Basics of Accounting Questions | India's #1 Learning Platform. Start Complete Exam Preparation Reena ate road raed CaaS) MasterClasses eee ion rad pacar . il B Download App - Question1: What will be the currentclassificationfor ‘goodwill’ and ‘bill discountedbutnot matured, respectively? 1. Intangible asset; current liability 2. Tangible asset, current liability 3. Tangible asset; contingent lability 4, Intangible asset; contingent liability 5. None ofthe above Cee mle ea Come en aS Clu y elmer ele) g CeesAnswer (Detailed Solution Below) Option 4: Intangible asset; contingent ability Win over the concepts of Basics of Accounting and geta step ahead with the preparations for Accountancy with Testbook Basics of AccountingQuestion1 DetailedSolution The correctansweris Intangibleasset;contingentiability. Oo organisation for more money than its actual value + Acontingent liability is a prospective debt thatmight matt booed ot jow a future event plays out 6 Key Points + Anintangible asset called goodwill is created whenever a buyer momen business # ImportantPoints Gs 1. Goodwill: + An intangible asset connectedto, isitionof a company by another is goodvill. + In particular, goodwill is documented When the purchase price exceeds the totalof the fair values of all tangible and intangible assets acquired in the acquisition 2s wellas the liabilities ‘taken on throughout the process + Examples of goodwill include the value of a company's brand name, strong customer base, positive customer and employee interactions, and any patents or proprietary technology. 2. ContingentLiabilities: + Liabilities classified as contingent may or may not require payment in the future. Itis the responsibility of the auditor to ensure that all liabilities, known and unknown, have been entered into the books as of the balance sheet date and are properly displayed as such + As of today, abill discounted but not matured’ is not a liability. However, if the bill has been paid late, it can become your responsibility. If a discounted ill is not honoured, we are responsible for payingthe full amount to the bank where the bill was discounted.As a result, it is a contingent liability. Hence, it can be concludedthat the current classificationfor ‘goodwill’ and ‘bill discounted but not matured’, is Intangibleasset, contingentliability respectively.Es eee arco Roe) Start Complete Exam Preparation Cee aR Se staS cal eau Marra ie ard COSC (oreo D>» Download App Exori22 Question2: = View this Question Online jf Asystemin which accounting entries are made on the basis of amounts having become due for paymentor receiptis called Concept 2. Accrual Concept 3. Matching Concept 4. On-going Concept Answer (Detailed Solution Below) Option 2: Accrual Concept Basics of AccountingQuestion2 DetailedSolution The correctansweris theAccrualconcept. @ Key Points Asystem in which accounting entries are made on the basis of amounts having become due for payment or receiptis called the Accrual Accounting System" Accrual Accounting System: In the accrual accounting system, financial transactions are recorded when they occur, not necessarily when the cash is rece! paid. This means that revenues are recognized when they are eamed, and expenses are vecccnaeiah they are incurred, regardless of when the cash is exchanged Key Characteristics:* Revenue Recognition: Revenue is recorded when it is earned, not necessarily when the payment is received + Expense Recognition: Expenses are recorded when they are incurred, not necessarily when the payment is made + Matching Principle: The system follows thematching principle, ensuring thatrevenues and their elated expenses are recognized in the same accounting period, ‘The accrual accounting system provides amore accurate representation of a company's financial position and performance over a specific period, as it reflects economic eventswhen they occur rather than when cash is exchanged This contrasts with cash accounting, wiere transactions are recorded only when cash is received or paid eae cy Start Complete Exam Preparation Cee an teas DU cuereey Creer Download App Exot Pa Practice aoa Question3: View this Question Online > Which of the followingis correct? 1. Income taxis a trade expense ¢ 2. Closing Stockshown in Trial'Balance is recorded in Balance Sheet 3. Prepaid Expenses Account is Nominal Account 4 Rm... one of the above 5. None of the above Answer (Detailed Solution Below) Option 2: Closing Stock shown in Trial Balance is recorded in Balance Sheet Basics of AccountingQuestion3 DetailedSolutionThe correctstatementis ClosingStockshownin TrialBalanceis recordedn Balance » Important Points Option: Income taxis atradeexpense + This statementis falseas Income taxis a personal expense of the proprietor. Business pays tax in the form of corporation or profit tax. Hence, Income taxis not @ trade expense. Option2: Closing Stockshownin TrialBalanceis recordedn BalanceSheet + This statementis trueas closing stock if presenitin the trail balance means that the accounting forit has already been done, and it is an asset So recorded only in Balance Sheet. Option3: Prepaidtxpence scouts Nominal Account * This statementis falseas prepaid expenses are those expenses which have been paid in advance. Prepaid(unexpired)expenseis a personalaccountand is shown on the Assets side of a balance sheet. Option4: Advancereceivedroma customeris creditedto Profitand Loss Accountas an income. * This statements falseas advance received from a customer is not treatedas revenue. According to the accrual method of accounting itis handled as a currentiability as the goods or servicehaven'tbeendeliveredyet againstthe advancereceived\ntil a customer invoice is received, it is reflectedon the liabilities side of the balance sheet. a India’s #1 Learning Platform BS ela Orel pie) (1c Cl eel el) Se ca) Pon fed sl Qu Download App Question4: View this Question Online > Gross Book Value of a fixed assetsis its 1. costless depreciation os 2. Historical cost aM tet4 More than one of the above 5. None of the above Answer (Detailed Solution Below) Option 2: Historical cost Basics of AccountingQuestion4 DetailedSolution The correct answer is historicalcost. © Key Points Fixed assets- Long-term tangible assets employed in corporate operations are referred toas fixed assets ei Theyare categorized as propertpipient, and equipment (PP&E) on the balance sheet because they offerlong-term financial bene have a useful life of more then a year. » \mportantPoints GrossBookValue ofa fixed assets- + A fixed asset'sgrossbookvalueis its historicalcostor a sum that has been substituted for historical costin the accounting records or financial statements + This number is known as net book value when it is displayed after cumulative depreciation Thus , GrossBookValue of Fixed assetsis knownashistoricalcost. a eee ea) Start Complete Exam Preparation ORD ar rrr Pn rot ey ea Drea Cree ear Download App a ete) Questions: View this Question Online > Match the following:Cash |g, (Memo _|( |cheque into bank |For Depositing cash or Debit |, (note —_ [good |Prepared by the seller whi (byInvoice (ii) |goods are sald on cred Payiin- (cip i, b-ii, c-Wv, d-i 2. ail, b-ii, c-) d-iv 3. a-ii, b-i, c-iv,d-ii 4 More than one of the above 5. None of the above Answer (Detailed Solution Below) Option 1: a-iii, b -ii, c-iv,d-i Basics of AccountingQuestions DetailedSolution (ivnade to the account o lEvidencing thata debit has beer party (|For Depositing cash into bank * \mportantPoints + CashMemo:A cash memo is a business voucher issued by a selleron cash sales. All transactions that are accounted for via a cash memo are legitimate because it is a legalrecord It serves as evidence of every sale a company has made + Invoic “An invoice is a record that the seller provides to the customer to request payment or a proof of sale. Itconsists of the price of the goods or services obtained by the buyer.* DebitNote:A seller may give @ buyer a debit note to alert them to existing debt obligations. + Pay-in-Slip: A pay-in-slip is a bank deposit slip thatis used to deposit money into a bank account. Top Basics of Accounting MCQ O} fe Questions 5 Co Eee ecco Start Complete Exam Preparation Pree Foes Pao a Pato Pcie Creer Download App Questions "© View this QuestionOnline Gross Book Value of a fixed assetsis its 1. cost less depreciation 2. Historical cost 3. fe et value 4. realisable value Answer (Detailed Solution Below) Option 2: Hstorical cost Basics of AccountingQuestioné DetailedSolution The correct answer is historicalcost. © Key Points Fixed assets- Long-term tangible assets employed in corporate operations are referred toas fixed assets. Qofferlong-term financial benefits’ have a useful fe of more than a year » ImportantPoints GrossBookValue of a fixed assets- Theyare categorized as am ‘and Equipment (PP&E) on the balance sheet because they + A fixed asset'sgrossbookvalueis its historicalcostor a sum that has been substituted for historical costin the accounting records or financial statements + This number is known as net book value when it is displayed after cumulative depreciation. Thus , GrossBookValue of Fixed assetsis knownashistoricakcost. a Teeter Element Lelie) Ree Dar et feenies Pacey Cree ea pare cs Question” \, View this QuestionOniine » Acreditentryin a real accountmeans: 1. a decrease of an expense 2. adecreasein value of anasset 3. an increase’in an income 4 A. in the value of an asset Answer (Detailed Solution Below) Option 2: a decrease in value of an asset Basics of AccountingQuestion7 DetailedSolution © Key Points* Real Accounts:These account typesare related to assets or properties. Theyare further classified as Tangibie real account and Intangible real accounts. 2» ImportantPoints TangibleReal Accounts: These include assets that have a physical existence and can be touched For example — Building A/c, cash A/c, stationery A/c, invengory, A/c, ete, IntangibleReal Accounts: These assets do not have any physi¢al existence and cannot be touched However, these can be measured in terms of money and have value. For Example ~ Goodwill, Patent, Copyright, Trademark, ete Real AccountRules: A + Debit what comes into the tess. * Credit what goes out of business. For Example: Furniture purchased by an entityin cash. Debit furniture A/c and credit cash A/c. Note: Assetvalue increases when a real accountis debited, while assetvalue decreases when a real accountis credited. In the aforementioned exampie, furniture is acquired, which causesan increasein furniture and a decrease in cash. Hence, it can be concludedthat a creditentry in areal accountmeans a decreasein value of an asset. e& Reger are Start Complete Exam Preparation RGD mn cea Paey oa a a Pcie Cres eon Peers Download App Questions View this Question Online Contingentliabilities appear in the 1, Balance sheet J 2. Chairman's report = 3, Share holders notice » 4 Notes on account tobalance sheet ~Answer (Detailed Solution Below) Option 4: Notes on account to balance sheet Basics of AccountingQuestion8 DetailedSolution The correct answer is Notesto AccountofBalanceSheet. Contingent liabilities reflectin footnotes»! financial statements © Key Points Meaning- Liabilities that are depend on the outcome of an uncertain event are known as cntgeannn Reportingof ContingentLiabilities- + These liabilities are recorded in financial statementsonly when it is po value of contingent liabilities and the probability of happening of + When probability of happening of uncertain eventis een estimated, itis recorded in ew statements. atements) ofinancial Chairman'sreport- + Areport by the chair of toth e* of the company, included in the annual report and accounts, that summery of the company's actions throughout the finencial petiod Shareholdermotice- + When a shareholder notifies the company and the seling shareholder in writing that they plan to use their secondary refusal right with regard toa portion of the transfer shares in connection with a proposed shareholder transfer, this is referred to as a "Shareholder Notice’ Balancesheet- + A financial statement that summarizes a company’s assets, labilties, and shareholder equity at end of the accounting period is referred to as a balance sheet.5 & eee ern Start Complete Exam Preparation Re OE Practice acc ca CEs cere & Quizz Question? View this QuestionOnline > s Life insurance premiums received by an insurancecompany shouldbe classified as 1. accrued asset» Wee liability 3. prepaid expense 4. unearned revenue Answer (Detailed Solution Below) Option 4° uneamed revenue Basics of AccountingQuestion9 DetailedSolution InsurancePremium: + Aninsurance premium is the amount of money an individual or business pays foran insurance policy. Insurance premiums are paid for policies that cover healthcare, auto, home, and ife insurance + The life insurance premium should be classified as unearnedrevenuebecauseagainstthis amountstill the companyhas torenderservice. + Actually, the insurance company will treat each year pro-rata amount of premium received as income = UnearnedRevenue: 1. Uneamed revenue, sometimes referred to as deferred evenugis paymentreceivedy a companyfroma customerforproductsor servicesthat will be deliveredat somepointin the future. &2. The termis used in accrual accounting, in which revenue is recognized only when the payment has been received by @ company AND the products or services have been delivered to the customer. 3. Some examples of uneamed revenue include advance rent payments, annual subscriptions fora software license, and pratt Therefore, Lifinsurancepremiumsreceivedy an insurancecompany shouldbe classified as unearnerevenue. : [additional Information 1 AccruedAsset:Therevenue a company earnsovera periodof timebut has not collectedby the end ofa reportingperiod For example, if a company makes $1 million in revenue buthas not collected$250,000 beforeit must make its quarterly statement, it lists thet amount as its accruedassets 2. AccruedLiability: Accrued liabilities are liabilities that reflectexpensesthat havenotyetbeen paid or logged under accounts payable during an accounting period, in other words, a company's obligation to pay for goods and services that have been provided for which invoices have not yet been received 3. PrepaidExpenses:Prepaid exoenses are future expenses thatavebeenpaidin advance In other words, prepaid expenses are costs that have been paid but are not yetused up or have not yetexpired India's #1 Learning Platform BS Ta mele Ce Cle Ld) Download App Question1O _g View this QuestionOniine > Trialbalance should always tally due to the rule of 1. All transactions are transferred to the trial balance in the end 2. Every debit has a. comésponding credit. 3. Assets anc liabilities are equal. 4. Income and expenses have credit and debit balences.Answer (Detailed Solution Below) Option 2: Every debit has a corresponding credit Basics of AccountingQuestion10 DetailedSolution The correct answer is Preparation of trial balance is based on doubleentrysystem Itis prepared to check whether the value of totaldebits is equal to value of totalcredits. @ Key Points TrialBalance: ~ * A trialbalanceis a statementwherethe totalsof the debit and creditaccountcolumnsaddup to the sameamountas the totalsofall theledgers. + Themain reason for meking a trial belance is tomeke sure that thenumbers in financial records (journals and ledgers) are correct + If the totalsum of debits is the same as the totalsum, the trial balance is said tobe balanced India’s #1 Learning Platform Start Complete Exam Preparation Oe Pierre Download App Questiont1 Wiew this Ques tion Online > The main objective of Book-keepingis to: 1. find out profit or loss 2. keep correct end completerecord of business transactions 3 Ne the correct position of assets and liabilities 4. examine the accuracy of business transactionsAnswer (Deiailed Solution Below) Option 2: keep correct and complete record of business transactions Basics of AccountingQuestion!1 DetailedSolution The correct answer is keepeorre: nd completerecordof businesstransactions © keyPoints + Bookkeepings actually just one part of the accounting process which deals with the recording of the transactions 4 + Itprovides the primary information in the accounting process. + Bookkeeping is the actwvities concemed with the systematicrecording and classification of financial date of an organization in an orderly manner. + Itis essentially a record-keeping function done to assist in the process of accounting. + Itis mainly concernedwith recordinginancial datarelatingto businessoperations. > importantPoints Objectivesof Bookkeeping: + The main objectiveof book-keepingis to keepa completeand accurater ecordofall the financial transactionsn a systematicorderly/ogicalmanner. This ensures that the financial effectsof these transactions are reflectedin the books of accounts. + Then the second main objective is to ascertain the overall effectof all recorded transactions on the final statement of the company. Book-keeping will eventually ascertain the final accounts of the company, namely the Profit and Loss Account and the Balance Sheet India's #1 Learning Platform Start Complete Exam Preparation CBee eRe oss ieee Fb ie easy aes ecole eeu Download App Exo a2 Question12 > is QuestionOnline > Debit what comes in and credit what goes outis the rule of. 1, personal account VL « ee aba hectece ene3. nominal <2 account Answer (Detailed Solution Below) Option 2: real account Basics of AccountingQuestion12 DetailedSolution The correct answer is realaccount. @ Key Points Realaccount- + Real Accounts are those that have todo with real estate, belongings, or otherty operty. + Real accounts can therefore be classified as either tangible real ac or intangible real accounts, s * Tangiblerealaccountsare Machinery A/c, Vehicle A/c, Built + Intangiblerealaccountsare trademarks, patents, etc * The golden rule is ‘Debitwhat comesin and Credit it! © Additional Information e? Personalaccount- + Personal Accounts are have to do with specific people, businesses, organizations, groups of associations, e + The personal accounts may be Natural person a/c, Artificial person a/c, and Representative person a/c. + The golden rule is ‘Debitthe Receiverfreditthe Giver’ Nominalaccount- + Nominal Accounts are related to gains, losses, and income. These consist of wages, salaries, rent, and other accounts. * The golden rule is ‘DebitAll Expensesand Losses,CreditAll Incomesand Gains.ae Start Complete Exam Preparation kes Cree eur & Quizze: Question13 View this QuestionOnline > The basic accounting equation is __. Az... equity = Assets - Liabilities 2. Profits= Revenues -Costs 3 Assets = Liabilities -Stockholder's equity 4. Networth = Assets + Liabilities Answer (Detailed Solution Below) Option 1: Stockholder's equity = Assets - Liabilities Basics of AccountingQuestion13 DetailedSolution ‘ 2 The correctanswer is Stockholder'equity= Assets- Liabilities © Key Points a% + According to Kohler "Accoutancy refers tothe entire body of the theory and process of accounting" ~*~ + In simple words accountingis thelact ofrecording¢lassifying,and summ: an organizatiorandinterpretinghe results + All propertiesheld by a businessmanand usedwithoutany intentionof gaininga profitare called assets for example Cash, Land and Building, Plant and Machinery, etc. ees ingtransactionof Sa aa gS ES, Caan ae Sac Da celiabilities are creditors, loan payable, etc * Capital orstockholder'squityis the totalamountinvestedby the ownerin the businessin the formof cashand otherassets + The accounting equation always signifies that the totalassets of a business are always equal to the totallabilities and owner's equity. + The accountingequationis. » Stockholder'equity= Assets- Liabilities ea eee ic BS Ea Orel Ce el) Rea occa ees Masterclas Question14 View this Question Online > Which one of the following is a real account? 1, Salary account x 2. Mr, Ram's account > 3. Building account =< 4. Interestexpense account a Answer (Detailed Solution Below) Option 3 Building account Basics of AccountingQuestion14 DetailedSolution The correctanswer is Bullding account © Key Points Building accountis a realaccount.Realaccount + Itis also general ledger. + Itcontains transactions related to the liabilities and assets of a company. + Here, the assetscan be further subdivided into tangible and intangible assets + Unike a nominal account, areal account does not close when a financial year completes + Itis cattied forward to the following year + Real accounts are not listed in the income statement. y + Real accounts denote assets, liabilities and equity + Real account includes- bs, ° Cash : ) « Accountsreceivable > Fixed assets » Accountspayable © Retainedearnings ~ & Additional Informati Nominalaccount + Itis a general ledger containing the transactions of a business, namely ~ expenses, incomes, profits and losses + Itis an account used to keep track of financial transactions aver a set period of time, usually a year. + Itbegins with a zero balance and is closed at the end of each accounting year + The rule is- "Debit all expenses and losses; Credit all incomes and gains" + Examples of nominal accountsare CommissionReceived Salary AccountRent Accountand InterestAccount. 2 Te eae Rec Start Complete Exam Preparation arc ace) iS eI lec Download App Question15 View this Question Online The time gap between the payment for raw material purchasesand collection of cash from salesis referredas the y 1. Cash Cycle 2. Operating Cycle for the Company4 ne of the above Answer (Detailed Solution Below) Option 1: Cash Cycle Basics of AccountingQuestion15 DetailedSolution Thecorrectansweris Cash Cycle, @ Key Points The time gap betweenthe paymentforrawmaterialpurchasesand collectionof cashfi lesis referred theCash Cycle forthe Company. e CashCycle or Cash OperatingCycle- + The amount of days that pass betweenpayint referred to as the cash operating cycle, also kn conversiorcycle. + Formulaof Cash OperatingCycle: 4 Additional Informa’ OperatingCycle llectingmoney from sales is rkingcapitalcycleor the cash Receivables days ~ Payables days * It refersto the typicallag time thatexistsbetweenthe initial purchase of inputsinto a processand the reaiizationof any resultingmonetaryvalue @ ConfusionPoints + Cash Cycle and operatingcycle do not mean the same + Cash cycle takes into account gap between payment of raw material and cash receipt from sale. + However, Operating cycle includes both cash and credit aspects of payment and sale