ACCOUNTING

FUNDAMENTALS
CHAPTER - 01

SKANS School of Accountancy ITA

 Accounting Fundamentals
1. BOOK-KEEPING AND ACCOUNTING
2. BOOK-KEEPING
Book-keeping is the process of recording financial transactions in the accounting records (the ‘books’) of an
entity. All transactions are analysed into different types and are then recorded in a series of individual
records called accounts. There is a separate account for each different type of transaction, or that is to say,
for each type of asset, liability, income, expense and owners’ capital.
Double entry book-keeping is used to record dual aspect of transactions in systems designed to allow the
management of the business to monitor its progress and produce periodic financial statements and
performance reports.

ACCOUNTING
Accounting is the process of recording, classifying, summarising the information of financial nature and
interpreting the results thereof. There are two kinds of accounting: financial accounting and managerial
accounting.
Financial accounting (and reporting) is a term that describes:
1. maintaining a system of accounting records for business transactions and other items of financial nature;
and
2. reporting the financial position and the financial performance (profit or loss) of an entity in a set of
financial statements to the stakeholders.

Accounting Cycle (or accounting process)

3. Ledgers:
Similar Transactions are
2. Books of prime entry: entered into the appropriate
accounts in ledgers.
This is the first place where
transaction are recoded
accourding to the type of 4. Trial balance:
1. Transactions: transactions A list all balances can be
A business usually has extracted from the ledgers and
thousands of transactions in
this list is celled trial balance.
an accounting period.

5. Financial statements:
The figures in trial balance are
adjusted for period-end
adjustments and fiancial
statements are prepared.

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3. BUSINESS TRANSACTIONS
A transaction is an action or activity involving two parties or things that reciprocally affect or influence each
other. A business transaction is an interaction between a business and customer, supplier or any other party
with whom they do business. It is an economic event that must be recorded by the accounting system.
Any transaction that has a monetary impact on the business’ accounts is a financial transaction. A financial
transaction has an effect on the business’ assets and liabilities, etc. A business must record and account for
all financial transactions.
Few examples of financial business transactions are:

1.Cash transaction. 10. Credit transaction.

2. Raceipt of cash from a customer to 11. Credit sales of goods or

whom credit sales was made. services.

12. Credit purchase of raw

3. Cash purchase of raw materials or goods. material or goods.

4. Receipt of loan proceeds.

5. Payments made to employees.

6. Purchase of non-current assets for cash.

7. Payments made to the government (for

example taxes).

8. Drawings (i.e. cash or goods taken by

owner from the business)

9. Repayment of a loan.

CLASSIFICATION OF BUSINESS TRANSACTIONS

The business transactions may be classified in following ways:

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Simple transactions and Complex transactions

Transactions can be very simple like buying and selling items on cash. Transactions may also be complex
involving long time and various parties, for example, selling an item through agent involving series of
instalment payment including interest.

One-off transactions and Ongoing transactions

Transactions might occur on single occasion, for example, buying land and building for setting up a factory.
Transactions may also occur on regular basis, for example, payment of monthly rent or electricity bill.

Capital transactions and Revenue transactions

Items of a long-term nature, such as property, plant and equipment used to carry out the operating activities
of the business, are ‘capital items. Items of a short-term nature, particularly items that are used or occur in
the normal cycle of business operations, are ‘revenue items.

Capital expenditure and Revenue expenditure

Capital expenditure is expenditure made to acquire or improve long term assets that are used by the
business. Revenue expenditure is expenditure on day-to-day operating expenses.
The term ‘capitalisation’ means recognising a cost as an asset or part of the cost of an expenditure as an
asset. So, when an item of cost is ‘capitalised’ it is treated as an asset rather than as an ‘expense.’

Capital receipts and Revenue receipts

Capital receipts are receipts of ‘long term’ nature, such as money from a bank loan, or new money invested
by the business owner (which is called ‘capital’). Revenue income is income arising from the normal
operations of a business from its investments, for example, revenue from sale of goods or interest received.

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Example 01:
Classify the following transactions as either ‘capital’ or ‘revenue’.
Sr. # Transaction Capital /Revenue
(i) Vehicle A engine is repaired Revenue
expenditure
(ii) Vehicle B engine is replaced Capital
expenditure
(iii) Loan borrowed from bank for five years Capital receipt

(iv) Interest paid on loan Revenue

expenditure
(v) Cash received from customer Revenue receipt

(vi) Cash paid to employees for their wages Revenue

expenditure
(vii) Wages paid by a building contractor to his own staff for construction of an Capital
office room expenditure
(viii) The purchase of machinery for use in the business Capital
expenditure
(ix) Carriage paid to bring the above-mentioned machinery to the factory Capital
expenditure
(x) Monthly electricity bill paid Revenue
expenditure
(xi) The purchase of a soft drinks vending machine for the canteen Capital
expenditure
(xii) The stock of soft drinks purchased for resale, along with above-mentioned Revenue
vending machine expenditure
(xiii) Annual motor vehicle tax paid for existing car Revenue
expenditure
(xiv) Annual motor vehicle tax paid for new car Revenue
expenditure
(xv) Cost of alteration in office van to increase carrying capacity Capital
expenditure
(xvi) Small but expensive alterations to a manufacturing machine which increased Capital
the output of that machine by 15% expenditure

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4. FINANCIAL STATEMENTS
Financial statements are reports of an entity to provide its stakeholders with necessary information for their
decision-making needs. The term entity is used to describe any type of organisation for which we do
accounting e.g., a business, a company, a bank, a charity organisation.

The business entity concept

Financial reports are constructed as if the business entity is separate from its owners. In other words, the
business entity and its owners are differentiated.
This concept has legal substance in case of companies i.e., a company by law is a legal person separate from
its owners (the shareholders). However, the concept is also applied to sole traders and partnership in
accounting.

Accounting period
Financial statements relate to given period of time, known as the ‘financial year’, ‘accounting period’ or
‘reporting period’.

COMPONENTS OF FINANCIAL STATEMENTS

A complete set of financial statements usually comprises:

1. A
Statement
of financial
position;

6.
Comparative
infomation
(not
examinable at
this level)

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Statement of financial position

A statement of financial position (also called balance sheet) reports the financial position of an entity as at
a particular date, usually the end of a financial year. The financial position of an entity is shown by its assets,
liabilities and equity (owner’s capital).

Statement of Comprehensive income

This statement provides information about the performance of an entity in a period. It consists of two parts:

A statement of profit A statement of other

or loss - a list of comprehensive
income and income - a list of
expenses which other gains and
result in a profit or losses that have
loss for the period; arisen in the period
and (not in syllabus)

ELEMENTS OF FINANCIAL STATEMENTS

The statement of financial position consists of three elements i. e. assets, liabilities and equity. These three
elements form an accounting equation i. e. Assets = Liabilities + Equity
The statement of comprehensive income consists of two elements i. e. income and expenses. The difference
of these two elements determines the profit or loss for an accounting period.

Assets
An asset is defined as:

a present economic resource

Controlled by the entity

As a result of past events

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The definition clarifies that the potential economic benefits no longer need to be ‘expected’ to flow to the
entity and they do not need to be certain or even likely. An economic resource is a right that has the potential
to produce economic benefits.
In simple words, an asset is something the business owns or controls and is available or will be available for
use in the business.
The assets are classified into current assets and non-current assets:
a) Current assets: assets that provide economic benefits in the short term (usually one year). For
example, cash and trade receivables.
b) Non-current assets: assets that have a long useful life and provide future economic benefits for an
entity over a period of several years. For example, buildings and plant & machinery.

Liabilities
A liability is:

A present obligation of the entity

Arising from past enents.

The settlement of which is expected to result in an outflow from the entity of resources embodying
economic benefits. To transfer an economic resource

The definition clarifies that a liability is the obligation to transfer an economic resource and not the ultimate
outflow of economic benefits. The outflow also no longer needs to be ‘expected’.
In simple words, a liability is something owed by the business to someone else.
The liabilities are classified into current and non-current, as well:
• Current liabilities: amounts payable by the entity within 12 months. For example, trade payables and
utilities bills payable, salary payable.
• Non-current liabilities: amounts payable more than 12 months after the reporting date. For
example, long term bank loan.

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Example 02:
Identify the following items as either an asset or a liability.

Sr.# Item Classification Sub Classification

(i) Loan to another business for five years Asset Long term investment
(ii) Bank overdraft Liability Current Liability
(iii) Fixture and fittings Asset Property plant and equipment
(iv) Computers for office use Asset Property plant and equipment
(v) We owe a supplier for inventory bought Liability Current Liability
(vi) Warehouse we own and control Asset Property plant and equipment
(vii) Motor vehicles Asset Property plant and equipment
(viii) Premises Asset Property plant and equipment
(ix) Accounts receivables Asset Current Asset
(x) Inventory Asset Current Asset
(xi) Accounts payable for inventory Liability Current Liability
(xii) Owing to bank in five years Liability Non-Current Liability
(xiii) Cash in hand Asset Current Asset
(xiv) Loan from a friend for business use Liability Current Liability
(xv) Machinery Asset Property plant and equipment
(xvi) Computers for sales* Assets Current Assets

*Note: Computer for sale can alternatively be classified as purchases i.e. expense

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Example 03:
Identify the following items as elements of financial statements and classify them as either current or non-
current.

Sr. # Item Element Classification

(i) Land and buildings Asset Non-current asset
(ii) Receivables (Trade debts) Asset Current asset
(iii) Cash Asset Current asset
(iv) Loan repayable in two years’ time Liability Non-current liability
(v) Payables (Trade creditors) Liability Current liability
(vi) Delivery trucks Asset Non-current asset

Equity (owner’s capital)

Equity is the residual interest in the assets of the entity after deducting all its liabilities.
Equity claims are claims against the entity that do not meet the definition of a liability i. e. the entity has
no obligation to pay or distribute its profits to its shareholders but most of the profitable companies
distribute it as to gain the investor confidence. Equity is often referred as owner’s capital in sole trader
businesses.
Income and investing further capital increase the equity while expenses and drawings decrease the equity.
Equity is sometimes referred to as the ‘net assets’ of the business. This is represented by accounting
equation i. e. Equity (net assets) = Assets – Liabilities

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Example 04:
Complete the gaps in following table using accounting equation.

Sr. # Assets Liabilities Owner’s Capital

Rs. Rs. Rs.
(i) 60,000 15,000 ?
(ii) 80,000 ? 56,000
(iii) ? 18,000 58,000
(iv) 120,000 27,000 ?
(v) 150,000 ? 97,000
(vi) ? 36,000 95,000

Income

Income arises from:

increase in assets or decrease in a other than contribution from owners

liability, resulting in increase in equity (more capital invested in the business).

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Income is usually classified into revenue and other items of income:
• Revenue: it is income arising in the course of the ordinary activities of the entity. For example,
revenue from sale of goods and fee for providing services.
• Other income: income arising other than in the course of ordinary activities. For example, interest
received on bank deposits and gain from disposal of non-current assets.

Expenses
Expenses arise from:
• decrease in assets or increase in liability, resulting in decrease in equity
• other than distributions (drawings or dividends) to owners.
Expenses arise in the normal course of activities, such as the cost of goods sold, salaries, rent and other
operational costs. Expenses also include losses such as the loss on disposal of a non-current asset, and losses
arising from damage caused by fire or flooding.

FORMAT OF FINANCIAL STATEMENTS

Name of Entity
Statement of Comprehensive Income for the year ended 30 June 2021

Rs’000
Revenue 950
Cost of Sales (750)
Gross Profit 200
Other income: Gain on disposal 100
300
Operating expenses
Salaries and wages (140)
Repair and maintenance (60)
Depreciation (20)
Other expenses (10)
(230)
Net profit 70

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Name of Entity
Statement of Financial Position as at 30 June 2021

Rs’000
Non-current assets
Land and building 200
Plant and machinery/equipment 100
Furniture and fixture 50
Motor vehicles 50
400
Current assets
Inventories 110
Trade Receivables 40
Cash and bank balances 50
200
600

Capital Rs’000
Balance at beginning 100
Add: additional capital invested 50
Add: net profit 70
Less: drawings (20)
200
Non-current liabilities
Bank loan 100
Loan from friend 100
200
Current liabilities
Trade payables 100
Salaries payables 100
200
600

Relationship between above financial statements

• The statement of financial position shows the equity of a business at a point in time.
• The statement of comprehensive income ends with a figure showing net profit for the period.
Profit belongs to the owner (or owners) of the business. It is, therefore, added to equity.

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ACCOUNTING TERMS

Recognition
This refers to putting an item into the bookkeeping system (performing double entry on it).

Cost
The amount of cash or cash equivalents paid, or the value of the other consideration given to acquire an
asset at the time of its acquisition or construction.

Gross amount
This is presenting an asset, liability, income or expense without deducting any related amount.
Illustration:
Rs.’000’
Sales 580,000
Trade receivables 63,000

Net amount
This refers to the result of adding a positive and negative number together. The result might be a net asset,
net liability, net income or net expense.
Illustration:
Rs. ‘000
Sales 580,000
Less: Sales return (46,000)
Less: Settlement discount allowed (3,000)
Net sales 531,000

Trade debts 63,000

Less: Allowance for doubtful debts (3,500)
Net trade debts 59,500

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5. FINANCIAL REPORTING
The objective of financial reporting is to provide financial information about the reporting entity that is
useful to existing and potential investors, lenders and other creditors in making decisions about providing
resources to the entity.
The information explains the financial position of an entity at the end of a period (usually a year) and the
financial performance of the entity over that period.

RESPONSIBILITY FOR PREPARING FINANCIAL STATEMENTS

Sole trader and partnership businesses

There may be no obligation to prepare financial statements, other than for tax purposes or obtaining loan
from bank, for which the owner/partners are responsible. They might employ a person or persons to
maintain the accounting records and prepare financial statements.

Companies
Companies must prepare financial statements for shareholders and for filing with relevant regulatory bodies.
It is the responsibility of the directors to ensure that this is done. Usually, the work is delegated to
employees.

REGULATION FOR PREPARING FINANCIAL STATEMENTS

Sole trader and partnership businesses

The financial statements are private and do not have to be disclosed, except to the tax authorities (and
possibly also to a lending bank). These must be prepared according to accepted accounting principles and
practices but need not conform to all the requirements of accounting standards.

Companies
The financial statements of a company are prepared for the shareholders of the company and are usually
subject to audit. Audit is the examination of the financial statements by an independent expert who
expresses an opinion as to whether they are fairly presented (show a true and fair view).
Company law requires that financial statements are filed with a government agency, where they can be
accessed and read by any member of the general public. Listed companies are even required to make their
financial statements available on their websites.
The concepts, principles, conventions, laws, rules and regulations that are used to prepare and present
financial statements are known as Generally Accepted Accounting Principles (GAAPs).

GAAP AND IFRS

The main sources of GAAPs in Pakistani jurisdiction are:
• Companies Act, 2017; and
• International Financial Reporting Standards (IFRSs)
The accountancy profession has developed a large number of regulations and codes of practice that
professional accountants are required to use when preparing financial statements. These regulations are

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accounting standards. Many countries and companies whose shares are traded on the world’s stock markets
have adopted IFRSs issued by the International Accounting Standards Board (IASB).

INFORMATIONAL NEEDS OF USERS OF FINANCIAL STATEMENTS

Financial statements are drafted to provide information that should be useful to most users but will not
necessarily satisfy all of their needs.

Investors
They need information to assess whether to buy, hold or sell investment in the business. Financial
statements also give some indication of the ability of a company to pay dividends to its shareholders out of
profits.

Lenders
Financial statements can help lenders to assess the continuing ability of the borrower to pay interest, and
its ability to repay the loan principal at maturity.

Suppliers
They can use the financial statements to assess how much credit they might safely allow to the entity.

Government
They might use this information for the purpose of business regulation or deciding taxation policies.

The public
In some cases, members of the general public might have an interest in the financial statements of a
company. The IASB Framework comments: ‘For example, entities may make a substantial contribution to
the local economy in many ways including the number of people they employ and their patronage of local
suppliers.’

Employees
Employees need information about the financial stability and profitability of their employer. An assessment
of profitability can help employees to reach a view on the ability of the employer to pay higher wages, or
provide more job opportunities in the future.

Customers
Customers might be interested in the financial strength of an entity, especially if they rely on that entity for
the long-term supply of key goods or services.

Managers
Management should have access to all the financial information they need, and in much more detail than
financial statements provide. However, management is responsible for producing the financial statements
and might be interested in the information they contain.

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6. DOUBLE ENTRY BOOK-KEEPING

Every transaction that affects assets, liabilities, capital, income or expenses must have an offsetting effect
to maintain the accounting equation. Every transaction must be recorded (entered) in two places. The
process of doing this is called double entry book-keeping.

RULES OF DEBIT AND CREDIT

Each business transaction has two aspects which are named as debit and credit by norm in accounting. By
convention, the terms ‘debit’ and ‘credit’ are shortened to ‘Dr’ and ‘Cr’ respectively. Total debit entries and
total credit entries must always be equal, this maintains the accounting equation.
An account is a record of an individual type of asset, liability, income, expense or equity. For example, a
record of amounts owed by an individual customer (an asset) or a record of utility bills (an expense).
Account type Increase Decrease
Assets, Expenses and Drawings Debit Credit
Liabilities, Income and Capital Credit Debit

Practice Material
1. Assignment
2. Practice Question
3. Test
4. Quiz

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Assignment
Question No. 01
Identify the accounts to be debited and credited for the following transactions:
(i) Bought motor vehicle for cash.
(ii) Paid creditor, Nawab shah Traders, by cash.
(iii) Repaid Bank loan by cheque.
(iv) Sold Motor vehicle for cash.
(v) Paid office rent by cheque.
(vi) A debtor, Multan Traders, pays us by cash.
(vii) Paid electricity bill for the month by cash.
(viii) Proprietor puts a further amount into the business by cheque.
(ix) A loan in cash is received from Sahiwal Bank.
(x) Paid a creditor, Peshawar Enterprise, by cash.
(xi) Bought office machinery on credit from Lahore Limited
(xii) The proprietor paid a creditor, Layyah Enterprises, from his private funds.
(xiii) A debtor, Islamabad Limited, paid us in cash.
(xiv) Repaid part of loan from Quetta Bank by cheque.
(xv) Returned some of office machinery to Lahore Limited.
(xvi) A debtor, Karachi Port, pays us by cheque.
(xvii) Interest on bank deposit received in bank account.
(xviii) Bought goods on credit from Arslan Traders
(xix) Returned good to supplier Amjad Enterprises
(xx) Sold goods to Habib Mall on credit
(xxi) Customer Rizwan Stores returned goods to us
(xxii) Owner took cash for his personal use

Question No. 02
Identify the accounts to be debited and credited for the following transactions:
(i) We pay a creditor in cash.
(ii) Bought fixtures paying by cheque.
(iii) Bought goods on credit.
(iv) The proprietor introduces further cash into the business.
(v) A bank lends us in cash.
(vi) A debtor pays us by cheque.
(vii) We return goods costing to a supplier whose bill we had not paid.
(viii) Bought additional shop fixtures paying by cheque.
(ix) Bought a van on credit.
(x) Repaid by cash a loan owed to Bank.

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Question No. 03
Identify the accounts to be debited and credited for the following transactions:

(i) Bought goods paying by cheque.

(ii) The owner puts further cash into the business.
(iii) Sold goods on cash.
(iv) Sold goods on credit.
(v) A debtor returns to us some goods. We agree to make an allowance for them.
(vi) Bought goods on credit.
(vii) The owner takes out cash for his personal use.
(viii) We pay a creditor by cheque.

Question No. 04
Identify the accounts to be debited and credited along with amounts for the following transactions:
(i) Started business with Rs. 75,000 cash and Rs. 900,000 in the bank.
(ii) Received a loan of Rs. 200,000 from KLM Bank by cheque.
(iii) Bought a computer for cash Rs. 30,000.
(iv) Bought display equipment on credit from Clear Count Ltd Rs. 42,000.
(v) Took Rs. 20,000 out of the bank and put it in the cash till.
(vi) Repaid part of KLM Bank loan by cheque Rs. 50,000.
(vii) Paid amount owing to Clear Count Ltd Rs. 42,000 by cheque.
(viii) Repaid part of KLM Bank loan by cash Rs. 25,000.
(ix) Bought a printer on credit from Image Traders for Rs. 20,000.
(x) Bought goods on credit from ABC for Rs. 10,000
(xi) Sold goods on credit to XYZ for Rs. 12,000
(xii) Owner took cash from bank of Rs. 7,000 for his personal use.

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Practice Question
01. Which of the following statements are true?
1. Accounting can be described as the recording and summarizing of transactions
2. Financial accounting describes the production of a statement of financial position and
Statement of Profit or Loss for internal use
(a) 1 only
(b) 2 only
(c) 1 and 2 both
(d) Neither 1 nor 2

02. The terms accounting and book keeping are classified as

(a) Same
(b) Different
(c) Opposite
(d) None of these

03. The main aim of financial accounting is to:

(a) Record all transactions in the books of account.
(b) Provide management with detailed analyses of costs.
(c) Present the financial results of an organization by mean of financial statements.
(d) Calculate profit.

04. Which of the following is least likely to be expected from a book-keeping and accounting system?
(a) Systematic recording of transactions
(b) Ascertaining profit or loss
(c) Ascertainment of financial position
(d) Solving tax disputes with tax authorities

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05. A business has incurred following costs for the year ended 31 December 2018:
Rs. million
Extension in building 1.5
Repairs to building 0.5
Overhaul to machinery that increased production capacity 1.2

What is the amount of capital expenditure incurred during the year?

Rs. ---------------

06. A business has incurred following costs for the year ended 31 December 2018:
Rs. million
Extension in building 1.5
Repairs to building 0.5
Overhaul to machinery that increased production capacity 1.2
What is the amount of revenue expenditure incurred during the year?
Rs. ---------------

07. A business has incurred following information for the year ended 31 December 2018:
Rs. million
Cost of building – Opening 15.5
Cost of machinery – Opening 10.2
Extension in building – during the year 1.5
Repairs to building – during the year 0.5
Overhaul to machinery that increased production capacity 1.2

What is the cost of building after incorporating the above costs?

Rs. --------------

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08. A business has incurred following information for the year ended 31 December 2018:

Rs. million
Cost of building – Opening 15.5
Cost of machinery – Opening 10.2
Extension in building – during the year 1.5
Repairs to building – during the year 0.5
Overhaul to machinery that increased production capacity 1.2

What is the cost of machinery after incorporating the above costs?

Rs. ----------

09. A business has incurred following costs for the year ended 31 December 2018:

Rs. million
Extension in building 1.5
Repairs to building 0.5
Overhaul to machinery that increased production capacity 1.2

Profit for the year before incorporating the above adjustments is Rs. 5.6 million.

What will be the profit for year after charging the above repairs?

Rs. -------------

10. Which of the following is not a business transaction?

(a) Incurring interest on a business loan
(b) Hiring a new employee
(c) Purchasing office supplies
(d) Receiving fees for services
11. Expenditures which provide benefits in future period are called:
(a) Revenue expenditure
(b) Outstanding expenditure
(c) Current expenditure
(d) Capital expenditure
12. Which one is a capital transaction?
(a) Purchase of goods
(b) Payment of wages
(c) Sale of goods
(d) Purchase of machinery
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13. The capital of a business would change as a result of:
(a) A supplier being paid by cheque
(b) Non-current assets being purchased on cash
(c) Non-current assets being purchased on credit
(d) Wages being paid in cash
14. Cash invested in the business by the owner is called
(a) Current asset
(b) Non-current asset
(c) Liabilities
(d) Capital
15. Cash or goods taken away by the proprietor is called
(a) Drawings
(b) Sales
(c) Charity
(d) Expense

16. Which of the following is an element of the statement of financial position?

(a) Income
(b) Expense
(c) Gains
(d) Liabilities

17. Which from the following is not a current asset?

(a) Equipment
(b) Inventory
(c) Cash
(d) Trade receivables

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18. Which from the following is not a non-current asset?
(a) Intangibles
(b) Property
(c) Inventory
(d) Equipment

19. The IASB’s Conceptual Framework for Financial Reporting defines an asset as:
(a) A resource controlled by an entity which is capable of generating independent cash flows.
(b) A present economic resource controlled by the entity as a result of past events.
(c) A resource owned/controlled by an entity as a result of past events, from which future
economic benefits are expected.
(d) A resource capable of generating income for the entity.

20. The basic accounting equation is given by the formula:

Equity + Long term liabilities = ________________ + Current assets – Current liabilities.

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Test

01. Economic resources controlled by a business are called its ______________.

02. According to the ________ concept, the business is regarded as separate from the personal affairs
of its owners.
03. A business has capital of Rs.10,000.
Which of the following asset and liability figures could appear in this business’s statement of financial
position?
Assets (Rs.) Liabilities (Rs.)
(a) 6,000 16,000
(b) 6,000 4,000
(c) 10,000 10,000
(d) 14,000 4,000
04. Which of the following is incorrect?
Assets (Rs.) Liabilities (Rs.) Capital (Rs.)
(a) 7,850 1,250 6,600
(b) 8,200 2,800 5,400
(c) 9,550 1,150 8,200
(d) 6,540 1,120 5,420
05. The correct form of accounting equation is
(a) Assets + Liabilities = Equity
(b) Assets – Liabilities = Equity
(c) Assets – Trade payables= Equity
(d) Assets + Receivable = Equity

06. Which of the following is not true:

(a) Revenue – Expenses = profit
(b) Revenue – Profit = Expenses
(c) Sales + Gross Profit = Revenue

07. Expenses paid by a business decrease:

(a) Cash
(b) Capital
(c) Cash and capital
(d) Capital and Accounts payable

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08. If during the accounting period the assets increased by Rs.7 million, and the owner's equity
decreased by Rs.3 million, then the liabilities must have;
(a) Increased by Rs.10 million
(b) Increased by Rs.4 million
(c) Decreased by Rs.4 million
(d) Decreases by Rs.10 million

09. At 31 October 2016 Zahid’s trial balance included the following balances:

Rs.
Machinery 12,890
Inventory 5,754
Trade receivables 11,745
Trade payables 7,830
Bank overdraft 1,675
Cash at bank 150

What is the value of Zahid’s current assets at 31 October 2016?

(a) Rs. 17,649

(b) Rs. 17,499
(c) Rs. 15,974
(d) Rs. 13,734

10. A business has provided following information in the trial balance;

Rs.
Machinery 150,000
Equipment 120,220
Trade receivables 35,150
Trade payables 40,220
Bank overdraft 18,997
Cash at bank 32,112

What is the amount of non – current assets to be shown in the financial position?

(a) Rs. 337,482

(b) Rs. 270,220
(c) Rs. 356,479
(d) Rs. 318,485

11. Which of the following user groups require the most detailed financial information from financial
statements?
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(a) The management
(b) Investors and potential investors
(c) Government agencies
(d) Employees

12. Which of the following explains why lenders are interested in financial statements of a business?
(a) Lenders need information about financial stability of business
(b) Lenders need information about profitability of business
(c) Lenders want to assess the entity’s capacity to pay interest and repay loan on time
(d) All of the above

13. Who is responsible to prepare financial statements in a company?

(a) Shareholders
(b) Managers
(c) Directors
(d) All of the above

14. Who is responsible to prepare financial statements of a partnership?

(a) Partner (for public disclosure)
(b) There may be no obligation to prepare financial statements of a partnership (other than
for tax purpose)
(c) Manager
(d) Accountant

15. Which one of the following not an external user of financial statements?
(a) Lender
(b) Investor
(c) Customer
(d) Management

16. Which one of the following not an internal user of financial statements?
(a) Employees

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(b) Management
(c) Supplier
(d) Executive Director

17. The main source(s) of Generally Accepted Accounting Principles (GAAP) is/are:
(a) Company Law
(b) International Finance Reporting Standards (IFRSs)
(c) Tax law
(d) Sales Tax Act

18. An entity (with 31 December year-end) has bought the machine for Rs. 1,000,000 with the down
payment of Rs. 200,000and remaining payment Rs. 800,000 would be made after a month. The
transaction happened on 15 December 2011. What would be the effect on the of transaction?
(a) Machine increased by Rs.800,000 and liabilities decreased by Rs.800,000
(b) Machine decreased by Rs.800,000 and liabilities increased by Rs.800,000
(c) Machine increased by Rs.1,000,000 and liabilities increased by Rs.800,000 while cash is
decreased by Rs.200,000
(d) Machine increased by Rs.800,000 and liabilities increased by Rs.800,000 while cash is
decreased by Rs.200,000

19. Purchase of machinery for cash

(a) Increases total assets
(b) Decreases total assets
(c) Increases assets and liabilities
(d) Keeps total assets unchanged

20. The investment of cash into the business results in a/an

(a) Increase in cash and a decrease in capital
(b) Increase in cash and an increase in capital
(c) Decrease in cash and an increase in capital
(d) Increase in fees earned and an increase in capital

Quiz
01. Services rendered for cash will result in a/an

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(a) Increase in cash and a decrease in capital
(b) Increase in cash and an increase in fees earned
(c) Decrease in cash and an increase in fees earned
(d) Increase in fees earned and an decrease in capital
02. One of the local fast-food outlets hired a first-year accounting student to oversee the cash-
collection procedures.
When the firm pays the student his weekly wage, the transaction will
(a) Increase an asset, increase a liability
(b) Decrease an asset, decrease a liability
(c) Increase an asset, increase owner's equity
(d) Decrease an asset, decrease owner's equity

03. QK Company records the transaction as a debit to Consultant Expense for Rs. 500,000 and an
equivalent credit to Accounts Payable.
What would be impact on elements of financial statements?
(a) Increase a liability, increase owner’s equity
(b) Decrease an asset, decrease a liability
(c) Increase a liability, decrease owner's equity
(d) Decrease an asset, decrease owner's equity

04. Which of the following will cause owner's equity to increase?

(a) Revenue
(b) Expense
(c) Drawings
(d) Asset’s depreciation

05. The owner contributes his personal car to the business

(a) Increase an asset, increase a liability
(b) Decrease an asset, decrease a liability
(c) Increase an asset, increase owner's equity
(d) Decrease an asset, decrease owner's equity

06. The company purchases a significant amount of office supplies on credit

(a) Decrease an asset, decrease a liability
(b) Increase an asset, increase owner's equity

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(c) Decrease an asset, decrease owner's equity
(d) Increase an asset, increase a liability

07. What double entry would be made to record the purchase of an item of machinery on credit?
(a) Debit machinery, credit cash
(b) Debit machinery, credit accounts payables
(c) Debit purchases, credit trade payables
(d) Debit trade payables, credit machinery

08. What transaction is presented by the entries: debit bank, credit Receivables?
(a) Sale of goods for cash
(b) Purchase of goods for cash
(c) Receipt of cheque from receivables
(d) Payment of cheque to payables

09. A debit entry usually represents increase in:

(a) Assets and Income
(b) Liabilities and Income
(c) Assets and Expenses
(d) Liabilities and Expenses

10. The double entry to record the withdrawal of cash from a business bank account by the owner is?
(a) Debit: drawings Credit: bank
(b) Debit: drawings Credit: capital
(c) Debit: liability Credit cash
(d) Debit: capital Credit: drawings

11. A business sells Rs. 100,000 worth of goods to a customer, the customer pays Rs. 50,000 in cash
immediately and will pay the remaining Rs. 50,000 in 30 days’ time.
What is the double entry to record the purchase in the customer’s accounting records?
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(a) Dr. cash Rs. 50,000; Cr. payables Rs. 50,000; Cr. purchases Rs. 50,000
(b) Dr. payables Rs. 50,000; Dr. cash Rs. 50,000; Cr. purchases Rs. 100,000
(c) Dr. purchases Rs. 100,000; Cr. payables Rs. 50,000; Cr. cash Rs. 50,000
(d) Debit purchases Rs. 100,000; credit cash Rs. 100,000

12. Mariam has the following transactions:

(i) Receipt of cash from Nauman in respect of an invoice for goods sold three weeks ago
(ii) Receipt of cash from Amjad for cash sales
What are the entries required to record the above transactions?
(a) Dr Cash; Cr Sales
(b) Dr Cash; Cr Sales; Cr Trade Receivables
(c) Dr Sales; Cr Cash
(d) Dr Trade Receivables; Dr Sales; Cr Cash

13. A business has purchased machinery on credit. Which of the accounts mentioned below are
affected by the transactions?
(a) Trade payables
(b) Purchases
(c) Machinery
(d) Capital

14. Payment of insurance through the bank involves entries in which of the two accounts
(a) Insurance account (Debit) and petty cash account (Credit)
(b) Insurance account (Debit) and bank account (Credit)
(c) Insurance account (Debit) and rent account (Credit)
(d) Insurance account (Debit) and capital account (Credit)

15. X Ltd. purchases a vehicle for Rs. 1.5 million for business use, paying by cheque, what is the
double entry:
(a) Purchases account (debit) and bank account (credit)
(b) Vehicle account (debit) and bank account (credit)
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(c) Vehicle account (credit) and bank account (debit)
(d) Debit vehicle account (debit) and petty cash account (credit)

16. The double entry for return of goods purchased from Khan Limited on account is:
(a) Cash (debit) and purchases (credit)
(b) Accounts payable (debit) and purchases (credit)
(c) Accounts payable (debit) and purchases return (credit)
(d) None of the above

17. The double entry for payment of a telephone bill is;

(a) Telephone expense (debit) and cash (credit)
(b) Office equipment (debit) and cash (credit)
(c) Office supplies (debit) and cash (credit)
(d) Cash (debit) and utilities (credit)

18. Khalid is a dealer in electronic goods (refrigerator, washing machine, air conditioners, televisions,
etc.). He purchased two air conditioners and installed in his showroom. In the books of Khalid, the
cost two air conditioners will be debited to
(a) Drawing account
(b) Capital Account
(c) Fixed assets (non-current assets)
(d) Purchases account
19. An asset was purchased for Rs. 1,000,000 with the down payment of Rs. 200,000 and bills
accepted for Rs. 800,000/-.
What would be the effect on the total asset and total liabilities in the statement of financial
position?
(a) Assets increased by Rs.800,000 and liabilities decreased by Rs.800,000
(b) Assets decreased by Rs.800,000 and liabilities increased by Rs.800,000
(c) Assets increased by Rs.1,000,000 and liabilities increased by Rs.800,000
(d) Assets increased by Rs.800,000 and liabilities increased by Rs.800,000

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