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31)
Trial balance is prepared to check accuracy of
A) Ledger accounts balances
B) Balance sheet balances
C) Income statement balances
D) Cash flow statement
balances
32) If a transaction is completely omitted from the books of accounts,
will it affect the agreement of a trial balance?
A) Yes
B) No
C) Transactions can't be omitted
33) ________ is the common base for preparing a trial balance
A) Ledger accounts B) General Journal C) Specialized journals D) Balance
sheet
34) Which of the following is true about a trial balance?
A) It lists down the balances of accounts B) It lists down the balances of a
balance sheet
C) It is a kind of financial statement
D) It is not a part of accounting
cycle
35) Debit balance = Credit balance in a trial balance indicates that
A) No error in recording transactions
B) No error in posting entries to
ledger accounts
C) Account balances are correct
D) Mathematically
Capital+Liabilities=Assets
36) Trial balance is commonly prepared
A) Frequently during the year
B) At the end of an accounting period
C) At the end of a month
D) At the end of a year
37) Which of the following will affect the agreement of a trial balance?
A) Complete omission of a transaction
B) Partial omission of a transaction
C) Error of principle
D) Compensating errors
38) If debit balances = credit balances, trial balance only shows or check
the ____________ and it does not indicate that no errors were made during
recording and posting
A) Arithmetic accuracy
B) Errors of commission
C) Omissions of economic events
D) Understatements of
balances
39) Which of the following account with normal balance is shown at the
debit side of a trial balance?
A) Rent income account
B) Creditors account
C) Unearned income account
D) Cash account
40) Which of the following account with normal balance is shown at the
credit side of a trial balance?
A) Cash account
B) Bank account C) Equipment account
D) Accrued
expenses account
41)
Which of the following is not regarded as the fundamental concept
that is identified by IAS-1
A) The going concern concept
B) The septate entity concept
C) The prudence concept
D) Correction concept
42) Using "lower of cost and net realisable value" for the purpose of
inventory valuation is the implementation of which of the following
concepts?
A) The going concern concept
B) The septate entity concept
C) The prudence concept
D) Matching concept
43) The concept of separate entity is applicable to which of following
types of businesses?
A) Sole proprietorship
B) Corporation
C) Partnership
D) All of them
44) Does Prudence concept allow a business to build substantially higher
reserves or provisions than that is actually required?
A) Yes
B) No
C) To some extent D) It depends on the
type of business
45) The revenue recognition principal dictates that all types of incomes
should be recorded or recognized when
A) Cash is received
B) At the end of accounting period
C) When they are earned
D) When interest is paid
46) The matching concept matches which of the following?
A) Asset with liabilities B) Capital with income C) Revenues with expenses D)
Expenses with capital
47) The allocation of owner's private expenses to his/her business
violates which of the following?
A) Accrual concept B) Matching concept C) Separate business entity concept
D) Consistency concept
48) The going concern concept assumes that
A) The entity continue running for foreseeable future
B) The entity continue running until the end of accounting period
C) The entity will close its operating in 10 years
D) The entity can't be liquidated
49) American companies prepare their their financial statement in
dollars whereas Japanese companies produce financial statements in
yens. Ths is an example of:
A) Stable monetary unit Concept
B) Unit of measurement Concept
C) Money value concept
D) Current swap concept
50) Which of the following is time span into which the total life of a
business is divided for the purpose of preparing financial statements?
A) Fiscal year B) Calendar year C) Accounting period
D) Accrual
period
51)
Financial statements are prepared mainly for
A) Internal users of financial information B) External users of financial
informaiton
C) Creditors of the business
D) Managers of the busienss
52) 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
53) Which of the following should be the most appropiate order of
current asset in a balance sheet?
A) cash, debtor, bank, stock
B) Bank, cash, stock, debtor
C) Stock, bank, cash, debtor
D) Cash, bank, debtor, stock
54) 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
55) Office equipment is a ________ asset for a computer manufacturer and
the same office equipment is a _________ asset for a company that deals
in these equipments
A) Current, Fixed
B) Fixed, intangible
C) Tangible, intangible
D) Fixed, current
56) Identify the external user of financial information or financial
statements
71)
Meaning of Accounting
According to the American Institute of Certified Public
Accountants, 1941, Accounting is the art of recording, classifying
and summarising in a significant manner and in terms of money;
transactions and events which are, in part at least, of a financial
character, and interpreting the results thereof.
Characteristics of Accounting
ii.
Point
of
Book-Keeping
Distinction
Key Area
Accounting
Apart from functions of bookkeeping it is concerned with
summarizing, interpreting and
communicating the financial
information to the various
parties interested in business.
Purpose
Connection
Accountancy
Key Area
Purpose
Main purpose is to find out the net Main purpose of accountancy includes
results and financial status of the decision making function.
business and communicating the results
to its various users.
Accountancy depends on the information
Accounting depends on the information
provided
by
book-keeping
and
provided by book-keeping.
accounting.
Accounting is narrow in scope. It starts It is wider in scope because it explains the
where book-keeping ends.
principles and techniques that are required
to be followed in accounting and includes
both accounting and book-keeping.
Accounting is prepared on the basis of Accountancy is the knowledge of
rules and regulations explained by accounting which explains principles and
Accountancy.
techniques that needs to be followed in
accounting.
Dependence
Scope
Basis
i. Owners- These are the persons who make investment in the business. These
are interested in knowing the profit earned or loss incurred during an
accounting period. They are interested in assessing the profitability and
viability of the capital invested by them in the business. The financial
statements prepared by the business concerns enable them to have
sufficient information to assess the financial status and financial health of
the business.
ii. Management- The management is an integral part of an organisation. They
are indulged in drafting plans, decision-making process, evaluating the past
performances, etc. The financial statements enable the management not
only in drafting policy measures and planning but also in efficient
implementation of the plans. With the help of information revealed by the
financial statements, management can not only enhance the efficiency of
the business but also exercise various cost controlling measures to remove
inefficiencies.
iii. Employees and Workers- They are interested in the timely payment of
wages and salaries, bonus and appropriate increment in their wages and
salaries. With the help of the financial statements they can know the
amount of profit earned by the company and can demand reasonable hike
in their wages and salaries. The financial statements also help them to
assess their individual career scope and their growth prospects.
2. External Users
External users are those who are outsiders to an organisation and are
interested in the financial affairs of the business. These users do not have a
direct access to the financial statements of the business. The following parties
come under the head of external users.
i. Banks and Financial Institutions- Banks provide finance to various
businesses in the form of loans and advances. Thus, they need information
regarding liquidity, credit worthiness, solvency and profitability to advance
loans. The accounting information revealed through the financial
statements of business enable them to have access over such information.
ii. Investors and Potential Investors- These are the parties who have invested
or are planning to invest in the business of an enterprise. They are
interested in knowing the safety of their investment in the business and
regularity of returns on their investments. Hence, in order to assess the
Purchases: Purchases means the goods which are purchased for resale or for
producing the finished goods from it. It includes both cash as well as credit
purchases
Revenue: Revenue refers to the amount received from day to day activities
of the business, like sale proceeds of goods and rendering services to the
customers.
Revenue Expenditure: Expenses related to the day to day activities and
which are recurring in nature are termed as Revenue Expenditure.
Sales: Sale of goods either in cash or credit is termed as Sales.
assets while valuing them, irrespective of whether the market value is higher
or lower than the book value. Similarly, depreciation on fixed assets is
provided on the basis of expected lives of the assets rather than on their
market values. Also, the financial statements are prepared at defined period
end to measure the performance of the entity during that period and not
only on the closure or liquidation of the entity.
Money Measurement Concept
In accounting, every transaction is recorded in terms of money. Events or
transactions that cannot be expressed in terms of money are not recorded in
the books of accounts. Receipt of income, payment of expenses, purchase
and sale of assets, etc., are monetary transactions that are recorded in the
books of accounts. For example, the event of a machinery breakdown is not
recorded as it does not have a monetary value. However, the expenditure
incurred for the repair of the machinery can be measured in monetary value
and hence is recorded.
Cost Concept
As per this concept, an asset is ordinarily recorded at the price paid to
acquire it, i.e. at its cost and this cost is the basis for all subsequent
accounting for the asset. The cost concept does not mean that the asset will
always be shown at cost.
Accounting Period Concept
The life of the business is endless. Every business wants to know its profit
and loss. For this purpose the whole life of the business divides into intervals,
these intervals known as accounting periods. These periods may be of
quarterly, half yearly or yearly. An accounting period is the interval of time at
the end of which the financial statements are prepared to ascertain the
financial performance of the organization.
Accrual Concept
Under the cash system of accounting, the revenues and expenses are
recorded only if they are actually received or paid in cash, irrespective of the
accounting period to which they belong. But under the accrual concept,
occurrence of claims and obligations in respect of incomes or expenditures,
assets or liabilities based on happening of any event, passage of time,
rendering of services, fulfillment (partially or fully) of contracts, diminution in
values, etc., are recorded even though actual receipts or payments of money
may not have taken place. In respect of an accounting period, the
outstanding expenses and the prepaid expenses and similarly the income
receivable and the income received in advance are shown separately in the
books of accounts under the accrual method.
Periodic Matching of Cost and Revenue Concept
To ascertain the surplus or deficit made by the entity during an accounting
period, it is necessary that the costs incurred are matched with the revenue
earned by the entity during that accounting period. The matching concept is
a corollary drawn from the accrual concept. To ascertain the correct surplus
or deficit, it is necessary to make adjustments for all outstanding expenses,
prepaid expenses, income receivable and income received in advance to
correctly depict and match the income and expenditure relating to that
accounting period.
Realisation Concept
According to this concept, revenue should be accounted for only when it is
actually realised or it has become certain that the revenue will be realised.
This signifies that revenue should be recognised only when the services are
rendered or the sale is effected. However, in order to recognise revenue,
actual receipt of cash is not necessary.
ACCOUNTING CONVENTIONS
Convention of Disclosure
The term disclosure implies that there must be a sufficient revelation of
information which is of material interest to owners, creditors, lenders,
investors, citizen and other stakeholders. The accounts and the financial
statements of an entity should disclose full and fair information to the
beneficiaries in order to enable them to form a correct opinion on the
performance of such entity, which in turn would allow them to take correct
decisions.
Convention of Materiality
An item should be regarded as material, if there is a sufficient reason to
believe that knowledge of it would influence the decision of informed
creditors, lenders, investors, citizen
and other stakeholders. The accounts and the financial statements should
impart importance to all material information so that true and fair view of the
state of affairs of the entity is given to its beneficiaries.
Convention of Consistency
The convention of consistency facilitates comparison of financial
performance of an entity from one accounting period to another. This means
that the accounting principles followed by an entity should be consistently
applied by it over the years. For example, an organisation should not change
its method of depreciation every year, i.e., from Straight Line Method to
Written Down Value Method or viceversa. Similarly, the method adopted for
valuation of stocks, viz., First In First Out (FIFO) or Weighted Average should
be consistently followed. In case a change is made, it should be disclosed.
Convention of Conservatism
As per this convention, the anticipated profits should be ignored but all
anticipated losses should be provided for in the books of accounts of an
entity. This means that all prospective losses are taken into consideration,
(3) To fulfill the special needs of small and medium size entity by following above objectives.
Meaning of IFRS: IFRS is a principle based accounting standards. IFRS are a single set of high
quality accounting Standards developed by IASB, recommended to be used by the enterprises
globally to produce financial statements.
Benefits of IFRS:
(1) Global comparison of financial statements of any companies is possible
(2) Financial statements prepared by using IFRS shall be better understood with financial statements
prepared by the country specific accounting standards. So the investors can make better decision
about their investments.
(3) Industry can raise or invest their funds by better understanding if financial statements are there
with IFRS.
(4) Accountants and auditors are in a position to render their services in countries adopting IFRS.
(5) By implementation of IFRS accountants and auditors can save the time and money.
(6) Firm using IFRS can have better planning and execution. It will help the management to execute
their plans globally.
Accounting Equation : Total Assets = Total Liabilities Or Total Assets = Internal Liabilities +
External Liabilities Or Total Assets = Capital + Liabilities Classification of Transactions Following
are the nine basic transactions:
1. Increase in assets with corresponding increase in capital.
2. Increase in assets with corresponding increase in liabilities.
3. Decrease in assets with corresponding decrease in capital.
4. Decrease in assets with corresponding decrease in liabilities.
5. Increase and decrease in assets.
6. Increase and decrease in liabilities
7. Increase and decrease in capital
8. Increase in liabilities and decrease in capital
9. Increase in capital and decrease in liabilities.
RULES OF DEBIT AND CREDIT (I) Traditional or English Approach: This approach is
based on the main principle of double entry system i.e. every debit has a credit and every credit has a
debit. According to this system we should record both the aspects of a transaction whereas one aspect
of a transaction will be debited and other aspect of a transaction will be credited. (1) Personal
Account: Debit the receiver and credit the giver. (2) Real Account: Debit what comes in and credit
what goes out. (3) Nominal Account: Debit all expenses and losses credit all incomes and gains. (2)
Modern or American Approach: This approach is based on the accounting equation or balance sheet.
In this approach accounts are debited or credited according to the nature of an account. In a
summarised way the five rules of modern approach is as follows:
1. Increase in asset will be debited and decrease will be credited.
2. Increase in the liabilities will be credited and decrease will be debited.
3. Increase in the capital will be credited and decrease will be debited.
4. Increase in the revenue or income will be credited and decrease will be debited.
5. Increase in expenses and losses will be debited and decrease will be credited
FINAL ACCOUNTS
Preparation of final account is the last stage of the accounting cycle. The basic
objective of every concern maintaining the book of accounts is to find out the profit
or loss in their business at the end of the year. Every businessman wishes to
ascertain the financial position of his business firm as a whole during the particular
period. In order to achieve the objectives for the firm, it is essential to prepare final
accounts which include Manufacturing and Trading, Profit and Loss Account and
Balance Sheet. The determination of profit or loss is done by preparing a Trading,
Profit and Loss Account. The purpose of preparing the Balance Sheet is to know the
financial soundness of a concern as a whole during the particular period.
Trading, Profit and Loss Account
Trading Account and Profit and Loss Account are the two important parts of income
statements. Trading Account is the first stage in the final account which is prepared
to know the trading results of gross profit or loss during a particular period. In other
words, it is a summary of the purchases, and sale of a business or production cost of
goods sold and the value of sales. The difference between the elements establishes
the gross profit or loss which is then carried forward to the profit or loss account for
calculation of net profit or net loss. Accordingly, if the sales revenue is higher than
the cost of goods sold the difference is known as 'Gross Profit,' Similarly, if the sales
revenue is less than the cost of goods sold the difference is known as 'Gross Loss.'
The determination of Gross Profit or Gross Loss is done by preparation of Trading
Account. But it does not reveal the Net Profit or Net Loss of a concern during the
particular period. This is the second part of the income statement and is called as
Profit and Loss Account. The purpose of preparing the profit and loss account to
calculate the Net Profit or Net Loss of a concern. Net profit refers to the surplus
which remains after deducting related trading expenses from the Gross Profit. The
trading expenses refer to inclusive of office and administrative expenses, selling
and distribution expenses. In other words, all operating expenses such as office and
administrative expenses, selling and distribution expenses and nonoperating
expenses are shown on the debit side and all operating and non operating gains and
incomes are shown on the credit side of the Profit and Loss Account. The difference
of two sides is either Net Profit or Net Loss. Accordingly, when total of all operating
and non-operating expenses is more than the Gross Profit and other non-operating
incomes, the difference is the Net Profit and in the reverse case it is known as Net
Loss. This Net Profit or Net Loss is transferred to the Capital Account of Balance
Sheet.
BALANCE SHEET
According to AICPC (The American Institute of Certified Public Accountants) defines
Balance Sheet as a tabular Statement of Summary of Balances (Debit and Credits)
carried forward after an actual and constructive closing of books of accounts and
kept according to principles of accounting. The purpose of preparing balance sheet
is to know the true and fair view of the status of the business as a going concern
during a particular period. The balance sheet is on~ of the important statement