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 elements of book keeping and accountancy nature of accounts and rules of debit and credit meaning, advantages and limitations of journals understand the classification of accounts introduction to books of prime entry

Which of the following books should be used to record an adjusting entry for depreciation?

  1. Cash book

  2. Sales book

  3. Purchase book

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

Journal book is meant for recording all such transactions for which no special journal has been maintained in the business. Therefore, in this journal, all such transactions are recorded which do not occur frequently and for these transactions no special journal  is required. For example, if Machinery is purchases on credit, it will be recorded in the journal book, because in the cash book only cash purchases of machinery is recorded. Similarly, many other transactions, which do not find their place in the special journals will be recorded in the General Journal such as:

(i) Outstanding expenses - Salaries outstanding, rent outstanding, etc.
(ii) Prepaid expenses - Prepaid rent, salaries paid in advance, etc.
(iii) Income received in advance - Rent received in advance, interest received in  advance, etc.
(iv) Accrued incomes - Commission yet to be received, interest yet to be received
(v) Interest on capital
(vi) Depreciation
(vii) Credit purchase and credit sale of fixed assets- machinery, furniture
(viii) Bade debts
(ix) Goods taken by the proprietor for personal use
Hence, recording and adjusting entry for depreciation is recorded in journal book.

Multiple choice elements of book keeping and accountancy nature of accounts and rules of debit and credit meaning, advantages and limitations of journals understand the classification of accounts introduction to books of prime entry

Machinery purchased on account is recorded in ___________.

  1. Purchase Book

  2. Cash Book

  3. Journal Book

  4. None of the above
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Journal book is meant for recording all such transactions for which no special journal has been maintained in the business. Therefore, in this journal, all such transactions are recorded which do not occur frequently and for these transactions no special journal  is required. 

For example, if Machinery is purchases on credit, it will be recorded in the journal book, because in the cash book only cash purchases of machinery is recorded.
Similarly, many other transactions, which do not find their place in the special journals will be recorded in the General Journal such as:
(i) Outstanding expenses - Salaries outstanding, rent outstanding, etc.

(ii) Prepaid expenses - Prepaid rent, salaries paid in advance, etc.
(iii) Income received in advance - Rent received in advance, interest received in  advance, etc.
(iv) Accrued incomes - Commission yet to be received, interest yet to be received
(v) Interest on capitals.

Multiple choice elements of book keeping and accountancy nature of accounts and rules of debit and credit meaning, advantages and limitations of journals understand the classification of accounts introduction to books of prime entry

_____________ includes identifying, recording, classifying and summarizing the transactions.

  1. Accounting posting

  2. Accounting cycle

  3. Tally of accounts

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

Accounting cycle is a step-by-step process of recording, classification and summarization of economic transactions of a business. It generates useful information in the form of financial statements including  income statement, balance sheet, cash flow statement and statement of changes in equity.

The time period principle requires that a business should prepare its financial statements on periodic basis. Therefore, cycle is followed once during each accounting period. Accounting cycle starts from the recording of individual transactions and ends on the preparation of financial statements and closing entries.

Multiple choice elements of book keeping and accountancy nature of accounts and rules of debit and credit meaning, advantages and limitations of journals understand the classification of accounts introduction to books of prime entry

Trading account is a ______________.

  1. Personal account

  2. Real account

  3. Nominal account

  4. Valuation account
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Trading account is nominal account which is prepared at the end of accounting year. It helps to find out gross profit or gross loss during the accounting period. 

Trading account consists of two sides 'debit and credit'. All direct expenses are debited and direct incomes are credited in trading account.

Multiple choice elements of book keeping and accountancy nature of accounts and rules of debit and credit meaning, advantages and limitations of journals understand the classification of accounts introduction to books of prime entry

Prepaid salary is _______________.

  1. Real Accounts

  2. Personal Accounts

  3. Nominal Accounts

  4. None of above
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Prepaid expenses are those expenses which have been paid in advance and related benefits are not consumed within the same accounting period. The benefits of expenses incurred are carried to the next accounting period. Examples-prepaid salary, prepaid rent, etc. Prepaid expenses are recorded in the books at the end of an accounting period to show true numbers of a business. 

Prepaid (Unexpired)  salary is a personal account and is shown on the assets side of balance sheet.

Multiple choice commercial studies cash book and bank related transactions objectives and importance of bank reconciliation statement meaning of petty cash book bank balance, bank overdraft, meaning, and bank reconciliation statement

A Bank Reconciliation Statement is prepared by ______.

  1. Bank

  2. Creditors

  3. Debtors

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

A bank reconciliation statement is a reconciliation statement between the balances of cash book (bank column) and pass book (bank statement). It is prepared by the business firm to identify and adjust the causes of differences between the two balances.

Multiple choice commercial studies cash book and bank related transactions objectives and importance of bank reconciliation statement meaning of petty cash book bank balance, bank overdraft, meaning, and bank reconciliation statement

A copy of customer's account in the ledger of the bank is called __________.

  1. Pass Book

  2. Cash Book

  3. Advice

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

Numerous accounts are maintained with the bank viz., current account, savings account,recurring account, etc.

A pass book with the customer is an extract from the ledger maintained by the bank comprising of all the transactions undertaken by the customers during a given period.

Multiple choice commercial studies cash book and bank related transactions objectives and importance of bank reconciliation statement meaning of petty cash book bank balance, bank overdraft, meaning, and bank reconciliation statement

A trial balance may agree in case of__________.

  1. wrong balancing of accounts

  2. posting to wrong side of correct a/c

  3. posting correct amount to correct side of wrong a/c

  4. partial omission of the transaction
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

A trial balance is a list of the closing balances of all the ledger accounts and usually the first step in the preparation of final accounts. A trial balance may be a test of mathematical accuracy when the debit side equals the credit side. However, it does not necessarily mean that the ledgers are made with accounting accuracy. Thus a trial balance may agree when the debit side equals the crdeit side even if there are some errors. There can be following types of errors:

  1. Error of principle: An error of principle is an error which violates the fundamentals of book keeping. For example, purchase of furniture is debited in the Purchase A/c (Expense A/c) instead of Furniture A/c (Asset A/c), then the debit side of the trial balance will still agree with the credit side but the principles of book keeping will be violated.
  2. Compensatory error: An incorrect debit entry being offset by an equal credit entry or vice versa may allow the trial balance to agree. For example, if one account in the ledger is debited Rs. 100 less and another account in the ledger is credited Rs. 100 less, then these errors will cancel out each other. This means that one error is neutralised by another same error on the opposite side, allowing the trial balance to agree.
  3. Error of omission: If a transaction is completely omitted that is both the aspects of an entry are omitted to be recorded in the double entry book keeping system, the trial balance will still agree.
  4. Error of amount in original book: If an invoice of Rs. 943 has been recorded in the sales book as Rs. 934, the trial balance will come out correctly since the debit and the credit side have been recorded with Rs. 934. Thus, the trial balance will show arithmetical accuracy and will tally in spite of the error.
  5. Posting to wrong account: This means posting an item to the wrong account but on the correct side with correct amount. For example, a purchase of Rs. 500 is credited in the account of Shamu instead of Shama. Such an error will not be deducted by the trial balance and it will still agree.

Multiple choice commercial studies cash book and bank related transactions objectives and importance of bank reconciliation statement meaning of petty cash book bank balance, bank overdraft, meaning, and bank reconciliation statement

A Trial balance may not agree in case of_____.

  1. non-recording of a transaction at all

  2. correct amount posted to wrong a/c but correct side

  3. wrong balancing of accounts

  4. entering wrong amount in the subsidiary books
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Error of Omission does not affect Trial Balance.

If amount is posted correctly into wrong account but on the correct side, still it won't affect the Trial Balance since Trial balance is a list of closing balances of all accounts.
But in case of wrong balancing of accounts Trial Balance will not agree because if credit and debit side of an account does not tally, it means some error has taken place.
A wrong amount will not affect Trial Balance since it is made on both the debit and credit side on correct side and in correct account.

Multiple choice commercial studies cash book and bank related transactions objectives and importance of bank reconciliation statement meaning of petty cash book bank balance, bank overdraft, meaning, and bank reconciliation statement

The balance of cash book shows ____________.

  1. net income

  2. cash in hand

  3. net expenditure

  4. cash received
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Cash book is  maintained to record the cash receipts and cash payments. So if we start with some cash balance in hand then add cash receipts and deduct cash expenses the balance figure what we get is  the cash in hand amount.

Multiple choice commercial studies cash book and bank related transactions objectives and importance of bank reconciliation statement meaning of petty cash book bank balance, bank overdraft, meaning, and bank reconciliation statement

Which book of prime entry is also a ledger account?

  1. cash book

  2. journal

  3. purchases journal

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

Cash book is a unique kind of subsidiary book. It plays a dual role. It acts as the book of original entry or prime entry and also as ledger. It is a subsidiary book because entries are first posted in the cash book and then, from there, it is posted in other ledger accounts.

Multiple choice commercial studies cash book and bank related transactions objectives and importance of bank reconciliation statement meaning of petty cash book bank balance, bank overdraft, meaning, and bank reconciliation statement

Bank reconciliation statement is prepared by _________.

  1. accountant of the business

  2. manager of the business

  3. controller of the bank

  4. accountant of the bank
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

A bank reconciliation statement is prepared to reconcile the balnaces as per cash book (bank column) with the balances as per pass book (bank statement). 

It is done by the accountant of the business as it is the business which needs to find the causes of differences between the two balances in order to present a true and fair view of it's financial statements and books of accounts to it's various stakeholders.

Multiple choice commercial studies cash book and bank related transactions objectives and importance of bank reconciliation statement meaning of petty cash book bank balance, bank overdraft, meaning, and bank reconciliation statement

Bank reconciliation statement is prepared on________________.

  1. yearly basis from Jan to December

  2. certain period basis

  3. as on particular date

  4. both a & b
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Bank reconciliation statement is a statement prepared by the business to reconcile the differences between the balances as per cash book and pass book on periodic basis. Generally it is done on monthly basis when the business receives the bank statement. It may also be prepared on yearly basis from January to December or some other certain period basis.

Multiple choice book keeping and accountancy bill of exchange (trade bill) dishonour of a bill dishonour of bills bills of exchange advantages of bill of exchange

Noting charges are considered as expense by the party, who makes the payment.

  1. True

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

When a Bill of Exchange (BOE) is dishonoured, then in order to prove this fact, the drawer (or the bill holder) may get it noted and protested through a public official known as 'Notary Public' for which it charges its fees which is called Noting Charges.

Multiple choice book keeping and accountancy bill of exchange (trade bill) dishonour of a bill dishonour of bills bills of exchange advantages of bill of exchange

Which of the following statements is true?

  1. Noting charge is an expense to be borne by drawer

  2. Noting charge is an expense to be borne by drawee

  3. Noting charge is an expense to be borne by payee

  4. Noting charge is an expense to be borne by bank.
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Noting charges are incurred due to the drawee's failure to pay the bill on the due date; therefore, the drawee is ultimately responsible for this expense.