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

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

→ Sole proprietorship is by the most common form of business organization in our society. Sole proprietorships are simple business organization and do not usually require extensive amounts of paperwork to start. A proprietorship is no more than a collection of business activities carried on by an individual person. Accounting is also easier for sole proprietorship organizations.

Examples of sole proprietorship:
→ Trade and Business: owns a manufacturing, construction, wholesale, service, or retail business.

→ Profession: a doctor, lawyer, accountant, or architect and you have your own business practice.

→ Vocation any one of the following:
commission agent (for example, you are in the financial services, insurance, or property industry)
freelancer (for example, you get fees for providing services as a deejay, singer, dancer, designer, fitness instructor, consultant etc.)
owner of a hawker business or a food stall
owner of a home-based business

Part of Sole Proprietorship’s Financial Statement:
→ Drawings: When an owner of a proprietorship takes cash or other assets from the company, the distribution is called withdrawals and reduces their capital.

→ Salary: Salaries paid to the owner of the business is recorded as withdrawals of profits and not expenses, even if he is the owner. However salaries paid to managers or employees besides the owner should be reported as expenses.

→ Accounts Receivable: A current asset resulting from selling goods or services on credit (on account). Invoice terms such as (a) net 30 days or (b) 2/10, n/30 signify that a sale was made on account and was not a cash sale.

→ Accounts Payable: This current liability account will show the amount a company owes for items or services purchased on credit and for which there was not a promissory note. This account is often referred to as trade payables (as opposed to notes payable, interest payable, etc.)

There are basically two (2) sets of financial statements prepared for a Sole Proprietor:

1. Trading and Profit & Loss Account
2. Balance Sheet

→ Trading and Profit and Loss Account
Trading Account: The purpose of the trading account is to show the gross profit on the sale of goods. Gross profit is the difference between the sale proceeds of goods and what those goods cost the seller to buy, or cost of sales. The cost of sales for this purpose includes the amount which has been debited for them to the purchases account plus the cost of getting them to the place of sale, which is usually the seller’s premises, i.e. The carriage inwards of those goods.

→ Features of Trading account are

• Its main purpose is for the owners to be able to see how profitably the business is being run.
• It can also be used for other purposes such as:
  • Income Taxes Calculation.
  • Comparing results obtained with the results expected

→ Sample Trading Account:
Name of the Company
TRADING ACCOUNT for the year ended

→ Profit and Loss Account: The profit and loss (income) statement presents a summary of the revenues and costs for an organization over a specific period of time. The profit and loss statement enables a marketer to examine overall and specific revenues and costs over similar time periods and analyses the organization’s profitability. When preparing Profit and Loss Account operating expenses such as selling administration, research and development expenses are deducted Balance of the trading account is the starting point of profit and loss account. After deducting all the expenses and adding all the revenue we get Net Profit.
Thus
Net Profit/Net Loss = Total Revenue – Total expenses
To Summarize

→ Where the cost of goods sold is greater than the sales the result would be a Gross Loss, but this is a relatively rare occurrence. Where the expenses incurred exceed the gross profit plus other revenue then the result is said to be a Net Loss. By taking the figure of sales less the cost of goods sold, it can be seen that the accounting custom is to calculate a trader’s profits only when the goods have been disposed of and not before. Gross Profit is defined as the excess of sales over costs of goods sold in the Trading Account) period. While, Net Profit is what remains after all other overhead expenses incurred in the period have been deducted. While the Trading Account is used for the determination of Gross Profit (or Gross Loss), the Profit and Loss Account section is used for determination of Net Profit (or Net Loss). While net profit increases the capital of the proprietor, net loss, on the other hand decreases his capital.

→ Balance Sheet: After the trading, profit and loss accounts have been completed a statement is drawn up in which the remaining balances in the books are arranged according to whether they are asset balances or liability or capital balances. This statement is called a balance sheet. The assets are shown on the right-hand side and the capital and liabilities on the left-hand side. It is very important to know that the balance sheet is not part of the double-entry system, and therefore it is not an account. This contrasts with the Trading and Profit and Loss Account which is part of double-entry. The use of the word ‘account’ indicates that it is part of double-entry. It may also be defined as the statement that describes the sources of funds (liabilities) and the uses of these funds (assets) so in other words the balance sheet gives the financial picture as:
Total Assets = Total Liabilities + Total Capital

→ Assets: are the possessions of the company or a business these can be of various types such as fixed-assets which include land and machinery, the current assets are those which are easily converted into cash and include- cash, stocks, receivables etc.

→ Liabilities: is the debt of the company. These are also of different types such as current liabilities which includes accounts payable, short-term debt etc. Similarly liabilities can be of intermediate term and long term. Capital/Equity – represents the ownership of the business in terms of shares or stocks

→ Features of Balance Sheet:

• A balance sheet shows the financial position of the accounting entity on a specific date.
• It is the last stage of Final Accounts.
• It is not an account under the Double Entry System, it is only a statement
• It has two sides-left-hand side known as asset side and right-hand side known as liabilities side.
• The totals of both sides are always equal.
• If there is a difference in the total of both sides then the deficit is placed in Suspense Account to make both sides total equal.
• No expense accounts and revenue accounts are shown here.
• It is prepared after the preparation of Trading and Loss A/C because the net profit or net loss of a concern is included in it through Capital A/C.

→ Marshalling of Balance Sheet
The arrangement of assets and liabilities in a particular order is known as Marshalling of Balance Sheet. It is generally done in two ways
1. Liquidity order/according to time: In this order, assets are arranged in a period in which they can be easily converted into cash and liabilities are arranged in a period in which they have to be paid off

2. Permanence Order/according to purpose: In this assets which are to be used permanently by organization are shown first and assets that are liquid are shown last in order. Similarly Liabilities are also shown in permanence order.

Classification of Assets:
→ Current assets: Assets which can be converted into cash easily within a short time say one year are called as current assets. Eg. Debtors, Inventories, short term investments, bank and cash balances etc.

→ Fixed assets: Assets which cannot be converted into cash easily within a short period of time or assets which are being used by business entity for long time are called fixed assets. Eg. Furniture, buildings, machinery, goodwill, patents etc. Fixed assets again can be classified into tangible and intangible assets. Tangible assets means those assets which can be touched or seen for eg. Building, machinery etc. Intangible assets are those which can not be touched eg. Goodwill, copyrights etc.

→ Fictitious Assets: These assets are not represented by possession of any property and, therefore, have no market value. Preliminary expenses, discount on issue of shares and debentures, etc are examples of fictitious assets. These are to be written off against Profit and Loss Account.

→ Wasting Asset: a wasting asset is one whose useful life is limited so that over a period of time it gradually becomes either valueless or worth only scrap value. A fixed asset, such as a mine or an oil well, that diminishes in value over time is a wasting asset.

→ Classification of Liabilities
Liabilities may be classified as follows.
→ Fixed Liabilities: These liabilities are repayable after a long period of time. These are not repayable within a short period or during the operating cycle of business. Long term loans, loans or mortgage, and debentures are examples of fixed liabilities.

→ Current Liabilities: These liabilities are repayable within a year or in the near future. These include trade creditors, bills payable, outstanding expenses, bank overdraft, etc.

→ Contingent Liabilities: These are anticipated liabilities. These are uncertain and may or may not arise in future on the happening of a certain event. If the contemplated event occurs, a contingent liability becomes a real liability. Liability on bills discounted, disputed claims or liability under a damage suit, guarantee for a loan is examples of contingent liabilities.

→ Difference between Trial Balance and Balance Sheet

1. A Trial Balance is prepared to check the arithmetical accuracy of the books of accounts.	A Balance Sheet is prepared to know the financial position of the business enterprise on a given date.
2. A Trial Balance can be prepared frequently. It may be prepared at the end of a month or a quarter.	A Balance Sheet is generally prepared at the end of the accounting period.
3. The heading of the two columns are “Debit Balances” and “Credit Balances”.	In balance sheet The headings of the two sides are “Liabilities” and “Assets”.
4. All types of accounts find their place in the Trial Balance.	In a Balance Sheet, accounts of assets, liabilities, capital and those accounts which are remained open after the preparation of Trading and Profit and Loss account.
5. Generally, the opening stock appears in the Trial Balance, whereas the closing stock does not.	In a Balance Sheet, only the closing stock appears on the assets side.
6. In a Trial Balance, it is not possible to have information about net profit or net loss.	In the Balance Sheet, information about net profit earned or net loss incurred is provided.
7. A Trial Balance can be prepared without making adjustments regarding prepaid expenses, income received in advance, accrued income, etc.	A Balance Sheet can not be prepared without making adjustments regarding prepaid expenses, outstanding expenses, income received in advance or accrued income, making provisions for possible losses, etc.

→ Difference between Balance Sheet and Profit and Loss Account

Balance sheet	Profit and Loss
Balance sheet is a statement of assets and liabilities.	Profit and loss is an account.
Balance sheet discloses the financial position of the business on a particular date.	Profit and loss account discloses profits earned or losses suffered during an accounting period.
Profit and loss account is prepared for the accounting period ending.	Balance sheet is prepared as at the last day of accounting period.
Accounts which are transferred to Balance sheet do not lose their identity and become the opening balances for next period.	Those accounts which are transferred to the profit loss account are closed and cease to exist.

→ Adjustment Entries: Before financial statements are prepared, additional journal entries, called adjusting entries, are made to ensure that the company’s financial records adhere to the revenue recognition and matching principles. Adjusting entries are necessary because a single transaction may affect revenues or expenses in more than one accounting period and also because all transactions have not necessarily been documented during the period.

→ Adjusting entries are journal entries recorded at the end of an accounting period to adjust income and expenses accounts so that they comply with the accrual concept of accounting. Their main purpose is to match income and expenses to appropriate accounting periods. An adjusting entry always involves either income or expense account.

(1) closing stock: closing stock is the unsold stock at the end of accounting period. There can be two entries for closing stock.

(A) when closing stock appears in the trading account and on the asset side of the Balance sheet Than following accounting entry will be passed

In this case closing stock becomes the opening stock of next year

(B) When closing stock appears in the Trial Balance then it is understood that double entry has already been completed. Thus it will appear only on the asset side of Balance sheet. Following accounting entry will be passed.

(2) Accrued or Outstanding Income: Outstanding income is an income which have not been received even though the event been incurred. Thus it is income for the current financial year but payment has not been received while accrual income is the income that is for this financial year but whose payment will not be received in this financial year. Thus if firm makes a profit earning of Rs 1000 but the payment is not received in this financial year it is outstanding income while if the payment date of this Rs 1000 was next financial year then it is accrued income. Accounting entries in both the cases are same.

Profit and loss account – shown at the credit side
Balance sheet – shown at the credit side

(3) Accrued or Outstanding Expenses – Accrued expense is expense which has been incurred but not yet paid. Expense must be recorded in the accounting period in which it is incurred. Therefore, accrued expense must be recognized in the accounting period in which it occurs rather than in the following period in which it will be paid. Accounting Entry will be

To Outstanding/accrued expense Account
Trading account/profit and loss account – shown at the debit side
Balance sheet – shown at the liabilities side

(4) Unexpired or Prepaid Expenses – Prepaid expenses represent payments made for expenses which are not yet incurred. In other words, these are “advance payments” by a company for supplies, rent, utilities and others that are still to be consumed. Accounting Entry will be

Profit and loss account – shown by deducting from the concerned expenses
Balance sheet – shown at the asset side

(5) Unearned Income or Income Received in Advance – Unearned revenue also known as income received in advance is the exact opposite of accrued income. It represents revenue already collected but not yet earned. Hence, they are also called “advances from customers”. Because they have not yet been earned, unearned revenues are not recorded as income. Remember that under the accrual concept, income is recognized when earned regardless of when collected,

To Income Received in Advance Account
Profit and loss account – shown by deducting from the income on credit side
Balance sheet – shown at the liabilities side as ‘Income received in advance’

(6) Depreciation – Depreciation is systematic allocation the cost of a fixed asset over its useful life. It is a way of matching the cost of a fixed asset with the revenue (or other economic benefits) it generates over its useful life. During each accounting period (year, quarter, month, etc.) a portion of the cost of these assets is being used up. The portio being used up is reported as Depreciation Expense. Accounting entries will

Balance sheet – shown at the asset side after deducting from the concerned asset
In case depreciation is shown in Trial Balance then transfer the depreciation account to Profit and Loss account as } adjustment entry already passed in trial balance

(7) Bad Debts – An entity may not be able to recover its balances outstanding in respect of certain receivables. In accountancy we refer to such receivables as Irrecoverable Debts or Bad Debts. Bad debts could arise for a number of reasons such as customer going bankrupt, trade dispute or fraud. Every time an entity realizes that it unlikely to recover its debt from a receivable, it must ’write off the bad debt from its books. This ensures that the entity’s assets (i. e.receivables) are not stated above the amount it can reasonably expect to recover which is in line with the concept of

To Sundry Debtors Account
Profit and Loss account – Debit
Balance sheet – debtors balance is reduced by the same amount in the balance sheet
In case it is given in Trial Balance then it is directly transferred to Profit and Loss account and no adjustment entry is required.

(8) Provision for Bad Debts – Recoverability of some receivables may be doubtful. Such receivables are known as doubtful debts. A firm may make provision for such debts in the accounting year. Accounting Entries will be

Profit and Loss account – Debit
Balance sheet – debtors balance is reduced by the same amount in the balance sheet

(9) Provision for Discount on Debtors – A provision for discounts to debtors who pay early is created in the current year itself. Accounting Entries will be

Profit and Loss account – Debit
Balance sheet – debtors balance is reduced by the same amount in the balance sheet
Provision for discount on debtors will be deducted after ‘Further bad debts’ and ‘Provision for doubtful debts’ are deducted from the Debtors

(10) Reserve for Discount on Creditors – When the business makes prompt payments of its debts, it is bound to receive Discounts from its creditors.

Although the discounts will be earned in the next year, the discounts so earned are an income of the current year. A Provision for such discount is made in the current year itself so that that the discounts thus earned may be credited to the Profit and Loss Account of the current year.

To Profit and Loss Account/Profit and Loss account – Credit
Balance sheet – Creditors balance is reduced by the same amount in the balance sheet

(11) Interest on Capital – Usually the owner gets an Interest on his investment the business. According to the principle of separate entity, Capital is considered as Liability for the business and the owner is paid a certain amount of interest on the capital employed.

Profit and Loss account – Debit
Balance sheet – shown at the Liabilities side

(12) Interest on Drawings – Many times during the operation of business, the owner may take out some cash from the business for his personal use. These withdrawals from the business are considered as Drawings. As interest is paid on capital the same way interest is charged on Drawings.

Profit and Loss account – Credit
Balance sheet – shown at the Liabilities side by deducting from Capital

(13) Accidental Loss of an Asset – Losses in the value of fixed assets arising through, accidents or theft or earthquake are known as accidental loss of an asset. Such losses are written off immediately against income. Accounting Entries will be

(14) Manager’s Commission on Net Profits – Sometimes, the manager of a concern is given a percentage of the net profit as commission. Since it is an expense like salaries, it is to be accounted for.

To Commission Payable Account
Profit and Loss account – Debit
Balance sheet – shown at the Liabilities side

Manager’s commission is calculated in two ways:-
(1) On Profits before charging such commission:-
Manager’s commission=Net Profits X (Percentage of commission/100)

(2) On Profits after charging such commission:-
Manager’s commission=Net Profits X (Percentage of commission/100+% of commission)

(15) Goods distributed as free Samples – Some goods are given as charity or distributed as free sample for advertisement. In such case, charity and advertisement are treated as expenses and therefore, their accounts are debited according to the rule of nominal account and purchase or goods account is credited by the amount of goods given according to the rule of real account.

To Purchase Account
Profit and Loss account – Debit

(16) Drawings of goods bv Proprietor for personal use – If some goods have been taken by the proprietor for personal use and no accounting entry has been made.

Trading Account – Debit
Balance sheet – shown at the Liabilities side, deducted from the capital

(17) Deferred Revenue Expenditure – It is an expenditure which are basically in the nature of revenue expenditure whose benefit cover a number of years called deferred revenue expenditure. Part of such expenditure is written off in each year.

Profit and Loss account – Debit
Balance sheet – shown at the Liabilities side

(18) Goods on sale on Approval Basis – Sometimes goods are sold on approval basis. In such scenario it cannot be termed as sale.

Trading Account – shown on Credit side by deducting from the sales at sale price and added to closing stock at cost price

(19) Goods received but not recorded in books – Sometimes Goods have been not received but invoice has not been received or omitted. In such case Goods are to be shown in the inventory. Accounting entries will be

Balance Sheet – Added to sundry creditors on liabilities side

(20) Salary to Proprietor – In case Proprietor charges salary then accounting entries will be

(21) Reserve Fund – A reserve is created out of profits for a particular purpose. Reserves are sometimes set up to purchase fixed assets, pay an expected legal settlement, pay bonuses, pay off debt, pay for repairs and maintenance, and so forth. This is done to keep funds from being used for other purposes, such as paying dividend.

(22) Cash Discount – Cash discounts are incentives offered by sellers that reduce the amount that the buyer owes by either a percentage of the total bill or a fixed amount. For example, if an invoice is due in 30 days, a seller could offer the buyer a typical cash discount of 2% if they were to pay the invoice within the first 10 days of receipt. Cash discount is given with the aim to get payment fastly and before payment date. Discount allowed is debited to discount allowed account.

(23) Trade Discount – A trade discount is the amount by which a manufacturer reduces the retail price of a product when it sells to a reseller, rather than to the end customer. The reseller then charges the full retail price to its customers in order to earn a profit on the difference between the amount by which the manufacturer sold the product to it and the price at which it then sells the product to the final customer. The reseller does not necessarily resell at the suggested retail price; selling at a discount is a common practice, if the reseller wishes to gain market share or clear out excess inventory. Trade discount is issued by deduction in list price. From accounting point of view no entries are made.

→ Closing Entries – Closing entries are journal entries made at the end of an accounting period which transfer the balances of nominal accounts to permanent accounts. Closing entries are based on the account balances in an adjusted trial balance.

→ Manufacturing account – Manufacturing account is prepared by the manufacturing concern to ascertain the cost of goods. Manufacturing account debits all the expenses incurred in the factory including the depreciation of machines. Total of all such expenses and cost of raw material gives the cost of goods manufactured.

→ Limitations of financial Statements

• Financial statements do not tell you about changes in senior management.
• Financial statements do not tell you about the loss of major customers.
• Financial statements do not tell you about the competitive environment in which the company operates.
• The profit exposed by the Profit and Loss Account and the financial position released by the Balance Sheet
  cannot be precise. They are fundamentally short-term reports
• Audited statements do not guarantee accuracy.
• Even audited financial statements are subject to a degree of manipulation.
• Because Balance Sheet is prepared on ongoing concern thus financial statements are not absolutely final and accurate.
• Financial statements are interim reports and cannot show true gain or loss which can only be depicted at the termination of business.
• The use of professional judgment of the preparers of financial statements is important cause greater the use of judgment involved, the more subjective financial statements would tend to be.

Preparation of Final Accounts for Sole Proprietorship MCQ Questions – CS Foundation Fundamentals of Accounting and Auditing

Question 1.
For a proprietor following are not included in final accounts.
a. Trading account
b. Profit and loss account
c. Balance sheet
d. None of the above
Answer:
d. None of the above

Question 2.
Which one of the following is true for proprietor?
a. Fixed assets are is his household property
b. Fixed assets are bought with the intention of resale
c. Fixed assets are liable to be destroyed very soon
d. Fixed assets are normally used in the business on a long-term basis
Answer:
d. Fixed assets are normally used in the business on a long-term basis

Question 3.
Position statement of the firm includes
a. Assets
b. Liabilities
c. Good will
d. Both a & b
Answer:
d. Both a & b

Question 4.
For finding out all the expenses and losses of a proprietor _______________ is prepared
a. Position statement
b. Balance sheet
c. Income statement
d. Both a & b
Answer:
c. Income statement

Question 5.
Liabilities and provisions made by sole proprietor are transferred to
a. Left hand side of the balance sheet
b. Left hand side of profit and loss statement
c. Left hand side of trading account
d. none of the above
Answer:
a. Left hand side of the balance sheet

Question 6.
First account to be prepared for determining the profit or loss a proprietor is
a. profit & loss account
b. trading account
c. Balance sheet
d. None of the above
Answer:
b. trading account

Question 7.
When taking final stock for preparation of trading account then _______________ should not be included
a. Purchases of goods made but not received.
b. Goods sold but not yet delivered
c. Both a & b
d. None of the above
Answer:
d. None of the above

Question 8.
Which statement is true?
a. Gross profit – gross loss = Net profit
b. Gross profit – net loss = net profit
c. Net profit – net loss = net profit
d. Total revenue – total expenses = net profit
Answer:
d. Total revenue – total expenses = net profit

Question 9.
There is a net profit of Rs. 5000 as shown in profit & loss account. It will be transferred to
a. Saving account of proprietor
b. Current account of proprietor
c. Capital account of proprietor
d. Business account of proprietor
Answer:
c. Capital account of proprietor

Question 10.
Basic principle to be followed while preparing trading and profit & loss account is
a. Expenses for the full trading period should be included
b. Revenue received for the whole period be included
c. Expenditure which is for other period be included
d. Both a & b
Answer:
d. Both a & b

Question 11.
What is transferred to capital account?
a. Gross profit
b. Net profit
c. Gross sales revenue
d. Net sales revenue
Answer:
b. Net profit

Question 12.
Dividend received from shares entry is made in
a. Trading account
b. Profit and loss account
c. Balance sheet
d. None of the above
Answer:
b. Profit and loss account

Question 13.
In income statement, gross profit is always equal to
a. Sales-expenses
b. Incomes-expenses
c. sales-cost of goods sold
d. Sales-selling costs
Answer:
c. sales-cost of goods sold

Question 14.
_______________ is not the integral part of profit & loss account
a. Bank interest received
b. Discount received
c. Sales
d. Rent of property received
Answer:
c. Sales

Question 15.
A statement which shows balance of assets liabilities is
a. Profit & loss account
b. Balance sheet
c. Trading account
d. All of the above
Answer:
b. Balance sheet

Question 16.
Balance sheet is prepared from
a. Real account
b. Saving account
c. Personal account
d. Both a & b
Answer:
d. Both a & b

Question 17.
It is not a feature of balance sheet
a. Shows the position of capital
b. Prepared for a particular period
c. It Is a statement
d. Both b & c
Answer:
b. Prepared for a particular period

Question 18.
The items in the balance sheet are marshaled in a way that assets that are to be used permanently are put on top order; this type of arrangement is called.
a. Liquidity order
b. According to time
c. Permanence order
d. Both a & b
Answer:
c. Permanence order

Question 19.
Trade mark is a _______________ asset
a. Intangible asset
b. Wasting asset
c. Fiction asset
d. None of the above
Answer:
c. Fiction asset

Question 20.
Shares of some limited company are
a. floating assets
b. liquid assets
c. fixed assets
d. intangible assets
Answer:
b. liquid assets

Question 21.
capital of the proprietor is a
a. fixed asset
b. fixed liability
c. long term liability
d. none of the above
Answer:
b. fixed liability

Question 22.
Contingent liability is
a. Liability to appear within a year
b. Liability to appear at the occurrence of an event
c. Liability to appear after a period of time
d. Liability to the proprietor
Answer:
b. Liability to appear at the occurrence of an event

Question 23.
What is UNCOMMON in trial balance?
a. Balances of personal, real and nominal account are shown
b. Closing stock appears in trial balance
c. Statement of assets and liabilities
d. Both b & c
Answer:
d. Both b & c

Question 24.
Which is the characteristic feature of profit & loss account?
a. Accounts transferred to profit & loss account do not exist after being transferred to profit & loses account
b. It is prepared at the last date of the accounting period.
c. It is a statement
d. All of the above
Answer:
a. Accounts transferred to profit & loss account do not exist after being transferred to profit & loses account

Question 25.
In case of unexpired entry following entry should be made
a. It should be shown as an asset in the balance sheet
b. It is shown as a expense in profit and loss account
c. Both a & b
d. None the above
Answer:
c. Both a & b

Question 26.
Which is an unearned income?
a. Insurance premium received by insurance company
b. Rent received
c. Depreciation
d. Both a & b
Answer:
d. Both a & b

Question 27.
Pick the odd one
a. Reserve for discount on creditors is credited to profit & loss account
b. Provision for discount on creditors is always made
c. Discount on creditors should be deducted from Sunday creditors in balance sheet
d. Both a & c
Answer:
b. Provision for discount on creditors is always made

Question 28.
If salary is given to proprietor
a. Proprietors salary account is debited
b. Capital account is credited
c. Both a & b
d. None of the above
Answer:
c. Both a & b

Question 29.
When the final accounts are being prepared for a firm in respect of adjustments
a. Double entry should be made
b. Double entry not required
c. Should appear only in balance sheet
d. None of the above
Answer:
a. Double entry should be made

Question 30.
Closing of nominal accounts is known as
a. Closing entries
b. Trail entries
c. Final entries
d. None of the above
Answer:
a. Closing entries

Question 31.
In trial balance closing stock is given, it will affect
a. Trading account & balance sheet
b. Profit & loss account
c. Balance sheet only
d. Trading account only
Answer:
a. Trading account & balance sheet

Question 32.
When cash is withdrawn in sole proprietor business
a. It will affect shareholder account
b. It will affect capital account
c. It will affect liability account
d. It will affect expense account
Answer:
c. It will affect liability account

Question 33.
Everyday office expenses are charged to
a. Selling expenses
b. Administrative expenses
c. Marketing expenses
d. Financial expenses
Answer:
b. Administrative expenses

Question 34.
_______________ shows the success or failure of a business .select the most Appropriate
a. Cash flow statement appropriate answer
b. Retained earning statement
c. Income statement
d. Balance sheet
Answer:
a. Cash flow statement appropriate answer

Question 35.
Financial statements are prepared mainly for
a. Internal users of financial information
b. External users of financial information
c. Creditors of the business
d. Managers of the business
Answer:
b. External users of financial information

Question 36.
Net profit is computed in which of the following?
a. Balance sheet
b. Income statement
c. Cash flow statement
d. Statement of changes in equity
Answer:
c. Cash flow statement

Question 37.
Which of the following should be the misappropriate order of current asset in a balance sheet
a. cash, debar, bank, stock
b. Bank, cash, stock, debtor
c. Stock, bank, cash, debtor
d. cash bank, debtor, stock
Answer:
d. cash bank, debtor, stock

Question 38.
Office equipment is a _______________ asset for a computer manufacturer company and _______________ asset for a company that deals in these equipments
a. Current, Fixed
b. Fixed, intangible
c. Tangible, intangible
d. fixed, current
Answer:
d. fixed, current

Question 39.
Identify the external user of financial information or financial statements
a. Management of the business
b. CFO of the business
c. employees of the business
d. Investors of the business
Answer:
d. Investors of the business

Question 40.
A statement or report that records the fluctuation in business’s capital is referred as
a. Balance sheet
b. Income statement
c. Cash flow statement
d. Statement of changes in equity
Answer:
d. Statement of changes in equity

Question 41.
Financial statements mainly help in
a. Assumption of economic events
b. Anticipation of economic events
c. Recording of economic events
d. communication of economic events
Answer:
d. communication of economic events

Question 42.
Purchases + opening stock-closing stock=?
a. Amount of sales
b. Gross profit .
c. cost of goods sold
d. Net income
Answer:
c. cost of goods sold

Question 43.
Which of the following financial statements shows the financial position of a business?
a. Balance sheet
b. Income statement
c. Cash flow statement
d. Statement of changes in equity.
Answer:
b. Income statement

Question 44.
Which one of the following is NOT a feature of sole proprietorship business?
a. Easy Formation
b. Easy Dissolution
c. Unlimited Liability
d. Separate Legal Entity
Answer:
d. Separate Legal Entity

Question 45.
Assuming no returns outwards or carnage inwards, the cost of goods sold will be equal to _______________ in proprietor
a. Sales less gross profit
b. Purchases plus opening inventory closing inventory less
c. Closing inventory opening inventory less purchases plus
d. Opening inventory closing inventory plus purchases plus
Answer:
a. Sales less gross profit

Question 46.
The characteristics of a current asset would not include in proprietor
a. Liquidity
b. Not bought for resale
c. Likely to change before the next accounting period is over
d. Use as part of the firm’s trading operations
Answer:
b. Not bought for resale

Question 47.
Outstanding business rent of Rs. 15,000 was paid by the proprietor from his purse. The effect on the balance sheet is that
a. both liabilities and assets are increased.
b. both liabilities and assets are decreased.
c. liabilities are increased, while the assets are decreased.
d. liabilities are decreased, while the assets are increased.
e. both liabilities and assets remain unchanged.
Answer:
c. liabilities are increased, while the assets are decreased.

Question 48.
In a proprietorship business machinery that will be used in the business on continues basis that would usually be stated in the balance sheet at:
a. Its historical cost
b. Its current replacement cost
c. Its historical cost less depreciation
d. its second- hand value
Answer:
c. Its historical cost less depreciation

Question 49.
Drawing by a sole trader are:
a. An appropriation of profit
b. Liability
c. Expenses
d. Revenue
Answer:
a. An appropriation of profit

Question 50.
The net assets of a firm at the beginning of 2007 were Rs. 107,700. What were the net assets in the year 2007, if the profit earned by the business in 2007 was Rs. 72,500 and owner withdrew goods for his own private use that had cost Rs. 2,500.
a. Rs. 177,200
b. Rs. 107,700
c. Rs. 177,700
d. Rs. 176,700
Answer:
c. Rs. 177,700

Question 51.
Which of the following is NOT a required characteristic of an asset?
a. The benefit must arise from some past transaction or event
b. It must have physical substance and be capable of being touched
c. Both a&b
d. A benefit exists in future.
Answer:
b. It must have physical substance and be capable of being touched

Question 52.
In a sole trader’s profit and loss account firm , taxation accounts are not present because:
a. The proprietor of such a business pays income tax in his private capacity
b. The Income tax department has not made laws regarding the taxation of firms
c. As sole trader has a simple business so tax paying is not required
d. The business is separate undertaking for the purposes of tax
Answer:
a. The proprietor of such a business pays income tax in his private capacity

Question 53.
Which of the following asset is not an example of Intangible Fixed Assets?
a. Vehicles
b. Good Will
c. Copyrights
d. Trade Marks and Designs
Answer:
a. Vehicles

Question 54.
Insurance paid in advance would be treated in the Balance sheet as:
a. Non current asset
b. Current asset
c. Intangible asset
d. Deferred expense
Answer:
a. Non current asset

Question 55.
Which of the following consist of money owing for goods supplied to the firm and for expenses & loans?
a. Assets
b. Capital
c. Liability
d. Income
Answer:
b. Capital

Question 56.
Random sampling in auditing means:
a. Selection through convenience sampling
b. Selection through scientific sampling approach
c. None of these
d. None of the above
Answer:
b. Selection through scientific sampling approach

Question 57.
Process Cost is very much applicable in:
a. Construction Industry
b. Pharmaceutical Industry
c. Air line company
d. None of these
Answer:
a. Construction Industry

Question 58.
Current maturity of long term loan is:
a. Current Liability
b. Long Term Liability
c. Both a & b
d. None of these
Answer:
b. Long Term Liability

Question 59.
Audit of a bank is generally conducted through:
a. Routine checking
b. Vouching
c. Balance sheet audit
d. None of these
Answer:
c. Balance sheet audit

Question 60.
Balance sheet is always prepared:
a. For the year ended
b. As on a specific date
c. For a current year
d. None of these
Answer:
b. As on a specific date

Question 61.
Quick assets include which of the following?
a. Cash
b. Accounts Receivable
c. Inventories
d. Only (a) and (b)
Answer:
d. Only (a) and (b)

Question 62.
A cash purchase of supplies would:
a. Decrease owner’s equity
b. Increase liabilities
c. Have no effect on total assets
d. None of these
Answer:
a. Decrease owner’s equity

Question 63.
Users of accounting information include:
a. ‘The tax authorities
b. Investors
c. Creditors
d. All of these
Answer:
d. All of these

Question 64.
Under the diminishing balance method, depreciation amount is:
a. Payment
b. Receipt
c. Expenditure
d. None of these
Answer:
c. Expenditure

Question 65.
The accounting profession can be divided into three major categories; Specifically, the practice of public accounting, private accounting, and governmental accounting. A somewhat unique and important service of public accountants is:
a. Financial accounting.
b. Managerial accounting.
c. Auditing.
d. Cost accounting.
Answer:
c. Auditing.

Question 66.
Retained earnings will change over time because of several factors. Which of the following factors would explain an increase in retained earnings?
a. Net loss.
b. Net income.
c. Dividends.
d. Investments by stockholders
Answer:
b. Net income.

Question 67.
Debit balance in a personal account shows.
a. Asset of the firm
b. Liability of the firm
c. Both a & b
d. Contingent liability of the firm
Answer:
a. Asset of the firm

Question 68.
Which of these items would be accounted for as an expense?
a. Repayment of a bank loan.
b. Dividends to stockholders.
c. The purchase of land.
d. Payment of the current period’s rent
Answer:
d. Payment of the current period’s rent

Question 69.
Which of the following account(s) will be affected, while rectifying the error of a purchase return of Rs. 200 to Mr. “A” entered in sales book instead of purchase return book?
a. A’s account only
b. Sales account only
c. Purchase returns account and sales account
d. Purchases account only
Answer:
c. Purchase returns account and sales account

Question 70.
Which of the following account(s) will be affected, while rectifying the error of an amount Rs. 200 received from Mr. “P” wrongly credited to Mr. “Q’s” account?
a. Only Cash Account
b. Only P’s account
c. Only Q’s account
d. Both of Mr. P’s & Mr. Q’s Account
Answer:
d. Both of Mr. P’s & Mr. Q’s Account

Question 71.
When closing stock is given in trial balance, then it will effect:
a. Trading account only
b. Balance sheet only
c. Owner’s equity only
d. Both Trading account and Balance sheet
Answer:
d. Both Trading account and Balance sheet

Question 72.
Which of the following is an item of a debtors control account?
a. Cash sale
b. Credit sales
c. Credit purchase
d. Cash purchases
Answer:
c. Credit purchase

Question 73.
Which of the following is an item of a creditors control account?
a. Cash purchases
b. Cash sales
c. Credit sales
d. Credit purchase
Answer:
a. Cash purchases

Question 74.
Which of the following is (are) benefit/s of subsidiary ledger accounts to business?
a. It tells about customer attitude of payments
b. It can be checked against the control account to pick up recording errors
c. t tells about the complete history of transactions of business client
d. All of the given options
Answer:
d. All of the given options

Question 75.
Which of the following item must be recorded in the adjusted Cash Book in order to bring it in line with the entries in the Bank Statement?
a. Bank charges
b. An error on the Bank Statement
c. An uncredited deposit
d. An unpresented cheque
Answer:
c. An uncredited deposit

Question 76.
Which of the following is/are NOT shown in balance sheet of sole proprietor?
a. Fixed assets
b. Current liabilities
c. Profit sharing ratio
d. Long term assets
Answer:
c. Profit sharing ratio

Question 77.
The Working Capital (or Net Current Assets) of a business is:
a. Current assets less current liabilities
b. Capital plus liabilities which are not expected to be paid within a year of the balance sheet date
c. The capital commencement of business
d. Non current assets plus current assets less current liabilities
Answer:
a. Current assets less current liabilities

Question 78.
Which of the following statement is true?
a. Return Inwards and Return Outwards both appear in trading account
b. Carriage Inwards and Carriage Outwards both appear in profit and loss account.
c. Carriage Inwards and Carriage Outwards both appear in trading account.
d. Neither Carriage Inwards nor Carriage Outwards appear in the trading account.
Answer:
a. Return Inwards and Return Outwards both appear in trading account

Hint:
Return Inwards and Return Outwards both appear in trading account. Return inwards appear in the trading account on the credit side and Return outwards appear on debit side of Trading A/c.

Question 79.
Prakash sells goods at 20% on sales. His sales were Rs. 10,00,000. The zamount of gross profit is:
a. Rs. 1,70,000
b. Rs. 2,50,000
c. Rs. 2,40,000
d. Rs. 2.00,000
Answer:
d. Rs. 2.00,000
Hint:
Sales = Rs. 10,00,000
Gross Profit = 20% of sales
Thus, Gross Profit = 10,00,000×20%
= Rs.2,00,000

Question 80.
Given the following data:
Gross profit Rs. 6,700; Carriage Inwards t 250; Rent received Rs. 575 and other expenses Rs. 3.600. The net profit of the firm would be:
a. Rs. 3.275
b. Rs. 3,025
c. Rs. 3,425
d. Rs. 3,675
Answer:
d. Rs. 3,675

Hint:

Question 81.
Ram has been running business from the year 2002. He has paid Rs. 1,650 as rent upto February, 2012 (for financial year 2011-12). Total rent to be debited to profit and loss A/c of financial year 2011-12 will be:
a. Rs. 1,650
b. Rs. 1,800
c. Rs. 2,000
d. Rs. 1,400
Answer:

Question 82.
Income tax paid by the sole- proprietor from the business bank account is debited to:
a. Income tax account
b. Bank account
c. Capital account
d. Provision for taxation account
Answer:
b. Bank account

Hint:
Rent paid of 11 months (April to February 2012) = Rs.1,650
So, one month rent wHI be = \(\frac{1,650}{11}\) = Rs. 150
Thus rent for 12 months i.e. one year will be 1650 + 150 = Rs 1800
Thus total amount of rent debited to P/L A/c will be Rs.1,800.

Question 83.
Debtors as appearing in Trial Balance are f 25,000. Provision for doubtful debts is to be provided @ 5% and 2% of amount is to be provided for discount. What is the amount of debtors to be shown in balance sheet?
a. f 23,750
b. f 23,250
c. f 23,275
d. f 1,750
Answer:
a. f 23,750

Hint:
The entries to be passed after payment of income tax are

Therefore, income tax paid, is debited to income Tax Account

Question 84.
The net profit of a sole proprietorship firm is f 1,320 (before commission). The manager of the firm gets 10% commission on the net profit after charging such commission. Manager’s commission would be:
a. f 120
b. f 132
c. f 1,188
d. f 1,200.
Answer:
c. f 1,188

Hint:

Thus, the amount of debtors to be shown in balance sheet is Rs. 23,275

Question 85.
Which of the following is correct about trade discount?
a. It is synonymous with discount?
b. It is shown by way of deduction in invoice itself
c. It is calculated on account paid or received
d. It is allowed to engage the prompt payment
Answer:
a. It is synonymous with discount?

Hint:
Manager’s commission ¡s calculated ¡n two ways:
(1) On Profits before charging such commission:
Manager’s commission=Net Profits × (Percentage of commission/100)
(2) On Profits after charging such commission:
Manager’s commission=Net Profits × (Percentage of commission/100+% of commission)
Commission on net profit after charging such commission
= Net profit × \(\frac{\text { Rate of commission }}{100+\text { rate of commission }}\)
= 1,320 × \(\frac{10}{100+10}\)
= 1320 × \(\frac{10}{110}\) = 120

Question 86.
Which of the following items would fall under the category of a-liability?
a. Cash
b. Debtors
c. Capital
d. Land
Answer:
b. Debtors

Hint:
A trade discount is the amount by which a manufacturer reduces the retail price of a product when it sells to a reseller, rather than to the end customer. The reseller then charges the full retail price to its customers in order to earn a profit on the difference between the amount by which the manufacturer sold the product to it and the price at which it then sells the product to the final customer. The reseller does not necessarily resell at the suggested retail price; selling at a discount is a common practice, if the reseller wishes to gain market share or clear out excess inventory. Trade discount is issued by deduction in list price. From accounting point of view no entries are made. It is shown by way of deduction in invoice itself.

Question 87.
If a piece of furniture’s list price is f 28,000 and it is sold at 10% trade discount and 2% cash discount. The cash safe price of furniture would be:
a. Rs. 25,200
b. Rs. 24,640
c. Rs. 24,696
d. None of the above
Answer:
c. Rs. 24,696

Hint:
According to the principle of seperate entity, capital is considered as liability for the business and the owner is paid a certain amount of interest on the capital employed.

Question 88.
What is shown in a balance sheet?
a. Only those assets which are expressed in monetary terms
b. Only those liabilities which are expressed in monetary terms
c. Assets and liabilities expressed in non-monetary terms
d. Assets and liabilities expressed in monetary terms
Answer:
c. Assets and liabilities expressed in non-monetary terms

Hint:

Question 89.
The correct sequence of the following in the preparation of periodical final statements would be:
1. Preparation of Balance Sheet
2. Preparation of Cash Flow Statement
3. Preparation of Trial Balance
4. Preparation of Profit/Loss Statement The correct option is:
a. 4, 2, 1,3
b. 3, 4, 1,2
c. 2, 4, 3,1
d. 1, 3, 2, 4.
Answer:
d. 1, 3, 2, 4.

Hint:
Balance sheet is a statement of assets and liabilities and according to money measurement concept those items which can be interpreted in terms of money are recorded and shown in financial books.
Thus, it can be said that those assets and liabilities which expressed in monetary terms is shown in a Balance Sheet.

Question 90.
Match list I with list II and select the correct answer using the codes given below the list:

List I	List II
X. Discount on Debentures	1. Current Liability
Y. Forfeited Capital	2. Non-Current Assets
Z. Income tax payable	3. Current Assets
W. Debtors acceptance	4. Non Current Liability

The correct option is:

Answer:
b

Hint:
The correct sequence of preparation of periodical financial statements is as follows:

• Trial Balance,
• Profit/Loss statement,
• Balance Sheet and
• Cash Flow Statement.

Question 91.
A company sends cars to dealers on ‘sales or return’ basis. All such transactions are however treated like actual sales and are passed through the sales day book. Just before the end of the financial year, two cars which had casted Rs. 55,000 each have been sent on ‘sales or return’ basis and have been debited to customers at Rs. 75,000 each. Cost of goods lying with the customers would be:
a. Rs. 1,10,000
b. Rs. 1,50,000
c. Rs. 75,000
d. Rs. 55,000
Answer:
a. Rs. 1,10,000

Hint:
Current assets: Assets which can be converted into cash easily within a short time say one year are called as current assets. Eg. Debtors acceptance
Non current assets: A noncurrent asset is an asset that is not expected to be consumed within one year Eg. Discount on debentures
Current liability: These liabilities are repayable within a year or in the near future . eg. Income tax payable.
Non current liability: A business’s long-term financial obligations that are not due within the present accounting year eg. Forfeited capital

Question 90.
The total cost of goods available for sales with a company during the current year is Rs. 12,00, 000 and the total sales during the period are Rs. 13,00,000. Gross profit margin of the company is 331/3% on cost. The closing inventory for the current year would be:
a. Rs. 4,00,000
b. Rs. 3,00,000
c. Rs. 2,25,000
d. Rs. 2,60,000.
Answer:
a. Rs. 4,00,000

Hint:
Cost of goods lying with customer = 55,000 + 55,000 = 110,000

Question 93.
How does an overcastting of purchases day book affect the cost of sales and profit?
a. Cost of sales is decreased while profit is increased
b. Cost of sales is increased while profit is decreased
c. Both cost of sales and profit are increased
d. Cost of sales is increased; gross profit is decreased but net profit remains unaffected.
Answer:
c. Both cost of sales and profit are increased

Hint:
Sales = Rs. 13,00,000
G.P. Margin cost is 1/3 and on sales it will be 1/4
Cost of goods sold = 13,00,000 × 3/4 = 9,75,000
Closing Stock = Total goods available for sale – Cost of goods sold
= 12,00,000 – 9,75,000
= Rs. 2,25,000

Question 94.
If outstanding wages appear in the trial balance, while preparing the final accounts: it will be shown in:
a. Asset side of the balance sheet
b. Liability side of the balance sheet
c. Profit and Loss A/c and asset side of the balance sheet
d. Profit and Loss A/c and Liability side of balance sheet.
Answer:
b. Liability side of the balance sheet

Hint:
Cost of Sales = Opening stock + Purchases – Closing stock
Sales – Cost of sales = profit
Looking at the above two statements it may be observed that if purchases is overcast the cost of sates will increase. And If cost of sates will increase the profit will decrease.
Therefore, cost of sates is increased white profit is decreased

Question 95.
E Ltd., a dealer in second-hand machinery has the following five machines of different models and makes in their stock at the end of the financial year 2012-13:

The value of stock included in the Balance Sheet of the company as on 31 SI March, 2013 was:
a. Rs. 7,62,500
b. Rs. 7,70,000
c. Rs. 7,90,000
d. Rs. 8,70,000.
Answer:
b. Rs. 7,70,000

Hint:
Outstanding wages appearing in the trial balance will be shown on liability side of balance sheet.

Question 96.
Fire Insurance premium paid on 1st October, 2011 for the year ended on 30th September, 2012 was Rs. 2,400 and Fire Insurance premium paid on 1st October, 2012 for the year ending on 30th September, 2013 was Rs. 3,200. Fire Insurance premium paid as shown in the profit and loss account for the accounting year ended 31st December, 2012 would be:
a. Rs. 2,600
b. Rs. 3,200
c. Rs. 2,800
d. Rs. 3,000
Answer:
b. Rs. 3,200

Hint:
Closing stock is the unsold stock at the end of accounting period. Stock is valued at lower of cost or market price.
Total value of closing stock = 9 + 1.15 + 2.65 + 1.00 + 2 = 7.7 lakh

Question 97.
Income earned which is yet to be collected results in:
a. Increase in capital and increase in liability
b. Decrease in liability and increase in capital
c. Increase in asset and increase in liability
d. Increase in capital and increase in asset.
Answer:
a. Increase in capital and increase in liability

Hint
Premium Expense for accounting year Ended 31 st December 2012 would be:-
1.1.2012 – 30.9.12: 2,400 × \(\frac{9}{12}\) = 1,800
1.10.2012 – 31.12.12: 3,200 × \(\frac{3}{12}\) = 800
Fire insurance premium paid = 1800 + 800 = 2,600

Question 98.
X Limited is in the business of trading. It is to receive Rs. 7,000 from Vinod and to pay Rs. 8,000 to Vinod. Similarly, it is to pay Rs. 8,000 to Sudhir and to receive Rs. 9,000 from Sudhir. Except above but after all the adjustment, the books of X Limited show the debtors balance at Rs. 72,000 (Dr.) and creditors balance at Rs. 39,000 (Cr.). The correct value of debtors and creditors to be shown in balance sheet would be
a. Debtors (Rs. 72,000), Creditors (Rs. 39,000)
b. Debtors (Rs. 88,000), Creditors (Rs. 55,000)
c. Debtors (Rs. 80,000), Creditors (Rs. 47,000)
d. Debtors (Rs. 79,000), Creditors (Rs. 46.000).
Answer:
d. Debtors (Rs. 79,000), Creditors (Rs. 46.000).

Hint:
Income earned which is yet to be collected is accrued or outstanding income.
It is shown as
Profit and Loss account – credit side
Balance sheet – credit side
This results in increase in income and thereby an increase in capital and also an increase in corresponding asset.

Question 99.
If the insurance Rs. premium paid is Rs. 1,000 and prepaid insurance is Rs. 300, the amount of Insurance premium shown in profit and loss account will be
a. Rs. 1,300
b. Rs. 700
c. Rs. 1,000
d. Rs. 300.
Answer:
b. Rs. 700

Hint:

	Debtors (Rs.)	Creditors (Rs.)
Balance shown by X Limited	72,000	39,000
Add: To receive from Vinod	7,000	–
To receive from Sudhir	9,000	–
To pay vinod	–	8,000
To pay Sudhir	–	8,000
Correct value to be shown in Balance sheet	88,000	55,000

Question 100.
The expired cost of a deferred revenue expense is known as
a. Asset
b. Expense
c. Liability
d. Provision
Answer:
a. Asset

Hint:
Prepaid insurance premium is not an expenses of this year, so it will not be shown in P/L A/c.
Insurance premium shown in profit and loss A/c will be (1,000 -300) = Rs. 700 only,

Question 101.
If prepaid rent appears in the trial balance, while preparing the final accounts it will be shown in –
a. Assets side of the balance sheet
b. Liabilities side of the balance sheet
c. Profit and Loss A/c and asset side of the balance sheet
d. Profit and Loss A/c and liabilities side of balance sheet.
Answer:
b. Liabilities side of the balance sheet

Hint:
The term “deferred expense” is used to describe a payment that has been made, but it won’t be reported as an expense until a future accounting period. It is shown as an expense in Profit and Loss Account.

Question 102.
Gauri paid Rs. 1,000 towards debt of Rs. 1,050, which was written-off as bad debt in the previous year. Which of the following account will be credited for this amount
a. Gauri’s personal account
b. Bad debts account
c. Bad debts recovered account
d. None of the above.
Answer:
a. Gauri’s personal account

Hint:
If prepaid rent appears in the trail balance, on preparation of final accounts it will be shown on assets side of balance sheet only.

Question 103.
While finalising the current year’s profit, the company realised that there was an error in the valuation of closing stock of the previous year. In the previous year; closing stock was valued more by Rs.50,000. As a result
a. Previous year’s profit was overstated and current year’s profit is also overstated
b. Previous year’s profit was understated and current year’s profit is overstated
c. Previous year’s profit was understated and current year’s profit is also understated
d. Previous year’s profit was overstated and current year’s profit is understated.
Answer:
c. Previous year’s profit was understated and current year’s profit is also understated

Hint:
When a bad debt is recovered which was written off in the previous year, Bad Debts Recovered A/c will be credited.

Question 104.
If Capital = 70,000; Liability = 40,000. Find Assets –
a. 30,000
b. 1,10,000
c. 40,000
d. 70,000
Answer:
d. 70,000

Hint:
The gross profit and net income are overstated as a result of overstating closing stock. Since the overstated amount of closing stock at the end of one accounting period becomes the opening stock for the next year, the following periods cost of goods sold is high and thereby the current year’s profit is low.

Question 105.
If opening stock is 10,000, Purchases 20,000, Direct expenses 10,000, Indirect expenses 30,000. Find value of cost of goods sold:
a. 10,000
b. 20,000
c. 30,000
d. 40,000.
Answer:
b. 20,000

Hint:
Assets = Capital + Liability
= 70,000 + 4,000 = 1,10,000

Question 106.
P/L A/c balance (before commission) is Rs. 1,320; manager’s commission is 10%. Find the amount of manager’s commission.
a. 120
b. 0
c. 132
d. 110.
Answer:
d. 110.

Hint:
Cost of goods sold = Opening Stock + Direct Material + Direct Expenses
= 10,000 + 10,000 + 20,000 = 40,000

Question 107.
Adjusted closing entry affects:
a. Trading A/c
b. P/L A/c
c. Balance Sheet
d. All of the above.
Answer:
c. Balance Sheet

Hint:
On Profits before charging such commission:
Manager’s commission = Net Profits × (Percentage of commission/100)
Amount of manager’s commission = \(\frac{1,320 \times 10}{100}\) = 132

Question 108.
The purpose of making trading account:
a. To know the financial position of business
b. To ascertain the gross profit/loss
c. To ascertain the net profit/loss
d. None of the above.
Answer:
c. To ascertain the net profit/loss

Hint:
Adjusting entries are journal entries recorded at the end of an accounting period to adjust income and expenses accounts so that they comply with the accrual concept of accounting. Their main purpose is to match income and expenses to appropriate accounting periods . Adjusting closing entry affects Balance Sheet.

Question 109.
Prepaid Rent is shown as:
a. Current Asset
b. Current Liability
c. Intangible Asset
d. Fictitious Asset
Answer:
b. Current Liability

Hint:
The purpose of the profit and loss account is to show whether a business has made a PROFIT or LOSS over a financial year.

Question 110.
Trial balance of a trader shows the following balances:
Opening Stock Rs. 9,600, Purchases Rs. 11,850, Wages and Salaries Rs. 3,200, Carriage on Purchases Rs. 200, Carriage Outwards Rs. 300, SA/cs Rs. 24,900, Closing Stock Rs. 3,500 Gross Profit will be:
a. Rs. 3,550
b. Rs. 6,750
c. Rs. 6,500
d. Rs. 6,550
Answer:
a. Rs. 3,550

Hint:
Current assets : Assets which can be converted into cash easily within a short time say one year are called as current assets .

Question 111.
Assets that a company expects to convert to cash to use up within one year are called:
a. Property plant and equipment
b. Intangible assets
c. Long term investments
d. Current assets
Answer:
d. Current assets

Hint:

Question 112.
Closing Stock of a Company, if given is adjustment, appears in:
a. Balance Sheet only
b. Trading Account only
c. Profit and loss account only
d. Trading account and balance sheet
Answer:
d. Trading account and balance sheet

Hint:
Current assets: Assets which can be converted into cash easily within a short time say one year are called as current assets . Eg. Debtors , Inventories , short term investments , bank and cash balances etc.

Question 113.
Financial data of an entity is given below:
Gross Profit Rs. 6,700, Carriage outwards Rs. 250, Rent received Rs. 575 and Other expenses Rs. 3,600. The net profit would be:
a. Rs. 3,025
b. Rs. 2,850
c. Rs. 3,425
d. Rs. 3,275
Answer:
d. Rs. 3,275

Hint:
Closing stock of a company, if given in adjustment, appears at two places Credit side of the Trading A/c and on the asset side of the balance sheet.

Question 114.
Liability in respect of a pending suit is an example of:
a. Current liability
b. Long term liability
c. Contingent liability
d. Current asset.
Answer:
c. Contingent liability

Hint:

Question 115.
Which of the following item appears in trading account of a business?
a. Wages and Salaries
b. Depreciation on buildings
c. Freight outward
d. Salaries.
Answer:
c. Freight outward

Hint:
Contingent Liabilities: These are anticipated liabilities. These are uncertain and may or may not arise in future on the happening of a certain event. If the contemplated event occurs, a contingent liability becomes a real liability. Liability on bills discounted, disputed claims or liability under a damage suit, guarantee for a loan is examples of contingent liabilities.

Question 116.
Which of the following statements is correct about trial balance?
a. A Trial balance is a list of all entries made in the books of account
b. A Trial balance is a list of balances in all assets accounts
c. A Trial balance is another ledger account
d. A Trial balance is a list of balances in the cash account and all ledger accounts.
Answer:
a. A Trial balance is a list of all entries made in the books of account

Hint:
Wages and salaries appeat in trading A/c whereas Depreciation, Freight outward and Salaries appear in Profit & Loss A/c.

Question 117.
Generally, in a balance sheet, fixed assets are shown at:
a. Realisable value
b. Market value
c. Written down value
d. Cost price.
Answer:
d. Cost price.

Hint:
The heading of the two columns in Trial balance are “Debit Balances” and “Credit Balances”., thus it can be said it is list of balances.

Question 118.
In order to prepare the final accounts all ……………………….. accounts are transferred to Trading and Profit and Loss Account:
a. Personal
b. Nominal and Real
c. Nominal
d. Real
Answer:
c. Nominal

Hint:
In order to prepare the final accounts all the nominal accounts are transferred to trading and profit and loss account.

CS Foundation Fundamentals of Accounting and Auditing Notes