Commerce Accountancy

Accounting Principles and Practices

2,324 Questions

Accounting principles and practices involve the preparation of trial balances, ledgers, and bank reconciliation statements. This area tests your knowledge of fundamental accounting concepts and routine business transactions. It is a core section in commerce exams and various competitive tests.

Ledger accountsTrial balance preparationBank reconciliation statementAccounting conceptsPrimary books of accounts

Accounting Principles and Practices Questions

Multiple choice

Which of the following accounting activities is defined as the measurement and reporting of internal and external information concerning the impact of an entity and its activities on society?

  1. Financial accounting

  2. Cost accounting

  3. Social responsibility accounting

  4. Farm accounting

  5. Government accounting
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

This accounting activity is defined as the measurement and reporting of internal and external information concerning the impact of an entity and its activities on society.

Multiple choice

Directions: Choose the correct option for the given question.

Which of the following statements is correct?

  1. Internal audit and management audit are the same.

  2. Internal audit and statutory audit are the same.

  3. Internal audit is compulsory in all cases.

  4. Statutory audit of company accounts is compulsory.
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Internal audit is optional and depends on management decision. Statutory audit of company accounts is mandatory under Companies Act for all companies regardless of size. Management audit is different from internal audit - the former evaluates management efficiency while latter checks internal controls.

Multiple choice

Directions: Choose the correct option for the given question.

Which of the following is not a part of the usual contents of the current file and audit working papers?

  1. A copy of accounts on which auditors are reporting

  2. Audit programme

  3. Minutes of the meetings

  4. Memorandum of Association and Articles of Association
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Current audit working papers contain the current year's audit-related documents like accounts, audit programs, and minutes. The Memorandum of Association and Articles of Association are constitutional documents that belong in the permanent audit file (continuing file), not the current file. They are retained permanently and referenced across multiple audits.

Multiple choice

Directions: Choose the correct option for the given question.

Match List-I with List-II List-I (Liability of Auditor) List-II (Example) (a) Liability for negligence 1. Breach of trust or duty (b) Liability for misfeasance 2. Untrue statement in the prospectus (c) Criminal liability 3. Not liable for untrue statement in prospectus (d) Liability to third party 4. Dividends paid out of capital Which of the following is the correct match?

  1. (a) 4 (b) 3 (c) 2 (d) 1

  2. (a) 2 (b) 1 (c) 4 (d) 3

  3. (a) 4 (b) 1 (c) 2 (d) 3

  4. (a) 2 (b) 3 (c) 4 (d) 1
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Liability for negligence (a) occurs when auditors fail to exercise due care, such as allowing dividends paid out of capital (4). Misfeasance (b) means breach of trust or duty (1). Criminal liability (c) arises for untrue statements in prospectus (2) under Companies Act provisions. Liability to third parties (d) is generally excluded - auditors are not liable to third parties for untrue statements in prospectus (3), as this is governed by the principle of privity of contract.

Multiple choice

Directions: Choose the correct option for the given question.

Consider the following statements: Accounting control comprises

  1. The plan of organization concerned with decision process.
  2. The plan of organization concerned with safeguarding of assets.
  3. The procedure concerned with safeguarding of assets. Which of the statements given above are correct?

  1. (1) and (2) only

  2. (2) and (3) only

  3. (1) and (3) only

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

Statement 1 is incorrect - decision-making processes are management functions, not accounting controls. Accounting controls focus on safeguarding assets and reliability of financial records. Statement 2 is correct - accounting controls include the organizational plan for asset safeguarding. Statement 3 is correct - accounting controls include specific procedures designed to protect assets. The core purpose of accounting controls is asset protection, not decision-making.

Multiple choice

Directions: Choose the correct option for the given question.

Consider the following statements: Audit working papers are maintained because

  1. They act as a guide to subsequent audit.
  2. They verify the arithmetical accuracy of the books of accounts.
  3. They provide evidence of the work performed by the auditor. Which of the statements given above are correct?

  1. (1) and (2) only

  2. (2) and (3) only

  3. (1) and (3) only

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

Statement 1 is correct - working papers provide a roadmap for future audits by documenting what was done. Statement 2 is incorrect - working papers themselves don't verify accuracy; they document the verification procedures performed. The audit procedures verify accuracy, not the papers. Statement 3 is correct - working papers serve as primary evidence of audit work performed, supporting the auditor's opinion.

Multiple choice

Directions: Choose the correct option for the given question.

Consider the following stages: An auditor has to undergo before commencing an audit

  1. Ascertaining the scope of audit work.
  2. Gaining knowledge about business of the client.
  3. Going through the agreement with the client.
  4. Instructions to and information from the client. What is the correct sequence of the above stages?

  1. 2 - 1 - 3 - 4

  2. 3 - 4 - 2 - 1

  3. 2 - 4 - 3 - 1

  4. 3 - 1 - 2 - 4
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The correct sequence begins with the client agreement (3) - establishing the engagement terms. Next is ascertaining the audit scope (1) based on the agreement. Then the auditor gains knowledge about the client's business (2) to understand risks and operations. Finally, instructions and information are obtained from the client (4) to facilitate the audit execution. This logical flow moves from contractual commitment to detailed execution.

Multiple choice

Directions:The following question consists of two statements, one labelled as the 'Assertion' (A) and the other as 'Reason' (R). You have to examine these two statements carefully and select the answer from the options given below Assertion (A)—Income tax paid is not shown on the debit side of the sole proprietor's Profit and Loss account. Reason (R)—It is an appropriation of profit and thus goes to Profit and Loss Appropriation Account.

  1. Both (A) and (R) are individually true and (R) is the correct explanation of (A)

  2. Both (A) and (R) are individually true but (R) is not the correct explanation of (A)

  3. (A) is true but (R) is false

  4. (A) is false but (R) is true
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

For a sole proprietor, income tax is NOT debited to the Profit and Loss Account as an expense. Instead, it's treated as an appropriation of profit, meaning it's distributed to the Profit and Loss Appropriation Account after calculating net profit. The Assertion claiming it's not shown in P&L is FALSE. The Reason explaining it's an appropriation is TRUE.

Multiple choice

Directions: Choose the correct option for the given question.

Government grants related to income as per the Accounting Standard (AS)-12 should be

  1. presented as a credit in the statement of Profit and Loss.

  2. presented as a deferred income on the asset side of the balance sheet.

  3. presented as a capital grant on the liability side of balance sheet.

  4. presented both in the profit and loss statement and in the balance sheet.
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

AS-12 requires that government grants related to income be presented in both financial statements - as income in the P&L and separately in the balance sheet until realized. This dual presentation ensures transparency about the nature and timing of grant recognition. The standard distinguishes between revenue and capital grants.

Multiple choice

Directions: Choose the correct option for the given question.

Which of the following is affected by treatment of an accrued item in accounting?

  1. Profit and loss account only

  2. Profit and loss appropriation account

  3. Balance sheet only

  4. Profit and loss account and balance sheet
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Accrued items represent revenues earned but not received, or expenses incurred but not paid. Recording accruals impacts the Profit and Loss account (revenue/expense recognition) and the Balance Sheet (receivable/payable creation). This dual effect maintains the accounting equation.

Multiple choice

Directions: Choose the correct option for the given question.

Which of the following statements about preparation of financial statements of a limited liability company is correct ?

  1. Financial statements should be prepared according to the cash basis of accounting only.

  2. Financial statements should be prepared according to the accrual basis of accounting only.

  3. Financial statements should be prepared according to either the cash basis or accrual basis of accounting.

  4. Financial statements should be prepared according to both the accrual and cash basis of accounting.
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Limited liability companies must prepare financial statements using accrual basis accounting as per statutory requirements and accounting standards. Accrual basis recognizes revenues when earned and expenses when incurred, matching income to the period it relates to. Cash basis is not appropriate for corporate financial reporting as it doesn't reflect true financial position.

Multiple choice

Directions: Choose the correct option for the given question.

Match List-I with List-II and select the correct answer using the code given below the lists. List-I (Nature of Expenditures/Receipts) (a) Capital receipts (b) Capital expenditure (c) Revenue expenditure (d) Revenue receipt List II (Example)

  1. Sale of fixed assets
  2. Improvement of fixed assets
  3. Income received as interest
  4. Interest on loan for business

  1. (a)1 (b)2 (c)4 (d)3

  2. (a)3 (b)4 (c)2 (d)1

  3. (a)1 (b)4 (c)2 (d)3

  4. (a)3 (b)2 (c)4 (d)1
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Capital receipts include sale of fixed assets (1). Capital expenditure includes improvement of fixed assets (2). Revenue expenditure includes interest on loan for business (4). Revenue receipts include income received as interest (3). This classification tests understanding of capital vs. revenue nature in accounting.

Multiple choice

Directions: Choose the correct option for the given question.

Expenses need to be recorded in the period in which the associated revenues are recognised. This is to be ensured as per which of the following accounting principles?

  1. Revenue recognition

  2. Cost benefit

  3. Matching

  4. Periodicity
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

The principle described is revenue recognition, which states that revenues should be recorded when earned and realizable. While matching principle also relates to this timing, the question specifically focuses on when expenses are recorded in relation to revenue recognition period. Revenue recognition principle addresses this timing.

Multiple choice

The annual record for all the monetary transactions of a country with other countries of the world is known as

  1. Balance of trade

  2. Balance of monetary-receipts

  3. Balance of payments

  4. Balance sheet.
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Balance of Payments (BoP) is a comprehensive record of all economic transactions between residents of a country and the rest of the world during a given period. It includes trade balance, services, income transfers, and capital flows. Unlike Balance of Trade which only covers goods, BoP encompasses all monetary transactions including invisible items.

Multiple choice

If the order of permanence is followed in preparing of Balance Sheet

  1. the assets which can be easily converted into cash are written first

  2. the assets which are to be used permanently and not meant to be sold are written first

  3. short-term liablities are written first

  4. none of these

Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

 The asset like goodwill, land and building, which are not meant to be sold are written first .As these assets are meant for permanent use and not easily convertible into cash they are written first.