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CA STUDY NOTES
Paper 1- Principles & Practice of Accounting
State with reasons whether the following statements are True or False:
Download PDF of Accounts TRUE False from here
Questions covering Past Year Papers, MTP & RTP :-
Q.1 Trade Discount is a reduction granted by a supplier from the list price of
goods or services on business considerations for prompt payment.
Q.2 M/s. XYZ & Co. runs a cafe. They renovated. some of the old cabins.
Because of this renovation some space was made free and number of cabins
was increased from 15 to 18. The total expenditure incurred was 30,000
and was treated as a revenue expenditure.
Q.3 Valuation of inventory, at cost or netrealizable value, whichever less,
is based on principle of Conservatism.
Q.4 In case of bill of exchange, the drawer and the payee may not be the
same person but in case of a promissory note, the maker and the payee may
be the same person.
Q.5 A Partnership firm cannot own any Assets.
Q.6 Since company has existence independent of its members, it continues
to be in existence despite the death, insolvency or change of members.
Q.7 Amount spent for the construction of temporary huts, which were
necessary for construction of the Cinema House and were demolished when
the Cinema House was ready, is capital expenditure.
Q.8 If the amount is posted in the wrong account or it is written on the wrong
side of the account, it is called error of principle.
Q.9 In case of consignment sale, ownership of goods will be transferred to
consignee at the time of receiving the goods.
Q.10 In case the due date of a bill falls after the date of closing the account, the
interest from the date of closing to such due date is known as Red- Ink interest.
Q.11 Limited Liability Partnership (LLP) is governed by Indian Partnership Act,
1932.
Q.12 The relationship between sales and fixed assets is expressed as working
capital ratio.
Q.13 Overhauling expenses for the engine of motor car to get better fuel
efficiency is revenue expenditure.
Q.14 Depreciation is a non-cash expense and does not result in any cash outflow.
Q.15 Fees received for Life Membership is a revenue receipt as it is of recurring
nature.
Q.16 If Closing Stock appears in the Trial Balance:
The closing inventory in then not entered in Trading Account. It is shown only in
the balance sheet.
Q.17 Inventory Turnover Ratio is also known as Stock Turnover Ratio.
Q.18 If del-creders commission is paid to consignee, the loss of bad debts is to be
borne by the consignor.
Q.19 Expenses in connection with obtaining a license for running the Cinema Hall is
Revenue Expenditure.
Q.20 Re-issue of forfeited shares is allotment of shares but not a sale.
Q.21 If the effect of errors committed cancel out, the errors will be called
compensating errors and the trial balance will disagree.
Q.22 There are two ways of preparing an account current.
Q.23 When there is no partnership deed prevails, the interest on loan of a partner
to be paid @ 6%.
Q.24 Interest coverage ratio indicates the firm’s ability to pay off current
interest and installments.
Q.25 Accrual concept implies accounting on cash basis.
Q.26 The Sales book is kept to record both cash and credit sales.
Q.27 Bank reconciliation statement is prepared to arrive at the bank balance.
Q.28 Finished goods are normally valued at cost or market price whichever is
higher.
Q.29 Reducing balance method of depreciation is followed to have a uniform
charge for depreciation and repairs and maintenance together.
Q.30 Discount at the time of retirement of a bill is a gain for the drawee.
Q.31 A withdrawal of cash from the business by the proprietor should be
charged to profit and loss account as an expense.
Q.32 Partners can share profits or losses in their capital ratio, when there is no
agreement.
Q.33 Receipts and Payments Account highlights total income and expenditure.
Q.34 Goods worth ` 600 taken by the proprietor for personal use should be
credited to Capital Account.
Q.35 Amount paid to Management company for consultancy to reduce the
working expenses is capital expenditure if the reduced working expenses will
generate long term benefits to the entity.
Q.36 The additional commission to the consignee who agrees to bear the loss on
account of bad debts is called overriding commission.
Q.37 When there is no agreement among the partners, the profit or loss of the
firm will be shared in their capital ratio.
Q.38 When shares are forfeited, the share capital account is debited with
called up capital of shares forfeited and the share forfeiture account is
credited with calls in arrear of shares forfeited.
Q.39 The results and position disclosed by final accounts are not exact.
Q.40 The rationale behind the opening of a suspense account is to tally the
trial balance.
Q.41 Reducing balance method of depreciation is followed to have a uniform
charge for depreciation and repairs and maintenance together.
Q.42 Accounting can be viewed as an information system which has its
input processing methods and output.
Q.43 The value of human resources is generally shown as assets in the
Balance Sheet.
Q.44 The financial statement must disclose all the relevant and reliable
information in accordance with the Full Disclosure Principle.
Q.45 The debit notes issued are used to prepare Sales Return Book.
Q.46 In Account Current, Red Ink Interest is treated as negative interest.
Q.47 A Tallied trial balance means that the books of accounts have been
prepared as per accepted accounting principles.
Q.48 Capital + Long Term Liabilities= Fixed Assets + Current Assets + CashCurrent Liabilities.
Q.49 Consignment account is of the nature of real account.
Q.50 The Sales book is kept to record both cash and credit sales.
Q.51 In the calculation of average due date, only the due date of first
transaction must be taken as the base date.
Q.52 If a partner retires, then other partners have a gain in their profit
sharing ratio.
Q.53 Net income in case of persons practicing vocation is determined by
preparing profit and loss account.
Additional Questions for practice :-
Q.1 Capital is all assets less fictitious assets.
Q.2 Equity + LTL – CL = FA + CA
Q.3 Prudence is a concept to recognize unrealized profits and not losses.
Q.4 As per AS-1, Fundamental Accounting Assumptions are Going Concern, Full
Disclosure and Accrual Concept.
Q.5 As per Concept of Conservatism, the accountant should provide for all possible losses,
but should not anticipate income.
Q.6 The economic life of an enterprise is artificially split into periodic intervals in
accordance with the going concern assumptions.
Q.7 Lease premium will be treated as revenue expenditure.
Q.8 Amount received by the issue of debentures is a capital receipt.
Q.9 Capital expenditure is done to restore the efficiency of an asset.
Q.10 Revenue loss is not the same thing as Revenue expenditure.
Q.11 Any expenditure which increases the value of fixed assets is termed as capital
expenditure.
Q.12 Preliminary expenses are classified under deferred revenue expenditure.
Q.13 Wages paid to workers for erecting machines will be treated as revenue expenditure.
Q.14 Capital receipts are either shown as an increase in liabilities or as a reduction in the
value of assets.
Q.15 Money spent to reduce working expenses is treated as capital expenditure.
Q.16 Interest paid on purchase of an asset in all cases, will be treated as capital
expenditure.
Q.17 A building of book value 45,000 got demolished and a new building having a
book value 17,00,000 was constructed. Thus, 45,000 is a revenue loss and
17,00,000 is a capital receipt.
Q.18 Repairs amount spent on second hand machine, purchased recently, before
using it will be treated as capital expenditure.
Q.19 10 lakhs were spent on the construction of a mess hall for the welfare of
the employees. 6 lakhs were received from the government as a grant.Inthiscase
4lakhswillbetreatedascapitalexpenditureand6 lakhs as capital receipt.
Q.20 Amount spent in connection with the issue of capital should be considered
as a capital expenditure, but legal expenses spent in connection with the issue
of capital shall be considered as revenue expenditure.
Q.21 Expenses in connection with obtaining a license for running the Cinema
Hall is Revenue Expenditure.
Q.22 Present liability of uncertain amount, which can be measured reliably by
using a substantial degree of estimation is termed as contingent liability.
Q.23 In the financial statement, contingent liability is recognized.
Q.24 If an inflow of economic benefits is probable then a contingent asset is
disclosed in the financial statements.
Q.25 Contingent asset usually arises from unplanned or unexpected events
that give rise to the possibility of an outflow of economic benefits to the
business entity.
Q.26 Wages paid for erection of machinery is debited to Profit and Loss
Account.
Q.27 The balance in the cash book shows net income.
Q.28 The debts written off as bad, if recovered subsequently are credited to
Debtors Account.
Q.29 The sales day book is a part of the ledger.
Q.30 Patent right is in the nature of nominal account.
Q.31 Goods costing 600 taken by the proprietor for personal use should be
credited to Sales Account.
Q.32 If a cheque received is further endorsed, it must be entered on both sides
of the cash book.
Q.33 Rent paid account is Nominal Account whereas, rent received account is
a Real Account.
Q.34 A tallied Trial Balance is a conclusive proof of accuracy of books
of account.
Q.35 Opening, Closing, Rectifying and Adjusting entries are recorded
in Journal proper.
Q.36 Sale of office furniture should be credited to Sales Account.
Q.37 The balance in the Petty Cash Book represents expenses.
Q.38 The purchase day book is a part of the ledger.
Q.39 In a Cash Book, Discount Columns may shown either debit
balance or credit balance.
Q.40 Purchase book records all purchases of goods.
Q.41 The Sales book is kept to record all sales.
Q.42 The debit notes issued are used to prepare sales return book.
Q.43 Bank column of the cash book will show only a debit balance.
Q.44 The interest charged by Banker to customer on overdrawn
account is called Red ink interest.
Q.45 Bank reconciliation statement is prepared to arrive at the bank
balance.
Q.46 Interest charged by the bank will be deducted, when the overdraft as
per the cash book is the starting point for making the bank reconciliation
statement.
Q.47 If the balance as per cash book and pass book are the same, there is no
need to prepare a reconciliation statement.
Q.48 Salary paid to Ram will be debited to Ram’s Personal account.
Q.49 A promissory note can be made payable to the bearer.
Q.50 No cancellation entry is required when a bill is renewed.
Q.51 At the time of Renewal of a bill, Interest account is debited in the
books of a drawee.
Q.52 A bill given to a creditor is called bills payable.
Q.53 A has drawn a bill on B. B accepts the same and endorses the bill to C.
Q.54 Refusal by the acceptor to make payment of the bill on the maturity
date is called Retirement of the bill.
Q.55 Promissory Note requires acceptance.
Q.56 Cancelling old bill and drawing new bill is called renewal of bill.
Q.57 Discount at the time of retirement of a bill is a gain for the
drawee.
Q.58 Rectifying errors in subsequent accounting period always affect
the profit or loss of that period.
Q.59 Errors of principle involves an incorrect allocation of expenditure
or receipt between capital and revenue.
Q.60 Wrong casting of subsidiary books does not affect the trail
balance.
Q.61 If the amount is posted in the wrong account or it is written on
the wrong side of an account, it is called an error of commission.
Q.62 Under or over-casting of a subsidiary book is an example of error
of commission.
Q.63 Any type of error affects the agreement of trial balance.
Q.64 Purchase of office furniture has been debited to general expenses
account. It is a compensating error.
Q.66 Finished goods are normally valued at cost or market price
whichever is higher.
Q.67 The inventory under AS-2 is valued on the basis of cost price or
current replacement cost, whichever is less.
Q.68 Land is also a depreciable asset.
Q.69 Depreciation is a cash expenditure like other normal expenses.
Q.70 Depreciation is an amortized expenditure.
Q.71 Depreciation cannot be provided in case of loss, in a financial
year.
Q.72 Depreciable amount refers to the different between historical
cost and the market value of an asset.
Q.73 Depreciation is a non-cash expense and does not result in any
cash outflow.
Q.74 Sales or Return Account in the Sale or return ledger represents
the value of goods still lying with the customers for approval.
Q.75 Profit and loss account shows the financial position of the
concern.
Q.77 The provision for discount on debtors is calculated before
deducting the provision for doubtful debts from debtors.
Q.78 The gain from sale of capital assets need not be added to revenue
to ascertain the net profit of a business.
Q.79 Under the ‘liquidity approach’ assets which are most liquid are
presented at the bottom of the balance sheet.
Q.80 The proprietor of a shop feels that he has made a loss due to
closing stock being zero.
Q.81 Closing stock will never appear in the trial balance.
Q.82 If Closing Stock appears in the Trial Balance :
The closing inventory is then not entered in Trading Account. It is
shown only in the balance sheet.
Q.83 The additional commission to the consignee who agrees to bear
the loss on account of bad debts is called overriding commission.
Q.84 The relationship between consignor and consignee is that of
principal and agent.
Q.85 In consignment, the goods are dispatched on the basis that the goods will
be sold on behalf of, at the expense of and at the risk of the consignee.
Q.86 Account sales is the statement sent by the consignor to the consignee.
Q.87 Loss of stock is said to be normal loss when such loss is not due to
inherent characteristics of the commodities.
Q.88 A partner who devotes more time to a business than other partners is
entitled to get a salary.
Q.89 Partners can share profits or losses in their capital ratio, when there is
no agreement.
Q.90 The business of partnership firm must be carried on by all thepartners.
Q.91 Goodwill brought in by an incoming partner in cash for joining a
partnership firm is taken away by the old partners in their new profit sharing
ratio.
Q.92 Goodwill is fictitious asset.
Q.93 Goodwill is in the nature of personal account.
Q.94 If a partner retires, then other partners have a gain in their profit
sharing ratio.
Q.95 Minor can be admitted to the benefits of LLP.
Q.96 The objective of taking a joint life policy by the partnership firm is to
secure the lives of the existing partners of the firm.
Q.97 LLP has no separate legal entity.
Q.98 LLP Partners act as agents of LLP and other partners.
Q.99 When there is no partnership deed prevails, the interest on loan of a
partner to be paid @ 6%.
Q.100 If payment is made on average due date, it results in loss of interest to
creditors.
Q.101 Average due date is the median average of several due dates for
payments.
Q.102 Scholarship granted to students out of funds provided by Government
will be debited to Income & Expenditure Account.
Q.103 Receipts and Payments Account is a summary of all capital receipts
and payments.
Q.104 If there appears a sports fund, the expenses incurred on sports
activities will be taken to income and expenditure account.
Q.105 Receipts and Payments Account highlights total income and expenditure.
Q.106 Only revenue items are disclosed in Income and Expenditure account.
Q.107 Fees received for Life Membership is a revenue receipt as it is of recurring
nature.
Q.108 Reserve Capital and Capital Reserve carry the same meaning.
Q.109 As per Table F, the Minimum rate of interest that can be charged on calls-inArrear and that can be allowed on calls-in-advance are 10% p.m. and 12% p.m.
respectively.
Q.110 Re-issue of forfeited shares is allotment of shares but not a sale.
Q.111 Debenture Redemption Premium Account and Discount on issue of debentures
Account are Nominal Accounts.
Q.112 Now Debentures can be issued at Par/Premium but not at discount.
Q.113 Like Shares a Company can issue debentures with voting rights.
Q.114 Maximum number of members in case of private company is 50.
Q.115 While drafting the balance sheet of a company bills receivables are shown
under the head Other Current Assets.
Q.116 When duration of operating cycle cannot be identified, it is assumed of 12
months.
Q.117 Securities premium received by a company is added to share
capital while preparing the balance sheet of a company.
Q.118 It is mandatory for a company to deduct provision for bad and
doubtful debts from trade receivables.
Q.119 A company registered under Companies Act, 2013 in India may
prepare its balance sheet in horizontal form only.
Q.120 Loss of stock is said to be abnormal loss when such loss is due to
inherent characteristics of the commodities.
Q.121 If the consignee is not authorized to get the del-credere
commission, then he is liable for all losses on account of non- recovery
of debts.
Q.122 Consignee has no right in the profit on goods sent on
consignment.
Q.123 If Del-credere commission is paid to consignee, the loss of bad
debts is to be borne by the consignor.
Solution
Answersheet of True and False Statements :
Answer of Questions covering Past Year Papers, MTP & RTP :-
- False: Trade Discount is a reduction granted by a supplier from the list price of goods or
services on business considerations other than for prompt payment. - False: Renovation of cabins increased the number of cabins. This has an effect on the
future revenue generating capability of the business. Thus the renovation expense is capital
expenditure in nature. - True: The conservatism concept states that one shall not account for anticipated profits
but shall provide all prospective losses. Valuing inventory at cost or net releasable value
whichever is less, therefore is based on principle of Conservatism. - False: The drawer and payee may be same person in case of bill of exchange whereas in
promissory note maker and payee can’t be same person. - True: A partnership firm is not a distinct legal entity and therefore can’t own any assets.
The partners own the assets of the firm. - True: As per Perpetual Existence company has existence independent of its members, it
continues to be in existence despite the death, insolvency or change of members. - True: Since the temporary huts were necessary for the construction, their cost should be
added to the cost of the cinema hall and thus capitalised. - False: If an amount is posted in the wrong account or is written on the wrong side of the
correct account, it is case of “errors of commission” and is not “error of principle”. - False: In Consignment sale, ownership of the goods rests with the consignor till they are sold
by the consignee. The consignee does not become the owner of the goods even though goods are in
his possession. He acts only as agent of the consignor. - True: In case the due date of a bill falls after the date of closing the account, then no interest
is allowed for that. However, interest from the date of closing to such due date is written in
“Red-Ink” in the appropriate side of the ‘Account current’. This interest is called Red-Ink interest. - False: The provisions of the Indian Partnership Act, 1932 shall not apply to a limited liability
partnership. Limited Liability (LLPs) Act, 2008 is applicable for Limited Liability Partnerships. - Deleted from course.
- False: Overhauling expenses for the engine of the motor car is incurred to get better fuel
efficiency. These expenses will reduce the running cost in future and thus the benefit is in the
form of a long-term advantage. So overhauling expenses should be capitalized. - True: Depreciation is a non-cash expense and unlike other normal expenditure (e.g. wages,
rent, etc.) does not result in any cash outflow. Therefore depreciation is a non-cash expense and
does not result in any cash outflow. - False: Life Membership Fee received for life membership is a capital receipt as it is of nonrecurring nature. It is directly added to capital fund or general fund.
- True: The closing stock appears in the trial balance only when it is adjusted against purchases
by passing the entry (in which Closing Stock A/c is debited and Purchases A/c is credited). In this
case, closing stock is not entered in Trading Account and is shown only in Balance sheet. - True: Inventory Turnover Ratio is also known as Stock Turnover Ratio. It establishes the
relationship between the cost of goods sold during the year and average inventory held during
the year. - False: To increase the sale and to encourage the consignee to make credit sales, the consignor
provides an additional commission generally known as del-credere commission. In case del-credere
commission is provided to consignee, bad debts is no more the loss of the consignor and it is borne by the
consignee. - False: The Cinema Hall could not be started without license. Expenditure incurred to obtain the
license is pre-operative expense which is capitalized. Such expenses are not revenue and amortized over
a period of time - False: A forfeited share is merely a share available to the company for sale and remains vested in
the company for that purpose only. Reissue of forfeited shares is not allotment of shares but only a
sale as they have already been allotted earlier. - False: If the effect of errors committed cancel out, the errors will be called compensating errors
and the trial balance will agree. - False: There are three ways of preparing an Account Current: (i)With help of interest table; (ii) By
means of products and (iii) By means of products of balances. - True: When there is no partnership deed then the provisions of the Indian Partnership Act are to be
applied for settling the dispute. Interest on loan is payable @ 6% p.a. as per Indian Partnership Act. - Deleted from course.
- False: Accrual concept implies accounting on ‘due’ or ‘accrual’ basis. Accrual basis of accounting
involves recognition of revenues and costs as and when they accrue irrespective of actual receipts or
payments. - False: The Sales book is a register specially kept to record credit sales of goods dealt in by the firm,
cash sales are entered in the cash book and not in the sales book. - False: Bank reconciliation statement is prepared to reconcile and explain the causes of differences
between bank balance as per cash book and the same as per bank statement as on a particular date. - False: Finished goods are normally valued at cost or net realizable value whichever is lower.
- True: In the early periods of useful life of a fixed assets, repairs and maintenance expenses are
relatively low because the asset is new. Whereas in later periods, as the asset become old, repairs
and maintenance expenses increase continuously. Under written down value method, depreciation
charged is high in the initial period and reduces continuously in the later periods. Thus, depreciation
and repair and maintenance expenses become more or less uniform throughout the useful life of the
asset. - True: Discount at the time of retirement of a bill is a gain for the drawee and loss for the
drawer. - False: Cash withdrawal by the proprietor from his business should be treated as his drawings
and not a business expense chargeable to profit and loss account. Such drawings should be deducted
from the proprietors capital. - False: According to Partnership Act, in the absence of any agreement to the contrary profits
and losses are to be shared equally among partners. - False: Receipts and payments account is a classified summary of cash receipts and payments
over a certain period together with cash and bank balances at the beginning and close of the
period. - False: Goods taken by the proprietor for personal use should be credited to Purchases Account as
less goods are left in the business for sale. - True: Amount paid to management company for consultancy to reduce the working expenses is
capital expenditure as this expenditure will generate long-term benefit to the entity. - False: The additional commission to the consignee who agrees to bear the loss on account of bad
debts is called del credere commission. - False: According to the Indian Partnership Act, in the absence of any agreement to the contrary,
profits and losses of the firm are shared equally among partners. - False: When shares are forfeited, the share capital account is debited with called up capital of
shares forfeited and the share forfeiture account is credited with amount received on shares forfeited. - True: They are prepared on the basis of assumptions, conventions, concepts and personal judgements
of the person who prepare them. - False: The rationale behind the opening of a suspense account is to avoid delay in the preparation of
financial statements. - True: In the early periods of useful life of a fixed asset, repairs and maintenance expenses are
relatively low because the asset is new. Whereas in later period, asasset becomes old, repairs and
maintenance expenses increase continuously. Under written down value method, depreciation charged
is higher in the initial period and reduces continuously in the later periods. Thus depreciation and repair
and maintenance expenses become more or less uniform throughout the useful life of the asset. - True: Accounting is a process of identifying, measuring and communicating information to permit
informed judgement and decisions. It covers the preparation of financial statements and communication
to the users of accounts. - False: The value of human resources cannot be measured in monetary terms, thus it will not be
shown in the balance sheet. - True: The financial statement must disclose all the relevant and reliable information in accordance
with the Full Disclosure Principle. - False: The debit notes issued are used to prepare purchases return book.
- True: In case the due date of a bill falls after the date of closing the account, then no interest
is allowed for that. However, interest from the date of closing to such due date is written in ‘Red
Ink’ in the appropriate side of Account Current. This Red Ink Interest is treated as negative
interest. - False: Trial balance only checks the arithmetical accuracy of the books. Errors of principle and
errors of commission will not affect the agreement of the trial balance. - False: The right hand side of the equation includes cash twice – once as a part of current assets
and another separately. The basic accounting equation is
Equity + Long Term Liabilities = Fixed Assets + Current Assets – Current Liabilities - False: Consignment account is a nominal account.
- False: The Sales book is a register specially kept to record credit sales of goods dealt in
by the firm, cash sales are entered in the cash book and not in the sales book. - False: While calculating the average due date, any transaction date maybe taken as the base
date. - True: If a partner retires, his share of profit or loss will be shared by the other partners in
their profit sharing ratio. - False: Net income is determined by preparing income and expenditure in case of persons
practicing vocation.
Answer of Additional Questions for practice :- - 2. 3.
False : Capital is all assets less fictitious assets less external liabilities.
False : The basic accounting equation is : Equity + LTL + CL = FA + CA
False : Prudence is a concept to recognize future or anticipated losses and not profits. - False: As per AS-1, Fundamental Accounting Assumptions are Going Concern Concept,
Consistency and Accrual Concept. - True: As per Concept of Conservatism, the accountant should provide for all possible losses,
but should not anticipate income. - True: The economic life of an enterprise is artificially split into periodic intervals in
accordance with the accounting period concept. The going concern assumption states that an
enterprise will continue its operation for indefinite period of time. - False: Lease premium is a capital expenditure.
- True: Money received by way of issue of shares or debentures by a company is a
capital receipt. - False: Capital expenditure is done to improve the efficiency of an asset.
- True: Revenue expenditure is incurred to receive a benefit during a current year. Revenue
loss occurs in the normal course of business and provides no benefit. - True: Expenditure that is done in connection with the acquisition of fixed assets or which
leads to the increment in the value of fixed assets are classified under capital expenditure. - True: Preliminary expenses are treated as deferred revenue expenditure as these can be
written off over a maximum of 4.5 years. Though according to AS-26, Preliminary expenses
spent in the incorporation of a company should be written off in the year it is incurred. - False : Expenditure done in connection with the erection of machines is an example of
capital expenditure. - True : Capital receipts are shown in the balance sheet as an increase in liabilities or as
reduction in the value of assets. - True : Any expenditure that reduces the working expenses will be treated as capital
expenditure. - False : Such expenditure is classified under the head of capital expenditure if it is paid during
the production / construction period. The expenditure will be treated as revenue after the asset
is put to use. - False : 45,000 is a revenue loss but 17,00,000 is a capital expenditure.
- True : Overhaul expenses (repairs) incurred to put a second hand machine in useable
condition to derive its benefit for future periods is a capital expenditure. - False : 10,00,000 will be treated as capital expenditure since it is spent on the construction
of the mess hall, though the amount has been received as a grant. - False : Legal expenses incurred on the issue of capital will be treated as capital expenditure.
- False : The Cinema Hall could not be started without license. Expenditure incurred to obtain
the license is pre-operative expense which is to be capitalized. Such expenses are not revenue and
amortized over a period of time. - False : Present liability of uncertain amount, which can be measured reliably by using a
substantial degree of estimation is termed as provision. - False : In the financial statement, contingent liability is not recognized.
- False: If an inflow of economic benefits is probable then a contingent asset is disclosed in the
report of the approving authority (Board of Directors in the case of a company, and the
corresponding approving authority in the case of any other enterprise). - False : Contingent asset usually arises from unplanned or unexpected events that give rise to
the possibility of an inflow of economic benefits to the business entity. - False : Wages paid for erection is a capital expenditure, so it should be debited to the
machinery account. - False : The balance in the cash book shows cash in hand at the end of the period.
- False : The debts written off as bad, if recovered subsequently, shall be credited to Bad
Debts Recovered Account. - False : The sales day book is a book of prime entry and so it is part of journal.
- False : Patent – right is an intangible asset, so it is a real account.
- False : Goods taken by the proprietor for personal use should be credited to Purchase Account
at a cost price of 600. - True : The cash book is debited in cash column when the cheque is received and it is credited
when it is endorsed. - False : Rent paid and rent received both are nominal accounts because they are expenses and
incomes of the business. - False : Agreement of trial balance is not a conclusive proof of the accuracy, because there may
be some errors like errors of principle, compensating errors etc. which do not affect the total of
trial balance. - True : All the Opening, Closing, Rectifying and Adjusting entries are recorded in journal proper
because these are not recorded in any other subsidiary book. - False : Sale of office furniture is a capital receipt, so it should be credited to Furniture
Account. - False : The balance in the Petty Cash Book represents petty cash balance lying with the Petty
cashier. It is treated as an asset of the business. - False : Purchase day book is a book of original entry and so it is a part of journal.
- False : Discount Columns of a Cash Book are totaled but never balanced. These are
totalled and transferred to Discount Allowed and Discount Received Account respectively. - False : Purchase book records only credit purchases of goods.
- False : The Sales book is kept to record only the credit sales of goods.
- False : The credit notes are used to prepare sales return book.
- False : Bank column of the cash book may show debit or credit balance.
- False : Interest charged by banker to customer on overdrawn account is called ‘interest
on overdraft’. - False : Bank reconciliation statement is prepared to reconcile the differences between
bank balance as per cash book and balance in bank statement. - False : Interest charged by the bank will be added because it will increase the overdraft
as shown by the cash book. - False : Bank reconciliation statement is prepared to find out the reasons of difference in
cash book and pass book even if the balance as per cash book and pass book are same. - False : Because salary paid to Ram will be debited to Salaries account as an expense of
the business. - False : A promissory note cannot be made payable to the bearer. It is payable to or to
the order of a certain person. - False : When the bill is renewed, entries are passed for cancellation of the old bill and
for recording of the new bill. - True : At the time of Renewal of a bill, interest account is debited in the books of a drawee
as it represents an expense for him. - True : A bill given to a creditor is called Bills Payable.
- False : B cannot endorse the bill to C because he is drawee. Only A, the drawer can do
it. - False : Refusal by the acceptor to make payment of the bill on the maturity date is called
dishonor of the bill. Early payment of the bill is known as the Retirement of the bill. - False : Promissory note does not require acceptance, only bills receivable require
acceptance. - True : When the acceptor of a bill fails to pay on the due date, a new bill may be drawn on
him after cancellation of the old bill. This is known as renewal of a bill. - True : Discount at the time of retirement of a bill is a gain for the drawee.
- False : Rectifying errors in subsequent accounting period related to Personal & Real
Accounts will not affect the profit of that period. - True : Recording the transaction in an incorrect fundamental manner is an error of
principle. - False : Wrong casting of subsidiary books affects the trial balance because wrong total
will be posted to its account and then to the trial balance. - True : Error of commission is an error on account of wrong posting, wrong balancing,
wrong carry forward, wrong totaling etc. - True : Error of commission is an error on account of wrong posting, wrong balancing,
wrong carry forward, wrong totalling etc. - False : Every error does not affect the agreement of trial balance because Errors of
Principle, Compensating errors etc. do not affect the agreement of trial balance. - False : It is an error of principle because here an item of capital nature is treated as an
item of revenue nature. - False : Damaged inventory should be valued at net realizable value only.
- False : As per AS-2, finished goods are normally valued at cost or net realizable value
whichever is lower. - False : As per AS-2 Valuation of Inventories, inventory is valued at the lower of cost and
net realizable value. - False : Land is not a depreciable asset because it does not qualify for depreciation as per
AS-10. - False : Depreciation is a non-cash expenditure because it does not involve any cash outflow.
- True : Depreciation is charged on value of fixed asset over its useful life. So, by way of
depreciation any capital expenditure is amortised over its useful life. - False : Depreciation is a charge against profit so it has to be provided for whether there is
a profit or loss in a financial year of the business. - False : Depreciable amount refers to historical cost less salvage value.
- True : Depreciation is a non cash expense and there is no outflow of cash in the
business. - True : The balance of Sales or Return Account in Sale or Return ledger represents the
value of goods lying with the customers who have neither returned nor intimated for goods
till date. - False : Profit and loss account shows the profit or loss of a concern for a particular
accounting period. - False : A profit and loss account is a period statement and a balance sheet is a point
statement. - False : The provision for discount on debtors is calculated after deducting the provision for
doubtful debts from debtors. - True : The profit on sale of capital assets should not be added to ascertain the net operating
profit of a business. - False : Under the ‘liquidity approach’ assets which are most liquid are presented first, like,
cash & cash equivalents. - False : Only closing stock is not taken in the calculation of the profits of a business.
- False : Closing stock may appear in the trial balance if an adjusting entry relating to
closing stock has already been passed and adjusted purchases are given in trial balance. - True : If closing stock appears in the Trial balance it indicates that it is already been
adjusted with the purchase and will be shown in the Balance Sheet only. - False : The additional commission to the consignee who agrees to bear the loss on account of
bad debts is called del-credere commission. - True : The relationship between consignor and consignee is that of principal and agent.
- False : In a consignment business, goods are generally sold on behalf of, at the expense of and
at the risk of the consignor as per its basic characteristics. - False : Account sales is a statement sent by the consignee to consignor, showing the
information of sales expenses incurred on behalf of the consignor, the commission earned by the
consignee, any advance given to the consignor and the balance due to the consignor. - False : Loss due to inherent characteristics of goods is treated as normal loss.
- False : No partner is entitled for salary unless it is provided for in the partnership deed.
- False : If there is no agreement profits or losses are to be shared equally among the
partners. - False : The business of the partnership firm can be carried on by all the partners or by
any one of them acting for all. - False : When a new partner brings in cash for goodwill, it is taken away by the old
partners in their sacrificing ratio. - False : Goodwill is an intangible asset.
- False : Goodwill is an intangible asset so it is in nature of real account.
- True : If a partner retires, his share of profit or loss will be shared by the other partners
in their profit sharing ratio unless otherwise agreed. - False : Minor cannot be admitted to the benefits of LLP.
- False : The objective of taking a joint life policy is to enable the firm to make payment
to the legal representatives of a deceased partner or to the retiring partner. - False : LLP has separate legal entity.
- False : LLP Partners act as agents of LLP and not of other partners.
- True : When there is no partnership deed then the provisions of the Indian Partnership
Act are to be applied for settling the dispute. Interest on loan is payable @ 6% p.a. as per
Indian Partnership Act. - False : Average due date results in no loss to any party i.e. debtor or creditor.
- False : Average due date is mean date of several due dates for payments.
- False : The Scholarship granted to students should be deducted from the funds
provided by the Government for the same purpose in the Balance Sheet. - False : Receipts and Payments Account is a summary of all cash or bank receipts and
payments whether they are of capital or revenue in nature. - False : Expenses incurred on sports activities will be deducted from sports fund only.
- False : Receipts and Payments Account is a summary of all cash or bank receipts and
payments whether they are of capital or revenue in nature. - True : Income and Expenditure Account is prepared to find out surplus/deficit. Hence, only
revenue items are shown in the Income and Expenditure Account. Thus, capital expenditures are
not shown in Income & Expenditure Account. - False : Life membership fee received for received for the life membership is a capital receipt
because it is of non-recurring nature. - False : Reserve Capital refers to that portion of uncalled up share capital which shall not be
capable of being called up except in the event of winding up. Capital Reserve is a reserve which is
created out of capital profits. - False : As per Table F, the maximum rate of interest that can be charged on Calls-in- Arrear
and that can be allowed on calls-in-advance are 10% p.a. and 12% p.a. respectively. - False : A forfeited share is merely a share available to the company for sale and remains
vested in the company for that purpose only. Reissue of forfeited shares is not allotment of
shares but only a sale as they have already been allotted earlier. - False : Debenture Redemption Premium Account is a Personal Account but Discount on issue of
Debentures Account is Nominal Account. - False : Debentures can be issued at Par/Premium/discount since there are no restrictions on
issue of debentures at discount. - False : A Company cannot issue debentures with voting rights.
- False : Maximum number of members in case of private company is 200.
- False : While drafting the balance sheet of a company bills receivables are shown under the
sub-head Trade receivables. - True : Normally operating cycle is less than or more than 12 months in any business but when it
is difficult to identify the duration of operating cycle of any business it is assumed as of 12 months. - False : Securities premium is not added to share capital but is shown under the sub- head
Reserves and Surplus. - False : It is not mandatory for any company to deduct provision for bad and doubtful debts from
trade receivables. A company may show their provision under the sub-head of short term provisions
in the head of current liabilities as per their choice. - False : A company registered under Companies Act, 2013 in India must prepare its balance sheet
in vertical format only as started in schedule III. - False : Loss incurred by accidents like loss by fire, loss by theft, abnormal spoilage etc., is
treated as abnormal loss. - False : If the consignee is not authorized to get del-credere commission, then he is not
responsible for any losses on account of non-recovery of debts. - True : The consignee being an agent is entitled for commission only and not for share in profit.
- False : If Del-credere commission is paid to consignee, then loss of bad debts will be borne by consignee only.
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