Theoretical Framework – CS Foundation Fundamentals of Accounting and Auditing Notes

→ The systematic recording of financial transactions pertaining to a business can be termed as accounting.

→ Accounting is defined by the American Institute of Certified Public Accountants (AICPA) as “the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.”

→ We can see from this definition that accounting involves these elements

Accounting is an art as it helps in finding the financial results
It is a process that identifies, classifies and summarises the financial events that take place within an organisation
A reporting system that communicates relevant financial information

→ Branches of accounting
Financial accounting refers to accounting for revenues, expenses, assets, and liabilities. It involves the basic accounting processes of recording, classifying, and summarizing transactions, preparing balance sheet, profit and loss account.

Cost accounting is the branch of accounting dealing with the recording, classification, allocation, and reporting of current and prospective costs. It helps in determining the cost of production.

Managerial accounting is the branch of accounting designed to provide information to management for the purpose of enhancing controls.

→ Functions of accounting

The primary function of accounting relates to recording, classification and summary of financial transactions. The sole purpose is to prepare financial statements for reporting.
Auditing is compulsory in case of registered firms. Auditing is not possible without accounting. Thus accounting becomes compulsory to comply with legal requirements
To provide managers with information for decision making. Decision making programme is greatly assisted by accounting as with the help of accounting we can compare day to day operations with the predefined profit.
Accounting helps to find if there is any misuse of the money or assets of the firm.
Real position of the firm can be ascertained with the help of accounting. Here are many parties-owners, creditors, government, employees etc., who are interested in knowing the results of the firm and this can be communicated only through accounting. The accounting shows a real and true position of the firm or the business.
To provide information for stakeholders about financial performance and viability

→ Advantages of accounting

It records all the financial business transactions in a systematic manner which helps in comparison of financial results- comparison of its own results of different years- comparison of financial results with other firms in the industry.
Once established, less time consuming than manual systems.
Enables Balance Sheet tracking.
It is the true test of performance.
It is good for legal purpose as tax authorities rely on the figures shown by accounting.
It is used for valuation of business.

→ Disadvantages of accounting

There can be human error.
Accounting records are based on estimates.
Requires a knowledge of general accounting procedures to be fully utilized
Fixed assets are recorded at original cost.
Accounting information may be biased.
Money as a measurement unit keeps changing

→ Bookkeeping
Bookkeeping is the recording, on a day-today basis of the financial transactions and information pertaining to a business. It is concerned with ensuring that records of those individual financial transactions are accurate, up-to-date and comprehensive. It is a small part of accounting. It is mainly concerned with recording of financial data which includes receipts, payments, purchases, sales, expenditure.

Difference between book keeping and accounting.

	Accounting	Book keeping
Definition	Preparation of accounting records.	Recording daily activities of revenue and expenditure.
Purpose	Measuring, preparation, analyzing, and interpretation of financial statements from the data provided by book keeping records	Keeping an account of all receipts, revenues, expenditure in order to create accounting ledgers.
Goal	To see how the company is performing, to monitor day to day accounting operations, and for taxing.	the process of accumulating, organizing, storing, and accessing the financial information
Tools	Balance sheets, profit and loss ledgers, positional declarations, and cash flow statements.	Supplier ledger, customer ledger and general ledger and cash book.

→ Systems of Accounting
Cash system of accounting:
→ Under the cash accounting method, a company records customer receipts in the period that they are received, and expenses in the period in which they are paid.

→ In this kind of accounting system entries are made when cash is received. It will not treat any revenue or sale unless cash is received against it. Thus even if the entry belongs to last year it is shown in the books only when cash is received. Such kind of accounting system does not show a true or fair picture of the organization. Cash accounting is recognizing the income and expenses in your business when they are physically paid rather than on receipt or issue of an invoice. Many business owners like small firm, professionals like doctors, lawyers etc. when starting out often use a simple, basic cash system, because it helps to keep track of cash flow.

→ Accrual system of Accounting
With the accrual method, income and expenses are recorded as they occur, regardless of whether or not cash has actually changed hands. In this type of system cost and revenue are matched on the basis of relevant time period. It is also known as mercantile system of accounting. Further if any cost has lost its utility then it is written off. An excellent example is a sale on credit. The sale is entered into the books when the invoice is generated rather than when the cash is collected. Likewise, an expense occurs when materials are ordered or when a workday has been logged in by an employee, not when the check is actually written. Almost every company uses the accrual accounting method, since it provides the most accurate representation of the company’s financial state.

→ Accounting information – Accounts are the basic language of a company. It helps to understand the organization financial condition. Users of accounting information are

→ Users of accounting information within the organization – They are owners, board of directors , employees . The owners, the Board of Directors and the employees are interested in the information about their entity’s stability and profitability to support their future decisions. The owners and the Board of Directors are particularly interested in the entity’s ability to generate profit, while the employees are interested in the entity’s ability to provide remuneration, pensions and other benefits, as well as career opportunities.

→ Users of accounting information outside the organization – They are investors, creditors, suppliers, banks, customers, the public and state institutions and other authorities. The current or potential investors are interested in the risk-benefit relationship in order to make decisions regarding the purchase, sale or retention of stocks. The financial creditors are interested in the information related to the entity’s reimbursement ability. Suppliers and other trade creditors are interested in the entity’s solvency. Customers are interested in the information related to the continuity of the entity’s activity to make decisions about: the long-term collaboration. The state institutions and other authorities need a wide range of information to regulate the entities. Banks would like to get assured that they will be paid back in time in case any loans given.

→ Key characteristics of accounting information

Understandability: The accounting information should be in such a way that it will be understandable to users – who are generally assumed to have a reasonable knowledge of business and economic activities.

Relevance: Accounting information should relate to a specific time period or contain information regarding individual business functions.

Consistency: A particularly important characteristic is for the accountant to record information using a consistent application of accounting standards, and to present aggregated results in the same way, period after period.

Comparability: A characteristic feature is the ability for users to be able to compare similar companies in the same industry group and to make comparisons of performance over time. Much of the work that goes into setting accounting standards is based around the need for comparability.

Reliability: This implies that the accounting information that is presented is truthful, accurate, complete There should be an accounting system in place that is comprehensive enough to be able to routinely collect, record, and aggregate all transactions, so that users of the accounting information are assured that they are reading about the complete results of a business. This also means that there are no “surprises” that appear as retroactive adjustments to the financial statements.

Timely: The information is to be timely so that it can be used in decision making a delayed information is of no use

Objectivity: This implies that accounting information is prepared and reported in a “neutral” way. In other words, it is not biased towards a particular user group or vested interest.

→ Role of accountant
Accountants have a vital role to play in commercial success, by using their increasingly valuable knowledge in a way which gives their organizations or clients a competitive advantage. The role of accountant can be enumerated as

An accountant keeps a systematic record of all the financial transactions of company
Every limited company is required to appoint an auditor who is required to do auditing . Auditing is actually inspecting the accounting data to see the accuracy of the accounting statements.

→ Auditing is of two types
1. Internal audit – It is generally done in large organization where company audits its records so as to keep a proper control. Generally professionally qualified people heads this department.

2. Statutory audit – As per Companies Act every company is required to-get its account audited by a qualified chartered accountant

He can present himself before tax authorities. As he has knowledge about this , he is in a better position to assist his client
Accountant also acts as an adviser and financial interpreter, who may present the company’s financial data to people within and outside of the business
Another important role is in budgeting. Budgeting means to plan business activities before they occur. Thus in the end when all the business activities and transactions have been completed, actual can be compared with projected. Being a qualified person he is the best person for doing this.
As analysts, accountants may perform certain types of analysis using financial data that is used to assist in making business decisions
They prepare financial reports for directors and other employees of the organization
Accountants also perform duties such as share registration work, settling the disputes etc.

→ Accounting principles
Accounting follows a certain framework of core principles which makes the information generated through an accounting system valuable. Without these core principles accounting would be irrelevant and unreliable. These principles are

→ Accrual Concept
Business transactions are recorded when they occur and not when the related payments are received or made. This concept is called accrual basis of accounting and it is fundamental to the usefulness of financial accounting information.

Example: A business records its utility bills as soon as it receives them and not when they are paid, because the service has already been used. The company ignored the date when the payment will be made.

→ Going Concern Concept
Financial statements are prepared assuming that a business entity will continue to operate in the foreseeable future. The intention on the part of management is not to liquidate the entity or to significantly curtail its operational activities. It is because of this concept that fixed assets are valued cost minus depreciated value. The status of going concern is important because if the company is a going concern it has to follow the generally accepted accounting standards. If the principle of going concern is not valid then the organization must clearly say it in its financial statements.

→ Business Entity Concept
In accounting business organization and owners are two different identity. Thus business has its own existence separate from owners, creditors etc. This concept is called business entity concept. It means that personal transactions of owners are treated separately from those of the business. Therefore any personal expenses incurred by owners of a business will not appear in the income statement of the entity. Similarly, if any personal expenses of the owners are paid out of assets of the entity, it would be considered to be drawings for the purpose of accounting much in the same way as cash drawings.

→ Monetary Unit Assumption
In accounting we can communicate only those business transactions and other events which can be expressed in monetary units. This is called monetary unit assumption. Non monetary events like death, dispute etc. may have a great influence on the organization but these factors will not form the part of accounts as they can be calculated on monetary basis.

→ Accounting period concept
Although businesses intend to continue in long-term, it is always helpful to account for their performance and position based on certain time periods because it provides timely feedback and helps in making timely decisions. This time period is called accounting period and is generally of twelve months.

→ Revenue match concept
In an accounting period it is necessary that revenue of that period match with the expenses of that period. Thus according to this concept adjustments should be made for all the outstanding expenses, accrued income etc.

→ Realisation concept
Realisation concept in accounting, also known as revenue recognition principle. In case of sale of goods, revenue must be recognized when the seller transfers the risks and has imposed a legal obligation for the money. This is generally deemed to occur when the goods are actually transferred to the buyer. Where goods are sold on credit terms, revenue is recognized along with a corresponding receivable which is subsequently settled upon the receipt of the due amount from the customer.

→ Dual concept
It is based on the double entry book keeping. Thus one entry consists of debit to one or more accounts and another entry consists of credit to some other account. Thus at any point of time total assets should be equal to total liabilities.

→ Cost concept
Cost is the value of a resource given up or a liability incurred to acquire an asset/service at the time when the resource was given up or the liability incurred.

→ Accounting convention
An accounting convention is not a legally-binding practice; rather, it is a generally-accepted convention based on customs, and is designed to help accountants overcome practical problems that arise out of the preparation of financial statements. Different accounting conventions are

→ Materiality
According to this convention accountant should report only what is material and relevant. An item may be material for one purpose and immaterial for other thus preparation of accounts involves a high degree of judgment. Where decisions are required about the appropriateness of a particular accounting judgment, the “materiality” convention suggests that this should only be an issue if the judgment is “significant” or “material” to a user of the accounts. The concept of “materiality” is an important issue for auditors of financial accounts.

→ Consistency
The convention of consistency means that same accounting principles should be used for preparing financial statements year after year. A meaningful conclusion can be drawn from financial statements of the same enterprise when there is comparison between them over a period of time. But this can be possible only when accounting policies and practices followed by the enterprise are uniform and consistent over a period of time.

→ Disclosure
It implies that accounts should be prepared in such a way that all material information is clearly disclosed to the reader. The term disclosure does not imply that all information that any one could desire is to be included in accounting statements. The term only implies that there is to a sufficient disclosure of information which is of material in trust to proprietors, present and potential creditors and investors.

→ Conservatism
This convention ensures that uncertainties and risks inherent in business transactions should be given a proper consideration. As per this convention the accountants follow the rule ‘anticipate no profit but provide for all possible losses’.

→ Difference between accounting concept and conventions
Accounting Concepts are the necessary assumptions, conditions or postulates upon which the accounting is based. They are developed to help in the preparation of accounting statements so that the financial information provided to all the readers is such that all.

→ Readers interpret the statements in the same meaning and context. Example entity concept, dual entry concept etc. Accounting conventions are the customs or traditions guiding the preparation of accounts. They are adopted to make financial statements clear and meaningful. Example : Convention of Disclosure, Convention of Materiality etc

→ Accounting standard: These are a set of rules that are to be followed while preparing financial statements. These rules are not rigid and have to be applied with due care in response to circumstances. These accounting standards are formulated by Accounting Standards Board of Institute of Chartered Accountants of India

→ Accounting policies: These are the specific policies and procedures used by a company to prepare its financial statements.

→ Classification of Accounts
All accounts may be grouped in two broad categories or classifications. These are personal and impersonal.
Personal Accounts: These are the accounts that have the names of debtors (customers) or creditors (suppliers), banks. They are therefore personal to this extent.

→ These accounts are of 3 types
(a) natural personal accounts
(b) artificial personal accounts
(c) representative personal account
Examples – Individuals, Partnership firms, corporate entities , Non- Profit Organizations

→ Impersonal Accounts:
These non-personal accounts may be divided into Real Accounts and Nominal Accounts.

→ Real Accounts – These accounts are tangible in nature and represent accounts that records possession such as machinery, furniture, premises and stock.
These accounts are of two types
(a) tangible real accounts – examples furniture and fixtures , plant and machinery
(b) intangible real accounts – example Goodwill, Patents and copyrights , cash accounts

→ Nominal Accounts – These accounts are intangible in nature and represent accounts that in which expenses, revenues and capital are recorded. Examples are sales , purchase, electricity , expenses, salary

→ Rules of Entry for general Accounts
An account is divided into two sides, a left side called the debit side and a right side called the credit side. The title of the account is written in the center at the top of each account.

→ Double entry: In the double entry system, transactions are recorded in terms of debits and credits. Since a debit in one account will be offset by a credit in another account, the sum of all debits must therefore be exactly equal to the sum of all credits. The double-entry system of bookkeeping or accounting makes it easier to accurately prepare financial statements directly from the books of account and detect errors. For example For example, when a company borrows money from its bank, the company’s Cash account will increase and its liability account Loans Payable will increase.

→ Rules of debit and credit: The source account for the transaction is credited (an entry is made on the right side of the account’s ledger) and the destination account is debited (an entry is made on the left). Each transaction’s debit entries must equal its credit entries.

→ In financial accounting or bookkeeping, “Dr” (Debit) indicates the left side of a ledger account and “Cr” (Credit) indicates the right.

→ When recording entries, debits are always listed first. In the general journal, where double-entry accounting is being used, debits are the first entry. The debited account is listed on the first line with the amount in the left-side of the register. The credited account is listed on the second line, usually indented and the credited amount is recorded on the right-side of the register.

→ Rules of Debit and Credit based on the types of Account: Under double entry system an account is classified into three types. They are
A. personal account,
B. real account and
C. nominal account,
there are three separate rules of debiting and crediting the financial transactions. The rules of debit and credit under different types of account are as follows:

A. Personal Account: Personal account is a account of a person. A person can be a natural person such as people like us, an artificial person such as firms, organizations and institutions and a representative person such as debtors and creditors. Since a person, be it a natural, artificial or representative, can be the receiver of benefits or giver of benefits, the rule of debiting and crediting the account of the person is as follows :

Debit the receiver of benefits.
Credit the giver of benefits.

This rule states that whenever a person receives benefits is debited by the amount of the benefit received. On the contrary, whenever the person gives the benefits is credited by the amount of benefits given. For example, if cash is paid to Anand (Anand is a natural person), his account (Anand’s account) is debited since he is the receiver of the benefit (cash). If cash is received from ABC Enterprises (ABC Enterprises is an artificial person), its account (ABC Enterprises account) is credited because it is the giver of benefits (cash).

B. Real Account: Real account is an record of an asset. An asset can be current asset such as cash, a fixed asset such as building and intangible asset such as goodwill. Since an asset, is a current, fixed or an intangible asset, can either come in the business through its purchase or go out of the business through its sales, the rule of debiting and crediting the real (asset) account is as follows:

Debit what comes in
Credit what goes out

This rule states that whenever some benefit in the form of asset come into the business through its purchase, its (asset) account is debited. Conversely, whenever some benefit in the form of asset goes out of the business through its sales, its (asset) account is credited. For example, if cash is invested in the business, cash (current asset) account is debited by the amount of cash. If furniture is purchased for cash, furniture (fixed asset) account is debited because it comes into and cash (current asset) account is credited because it goes out from the business in exchange for furniture.

C. Nominal account: Nominal account is a record of expense or loss or income or gain. An expense or loss is the sacrifice of benefits in exchange for service used and an income or gain is the benefit earned in exchange for service rendered. Since the business makes expenses and earns incomes, the rule of debiting and crediting the expense and income (nominal) account is as follows:

Debit all expenses and losses
Credit all incomes and gains

This rule states that whenever some benefit is sacrificed in exchange for service used ( expense made or loss suffered), its (expense) account is debited. On other hand, whenever some benefit is earned in exchange for service rendered, its (income or gain) account is credited. For example, when salary is paid, an expense is made by the business, therefore salary account is debited. On the other hand, when interest is received, an income is earned by the business, hence, interest received account is credited.

→ Rules of Debit and Credit Based on the Accounting Equation: Accounting equation is a statement of equality between the three basic elements of accounting. They are assets, capital and liabilities. Each and every financial transaction affects the three basic elements. However, the total of all assets is always equal to the total of capital and liabilities at any point in time.

Theoretical Framework MCQ Questions – CS Foundation Fundamentals of Accounting and Auditing

Question 1.
Accounting is
a. Recording of data accounting?
b. Recording of financial data
c. Recording of Strategically data
d. None of the above
Answer:
a. Recording of data accounting?

Question 2.
Financial statements are
a. Financial records which make the statements
b. Financial records analyzed and put in a statement form so as to be used by an enterprise.
c. Transactions of the business.
d. None of the above
Answer:
b. Financial records analyzed and put in a statement form so as to be used by an enterprise.

Question 3.
The branch of accounts that deals with the calculation of unit cost of services is called.
a. Cost Accounting
b. Management accounting
c. Financial Accounting
d. All of the above
Answer:
a. Cost Accounting

Question 4.
The net profit or loss for a particular period of time is reported on the
a. Income Statement
b. Balance Sheet
c. trial Balance
d. Statement of Changes In Owner’s Equity
Answer:
a. Income Statement

Question 5.
Financial Accounting deals with.
a. Trial balance
b. Profit & loss account
c. Financial data
d. Both a & B
Answer:
d. Both a & B

Question 6.
Which of the following is NOT the function of
a. Creating the liabilities of an organization
b. Keeping systematic accounting
c. Preparation of balance sheet
d. All of the above
Answer:
a. Creating the liabilities of an organization

Question 7.
Accounting makes
a. Decision making for the management easy as financial results can be compared.
b. The records being put is a systematic pattern so that any point of time they can be used.
c. The financial information being stored in a meaningful way for taxation purpose
d. All of the above
Answer:
d. All of the above

Question 8.
Fixed assets are recorded at
a. Current cost
b. Original cost
c. Depreciated cost
d. All of the above
Answer:
b. Original cost

Question 9.
Accounting gives the true picture of the organization’s financial position.
a. True
b. False
c. Irrelevant
d. Partiality false
Answer:
d. Partiality false

Question 10.
Sometimes the accounting information is
a. Biased
b. Based on estimates
c. Based on current replacement cost
d. Both a & b
Answer:
d. Both a & b

Question 11.
An asset posses which of the following?
a. Future economic benefits for the business
b. All kind of benefits for the business
c. Expenses for the business
d. Merits and Demerits for the business
Answer:
a. Future economic benefits for the business

Question 12.
The limitation of accounting records is
a. Events can be expressed in the accounts
b. Non monetary items can be shown in accounting statements
c. Non monetary items can not be shown in accounting statements
d. Monetary items can be shown in accounting statements
Answer:
c. Non monetary items can not be shown in accounting statements

Question 13.
Accounting information is dependent on the
a. Person who is making it
b. Data that has been taken
c. Both a & b
d. None of the above
Answer:
c. Both a & b

Question 14.
Book keeping is
a. Science
b. Art
c. Both a & b
d. Literature
Answer:
c. Both a & b

Question 15.
Features of book keeping one.
a. Mechanical recording
b. Repetitive recording
c. Record keeping of all money transactions
d. All of the above
Answer:
d. All of the above

Question 16.
Book keeping is meant to show all the transactions
a. of the whole year
b. of the accounting period
c. of half year
d. all of the above
Answer:
b. of the accounting period

Question 17.
What is done as per the basic concepts of accounts?
a. Book keeping
b. Accounting
c. Preparation of balance sheet
d. None of the above
Answer:
a. Book keeping

Question 18.
Which is NOT a part of financial statements?
a. Balance sheet
b. Book keeping
c. Debit & Credit
d. All of the above
Answer:
b. Book keeping

Question 19.
Which does not appear in a purchases ledger control account?
a. bad debts
b. discount received
c. goods returned to creditors
d. interest charged by supplier
Answer:
a. bad debts

Question 20.
In cash accounting system
a. Revenues of assets are shown only when cash is received irrespective of the period
b. Revenues of assets are shown only of the cash received for the transactions of the financial year
c. Revenues of assets are shown only of the cash received for the current year.
d. None of the above
Answer:
a. Revenues of assets are shown only when cash is received irrespective of the period

Question 21.
In determing the income of ______________ people use receipts and expenditure account.
a. Doctors
b. Lawyers
c. Company secretary
d. All of the above
Answer:
d. All of the above

Question 22.
While preparing receipts and expenditure account
a. Outstanding expenses are to be taken care of
b. Only current expenses are to be taken care of
c. Outstanding income is to be taken care of
d. Outstanding expenses are not to be taken care of
Answer:
a. Outstanding expenses are to be taken care of

Question 23.
The other name of merchantile system of accounting is.
a. Cash system of accounting
b. Receipts & expenditure accounts
c. Accrual system of accounting
d. Whole of the above
Answer:
c. Accrual system of accounting

Question 24.
Which accounting system best reflect the time picture of organization?
a. Accrual system of accounting
b. Cash system of accounting
c. Receipts & expenditure accounts
d. All of the above
Answer:
a. Accrual system of accounting

Question 25.
Which of the following should be the first action when making a prime entry for a transaction?
a. Study the voucher to identify the nature of the transaction
b. Post the transactions to the appropriate Ledger accounts
c. Decide on the Ledger account to be debited and the one to be credited
d. Enter the transaction in the appropriate book of prime entry
Answer:
a. Study the voucher to identify the nature of the transaction

Question 26.
As per the accrual system of accounting loss is
a. Cost that can not generate any revenues in future
b. Cash which has not been charged.
c. Cost which has lost its utility
d. Both a & c
Answer:
d. Both a & c

Question 27.
In accrual system of accounting
a. Revenues are taken care of irrespective whether cash in received on not
b. Cost incurred during the period is taken care of
c. Both a & b
d. Cost of last financial period is only taken care of
Answer:
c. Both a & b

Question 28.
Most appropriate way of defining accounting will be
a. Communicating the revenues
b. Communicating the losses of the organization
c. Collection of all the financial data
d. Communicating the financial position of an organization
Answer:
d. Communicating the financial position of an organization

Question 29.
Accounting information is being used by
a. Customer
b. Researchers
c. Both a & b
d. None of the above
Answer:
c. Both a & b

Question 30.
Which amongst is NOT the work of accountant
a. Statutory audit
b. Internal audit
c. Secretarial auditor
d. All of the above
Answer:
c. Secretarial auditor

Question 31.
Internal audit is
a. Of the staff of the company by its own staff
b. To check whether the instructions of the management are being followed ‘
c. Audit done by chartered accountant to show time and fair position of the company as per accounting principles
d. Both a & b
Answer:
d. Both a & b

Question 32.
Which is NOT the work of an accountant _____________?
a. Representing before the tax authorities
b. Working as an arbitrator
c. Planning & controlling the organization
d. Working as liquidation
Answer:
c. Planning & controlling the organization

Question 33.
Capital is
a. Liability to outsiders
b. Liability to owners
c. Assets of outsiders
d. Assets of owners
Answer:
b. Liability to owners

Question 34.
Recording 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
Answer:
b. decrease an asset, decrease a liability

Question 35.
The basic sequence in the accounting process can best be described as:
a. assets less liabilities equal capital
b. assets plus liabilities equals capital
c. assets plus capital equals liabilities
d. none of the above
Answer:
a. assets less liabilities equal capital

Question 36.
The characteristic feature of dual aspect concept of accounting is
a. The total amount debited is always equal to total amount credited
b. All the transactions are settled in cash
c. Cost of the various asset is taken on the basis of actual amount spent on it
d. None of the above
Answer:
a. The total amount debited is always equal to total amount credited

Question 37.
Convention means
a. Practices followed by accountants
b. Assets and liabilities together form convention
c. It is a treaty signed by all the accounting forms all over the countries
d. All of the above
Answer:
a. Practices followed by accountants

Question 38.
The objective of accounting standard is to
a. Bring uniformity in financial reporting
b. Ensure consistency and comparability of data with earlier years on with similar organizations
c. Both a & b
d. Establishment of law
Answer:
c. Both a & b

Question 39.
Interest outstanding will come under
a. Natural personal accounts
b. Artificial personal accounts
c. Representative personal accounts
d. Real accounts personal accounts
Answer:
c. Representative personal accounts

Question 40.
Trademark is classified in ____________ type of account
a. Real accounts
b. Personal accounts
c. Nominal accounts
d. Tangible real accounts
Answer:
a. Real accounts

Question 41.
A company sells goods on credit valued at Rs25000 to a customer. At what point in the sales cycle should this sale be recognized in the accounts?
a. When the customer’s order is received.
b. When the goods are ready for dispatch to the customer.
c. When the goods are sent, accepted and invoiced.
d. When the customer pays.
Answer:

Question 42.
The recording of financial transactions and events manually or electronically is called
a. Bookkeeping
b. information technology
c. Reporting
d. Auditing
Answer:
c. Reporting

Question 43.
Which best describes, the assets of a business?
a. items that should turn into cash in the near future
b. cash invested by the owner of the business
c. items bought for long term use by the business
d. items owing to or owned by the business
Answer:
a. items that should turn into cash in the near future

Question 44.
Which is recorded in the purchases ledger?
a. cash paid to a creditor
b. cash purchases
c. cheque received from a debtor
d. purchase of fixed assets
Answer:
d. purchase of fixed assets

Question 45.
Which document is issued by a supplier when a customer returns goods?
a. credit note
b. debit note
c. invoice
d. statement
Answer:
a. credit note

Question 46.
Accounting is
a. Art
b. Science
c. Literature
d. Money
Answer:
a. Art

Question 47.
Which of the following is a liability?
a. Motor Vehicles
b. Creditors for goods
c. Cash at Bank
d. Machinery
Answer:
b. Creditors for goods

Question 48.
Which ledger entries record the purchase of a machine bought on credit?
a. debit creditors, credit machinery
b. debit creditors, credit purchases
c. debit machinery, credit creditors
d. debit purchases, credit creditors
Answer:
c. debit machinery, credit creditors

Question 49.
Which will appear in income statement?
a. bank account
b. bank charges
c. bank loan
d. bank overdraft
Answer:
b. bank charges

Question 50.
Which book of prime entry is also a ledger account?
a. cash book
b. journal
c. purchases journal
d. sales journal
Answer:
a. cash book

Question 51.
In the audit of historical financial statements by audit firms, the criteria used are
a. regulations of the Indian Revenue Agency.
b. generally accepted auditing standards.
c. generally accepted accounting principles.
d. regulations of the provincial securities commissions
Answer:
b. generally accepted auditing standards.

Question 52.
What type of organizations use auditing services?
a. Non-for-profit organizations
b. Businesses
c. Governments
d. All of the above
Answer:
d. All of the above

Question 53.
The financial position of the business on a given date is reported on the
a. Income Statement
b. Balance Sheet
c. Statement of Changes In Owner’s Equity
d. Statement of Flows
Answer:
b. Balance Sheet

Question 54.
The purchase of supplies for cash will result in an
a. increase in cash and a decrease in capital
b. increase in cash and an increase in supplies
c. increase in supplies and a decrease in cash
d. increase in equipment and an increase in capital
Answer:
c. increase in supplies and a decrease in cash

Question 55.
Keeping the records of the business separate from the personal records of the owner of the business is said to be adherence to which accounting principle or concept?
a. Continuing-concern concept
b. Business entity principle
c. Realization principle
d. Objectivity principle
Answer:
b. Business entity principle

Question 56.
Which of the following is a formal written promise to pay a definite sum of money on demand or at a fixed or determinable future date?
a. Account payable
b. Account receivable
c. accounts payable
d. Prepaid insurance policy
Answer:
c. accounts payable

Question 57.
Which of the following statements is true?
a. a salary paid to a partner is an expense to the partnership
b. a salary paid to a proprietor is an expense to the proprietorship
c. a salary paid to a shareholder is an expense of the corporation
d. the business entity principle does not apply to corporations
Answer:
c. a salary paid to a shareholder is an expense of the corporation

Question 58.
Which of the following can be considered as the most important phase of accounting primary objective of financial accounting?
a. Identifying transactions
b. Preparing “T Accounts”
c. Preparing financial statements
d. Preparing trial balances
Answer:
c. Preparing financial statements

Question 59.
Which one of the following errors would cause a company’s unadjusted trial balance to be out of balance?
a. Overstating an asset balance by Rs 100 and a revenue balance by the same amount
b. Failure to post the debit portion of a journal entry to the proper account (recorded, for example, in a revenue rather than an expense account)
c. Recording a revenue transaction by crediting the accounts receivable account and debiting the revenue account
d. Recording the amount collected from a customer as a debit to the cash account and a debit to the accounts receivable account
Answer:
d. Recording the amount collected from a customer as a debit to the cash account and a debit to the accounts receivable account

Question 60.
The gross decreases in economic benefits for the business are what?
a. Expenses
b. Obligations
c. Creditors
d. Income or gain
Answer:
a. Expenses

Question 61.
If during the accounting period the assets increased by Rs 7,000, and the owner’s equity decreased by Rs 3,000, then the liabilities must have
a. increased by Rs 10,000
b. increased by Rs 4,000
c. decreased by Rs 4,000
d. decreased by Rs10,000
Answer:
a. increased by Rs 10,000

Question 62.
Sitara Textile is using the prudence concept to record the profit in its income statement. According to prudence concept, Sitara Textile will record profit when it is:
a. Expected
b. Realized
c. Material
d. Received
Answer:
b. Realized

Question 63.
Double entry book-keeping was fathered by
a. F.W. Taylor
b. Henry Fayol
c. Lucas Paciol
d. None of the above
Answer:
c. Lucas Paciol

Question 64.
Which of the following is not an asset?
a. Buildings
b. Loan from a partner
c. Cash balance
d. Debtors
Answer:
b. Loan from a partner

Question 65.
Which of the following should not be called ‘Sales’?
a. Office fixtures sold
b. Goods sold for cash
c. Goods sold on credit
d. Sale of item previously included in ‘Purchases’
Answer:
a. Office fixtures sold

Question 66.
Which of the following is correct?
a. Capital can only come from profit
b. Profit increases capital
c. Profit does not alter capital
d. Profit reduces capital
Answer:
b. Profit increases capital

Question 67.
Common balance sheet format is:
a. The Account Form which lists assets on the right, and liabilities and equity on the left
b. The Report Form which lists assets on the bottom, and liabilities equity on the top
c. The Account Form which lists assets and liabilities on the left, and equity on the right
d. The Report Form which lists liabilities and equity on the bottom, and assets on the top
Answer:
d. The Report Form which lists liabilities and equity on the bottom, and assets on the top

Question 68.
Which of the following item is found in a Journal entry?
1. Date of each transaction
2. Rupee amount of each debit and credit
3. Explanation of each transaction
a. 1 only
b. 1 & 2 only.
c. 2 & 3 only.
d. All of the above
Answer:
d. All of the above

Question 69.
Business is treated as a separate entity accounts for
a. Role trader
b. Partnership
c. Company
d. All of the above
Answer:
d. All of the above

Question 70.
Which of the following statements is correct?
a. Accounting profit is the difference between cash receipts and cash paid in a period.
b. Accounting profit is the total of cash sales in the year less the expenses for the period.
c. Accounting profit is the difference between revenue income and expenses for the period.
d. Accounting profit is the difference between revenue income and cash payments for the period.
Answer:
c. Accounting profit is the difference between revenue income and expenses for the period.

Question 71.
From which of the following events the liability arises?
a. Present event
b. Future event
c. Past event
d. None of them
Answer:
c. Past event

Question 72.
Which of the following statements correct in relation to a trial balance?
a. It shows the financial position of a business.
b. All the balances in the trial balance will be summarized on the business balance sheet.
c. It is a list of balances and forms the starting point for the preparation of the business accounts.
d. It is part of the published accounts of a business.
Answer:
c. It is a list of balances and forms the starting point for the preparation of the business accounts. –

Question 73.
_____________ is the gross inflow of economic benefits
a. Assets
b. Liabilities
c. Income
d. Expenses
Answer:
c. Income

Question 74.
When a consistency is found between financial statements cf c, ,e entity from period to period
a. Conventions of conservatism
b. Conventions of materiality
c. Conventions of disclosure
d. Conventions of horizontal consistency
Answer:
d. Conventions of horizontal consistency

Question 75.
Which of the following are accounting conventions?
a. Double entry
b. Accounting equation
c. Both a & b
d. None of the above
Answer:
c. Both a & b

Question 76.
In which of the following should an auditor’s report refer to the lack of consistency when there is a change in accounting principle that is significant?
a. The scope paragraph.
b. The opinion paragraph.
c. An explanatory paragraph following the opinion paragraph.
d. An explanatory paragraph before the opinion paragraph.
Answer:
c. An explanatory paragraph following the opinion paragraph.

Question 77.
______________ is the first phase of accounting cycle.
a. Identifying an economic event or transaction
b. Preparing journals
c. Posting entries to ledger accounts
d. Making decisions about business
Answer:
a. Identifying an economic event or transaction

Question 78.
Financial statements differ from management account because
a. The are mainly prepared for external users of financial information
b. They are more complex and hard to prepare
c. The are the summary of accounting data
d. The are prepared on basis of actual concept
Answer:
a. The are mainly prepared for external users of financial information

Question 79.
______________ is a separate legal structure where total
capital can be divided in many shares
a. Partnership
b. Sole proprietorship
c. Company
d. Non-profit organization
Answer:
c. Company

Question 80.
Which of the following is liability?
a. Resources
b. Obligations
c. Future benefits
d. Expenses
Answer:
b. Obligations

Question 81.
It is important for the auditor to be independent because
a. The audit conclusions cannot be relied upon if th4 auditor was biased in accumulating and evaluating evidence.
b. The auditor would not charge a fair rate to the client.
c. The auditor might not be as knowledgeable of the subject matter and the criteria.
d. The Indian Tax Authorities require that the auditor be independent.
Answer:
d. The Indian Tax Authorities require that the auditor be independent.

Question 82.
An asset must be ______________ by the business to be shown as an asset in its “balance sheet”
a. Possessed
b. Owned
c. Controlled
d. Used
Answer:
c. Controlled

Question 83.
Inclusion of personal expenses of using car in the business expenses would violate the concept:—
a. Separate business entity
b. Consistency
c. Going concern
d. Dual aspect
Answer:
a. Separate business entity

Hint:
In accounting business organization and owners are two different identity. Thus business has its own existence separate from owners, creditors etc. This concept is called business entity concept. It means that personal transactions of owners are treated separately from those of the business. Therefore any personal expenses incurred by owners of a business will not appear in the income statement of the entity.

Question 84.
“Assets should be valued at the price paid to acquire them” is based on-
a. Accrual concept
b. Cost concept
c. Money Measurement concept
d. Matching concept
Answer:
b. Cost concept

Hint:
Cost concept – cost is the value of a resource given up or a liability incurred to acquire an asset/service at the time when the resource was given up or the liability incurred.

Question 85.
A businessman purchases goods worth Rs. 25,00,000 and sold 80% of such goods during the accounting year ending on 31st March, 2011. The market value of the remaining goods was Rs. 7,50,000. He valued the closing stock @ Rs. 5,00,000 and not at Rs. 7,50,000 due to-
a. Money Measurement concept
b. Convention of conservatism
C. Cost concept
d. Accounting period concept
Answer:
b. Convention of conservatism

Hint:
Conservatism convention -This convention ensures that unceitainties and risks inherent in business transactions should be given a proper consideration. As per this convention the accountants follow the rule ‘anticipate no profit but provide for all possible losses’.
Purchase = Rs. 25,00,000; 80% of the goods have been sold.
So, cost of goods sold = Rs. 20,00,000 Stock remains at cost of Rs.5,00,000.
Since, market value of the stock left is Rs.7,50,000 which is higher than the cost of stock. So, stock is valued at Rs.5,00,000.

Question 86.
Revenue from sales of products is generally accounted in the period in which:-
a. Cash is collected
b. Sales is made
c. Products are manufactured
d. None of the above.
Answer:
b. Sales is made

Hint:
Accrual Concept:
Business transactions are recorded when they occur and not when the related payments are received or made. This concept is called accrual basis of accounting and it is fundamental to the usefulness of financial accounting information.
Thus sale of products is recorded when sales is made and not when cash is collected or when products are manufactured.

Question 87.
Which of the following is not the purpose of accounting?
a. Providing information about the assets, liabilities and capital of business entity
b. Maintaining record of business
c. Providing information about the performance of business
d. Providing details about the personal assets and liabilities of the owners of business entity.
Answer:
d. Providing details about the personal assets and liabilities of the owners of business entity.

Hint:
Functions of accounting
The primary function of accounting relates to recording, classification and summary of financial transactions. The sole purpose is to prepare financial statements for reporting.

Auditing is compulsory in case of registered firms. Auditing is not possible without accounting. Thus accounting becomes compulsory to comply with legal requirements.

To provide managers with information for decision making. Decision making programme is greatly assisted by accounting as with the help of accounting we can compare day to day operations with the predefined profit.

Accounting helps to find if there is any misuse of the money or assets of the firm.
Real position of the firm can be ascertained with the help of accounting. Here are many parties-owners, creditors, government, employees etc., who are interested in knowing the results of the firm and this can be communicated only through accounting. The accounting shows a real and true position of the firm or the business.
To provide information for stakeholders about financial performance and viability

Question 88.
Which accounting concept is applicable to record a transaction entered between owner and business?
a. Productivity
b. Going concern
c. Prudence
d. Business entity
Answer:
d. Business entity

Hint:
Business Entity Concept
In accounting business organization and owners are two different identity. Thus business has its own existence separate from owners, creditors etc. This concept is called business entity concept. It means that personal transactions of owners are treated separately from those of the business. Therefore any personal expenses incurred by owners of a business will not appear in the income statement of the entity.

Question 89.
Ashok a cloth merchant buys cloth for Rs.50,000 paying cash Rs.20,000. What is the amount of expense as per accrual concept?
a. 50,000
b. 20,000
C. 30,000
d. Nil.
Answer:
a. 50,000

Hint:
Accrual Concept:
Business transactions are recorded when they occur and not when the related payments are received or made.
So, here amount of expenses is Rs.50,000 and not Rs.20,000.

Question 90.
Which of the following is an accepted method of accounting?
a. Cash Accounting
b. Accrual or Mercantile Accounting
c. Both Accrual Accounting and Cash Accounting
d. None of the above
Answer:
b. Accrual or Mercantile Accounting

Hint:
Accrual system of Accounting
With the accrual method, income and expenses are recorded as they occur, regardless of whether or not cash has actually changed hands. In this type of system cost and revenue are matched on the basis of relevant time period. It is also known as merchantile system of accounting . Further if any cost has lost its utility then it is written off.

Almost every company uses the accrual accounting method, since it provides the most accurate representation of the company’s financial state.

Question 91.
Accounting transactions are recorded in terms of
a. Money
b. Purpose
c. Characteristics
d. None of the above.
Answer:
a. Money

Hint:
Monetary Unit Assumption:
In accounting we can communicate only those business transactions and other events which can be expressed in monetary units. This is called monetary unit assumption. Non monetary events like death, dispute etc. may have a great influence on the organization but these factors will not form the part of accounts as they can be calculated on monetary basis.

Question 92.
A businessman purchased goods for Rs. 25,00,000 and sold 70% of such goods during the accounting year ended on 31 st March, 2013. The market value of the remaining goods was Rs.5,00,000. He valued the closing stock at Rs.5,00,000 and not at Rs.7,50,000 due to:
a. Money measurement concept
b. Conservatism concept
c. Cost concept
d. Periodicity concept.
Answer:
b. Conservatism concept

Hint:
Conservatism convention -This convention ensures that uncertainties and risks inherent in business transactions should be given a proper consideration. As per this convention the accountants follow the rule ‘anticipate no profit but provide for all possible losses’.
Purchase of goods = Rs 25,00,000 Goods sold ( 70%) = Rs 17,50,000 Cost of stock remaining = Rs 7,50,000 – Market value of stock = Rs 5,00,000
Since market value is less than the cost of remaining stock so as per conservatism convention value of stock is taken as Rs 5,00,000.

Question 93.
Match List I with List II and select the correct answer using the codes given below the lists.
List 1
(Types of Accounts)
X. Nominal Account
z. Personal Account

List II
Real account
(Principles)
1. Debit the receiver, credit the giver
2. Debit what comes in, credit what goes out
3. Debit all expenses, credit all gains

Correct option is:

	X	Y	Z
a.	3	2	1
b.	1	3	2
c.	2	3	1
d.	1	2	3

Answer:

	x	y	z
c.	2	3	1

Hint:
Personal Account: Debit the receiver of benefits. Credit the giver of benefits
Real Account: Debit what comes in. Credit what goes out
Nominal account: Debit all expenses and losses. Credit all incomes and gains

Question 94.
If capital at the end of the year is Rs. 7,000, capital introduced during the year is Rs. 5,000, drawings during the year are Rs. 8,000, loss incurred during the year is Rs. 10,000, then capital in the beginning would be equal to:
a. Rs. 12,000
b. Rs. 16,000
c. Rs.20,000
d. Rs.30,000.
Answer:
c. Rs.20,000

Hint:
Capital at the end of year= Rs 7000 Less – capital introduced during the year= Rs 5000 Add – Drawings made during the year = Rs 8000 Add – Loss incurred during the year = Rs 10,000 Capital at the beginning of the year = Rs 20,000

Question 95.
Which one of the following statements is correct?
a. Capital of the firm is reduced by borrowing
b. When there is no change in proprietor’s capital, it is an indication of loss in business .
c. Nominal accounts refer to false transactions
d. Real accounts relate to the assets of a business.
Answer:
d. Real accounts relate to the assets of a business.

Hint:
Real account is an record of an asset. An asset can be current asset such as cash, a fixed asset such as building and intangible asset such as goodwill.

Question 96.
A concern proposes to discontinue its business from March 2013 and decides to dispose of all its assets within a period of 4 months. The Balance Sheet as on 31st March, 2013 should indicate the assets at their:
a. Historical cost
b. Net realisable value
c. Cost less depreciation
d. Cost price or market value whichever is lower.
Answer:
b. Net realisable value

Hint:
It should indicate assets at net realizable value because the concern proposes to discontinue it business.

Question 97.
The convention of conservatism is likely to lead to an in the
a. Understatement of, liabilities
b. Overstatement of assets
c. Overstatement of capital
d. Understatement of assets.
Answer:
d. Understatement of assets.

Hint:
Conservatism convention ensures that uncertainties and risks inherent in business transactions should be given a proper consideration.
Thus it is likely to lead to an understatement of assets.

Question 98.
The rule ‘every transaction affects two or more ledger accounts’ is based or the concept of –
a. Going concern
b. Double entry system of book-keeping
c. Money measurement
d. Periodicity.
Answer:
b. Double entry system of book-keeping

Hint:
Double entry system is based ‘on scientific principles therefore, it is used by most of the business houses. This system recoqnlses the fact that every transaction has two aspects and records both aspects of each and every transaction.

Question 100.
Which of, the following is correct about ‘Accounting Concept’
a. Accounting concepts are based on accounting conventions
b. Accounting concepts are established by common accounting practices
c. Accounting concepts are methods or procedures accepted by caneral agreement
d. Personal judgement has no role in the adoption of accounting concepts.
Answer:
d. Personal judgement has no role in the adoption of accounting concepts.

Hint:
Accounting Concepts are the necessary assumptions, conditions or postulates upon which the accounting is based. They are developed to help in the preparation of accounting statements so that the financial information provided to all the readers is such that all readers .interpret the statements in the same meaning and context. Example entity concept, dual entry concept etc.
In brief we can say that personal judgement has no role in the adoption of accounting concepts.

Question 101.
Which of the following accounting equation is correct
a. Capital (Rs. 15,000) = Fixed Assets (Rs. 12,000) + Cash (Rs.4,000)
b. Trade payables (Rs.3,000) + Capital
(Rs. 17,000) + Bills Payable
(Rs.4,000) = Fixed Assets (Rs.20,000)
c. Capital (Rs. 15,000) = Cash (Rs. .3,000) + Fixed Assets (Rs. 9,000)
d. Trade payablestt 8,000) + Capital (Rs.7,000) = Fixed Assets
(Rs. 8,000) + Cash at Bank (Rs. 4,000) + Cash (Rs.3,000).
Answer:
d. Trade payablestt 8,000) + Capital (Rs.7,000) = Fixed Assets
(Rs. 8,000) + Cash at Bank (Rs. 4,000) + Cash (Rs.3,000).

Hint:
According to accounting equation Capital + Trade Liabilities = Assets (or)
Capital + Trade Liabilities = Fixed Assets + Current Assets Capital = 7,000
Assets = Assets (8,000) + Cash at Bank (4,000) + Cash (3,000) = Rs. 15,000.
Trade Payable = 8,000

Question 102.
General reserve is created on the basis of convention of –
a. Conservatism
b. Uniformity
c. Materiality
d. Full disclosure.
Answer:
a. Conservatism

Hint:
Conservatism
This convention ensures that uncertainties and risks inherent in business transactions should be given a proper consideration. As per this convention the accountants follow the rule ‘anticipate no profit but provide for all possible losses’. Examples Making provisions for Bad Debts, Making General Reserve, Valuing the stock at lower of cost or market value etc.

Question 103.
Revaluation account is a
a. Nominal account
b. Real account
c. Personal account
d. None of the above.
Answer:
a. Nominal account

Hint:
Nominal Accounts – These accounts are intangible in nature and represent accounts that in which expenses, revenues and capital are recorded. Examples are sales, purchase, electricity, expenses, salary, revaluation.
Since Revaluation a/c shows the profit or loss on revaluation, so it is a Nominal Account.

Question 104.
Atul purchased a car for Rs.5,00,000, by making a down, payment of Rs.1,00,000 and signing a Rs. 4,00,000 bill payable due in 60 days. As a result of this transaction
a. Total assets increased by Rs’5,00,000
b. Total liabilities increased by Rs.4,00,000
c. Total assets increased by Rs, 4,00,000
d. Total assets increased by Rs. 4,00,000 with a corresponding increase in liabilities by Rs. 4,00,000.
Answer:
d. Total assets increased by Rs. 4,00,000 with a corresponding increase in liabilities by Rs. 4,00,000.

Hint:
On purchase of a Car, total assets of balance sheet will be increased by Rs. 5,00,000 and on making of down payment of Rs. 1,00,000 total assets will decrease by Rs. 1,00,000. The result will be that total assets of Balance sheet will increase by Rs. 4,00,000.
On other hand a liability of Rs. 4,00,000 has been made so the liability side of Balance Sheet will be increased by Rs. 4,00,000.

Question 105.
Number of accounting standards presently issued by ICAI and notified by CG –
a. 29
b. 32
c. 31
d. 19
Answer:
a. 29

Hint:
Presently these are 32 accounting standards issued by ‘ICAI’ out of which 29 are notified by Central Government.

Question 106.
_____________ is an art of recording, classifying, summarising transactions and events which are of financial character in terms of money and interpreting the result thereof
a. Accountancy
b. Accounting
c. Book-Keeping
d. None of these.
Answer:
b. Accounting

Hint:
Accounting is defined by the American Institute of Certified Public Accountants (AICPA) as “the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.”

Question 107.
Contingent liability is shown as ____________ in Balance Sheet.
a. Liability
b. Equity Shareholders fund.
c. Footnote
d. None of the above.
Answer:
c. Footnote

Hint:
As per Schedule III of Companies Act 2013, Contingent liabilities are shown’ as footnote in the Balance Sheet.

Question 108.
Closing entry means
a. All income & expenses
b. All assets & liabilities
c. All assets
d. All liabilities
Answer:
b. All assets & liabilities

Hint:
Closing entry means all assets and liabilities are revalued and closed.

Question 109.
In which of the book cash purchase is recorded?
a. Cashbook
b. Purchase book
C. Both (a) and (b)
d. None of these.
Answer:
a. Cashbook

Hint:
Journal in which all cash receipts and payments (including bank deposits and withdrawals) are recorded first, in chronological order.

Question 110.
Which of the following is not considered as an accounting concept?
a. Conservation
b. Business Entity
C. Accrual
d. Going Concern.
Answer:
a. Conservation

Hint:
Accounting Concepts are the necessary assumptions, conditions or postulates upon which the accounting is based. They are developed to help in the preparation of accounting statements so that the financial information provided to ail the readers is such that all readers interpret the statements in the same meaning and context. Example entity concept, dual entry concept etc.
Conservatism is an accounting convention & not a concept.

Question 111.
Which convention implies that the accounting practices should remain same from one year to another year.
a. Going Concern
b. Materiality
c. Accrual
d. Consistency.
Answer:
d. Consistency.

Hint:
Consistency
The convention of consistency means that same accounting principles should be used for preparing financial statements year after year.

Question 112.
_________________ and _________________ are independent variables.
a. Asset and Liability
b. Income and Expenses
c. Both (a) and (b)
d. None of these.
Answer:
b. Income and Expenses

Hint:
An expense or loss is the-sacrifice of benefits in exchange for service used and an income or gain is the benefit earned in exchange for service rendered.
Independent variables are those variables which has no effect on each other.
The asset & liability are dependent variables while the income & expenses are independent variables.

Question 113.
Accounting Transactions are recorded in terms of:
a. Money”
b. Purpose
c. Characteristics
d. None of these.
Answer:
a. Money

Question 114.
Double Entry principle means:
a. Writing all entries twice in the book
b. Having debit for every credit and similarly, credit for every debit
c. Maintaining the double account for each business transactions.
d. Writing two times the same entry Questions from December 2014
Answer:
b. Having debit for every credit and similarly, credit for every debit

Hint:
Double entry is a principle in which there is a debit for every credit & similarly a credit for every debit.

Question 115.
Which one of the following statements is correct?
a. Capital of the: firm is reduced by borrowing
b. Nominal accounts refer to false transactions
c. When there is no change Inpropnetors capital, it is an indication of loss in business
d. Real accounts relate to the assets of a business.
Answer:
d. Real accounts relate to the assets of a business.

Hint:
Real account is an record of an asset. An asset can be current asset such as cash, a fixed asset such as building and intangible asset such as goodwill. Real account relate to the assets & liabilities of a business.

Question 116.
Which of the following statement is corrects.
a. Assets are equal to liabilities minus capital
b. Capital is equal to assets minus liabilities
c. Liabilities are equal to capital plus assets
d. Capital is equal to assets plus liabilities.
Answer:
b. Capital is equal to assets minus liabilities

Hint:
According to Accounting Equation.
Capital = Assets – Liabilities.

Question 117.
The convention of conservatism is likely to lead to an in the balance sheet.
a. Understatement of assets
b. Overstatement of assets
c. Overstatement of capital
d. Understatement of liabilities
Answer:
a. Understatement of assets

Hint:
Conservatism
This convention ensures that uncertainties and risks inherent in business transactions should be given a proper consideration. As per this convention the accountants follow the rule anticipate no profit but provide for all possible losses’. Examples Making provisions for Bad Debts, Making General Reserve, Valuing the stock at lower of cost or market value etc.
This convention understates the assets and over estimates the liabilities.

Question 118.
Mr. Ashish purchased a machinery costing Rs.3,00;000- on 1st October, 2012 Transportation and installation charges were incurred amounting to Rs.30,000 and Rs. 12,000 respectively. Dismantling charges of the old machine in place of which new machine was purchased amounted to Rs.30,000. Market value of the machine was estimated at Rs.3,60,000 on 31st March, 2013. While finalising the annual accounts Ashish values the machinery at Rs.3,60,000 in .his books. Which of the following concepts was violated by Ashish?
a. Cost Concept
b. Matching Concept
c. Realisation Concept
d. Periodicity Concept Questions from June 2015
Answer:
a. Cost Concept

Hint:
Cost concept – cost is the value of a resource given up or a liability incurred to acquire an asset/service at the time when the resource was given up or the liability incurred.
Ashish violated the cost concept. According to this concept, the value at which the various assets shall be recorded in the books shall be the historical cost or acquisition cost.

Question 119.
The provision for discount on debtors is often provided in keeping with the concept of:
a. Conservatism
b. Going Concern
c. Materiality
d. Consistency.
Answer:
b. Going Concern

Hint:
Conservatism
This convention ensures that uncertainties and risks inherent in business transactions should be given a proper consideration. As per this convention the accountants follow the rule anticipate no profit but provide for all possible losses’. Examples Making provisions for Bad Debts, Making General Reserve, Valuing the stock at lower of cost or market value etc.

Question 120.
Which of the following statements describe objectives of accounting?
(i) providing details of the personal assets and liabilities of the owner,
(ii) providing information about the assets, liabilities and capital of business entity
(iii) maintaining records of business
(iv) providing information about the performance of business entity:
a. (ii) and (iii)
b. (ii), (iii) and (iv)
c. (i), (iii) and (iv)
d. (i), (ii) and (iv).
Answer:
b. (ii), (iii) and (iv)

Hint:
Objectives of accounting:

Maintaining the accounting records
Providing accounting information to users
Ascertaining profit & loss & financial position of business