Commerce Accountancy

Accounting Principles and Practice

1,241 Questions

Accounting principles and practice questions cover core concepts like assets, depreciation, financial statements, and ledger adjustments. These topics are essential for commerce students preparing for academic and competitive exams. Regular practice ensures a strong grasp of standard accounting standards and business operations.

Asset depreciationFinancial statement adjustmentsAccounting standardsSingle entry systemCapital expenditure

Accounting Principles and Practice Questions

Multiple choice elements of accounts dual effect of transactions and types of accounts meaning and classification of business transactions develop the understanding of recording of transactions in journal illustrations on journal entries

The term 'Internal Reconstruction' includes _______________.

  1. Reduction of Share Capital

  2. Variation in Shareholder's rights

  3. Alteration of Share Capital

  4. All of the above
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

 

Internal reconstruction is a method in which the reconstruction is undertaken without winding up the company and forming a new one. It involves a reduction in the share capital of the company. It also relieves the company from its debts and losses through negotiation with the creditors. Thus, we can say that it is the internal rearrangement of the financial structure of the company.

The various methods of internal reconstruction are:

1. Alteration of Share Capital: The alteration in the share capital can be done either by sub-division and consolidation of shares or by conversion of shares into stock or stock into shares.

2. Variation of Shareholder’s rights: As per Section 47(7) of the Companies Act, 1956 the company can vary the rights of the shareholders with the consent in writing of the holders of three-fourths of the issued and outstanding shares of that class.  It can also do so with the sanction of a resolution passed by a majority of the votes cast at a separate general meeting.

3. Reduction of Share Capital: The Company can reduce share capital by share cancellations or buybacks.

4. Compromise/Arrangement: Under this method, an agreement is made between the company and its members and outside liabilities in case of financial crisis whereby a sacrifice is made by the shareholders, creditors or debenture holders.

 5. Surrender of Shares: In this method, the shareholders are made to surrender their shares so that these can be allotted to debenture holders and creditors so as to reduce their liabilities.

Thus, the correct answer is D.

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

Capital reserves are normally created out of free of distributable profits.

  1. True

  2. False
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Capital reserves are those reserves which are not created out of operating profits. Capital reserves refers to the amounts which are not free for distribution by way of dividend.. In case of companies, following are examples of capital reserves :

  • Profit prior to incorporation.
  • Premium on the issue of shares and debentures.
  • Profit on reissue of forfeited shares.
  • Profit on redemption of debentures.
  • Profit on sale of fixed assets.
  • Profit on revaluation of fixed assets.
  • Profit on a sale of  the whole undertaking or a part of it.

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

A specific reserve can be created for specific purpose.

  1. True

  2. False
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Specific reserve is that reserve which is created for a specific purpose and can be utilized only for that purpose. For example, Dividend Equalization Reserve is a specific reserve, because it is created to maintain a steady rate of dividend flow. Debenture redemption reserve, Capital redemption reserve, Investment fluctuation reserve etc. are the example of specific reserve.

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

__________ may be defined as a sum set aside out of divisible profits ad retained in order to provide for unexpected or unknown contingencies or loss or to equalize dividends or to strengthen the financial condition of the business.

  1. Provisions

  2. Reserve Fund

  3. Fund

  4. Specific Reserve
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

A reserve fund is a saving account or other highly liquid asset set aside by an individual or business to meet any future costs or financial obligations, especially those arising unexpectedly. 

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

Under sinking fund method of depreciation any surplus in sinking fund A/c is transferred to ____________.

  1. Capital Reserve A/c

  2. General Reserve A/c

  3. Reserve Capital A/c

  4. Profit and loss A/c
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Any surplus in Sinking fund account may be transferred to general reserve account. If any deficit, that may be transferred to profit and loss account. The journal entry for this transaction is:

For Profit:

Sinking fund A/c ------Dr.
   To General reserve A/c

For Deficit:

Profit and loss A/c----- Dr. 
   To Sinking fund A/c

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

Under sinking fund method of depreciation any deficit in sinking fund A/c is transferred to ____________.

  1. Capital Reserve A/c

  2. General Reserve A/c

  3. Reserve Capital A/c

  4. Profit and loss A/c
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Any surplus in Sinking fund account may be transferred to general reserve account. If any deficit, that may be transferred to profit and loss account. The journal entry for this transaction is:

For Profit:

Sinking fund A/c ------Dr.
   To General reserve A/c

For Deficit:

Profit and loss A/c----- Dr. 
   To Sinking fund A/c

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

When two firms amalgamate, general reserve is transferred to:

  1. New firm's account

  2. Revaluation account

  3. Partner's account

  4. Equal Ratio
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

When two or more partnership firms are amalgamated, the books of old firm are closed and books of new firm are opened.

While closing the books of the old firm :
1. Each firm should prepare a revaluation account relating to its own assets and liabilities and transfer the balance to the partner's capital account in the profit sharing ratio.
2. Entries of raising goodwill should be passed.
3. Transferring reserve to old partners capital account in old ratio.
4. Assets and liabilities not taken over by the new firm should be transferred to the capital accounts of partners in the ratio of their capitals.
5. The new firm should be debited with the difference between the value of assets and liabilities taken over by it; the assets should be credited and the liabilities debited.
6. Partner's capital account should be transferred to the new firm's account.

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

A provision is a ___________.

  1. General reserve

  2. Specific reserve

  3. Capital reserve

  4. None of these
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation
Specific reserve.
A Provision is the amount written off or retained by way of providing depreciation, renewals or diminution in the value of assets or retained by way providing for any liability of which the amount cannot be determined with substantial accuracy. In other words, Provision is an amount set aside out of income or profits. It is a retention of profir, made temporily, for a specific purpose. Therefore, provision may be considered as specific reserve.
Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

Capital reserve is_______.

  1. created out of revenue profits

  2. created out of capital profits

  3. used for meeting revenue losses

  4. used for manipulating profit and loss
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Reserves which are created out of capital profit are known as capital reserve. Generally these reserves are not available for distribution as dividend among shareholders. Example of such reserves are - Profit prior to incorporation, Profit on forfeiture of shares, etc. In short, all capital profits are regarded as capital reserves.

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

Over provision of liabilities result into creation of ________.

  1. secret reserves

  2. general reserves

  3. capital reserve

  4. none of the above
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Secret reserve is a reserve, the existence and/ or the amount of which is not disclosed in the balance sheet. It is also called as "Hidden Reserves or Internal Reserves."

Secret reserves are created by :
  • Excessive depreciation on the asset.
  • Excessive overvaluation of liability
  • Showing a contingent liability of an actual liability or as provision.
  • Charging capital expenditure to revenue or crediting revenue receipts to an asset.

Multiple choice book keeping and accountancy analysis of financial statements financial statement of company rules for recording in journal dual effect of transactions, types of accounts and rules of debit and credit

Withdrawals by proprietor would.

  1. Reduce both Assets and Owner's Equity

  2. Reduce Assets and increase Liabilities

  3. Reduce Owner's Equity and increase Liabilities

  4. Have no affect on the Balance Sheet
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Withdrawals represent the owner taking assets (usually cash) out of the business. This reduces the business's total assets and simultaneously reduces the owner's equity in the business.

Multiple choice book keeping and accountancy analysis of financial statements financial statement of company rules for recording in journal dual effect of transactions, types of accounts and rules of debit and credit

Cash purchases _________.

  1. Increases assets

  2. Results in no change in the total assets

  3. Decreases assets

  4. Increases liability
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Every business transaction gives two affects because financial accounting is based on double entry system of accounting. 


Cash purchases will affect two account i.e. purchases and cash. 

Accounting entry will be done as under:

Purchases A/c      Dr.
    To Cash A/c. 

Cash is a current assets which gets reduced. Hence it decreases the assets.

Multiple choice book keeping and accountancy analysis of financial statements financial statement of company rules for recording in journal dual effect of transactions, types of accounts and rules of debit and credit

Which one of the following statements is correct?

  1. Increases in liabilities are credits and decreases are debits.

  2. Increases in assets are credits and decreases are debits.

  3. Increases in capital are debits and decreases are credits.

  4. Increases in expenses are credits and decreases are debits.
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Business transactions are events that have a monetary impact on the financial statements of an organization. When accounting for these transactions, numbers in two accounts are recorded, where the debit column is on the left side and the credit column id on the right side.

1. A debit is an accounting entry that either increase an asset or expense account, or decreases a liability or equity account. It is positioned on the left in an accounting entry.
2. A credit is an accounting entry that either increases a liability or equity account, or decreases an asset or expense account. It is positioned to the right in an accounting entry.

Multiple choice book keeping and accountancy analysis of financial statements financial statement of company rules for recording in journal dual effect of transactions, types of accounts and rules of debit and credit

Purchase of office equipment for cash would cause __________.

  1. Cash in hand to decrease

  2. External liability to decrease

  3. Total liabilities to increase

  4. Total assets to increase
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Cash exists as a company's most liquid asset. Purchasing office equipment for cash will reduce a company's assets (i.e. reduction in cash in hand). Since owner's equity equals assets minus liabilities, owner's equity will be reduced as a result of buying office equipment with cash.

Multiple choice book keeping and accountancy analysis of financial statements financial statement of company rules for recording in journal dual effect of transactions, types of accounts and rules of debit and credit

____________ reduces both total assets as well as owner's equity.

  1. Credit purchases

  2. Retained earnings

  3. Bank loans

  4. Drawings
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

A drawing account is an accounting record maintained to track money withdrawn from a business by its owners. For example if proprietor withdraw cash from business then cash in hand account in decreased i.e. total assets decreased and it is recorded in the proprietor capital account as drawing which will reduce owner's equity.