________.
(ix) When bank column of a Cash Book shows a credit balance, it means _______________.
(x) When Pass Book shows a debit balance, it means _______________.
[Ans.: (i) deducted; (ii) added; (iii) added; (iv) deducted; (v) added; (vi) reconcile bank balance;
(vii) balance lying with bank; (viii) balance lying with bank, i.e., amount due from the bank;
(ix) overdraft, i.e., amount due to the bank; (x) overdraft as per Pass Book.]

Multiple Choice Questions (MCQs)

Select the correct alternative:
1. Which of the following will not require adjustment in the Cash Book balance?
(a) Error in Pass Book (b) Cheque issued but not presented for payment
(c) Cheque deposited but not cleared (d) All of these.
2. Which of the following will not require adjustment in the Cash Book balance?
(a) Cheque issued but not presented for payment.
(b) Cheque deposited but not cleared.
(c) Cheque wrongly credited by bank.
(d) All of the above.
3. A cheque of ` 5,000 received from a debtor recorded in the cash book but omitted to be banked. When
balance as per cash book is the starting point
(a) ` 5,000 to be added. (b) ` 5,000 to be subtracted.
(c) No adjustment is required. (d) None of these.
4. A cheque of ` 10,000 received from a debtor deposited but omitted to be recorded in the cash book.
When balance as per cash book is the starting point
(a) ` 10,000 to be added. (b) ` 10,000 to be subtracted.
(c) No adjustment is required. (d) None of these.
5. A cheque of ` 1,120 received from a debtor recorded twice in the Cash Book. When balance as per
Cash Book is the starting point
(a) `1,120 to be added. (b) ` 1,120 to be subtracted.
(c) No adjustment is required. (d) None of these.
6. A cheque received from a debtor for ` 1,023 recorded as ` 1,032 in the cash column in the cash book.
When the balance as per cash book is the starting point
(a) ` 1,023 to be added. (b) ` 1,032 to be added.
(c) ` 9 to be subtracted. (d) ` 1,023 to be subtracted.
18
 7. A cheque of ` 3,500 issued and recorded in the Cash Book but was not sent to creditor. When balance as
per Cash Book is the starting point
(a) ` 3,500 to be added. (b) ` 3,500 to be subtracted.
(c) No adjustment is required. (d) None of these.
8. The payment side of the Cash Book (Bank Column) was undercast by ` 10,000. When the balance as per
Cash Book is the starting point
(a) ` 10,000 to be added. (b) ` 10,000 to be subtracted.
(c) No adjustment is required. (d) None of these.
9. The receipt side of the Cash Book (Bank Column) was overcast by ` 5,000. When the balance as per Cash
Book is the starting point
(a) ` 5,000 to be added. (b) ` 5,000 to be subtracted.
(c) No adjustment is required. (d) None of these.
10. Withdrawal column of the Pass Book showed a wrong entry of ` 1,200. When the balance as per Cash
Book is the starting point
(a) ` 1,200 to be added. (b) ` 1,200 to be subtracted.
(c) No adjustment is required. (d) None of these.
11. A cheque of ` 2,345 issued was recorded in deposit column as ` 2,435. To ascertain the balance as per
Cash Book
(a) ` 2,345 should be added to the balance as per Pass Book.
(b) ` 2,435 should be subtracted from the balance as per Pass Book.
(c) ` 4,780 should be subtracted from the balance as per Pass Book.
(d) ` 10 should be added to the balance as per Pass Book.
12. Cash Book showed Bank overdraft of ` 3,000. But the Pass Book made up on the same date showed that
cheques of ` 200, ` 100 and ` 250 respectively had not been presented for payments; and the cheque
of ` 800 paid into account had not been cleared. The balance as per the cash book will be
(a) ` 2,200. (b) ` 4,350.
(c) ` 3,250. (d) ` 2,750.
[Ans.: 1. (a); 2. (d); 3. (b); 4. (a); 5. (b); 6. (c); 7. (a); 8. (b); 9. (b); 10. (b); 11. (c); 12. (c).]

14. TRIAL BALANCE

Objective Type Questions

1. State whether the following statements are True or False:
(i) Trial Balance is a statement not an account.
(ii) Opening Stock appears in a Trial Balance.
(iii) Closing Stock is usually given as an additional information or adjustment outside the Trial Balance.
(iv) Trial Balance is not a conclusive proof of correctness of the books of account.
(v) Trial Balance is prepared for a particular period.
(vi) Trial Balance is a part of the Ledger.
(vii) Trial Balance is a result of posting into ledger accounts and its balancing.
(viii) The main purpose of preparing a Trial Balance is to check the arithmetical accuracy of double entry.
(ix) Trial Balance is prepared on the basis of balances in the Ledger.
(x) If the Trial Balance tallies, it is proved that there are no errors.
(xi) Trial Balance is always prepared at the end of each month.
[Ans.: (i) True; (ii) True; (iii) True; (iv) True; (v) False; (vi) False; (vii) True;
(viii) True; (ix) True; (x) False; (xi) False.]
19
 2. Fill-in-the blanks with appropriate words:
(i)Debit balances of accounts are recorded in _______________ column of Trial Balance.
(ii)Credit balances of accounts are recorded in _______________ column of Trial Balance.
(iii)_______________ are prepared from the Trial Balance.
(iv) _________________ and ________________ balances of a Trial Balance if in agreement, proves at
least the arithmetical accuracy.
(v) Trial Balance is not a part of the double entry system of _______________.
(vi) Trial Balance is a _______________ of debit and credit balances in Ledger at a particular date.
[Ans.: (i) debit; (ii) credit; (iii) Final accounts; (iv) Debit, credit;(v) book keeping; (vi) statement.]

Multiple Choice Questions (MCQs)

Select the correct alternative:
1. An Asset Account shows a
(a) Credit balance. (b) Debit balance.
(c) Debit or Credit balance. (d) None of these.
2. Preparation of Trial Balance is
(a) compulsory. (b) optional.
(c) compulsory or optional. (d) None of these.
3. Trial Balance shows
(a) only credit balance. (b) only debit balance.
(c) both debit and credit balances. (d) either debit or credit balance.
4. Trial Balance is prepared
(a) before Journal is written.
(b) after Journal is written.
(c) after Journal is posted into ledger accounts.
(d) after financial statements have been prepared.
5. Trial Balance can be prepared
(a) at any time of the year. (b) at the end of the year.
(c) in the beginning of the year. (d) None of these.
6. If Trial Balance matches, it means
(a) arithmetical accuracy. (b) books are accurate.
(c) Both (a) and (b). (d) None of these.
7. Trial Balance is prepared from the balances taken from
(a) Day Books. (b) Journal.
(c) Balance Sheet. (d) Ledger Accounts.
8. Discount Received has
(a) Debit balance. (b) Credit balance.
(c) Both (a) and (b). (d) None of these.
9. If Closing Stock appears in the Trial Balance, it means
(a) purchases are adjusted against opening and closing stocks.
(b) purchases are adjusted against closing stock.
(c) Both (a) and (b).
(d) None of the above.
10. Trial Balance is prepared from
(a) Ledger. (b) Ledger and Journal Book.
(c) Ledger and Cash Book. (d) None of these.
[Ans.: 1. (b); 2. (b); 3. (c); 4. (c); 5. (a); 6. (a); 7. (d); 8. (b); 9. (a); 10 (c).]
20
 15. DEPRECIATION

Objective Type Questions

1. State whether the following statements are True or False:
(i) Depreciation is not provided in case of loss in a financial year.
(ii) Depreciation is the process of valuation of asset.
(iii) The main objective of providing depreciation is to calculate the correct profit.
(iv) Under Straight Line Method, the depreciation charge is constant every year.
(v) Depreciation is charged only on Tangible fixed assets except land.
(vi) Depreciation is decline in the market value of tangible fixed assets.
(vii) Under the Diminishing Balance Method, depreciation is calculated on the original cost of the asset.
(viii) Depreciation is a non-cash expense.
(ix) Depreciation is charged on the amount paid for the asset, including GST Paid.
[Ans.: (i) False; (ii) False; (iii) True; (iv) True; (v) True; (vi) False; (vii) False; (viii) True; (ix) False.]
2. Fill-in-the blanks with appropriate words:
(i) Depreciation means _______________ in the book value of fixed assets.
(ii) Depreciation is provided on _______________ assets.
(iii) Scrap value of an asset means the _______________ that will be realised on sale at the end of its
_______________.
(iv) Temporary rise or fall in the price of an asset is called _______________.
(v) Depreciation provides funds for _______________.
[Ans.: (i) decrease; (ii) fixed Tangible; (iii) amount or value, useful life; (iv) fluctuation; (v) replacement.]

Multiple Choice Questions (MCQs)

Select the correct alternative:
1. Depreciation arises because of
(a) Wear and Tear. (b) Inflation.
(c) Fall in the value of the asset. (d) None of these.
2. The Diminishing Value Method means a method by which
(a) the rate of Depreciation falls year by year.
(b) the amount on which Depreciation is calculated falls year by year.
(c) the rate as well as the Amount to which it is applied fall year by year.
(d) None of the above.
3. Straight Line Method of Depreciation is that method under which
(a) Depreciation is charged at a fixed percentage on the book value of the asset.
(b) Depreciation is charged at a fixed percentage on the original cost of the asset.
(c) Depreciation is charged on original cost of asset but the depreciation rate changes.
(d) None of the above.
4. The Amount of Depreciation charged on machinery is debited to
(a) Depreciation Account. (b) Machinery Account.
(c) Provision for Depreciation Account. (d) None of these.
21
 5. A Machinery which costs ` 2,00,000 is depreciated at 25% per year using the Written Down Value Method.
At the end of three years, it will have a net book value of
(a) ` 1,50,000. (b) ` 84,375.
(c) ` 1,12,500. (d) ` 1,00,000.
6. Depletion method is adopted in the case of
(a) Wasting assets like mines and quarries. (b) Land and building.
(c) Goodwill. (d) Plant and machinery.
7. The Journal entry to record a gain (profit) on the sale of fixed assets is:
If Asset Disposal Account is not maintained:
Debit Credit
(a) Fixed Asset Account Profit and Loss Account
(b) Bank Account Profit and Loss Account
(c) Profit and Loss Account Fixed Asset Account
8. The Journal entry to record a gain (profit) on the sale of fixed assets is:
If Asset Disposal Account is maintained:
Debit Credit
(a) Asset Disposal Account Profit and Loss Account
(b) Fixed Asset Account Profit and Loss Account
(c) Profit and Loss Account Asset Disposal Account
9. Charging depreciation is
(a) compulsory. (b) voluntary.
(c) dependent on the condition of assets. (d) None of these.
10. Depreciation is a
(a) Reserve. (b) Provision.
(c) Both (a) and (b). (d) None of these.
11. Depreciation is not provided on
(a) Machinery. (b) Building.
(c) Computers. (d) Land.
12. Depreciation is
(a) Revenue Expenditure. (b) Capital Expenditure.
(c) Deferred Revenue Expenditure. (d) None of these.
[Ans.: 1. (a); 2. (b); 3. (b); 4. (a); 5. (b); 6. (a); 7. (a); 8. (a); 9. (a); 10. (b); 11. (d); 12. (a).]

16. PROVISIONS AND RESERVES

Objective Type Questions

1. State whether the following statements are True or False:
(i) Reserves can be specific or general.
(ii) Reserves appear on the liabilities side of the Balance Sheet.
(iii) Capital reserves are not freely distributed as profits.
(iv) Reserves are not the items of the owners’ equity.
(v) Secret reserves are disclosed in the Balance Sheet.
(vi) A specific reserve can be created for any purpose.
(vii) General Reserve is created to meet contingent liability.
(viii) Revenue reserves are created out of revenue profits of the business.
[Ans.: (i) True; (ii) True; (iii) True; (iv) False; (v) False; (vi) True; (vii) True; (viii) True.]
22
 2. Fill-in-the blanks with appropriate words:
(i) Reserves arising from capital receipts are _______________ reserve.
(ii) Provisions are _______________ transactions.
(iii) A provision is a _______________ against profits.
(iv) If the amount of any known liability cannot be determined with substantial accuracy, ____________
is created.
(v) If the amount of any known liability can be determined with substantial accuracy, _______________
is created.
[Ans.: (i) capital; (ii) internal; (iii) charge; (iv) provision; (v) liability.]

Multiple Choice Questions (MCQs)

Select the correct alternative:
1. Reserves arising from capital receipts are
(a) Capital Reserve. (b) Reserve Fund.
(c) General Reserve. (d) None of these.
2. Reserves
(a) are part of proprietor’s equity. (b) are not part of proprietor’s equity.
(c) are Liabilities of the Firm. (d) None of these.
3. Provisions are
(a) liabilities with known Amount. (b) liabilities with estimated Amount.
(c) Both (a) and (b). (d) None of these.
4. Provision is
(a) an appropriation out of Profit. (b) A charge against the profit.
(c) Both (a) and (b). (d) None of these.
5. If amount of any known liability is not known, it is accounted in the Books of Account as
(a) a Liability. (b) a provision.
(c) a reserve. (d) None of these.
6. If amount of any known liability is known, it is accounted in the Books of Account as
(a) a Liability. (b) a provision.
(c) a reserve. (d) None of these.
[Ans.: 1. (a); 2. (a); 3. (b); 4. (b); 5. (b); 6. (a).]

17. RECTIFICATION OF ERRORS

Objective Type Questions

1. State whether the following statements are True or False:
(i) Error of principle is not disclosed by the Trial Balance.
(ii) Error of complete omission is disclosed by the Trial Balance.
(iii) Compensating error is disclosed by the Trial Balance.
(iv) A Trial Balance will be in agreement when a transaction is recorded on the wrong side of an account.
(v) Errors of principle affect only one account.
(vi) All accounting errors affect the agreement of Trial Balance.
(vii) Difference in Trial Balance is debited or credited to the Suspense Account, which is transferred to
Profit and Loss Account.
(viii) The errors are credited or debited to the Suspense Account in the next year and the balance, if any,
is transferred to the Capital Account.
[Ans.: (i) True; (ii) False; (iii) False; (iv) False; (v) False; (vi) False; (vii) False; (viii) True.]
23
 2. Fill-in-the blanks with appropriate words:
(i) Undercasting of Sales Book is corrected by _______________ Sales Account.
(ii) Rectifying entries are passed in _______________.
(iii) Disagreement of Trial Balance indicates that an _______________ has been committed.
(iv) Compensating errors are of a _______________ nature.
(v) An asset has been purchased for the firm. However, the amount was debited to Purchases Account.
It is an error of _______________.
(vi) An item of ` 53 has been debited to a personal account as ` 35. It is an error of _______________.
[Ans.: (i) crediting; (ii) Journal Proper; (iii) error; (iv) neutralising;
(v) principle; (vi) commission.]
Multiple Choice Questions (MCQs)
Select the correct alternative:
1. ` 2,000 paid as wages for installing a machine should be debited to
(a) Wages Account. (b) Machinery Account.
(c) Capital Account. (d) Any of these.
2. On purchase of old furniture, the amount of ` 1,000 spent on its repairs should be debited to
(a) Repairs Account. (b) Furniture Account.
(c) Cash Account. (d) Any of these.
3. Goods of ` 500 given as charity should be credited to
(a) Charity Account. (b) Sales Account.
(c) Purchases Account. (d) Any of these.
4. Goods of ` 1,000 taken by the proprietor for personal use should be credited to
(a) Sales Account. (b) Proprietor’s Personal Expenses Account.
(c) Purchases Account. (d) Drawings Account.
5. Errors of complete omission permit
(a) correct totalling of the Balance Sheet. (b) correct totalling of the Trial Balance.
(c) the Trial Balance to agree. (d) None of these.
6. The preparation of a Trial Balance helps in
(a) preparation of Balance Sheet. (b) correct totalling of the Trial Balance.
(c) locating errors of principle. (d) None of these.
7. ` 200 received from Smith whose account was previously written off as Bad Debt should be credited to
(a) Bad Debts Recovered Account. (b) Smith’s Account.
(c) Cash Account. (d) Sales Account.
8. Purchase of office furniture of ` 1,200 has been debited to the General Expenses Account. It is
(a) a clerical error. (b) an error of principle.
(c) an error of omission. (d) Compensating Error.
9. Errors of Principle
(a) can be known from the Trial Balance. (b) cannot be known from the Trial Balance.
(c) may or may not be known from the Trial Balance. (d) None of these.
10. Errors of Complete Omission
(a) are reflected in the Trial Balance. (b) are not reflected in the Trial Balance.
(c) Both (a) and (b). (d) None of these.
11. Suspense Account appears in the Trial Balance because of
(a) one sided errors. (b) compensating errors.
(c) errors of principle. (d) None of these.
24
 12. Compensating errors are
(a) combination of more than one errors.
(b) errors committed in one transaction.
(c) errors committed by applying incorrect accounting principles.
(d) None of the above.
13. Suspense Account will give the
(a) Debit balance. (b) Credit balance.
(c) Debit or Credit balance, as the case may be. (d) Nil balance.
14. Rectification entries are normally passed in
(a) Journal Proper. (b) Cash Book.
(c) Day Books. (d) None of these.
15. In case a Trial Balance does not agree, the difference is placed in
(a) Suspense Account. (b) Drawing Account.
(c) Capital Account. (d) Trading Account.
[Ans.: 1. (b); 2. (b); 3. (c); 4. (c); 5. (c); 6. (a); 7. (a); 8. (b); 9. (c);
10. (b); 11. (a); 12. (a); 13. (c); 14. (a); 15. (a).]

18. FINANCIAL STATEMENTS OF SOLE PROPRIETORSHIP

Objective Type Questions

1. State whether the following statements are True or False:

(i) Capital Expenditure and Revenue Expenditure should be distinguished to determine net profit.
(ii) Capital Receipts and Revenue Receipts need not be distinguished to determine net profit.
(iii) Insurance claim received for loss of goods is a revenue receipt.
(iv) Purchase of machinery for production is a revenue expenditure.
(v) Computers purchased for office use is a revenue expenditure.
(vi) Insurance premium paid to insure the machinery is a revenue expenditure.
(vii) Alok’s Trial Balance shows Opening stock ` 20,000, it will be debited to the Profit & Loss Account.

[Ans.: (i) True; (ii) False; (iii) True; (iv) False; (v) False; (vi) True; (vii) False.]
2. Fill-in-the blanks with appropriate words:
(i) Revenue Expenditure is transferred to _______________.
(ii) Revenue is transferred to _______________.
(iii) Closing Stock in the Trial Balance is transferred to _______________.
(iv) Capital expenditure is shown in _______________.
(v) Capital Receipts are shown in _______________.
(vi) Prepaid wages ` 2,500, appears in a Trial balance. It will be shown in _______________.
(vii) Income tax paid by proprietor of ` 30,000. It will be _______________.
[Ans.: (i) Profit and Loss Account; (ii) Profit and Loss Account; (iii) Balance Sheet;
(iv) Balance Sheet; (v) Balance Sheet; (vi) Balance Sheet;
(vii) deducted from capital as drawings.]
25
 Multiple Choice Questions (MCQs)

Select the correct alternative:

1. Returns Inward in the Trial Balance are deducted from
(a) purchases. (b) sales.
(c) returns outward. (d) None of these.
2. Bhuvan’s Trial Balance has following entries, besides others: Bad Debts ` 1,000; Provision for Doubtful
Debts ` 1,500. Provision for Doubtful Debts of ` 2,000 should be at the end of the year. The amount to
be debited to the Profit & Loss Account will be
(a) ` 4,500. (b) ` 5,000.
(c) ` 1,500. (d) ` 3,500.
3. Dravid’s Trial Balance gives following information: Discount Allowed ` 500, Provision for Discount on
Debtors ` 1,100. Provision for Discount on Debtors should be ` 1,800 at the end of the year. Amount that
should be debited to Profit & Loss Account will be
(a) ` 1,200. (b) ` 3,200.
(c) ` 700. (d) ` 2,200.
4. I’s Trial balance has the following information: 12% Bank loan ` 40,000, interest paid ` 3,800. Interest
debited to the Profit & Loss Account is
(a) ` 4,800. (b) ` 5,000.
(c) ` 5,500. (d) ` 1,000.
5. Opening stock ` 40,000; purchases ` 3,60,000; closing stock ` 1,30,000, sales ` 3,80,000; carriage inward
` 6,000; Freight inward ` 4,000; Wages and salaries ` 50,000, Returns inwards ` 20,000; Returns outward
` 40,000. The market value of closing stock was ` 1,20,000. Gross Profit of the year is
(a) ` 60,000. (b) ` 70,000.
(c) ` 90,000. (d) None of these.
6. Adjusted purchases ` 6,63,600; sales ` 7,44,000; Closing Stock ` 50,400; Freight & Cartage Inward ` 3,600;
Wages ` 2,400; Freight & Cartage outward ` 1,800. Gross Profit for the Year is
(a) ` 76,200. (b) ` 74,400.
(c) ` 1,24,800. (d) None of these.
7. Cost of Goods Sold ` 6,69,600; Sales ` 7,44,000; Closing Stock ` 50,400. Gross Profit for the year is
(a) ` 1,24,800. (b) ` 74,400.
(c) ` 5,25,000. (d) None of these.
8. Opening Stock ` 1,00,000; Sales ` 5,00,000; Gross Profit @25% on sales; Purchases ` 5,00,000. Closing
stock is
(a) ` 1,25,000. (b) ` 2,25,000.
(c) ` 3,00,000. (d) ` 3,25,000.
9. Opening Stock ` 1,00,000; Sales ` 5,00,000; Gross profit @ 25% on cost; Purchases ` 6,00,000. Closing
Stock is
(a) ` 1,25,000. (b) ` 3,00,000.
(c) ` 8,00,000. (d) ` 3,25,000.
[Ans.: 1. (b); 2. (c), 3. (a); 4. (a); 5. (a); 6. (b); 7. (b); 8. (b); 9. (b).]
26
 19. ADJUSTMENTS IN PREPARATION OF FINANCIAL STATEMENTS

Objective Type Questions

1. State whether the following statements are True or False:
(i) Depreciation is debited to Profit and Loss Account and deducted from the fixed assets in the
Balance Sheet.
(ii) Closing stock is included in Trading Account and on the assets side of the Balance Sheet.
(iii) Interest received on loan is an income for the business.
(iv) Provision for doubtful debts is debited to the Bad Debts Account.
(v) Closing stock if it appears in the Trial Balance, it is taken to Trading Account.
(vi) Income tax paid on behalf of the proprietor is debited to the Profit and Loss Account.
(vii) The expression depreciation at 10% and 10% p.a. convey the same meaning.
(viii) Prepaid rent appearing in the Trial Balance is taken only to the Profit and Loss Account.
(ix) Provision for Discount on Debtors is shown in the Balance Sheet as deduction from Debtors.
[Ans.: (i) True; (ii) True; (iii) True; (iv) False; (v) False; (vi) False;
(vii) False; (viii) False; (ix) True.]
2. Fill-in-the blanks with appropriate words:
(i) Income received in advance is debited to _______________ account and credited to Income
Received in Advance Account while making adjustment entries.
(ii) If outstanding salary appears in the Trial Balance, it is taken to the ______________.
(iii) If the adjustment related to bad debts is given outside the Trial Balance then it is adjusted by
debiting _______________ and crediting _______________.
(iv) Unearned income means income received in _______________.
(v) Prepaid expenses are _______________ of the business.
(vi) Expenses incurred but not yet paid are accounted because of _______________.
(vii) Wages paid for installation of machine is added to the cost of machine because of _______________.
(viii) Prepaid Insurance in the Trial Balance is shown in the Balance Sheet on the assets side because of
_______________.
(ix) Indirect Expenses are debited to _______________.
(x) Prepaid Rent appearing in the Trial Balance is transferred to _______________.
[Ans.: (i) Income; (ii) Balance Sheet; (iii) Bad Debts Account, Sundry Debtors Account;
(iv) Advance; (v) Assets; (vi) Accrual Concept; (vii) Cost Principle; (viii) Accrual Concept;
(ix) Profit and Loss Account; (x) Balance Sheet.]

Multiple Choice Questions (MCQs)

Select the correct alternative:
1. Unearned income means
(a) Income received in advance. (b) Income earned but not received.
(c) Income of the firm in the year of receipt. (d) None of these.
2. Wages and Salaries Account is shown in
(a) Trading Account. (b) Profit and Loss Account.
(c) Balance Sheet. (d) None of these.
3. Salaries and Wages Account is shown in
(a) Trading Account. (b) Profit and Loss Account.
(c) Balance Sheet. (d) None of these.

27
 4. Outstanding income is
(a) an asset. (b) a liability.
(c) an expense. (d) All of these.
5. The Manager is entitled to commission of 5% on profits before deducting the commission. The profit is
` 2,100, therefore, the commission will be
(a) ` 100. (b) ` 105.
(c) ` 110.53. (d) None of these.
6. Stock is valued at
(a) cost price.
(b) Net realisable value (market price).
(c) cost or net realisable (market price) whichever is less.
(d) None of these.
7. Closing Stock given as adjustment is shown in
(a) Trading Account. (b) Balance Sheet.
(c) Profit and Loss Account. (d) Both (a) and (b).
8. Closing Stock appearing in the Trial Balance is shown in
(a) Trading Account. (b) Balance Sheet.
(c) Profit and Loss Account. (d) Both (a) and (b).
9. The adjustment entry passed for interest on capital is:
(a) Debit Profit and Loss Account and Credit Drawings Account
(b) Debit Profit and Loss Account and Credit Capital Account
(c) Debit Profit and Loss Account and Credit Interest on Capital Account
(d) Debit Interest on Capital Account and Credit Profit and Loss Account
10. The adjustment entry passed for Provision for Doubtful Debt is:
(a) Debit Provision for Doubtful Debts Account and Credit Profit and Loss Account
(b) Debit Profit and Loss Account and Credit Provision for Doubtful Debts Account
(c) Debit Debtors Account and Credit Profit and Loss Account
(d) Debit Profit and Loss Account and Credit Debtors Account
11. Undervaluation of Closing Stock will
(a) Understate Cost of Goods manufactured.
(b) Overstate Current Assets.
(c) Overstate Gross Profit.
(d) Understate Net Income.
12. If sales are ` 60,000 and the rate of Gross Profit on Cost of Goods Sold is 25%, Cost of Goods Sold will be
(a) ` 45,000. (b) ` 50,000.
(c) ` 48,000. (d) None of these.
13. Which of the following statement is not correct?
(a) Provision for Doubtful Debts Account is amount payable to debtors.
(b) Bad Debts can be more than the amount of Provision for Doubtful Debts.
(c) Bad Debts can be less than the amount of Provision for Doubtful Debts.
(d) Provision for Doubtful Debts is shown in the Balance Sheet.
14. Sales is equal to
(a) Cost of Goods Sold – Gross Profit. (b) Cost of Goods Sold + Gross Profit.
(c) Gross Profit – Cost of Goods Sold. (d) Cost of Goods Sold + Net profit.
[Ans.: 1. (a); 2. (a); 3. (b); 4. (a); 5. (b); 6. (c); 7. (d); 8. (b); 9. (c);
10. (b); 11. (d); 12. (c); 13. (a); 14. (b).]
28
 20. ACCOUNTS FROM INCOMPLETE RECORDS—SINGLE ENTRY SYSTEM

Objective Type Questions

1. State whether the following statements are True or False:
(i) Accounts from incomplete records is an unscientific method of accounting as it does not follow
Dual Aspect Concept.
(ii) Under Double Entry System, one aspect of each transaction is recorded.
(iii) Statement of Affairs is prepared from incomplete records.
(iv) Net worth of an organisation means the excess of its total assets over total liabilities.
(v) Net profit is equal to Capital at the end + Drawings – Additional capital introduced – Capital in
the beginning.
[Ans.: (i) True; (ii) False; (iii) True; (iv) True; (v) True.]
2. Fill-in-the blanks with appropriate words:
(i) Statement of affairs shows only the _______________ financial position of the business.
(ii) Capital in the beginning and capital at the end are usually ascertained as the balancing figures of
_______________ prepared on the relevant accounting dates.
(iii) The difference of the capital at the end and the capital in the beginning will show _______________
provided that there are neither drawings nor additional capital introduced during the year.
(iv) The Statement of Affairs in the beginning reveals _______________.
(v) Total Sales = _______________ + _______________.
[Ans.: (i) estimated; (ii) Statement of Affairs; (iii) Profit earned;
(iv) capital in the beginning; (v) Cash Sales, Credit Sales.]

Multiple Choice Questions (MCQs)

Select the correct alternative:
1. In case of net worth method of Single Entry System, profit is ascertained by
(a) comparing the capital in the beginning and capital at the end of the accounting period.
(b) Preparing a Profit and Loss Account.
(c) Preparing a Balance Sheet.
(d) None of the above.
2. From incomplete records, it is possible to prepare
(a) Ledger Accounts. (b) Trial Balance.
(c) Statement of Affairs. (d) None of these.
3. Trial Balance cannot be prepared from Accounts from Incomplete Records because
(a) Dual Aspect Principle is not followed. (b) Matching Principle is not followed.
(c) Both (a) and (b). (d) None of these.
4. The capital in the beginning of the accounting year is ascertained by preparing:
(a) Debtors’ Account. (b) Cash Account.
(c) Opening Statement of Affairs. (d) Creditors’ Account.
5. Profit = Capital at the end + ? – Additional capital introduced – Capital in the beginning.
(a) Sales. (b) Drawings.
(c) Net Purchases. (d) Expenses.
[Ans.: 1. (a); 2. (c); 3. (a); 4. (c); 5. (b).]
29
1 Mark Questions
Q. 1. Accounting records business transactions and events which are of financial nature.
Is this a limitation of accounting?
Ans. Yes, it is a limitation of accounting because there are some events which impact
business but are not recorded because they are not of financial nature.
Q. 2. Goods withdrawn by the proprietor for his own use have not been recorded in the
books of account. Which accounting principle has not been followed?
Ans. Business Entity Principle.
Q. 3. An accountant always charges depreciation on fixed assets @ 20% p.a. Which
principle is followed by the accountant?
Ans. Consistency Assumption.
Q. 4. Management creates provision for doubtful debts @ 5% on debtors every year based
on its past experience. Name the two accounting principles followed in this process.
Ans. Consistency and Prudence.
Q. 5. The Accounts Manager of Pioneer Sports does not want to give previous year
amounts, a practice followed by the firm for the past many years. Is it a good decision?
Ans. It is not a good decision because Consistency Concept is being ignored.
Q. 6. Realisation concept has been formulated to resolve the issues relating to revenue
recognition. Do you agree?
Ans. Yes. The essence of Realisation Concept is timing of revenue recognition.
Q. 7. Do you think that invoice is a source document?
Ans. Yes.
Q. 8. Why contra entry in two column Cash Book is not posted into ledger?
Ans. When two column Cash Book is maintained, Cash and Bank Accounts are not
maintained in the ledger. Therefore, such entries are not posted into ledger.
Q. 9. Imprest System of Petty Cash is used for easing the work of the Head Cashier. Do
you agree?
Ans. Yes, it distributes the work of handling cash.
Q. 10. Cash Book is a principal book and not a subsidiary book. Do you agree?
Ans. No. Cash Book is a principal book and also subsidiary book.
Q. 11. Balance of Petty Cash is an asset for the firm. Do you agree?
Ans. Yes, it is an asset.
Q. 12. Profit is earned on sale of fixed asset, what should be the accounting treatment of it?
Ans. Profit on sale of fixed asset is a capital profit and, therefore, should be transferred
to Capital Reserve.
Q. 13. Which account should be debited for creating provision for doubtful debts?
Ans. Profit & Loss Account should be debited for provision for doubtful debts.
Q. 14. Drawings by the proprietor in cash is debited to Drawings Account and credited to
Cash Account. Is the accounting entry correct?
Ans. Yes, it is correct.
1
Q. 15. At the time of preparing the financial statements, Drawings Account is transferred
to Capital Account. Is it correct?
Ans. Yes, it is correct.
Q. 16. The accountant feels that since Sales Book is maintained, there is no need to open
Sales Account. Is he correct in his views?
Ans. No, he is not correct because Sales Book records only credit sales whereas Sales
Account records both cash and credit sales.
Q. 17. An accountant has debited the Purchases Account by the amount of furniture
purchased for office use. Which error has been committed by the accountant?
Ans. Error of Principle.
Q. 18. Do you agree that Liabilities side of the Balance Sheet represents credit balances?
Ans. Yes. Liability Accounts always have credit balances.
Q. 19. Accrued incomes and income due but not received are two different terms. Do you agree?
Ans. No.
Q. 20. Closing stock appearing in the Trial Balance is shown in the Trading Account only.
Is it correct?
Ans. No, it is shown in the Balance Sheet.
Q. 21. Prepaid expenses are assets of the business. Is it correct?
Ans. Yes.

3 Marks Questions
Q. 1. Rakesh started his business of retail trade at a moderate level on
October 1, 2022. He desires that he should prepare first Profit & Loss Account and
Balance Sheet on March 31, 2023 and thereafter every year on March 31. You have
to appraise his decision and ascertain whether his decision is justified.
Ans. Rakesh has made a correct decision. By doing so he has followed the fundamental
accounting concept of Going Concern and also Periodicity Principle.
Q. 2. Sunil is an architect and has got a contract in which he has received an advance fee of
` 1,00,000. He has shown it as his income for the year. Is he correct in doing so?
Ans. Sunil is not correct in treating it as his income because he has not rendered the
service yet. It means he has not earned the income. It should be accounted as
income received in advance, i.e., liability.
Q. 3. Madan, a businessman has employed Sujit and has estimated his value at
` 10,00,000. He has accounted it as an asset in the books of account. Is he correct
in doing so?
Ans. No, he is not correct because in accounting only those transactions and events are
recorded which can be measured in terms of money. Value of manpower cannot be
measured in money terms and, therefore, should not be accounted.
2
 Q. 4. Inderpal has shown interest earned and interest paid at net amount in the Profit
& Loss Account. Is he correct in doing so?
Ans. No, he is not correct because Full Disclosure Principle is not followed. Interest
earned is an income whereas interest paid is an expense. By netting it, correct
expense and correct income is not shown in the Profit & Loss Account.
Q. 5. Shivreet has stationery stock amounting to ` 500 as at the end of the financial year.
His accountant has written it off to Profit & Loss Account. But, Shivreet has asked
him to show it as stock of stationery. Is he right in doing so?
Ans. Accounting is guided by the Materiality Concept. Since the amount of stationery
stock is not material, it should be written off to Profit & Loss Account. Materiality
Concept requires that a transaction having insignificant effect should be ignored.
Stock of stationery being not material, it is better to write it off.
Q. 6. Anuj has prepared the accounts showing closing stock at higher value by valuing
them at Market Price so that higher profits are shown, which in turn will help getting
better loan facility from the bank. Is it in line with the good business practices?
Ans. The action of Anuj is not in line with good business practices. Besides, it amounts
to misleading the bank. The stock should be valued at lower of cost or net realisable
value (market value) following the Prudence Concept.
Q. 7. Due to a major loss in the current year, the accountant of the firm has not charged
depreciation on fixed tangible assets.
Whether his decision not to charge depreciation is correct?
What will be the impact of the decision on financial statements?
Ans. Depreciation is the process of allocating cost of fixed assets over its estimated
useful life. Therefore, depreciation being an expense should be debited to the
Profit & Loss Account.
Impact of not charging depreciation on fixed assets will result in higher profit or lower
loss. It will also result in showing fixed assets in the Balance Sheet at higher value.
Q. 8. Proprietor of the firm has taken goods for his personal use. The accountant has
accounted it as sale in the books of account. Is he correct in his accounting?
Ans. No, he is not correct in his accounting. The goods taken by the proprietor should be
debited to Drawings Account for the reason that the goods taken for personal use
do not have an element of profit.
Q. 9. The accountant of a small firm feels that incomplete records system should not be
followed. In spite of that it is easy to maintain accounts on Single Entry basis. The
accountant suggests that Double Entry Accounting System should be followed. Is
the suggestion correct? Give reasons.
Ans. The suggestion given by the accountant is correct.
Double Entry System gives better and reliable results. Under the incomplete
records system, all the accounts are not maintained and, therefore, Trial Balance
cannot be prepared. As a result, locating errors becomes difficult.

3
4 Marks Questions
Q. 1. Hariharan had started a new mid-sized business. He being new to accounting
sought advice from a chartered accountant on maintenance of accounts. He was
advised that he should follow Double Entry System of Accounting maintaining
accounts on accrual basis. Some of his friends advised him to maintain accounts on
Cash Basis of Accounting. He decided to follow the advice of the chartered accountant.
You have to appraise, judge and justify whether the decision of Shri Hariharan
is correct.
Ans. The decision of Hariharan to maintain accounts on Double Entry System of
Accounting following Accrual Concept is correct because when accounts are
maintained on accrual-based double entry system of accounting, correct income,
expenditure, liabilities and assets are shown in the financial statements. It is
important to know the correct income, expenditure, liabilities and assets as it
enables the businessman to plan his finances. Had he followed Cash Basis of
Accounting, the business would not have shown correct financial performance and
financial position as credit transactions would not have been recorded.
Q. 2. Avtar established a small business and has not maintained regular books and
records his transactions through accounting equation. Whether his decision is
correct? What is the effect thereof?
Ans. Recording the transactions by means of accounting equation is that the accounts are
being maintained on Double Entry System of Accounting. In effect, Avtar will know
what his liabilities are and what are the assets owned by him. Since his business is
small and presuming that the accounts are maintained by the proprietor himself,
the decision seems to be correct. Had he maintained the accounts maintaining
complete set of books, it would have required specialised knowledge, besides it
being expensive and time-consuming.
Q. 3. A firm has voluminous transactions and, therefore, it records its transactions in
Cash Book, Journal and other Subsidiary Books. The firm follows financial year
for its accounts. It prepares its financial statements by April 15 every year. What
does this indicate?
Ans. It shows that the accounting staff is working as a team. As a result, in spite of
many individuals working on separate books of account, the financial statements
are prepared within a short period after year-end.
It shows the value of team spirit, which means improved and synchronised
performance by the accounting staff.
Q. 4. An accountant of a large-sized firm records all the transactions in a Journal instead
of maintaining Subsidiary Books. His views on this are that it will result in better
control and also large team of accountants will not be required.
Whether his decision is correct?
Ans. No, his decision is not correct because of the following reasons:
(i) It ignores the concept of division of work and specialisation;
4
 (ii) Maintaining a Journal book alone will make the book unwieldy and difficult
to handle;
(iii) Posting will become a complicated and time-consuming process;
(iv) Difficult to prepare the Trial Balance and locate the errors, if any;
(v) It leads to possibilities of manipulations and frauds as tracking of Cash and
Bank will become difficult.
Q. 5. The Chief Accountant of Rana Motors has taken a decision that adjustments for
outstanding expenses and prepaid expenses of the current year should not be made
while preparing the financial statements.
(i) Whether his decision is correct?
(ii) Which accounting concepts are not being followed?
Ans. (i) The decision of the Chief Accountant is not correct.
(ii) The decision is not correct because the fundamental accounting concept,
i.e., Accrual Concept and Matching Concept is being ignored. As a result,
Profit & Loss Account will not show correct profit earned or loss incurred.
Also, Balance Sheet will not show correct financial position.
Q. 6. The Chief Accountant of Grand Marketing has taken a decision that adjustments
for accrued incomes and incomes received in advance of the current year should
not be adjusted while preparing the financial statements.
(i) Whether his decision is correct?
(ii) Which accounting concepts are not being followed?
Ans. (i) The decision of the Chief Accountant is not correct.
(ii) The decision is not correct because the fundamental accounting concept, i.e.,
Accrual Concept and Matching Concept, is not being followed. In the case of accrued
income being not accounted in the current year, cost will be accounted whereas
income will not be accounted. Similarly, in the case of incomes received in
advance, income will be accounted whereas cost will be accounted in the next
year. Thus, Profit & Loss Account will not show correct profit earned or loss
incurred. Also, Balance Sheet will not show correct financial position.
Q. 7. In spite of all efforts by the accounting team for the agreement of Trial Balance, the
difference is placed temporarily in Miscellaneous Expense Account.
Whether the decision is correct? If not, name the account in which the difference
should have been placed explaining the nature of the account?
Ans. The difference in Trial Balance has been wrongly placed in Miscellaneous Expenses
Account. Thus, the decision is not correct. The difference should have been placed
in an account titled Suspense Account. Suspense Account is neither an asset
account, nor a liability account. It depends on whether the balance in Suspense
Account is debit or credit, it is placed accordingly in the Balance Sheet.

5
 1
Hari was satisfied that he must switch over from Cash Basis of Accounting to Accrual Based Double Entry
System of Accounting since his business was growing rapidly and he will be in continuous need of information
about sales, purchase, expenses, creditors, debtors and stock, etc. Besides his income was increasing and, in
all probability, will be above the threshold limit of Income Tax. As a result, he will have to file his Income Tax
Returns from this year. He decided to maintain his accounts as was suggested by Amit. Considering that it was
not an easy step, he again met Amit to know if he will be able to maintain his accounts to which Amit agreed
for a monthly fee of ` 5,000.
Hari desired to know how will be the accounts maintained and what he has to do. Amit suggested that he will
require one hour of his time in which he will visit his place, understand his business and will educate him about
the accounting system, important accounting terms and whatever else he would like to know.
Amit first discussed the business nuances and later presented a note on accounting as follows:
The process of accounting is shown in the chart below:

Communication to
Transaction
Users

Journal
Analysis and 1. Cash Book
Interpretation 2. Purchase Book Recorded
3. Sales Book (In one of the Journals)
4. Purchase Return Book
Summarising 5. Sales Return Book
(i.e., Preparing 6. Journal Proper
1. Trial Balance
2. Trading and Profit & Classifying/Posted
Loss Account (In the relevant Ledger
3. Balance Sheet) Account)

Amit explained that any business transaction entered into by Hari will be recorded in one of the six journals. For
example, cash transactions will be recorded in Cash Book, credit purchase of goods in Purchases Book, credit
sale of goods in Sales Book and so on. Transactions (which are not recorded in any of the above books) will be
recorded in Journal Proper. Such transactions are depreciation providing on assets, drawings of goods by Hari,
credit purchase of assets and so on.

He explained that the further process is to transfer (post) recorded transactions in the relevant ledger account
maintained in a ledger from where Trial Balance, Trading and Profit & Loss Account and Balance Sheet are
prepared. Trading Account shows the gross profit or gross loss while Profit & Loss Account shows the net profit or
net loss and Balance Sheet shows the financial position of the business. These statements are collectively called
financial statements. Hari was informed that personal transactions are not recorded in the books of account
since they do not relate to business.

1
Thereafter, analysis of financial statements is made and the results are interpreted to know whether the business
is in the right direction and if not, corrective steps be taken.

The last step is to communicate the accounting information to the users. At present, there are no users of the
accounting information. It may be required at a later stage when the business borrows money or the number of
employees increase and information is to be supplied to Government departments. It, however, will be required
for filing the Income Tax return.

Hari was satisfied with the explanation and thanked Amit for this elaborate presentation. But his questions did
not end here and had few more questions as follows:
(i) He has often heard his friends referring to terms such as Business Transaction, Capital, Drawings, Revenue
from Operations, Income, Goods, Debtors and Creditors, etc. He would like to understand these terms or
any other term that is useful in a simple manner.
(ii) Any other information that is considered appropriate and useful.
Prepare the replies to the queries / questions of Hari.

Answers
(i) The terms were explained as follows:
(a) Business Transaction: It is a financial transaction or event entered into by the business say, purchase
of goods, sale of goods and providing depreciation on assets, etc.
(b) Capital: It is the investment in the business by the proprietor and increases by further investment and
profit earned during the year. It decreases by loss incurred or drawings made by him during the year.
(c) Drawings: It is withdrawal by the proprietor for personal use either in cash or goods.
(d) Revenue from Operations: It is the gross amount received or receivable from the goods sold and /
or services rendered during the normal course of its business. Sale of goods and commission earned
are revenue from operations while interest received on fixed deposit with bank is not revenue from
operations.
(e) Income: It means revenue from operations less expenses incurred to earn the revenue.
(f) Goods: Goods mean items of physical existence purchased either to resell or to be used for manufacture
of items to be sold.
(g) Debtors: Debtors are the persons or parties to whom goods are sold and / or services are rendered in
the normal course of business against which amount is yet to be received.
(h) Creditors: Creditors are the persons or parties from whom goods are purchased and/or services are
taken in the normal course of business against which amount is yet to be paid.
(i) Outstanding Expenses: Outstanding expenses are the expenses that have been incurred but are yet
to be paid. Under the accrual system of accounting, all expenses incurred, whether paid or not, should
be accounted to determine correct profit or loss.
( j) Prepaid Expenses: Prepaid expenses are the expenses that have been paid but its benefit spreads to
next year or year. For example, Insurance premium of ` 12,000 is paid for one year beginning 1st July,
2022. Since the accounting year closes on 31st March, 2023 and insurance will expire on 30th June,
2023, insurance premium for three months i.e., ` 3,000 are for next year. Therefore, in current year they
are prepaid expenses.
2
 2
Complete the missing values or information in the following Journal entries:
JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)

2023
April 10 Cash A/c ...Dr. 2,00,000
To ... A/c ...
(Capital introduced by Bimal)
April 10 ... A/c ...Dr. ...
To ... A/c 10,00,000
(Capital introduced by Bimal by cheque)
April 15 ... ...Dr. 75,000
To ... A/c 75,000
(Purchase of Exercise Machines by cheque)
May 1 ... A/c ...Dr. 25,000
To M/s Fitness Apparels 25,000
(Apparels purchased)
May 1 Bank A/c ...Dr. 47,500
To ... A/c ...
(Sale of 2 treadmills against cheque during May)
May 1 ... ...Dr. 23,750
To ... A/c 23,750
(Sale of 1 Exercise Machine to Raman)
May 1 Cash A/c ...Dr. 27,075
To Sales A/c 27,075
(Sale of 5 Exercise Cycles, 2 Weight Bars and 2 Sets Weights
during May)
May 1 Bank A/c ...Dr. 47,500
To ... A/c 47,500
(Advance against sale of 2 treadmills)
May 1 Cash A/c ...Dr. 1,000
To ... A/c 1,000
(Advance against sale of Exercise Cycle)
May 1 ... A/c ...Dr. 28,075
To ... A/c 28,075
(Amount of Cash Sale and advance deposited in Bank)
May 1 Salaries A/c ...Dr. 15,000
To Bank A/c 15,000
(...)
May 1 ... A/c ...Dr. 10,000
To Cash A/c 10,000
(Amount withdrawn for personal use)

3
May 1 Electricity Expenses A/c ...Dr. 2,000
Telephone Expenses A/c ...Dr. 1,000
To ... A/c ...
(Expenses for the month of May payable)
May 1 ... A/c ...Dr. 30
To Furniture & Fixtures A/c 30
(Depreciation for the month @ 10% p.a.)

Answer
JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)
2023
April 10 Cash A/c ...Dr. 2,00,000
To Capital A/c 2,00,000
(Capital introduced by Bimal)
April 10 Bank A/c ...Dr. 10,00,000
To Capital A/c 10,00,000
(Capital introduced by Bimal by cheque)
April 15 Purchases A/c ...Dr. 75,000
To Bank A/c 75,000
(Purchase of exercise machines by cheque)
May 1 Purchases A/c ...Dr. 25,000
To M/s Fitness Apparels 25,000
(Apparels purchased)
May 1 Bank A/c ...Dr. 47,500
To Sales A/c 47,500
(Sale of 2 treadmills against cheque during May)
May 1 Raman ...Dr. 23,750
To Sales A/c 23,750
(Sale of 1 Exercise Machine to Raman)
May 1 Cash A/c ...Dr. 27,075
To Sales A/c 27,075
(Sale of 5 Exercise Cycles, 2 Weight Bars and 2 Sets Weights
during May)
May 1 Bank A/c ...Dr. 47,500
To Advance Against Sale A/c 47,500
(Advance against sale of 2 treadmills)
May 1 Cash A/c ...Dr. 1,000
To Advance Against Sale A/c 1,000
(Advance against sale of Exercise Cycle)
May 1 Bank A/c ...Dr. 28,075
To Cash A/c 28,075
(Amount of Cash Sale and advance deposited in Bank)
May 1 Salaries A/c ...Dr. 15,000
To Bank A/c 15,000
(Salaries for the May month paid by cheque)

4
May 1 Drawings A/c ...Dr. 10,000
To Cash A/c 10,000
(Amount withdrawn for personal use)
May 1 Electricity Expenses A/c ...Dr. 2,000
Telephone Expenses A/c ...Dr. 1,000
To Outstanding Expenses A/c 3,000
(Expenses for the month of May payable)
May 1 Depreciation A/c ...Dr. 30
To Furniture & Fixtures A/c 30
(Depreciation for the month @ 10% p.a.)

3
Complete the following Rectification Entries:
JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)

(i) .... ...Dr. 25,000

To ... 25,000
(Correction of wrong credit to Sales Account for sale of old furniture,
now rectified)
(ii) ... ...Dr. 5,000
To ... 5,000
(Accrued Rent not recorded, now recorded)
(iii) ... ...Dr. 2,000
To ... 2,000
(Short debit in Amit’s Account and excess debit in
Harish’s Account rectified)
(iv) ... ...Dr. 3,500
To ... 3,500
(Cash paid to Arnav recorded in Aman’s Account,
now rectified)
(v) ... ...Dr. 8,000
... ...Dr. 8,000
To ... 16,000
(Bill drawn on Rahul was passed through Bills Payable Book,
now rectified)

Note: Also mention the nature of errors involved in the above errors.

Answers

S. No. Debit Credit Nature of Error

(i) Sales A/c Furniture A/c Error of Principle

(ii) Accrued Rent A/c Rent A/c Error of Complete Omission
(iii) Amit’s A/c Harish’s A/c Compensating Errors
(iv) Arnav’s A/c Aman’s A/c Error of Posting in Wrong Account
(v) Bills Receivable A/c Rahul’s A/c Recording in Wrong
Bills Payable A/c Subsidiary Book.

5
 4
Gaurav did his Economics (Hons) from Delhi University and his MBA from IIM-Ahmedabad. He got a job
with an FMCG company with a good salary. Post working there for 5 years, he started his own business
of assembling Toy Cars for Children and named his business “Smiling Toys”, on 1st April, 2022 with capital
of ` 12,50,000. He deposited ` 10,00,000 in the firm’s name in HDFC bank and remaining amount was
retained as cash in hand.
He took on lease premises (having ground and first floors) for an annual rent of ` 1,80,000. Factory and shop
occupied the ground floor and he used the first floor for residence.
He purchased a Delivery Van on 1st April, 2022 for ` 2,50,000. The estimated working life of the van is 10 years
at the end of which it is likely to be sold for ` 30,000.
An imported toy making machine was also purchased for ` 2,00,000. Its estimated useful life was 10 years and at
the end of its useful life, is likely to have scrap value of ` 25,000. Installation charges of ` 15,000 for the machine,
were wrongly debited to the Wages Account.
He spent ` 25,000 on furnishing his office. 1/4th of all the expenditures on rent, electricity and insurance was
attributed to residential portion and the balance for business purpose.
At the year-end on 31st March, 2023, he prepared following financial statements showing his financial performance
and financial position as of that date:

Dr. TRADING AND PROFIT & LOSS ACCOUNT for the year ended 31st March, 2023 Cr.
Particulars
` Particulars `

To Purchases A/c 6,31,000 By Sales A/c 9,00,000

Less: Returns 45,000 5,86,000 Less: Returns 11,000 8,89,000
To Wages A/c 28,500 By Closing Stock 2,35,500
To Gross Profit c/d 5,10,000
11,24,500 11,24,500
To General Expenses A/c 44,000 By Gross Profit b/d 5,10,000
To Rent (1,80,000 × 3/4) 1,35,000 By Discount Received A/c 15,500
To Electricity and Insurance (50,000 × 3/4) 37,500 By Interest A/c 22,000
To Bad Debts A/c 12,500
To Provisions for Doubtful Debts 2,500
To Provision for Discount on Debtors 2,375
To Depreciation on:
Delivery Van 44,000
Toy Machine 19,000 63,000
To Salary A/c 87,000
To Discount Allowed A/c 23,500
To Delivery Van Running Expenses 72,000
To Net Profit transferred to Capital A/c 68,125
5,47,500 5,47,500

6
 BALANCE SHEET as at 31st March, 2023
Liabilities
` Assets `

Creditors 1,08,000 Cash in Hand 4,30,000

General Reserve 50,000 Cash at Bank 2,31,000
Capital 12,00,000 Debtors 50,000
Less: Drawings* 57,500 Less: Provision for Doubtful Debts 2,500
11,42,500 47,500
Add: Net Profit 68,125 12,10,625 Less: Provision for Discount 2,375 45,125
Closing Stock 2,35,500
Furniture 25,000
Toy Machine 2,15,000
Less: Depreciation 19,000 1,96,000
Delivery Van 2,50,000
Less: Depreciation 44,000 2,06,000
13,68,625 13,68,625

* Rent 45,000 plus Electricity & Insurance 12,500.

On the basis of the above financial statement, answer the following questions:

Question
Gaurav decided to create a Provision for Doubtful Debts and Provision for Discount on Debtors @ 5% on debtors.
Which account should be debited for providing for Doubtful Debts and Provision for Discount on Debtors?

Answer
Profit & Loss Account should be debited for Provision for Doubtful Debts and Provision for Discount
on Debtors.
Question
Gaurav has charged as depreciation on Delivery Van ` 44,000 during the year instead of charging correct
depreciation of ` 22,000 (i.e., Cost of Asset – Scrap Value)/Estimated Useful life). Is it a premium or reserve? State
the type thereof.
Answer
It’s a Secret Reserve.
Question
What is a Secret Reserve?
Answer
Secret Reserve is a reserve which exists but is not shown as a separate item in the Balance Sheet.
Question
How is Secret Reserve created?
Answer
Secret Reserve is created by following methods:
(i) by providing excessive depreciation.
(ii) by creating excessive Provision for Doubtful Debts.
(iii) by showing Capital Expenditure as Revenue Expenditure.
(iv) by accounting Contingent Liability as a Liability.

7
Question
State two objections against secret Reserve.
Answer
(i) Accounting principle of “full disclosure” is violated.
(ii) Balance Sheet does not show a True and Fair View.
Question
What is “Depreciable Cost”?
Answer
Depreciable Cost = Cost of the Asset – Scrap Value.
Question
Gaurav decided that depreciation would not be provided in case of a loss in a financial year. Is it a correct
decision? Give reason.
Answer
No, it is not a correct decision reason being depreciation is a charge against profit. If it is not charged, it will result
in showing higher net profit or lower net loss. So, it should be charged in case of loss also.
Question
Gaurav decided that 10% of the profits would be set aside to a reserve for the purpose of strengthening the
financial position. Name the reserve which would be created for this purpose.
Answer
General Reserve.
Question
Name the reserves that can be used in distribution of dividend.
Answer
Revenue Reserves, i.e., General Reserve and Surplus, i.e., Balance in Statement of Profit & Loss.
Question
Balance Sheet has an item termed as General Reserve. Can it also be said to be Reserve Fund? Give reason.
Answer
No, it cannot be termed as Reserve Fund because, the amount of reserve if not retained in the business but is
invested outside the business, it is termed as Reserve Fund.
Question
What is the purpose for which Gaurav has created Provision for Doubtful Debts?
Answer
It is set aside to meet the possible loss as bad debts out of the debtors. It is provided because of the Prudence
or Conservatism Concept which prescribes that anticipated expenses and losses be accounted while anticipated
incomes and gains are not. In brief, financial statements should not show better picture than real.
Question
What is the purpose for which Gaurav has created Provision for Discount for Debtors?
Answer
It is set aside to meet the possible loss on discount being allowed to debtors. It is provided because of the
Prudence or Conservatism Concept which prescribes that anticipated expenses and losses be accounted while
anticipated incomes and gains are not. In brief, financial statements should not show better picture than real.
Question
Suppose Gaurav has earned a profit of ` 10,000 on sale of fixed asset. What should be correct accounting
treatment of it?
Answer
Profit earned on sale of fixed asset being a capital profit is transferred to Capital Reserve.
8