Sample Question Paper
Time: 3 Hours
Maximum Marks: 70
General Instructions:
- This question paper contains 30 questions.
- Questions 1 to 18 carry one mark each.
- Questions 19 to 22 carry 3 marks each.
- Questions 23 to 26 carry 4 marks each.
- Questions 27 to 30 carry 6 marks each.
- All questions are compulsory.
Multiple Choice Questions (1 Mark Each)
1. Which of the following is a Capital Expenditure?
- A) Purchase of Goods
- B) Purchase of Securities as Investments
- C) Purchase of Fixed Assets
- D) Depreciation on Assets
Answer: C. Purchase of Fixed Assets
Explanation:
Capital Expenditure refers to expenses for acquiring or improving long-term assets. The purchase of fixed assets is a typical capital expenditure.
2. Which of the following is a characteristic of Revenue Expenditure?
- A) It results in the acquisition of assets
- B) It is incurred to maintain the earning capacity of the business
- C) It is shown as an asset in the Balance Sheet
- D) It is incurred to increase the capital of the business
Answer: B. It is incurred to maintain the earning capacity of the business
Explanation:
Revenue Expenditure refers to costs that are necessary for the day-to-day functioning of the business and are usually short-term in nature.
3. Bank Reconciliation Statement helps in:
- A) Comparing the Cash Book and Pass Book balances
- B) Determining the capital of the business
- C) Calculating profit and loss
- D) Preparing the Balance Sheet
Answer: A. Comparing the Cash Book and Pass Book balances
Explanation:
A Bank Reconciliation Statement is prepared to reconcile the differences between the Cash Book and Pass Book balances.
4. If Bank Reconciliation Statement is prepared with a favorable Pass Book Balance, and it was noticed that Cash deposited in the bank for ₹35,000 but recorded as ₹3,500 in the Cash Book, how it will be shown in the Bank Reconciliation Statement?
- A) Subtracted ₹31,500
- B) Added ₹31,500
- C) Subtracted ₹35,000
- D) Added ₹35,000
Answer: B. Added ₹31,500
Explanation:
The difference of ₹31,500 (₹35,000 – ₹3,500) will be added to the Cash Book balance in the Bank Reconciliation Statement.
5. Which of the following is an example of a Capital Receipt?
- A) Rent Received
- B) Sale of Investments
- C) Salaries Paid
- D) Insurance Premium
Answer: B. Sale of Investments
Explanation:
Capital receipts are those that do not form part of the regular business activities. Sale of investments is a capital receipt.
6. Which of the following is a feature of the Written Down Value method of depreciation?
- A) Depreciation is the same every year
- B) Depreciation is higher in the initial years
- C) Depreciation is calculated on the original cost of the asset
- D) It is used for assets with a long life span
Answer: B. Depreciation is higher in the initial years
Explanation:
In the Written Down Value (WDV) method, depreciation is calculated on the reducing balance of the asset, resulting in higher depreciation in the initial years.
7. Assertion (A): Revenue Expenditure is shown as an expense in the Profit and Loss account.
Reason (R): Revenue Expenditure is incurred to earn revenue during the year.
Which of the following is correct?
- A) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A)
- B) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A)
- C) Assertion (A) is true, but Reason (R) is false
- D) Assertion (A) is false, but Reason (R) is true
Answer: A. Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A)
Explanation:
Revenue expenditure reduces profits and is recorded in the Profit and Loss Account. It is incurred to maintain the earning capacity of the business.
8. Which of the following is an example of a Non-Operating Income?
- A) Sales Revenue
- B) Rent Received
- C) Interest on Bank Loan
- D) Discount Received
Answer: B. Rent Received
Explanation:
Non-operating income refers to income earned from activities outside the core operations of the business, like rent, interest, etc.
9. A partnership firm incurred the following expenses:
- Office Rent: ₹12,000
- Salaries: ₹15,000
- Which of these will be shown in the Profit and Loss account?
Answer: A. Both Office Rent and Salaries
Explanation:
Both office rent and salaries are part of the operational expenses of the business and are included in the Profit and Loss account.
10. The provision for bad debts is an example of:
- A) Capital Expenditure
- B) Revenue Expenditure
- C) Capital Receipt
- D) Current Liability
Answer: B. Revenue Expenditure
Explanation:
The provision for bad debts is created to cover potential losses in the current period and is a revenue expenditure.
11. When goods are purchased on credit, the journal entry would be:
- A) Debit Purchases, Credit Bank
- B) Debit Purchases, Credit Creditors
- C) Debit Bank, Credit Creditors
- D) Debit Stock, Credit Purchases
Answer: B. Debit Purchases, Credit Creditors
Explanation:
When goods are purchased on credit, Purchases account is debited (as it increases the inventory) and Creditors account is credited (since the amount is payable in the future).
12. In the case of a favorable bank balance, which of the following will be added to the balance in a Bank Reconciliation Statement?
- A) Cheques issued but not yet presented
- B) Bank Charges
- C) Cash Deposited but not yet recorded in the Bank
- D) Overdraft Balance
Answer: C. Cash Deposited but not yet recorded in the Bank
Explanation:
Cash deposits made but not yet recorded by the bank will be added to the balance in the Bank Reconciliation Statement.
13. A business paid ₹500 for repairs to its machinery. Which of the following is true regarding this expenditure?
- A) It is a Capital Expenditure
- B) It is a Revenue Expenditure
- C) It is a Non-operating Expenditure
- D) It is a Depreciation
Answer: B. It is a Revenue Expenditure
Explanation:
Repairs to machinery are an ongoing expense that maintains the asset in working condition. Therefore, it is a revenue expenditure.
14. Which of the following is a non-cash transaction?
- A) Sale of goods for cash
- B) Depreciation charged on machinery
- C) Cash withdrawal from the bank
- D) Purchase of goods on credit
Answer: B. Depreciation charged on machinery
Explanation:
Depreciation does not involve any cash flow, making it a non-cash transaction.
15. In the context of Depreciation, which of the following statements is correct?
- A) Depreciation is charged on non-current assets
- B) Depreciation is an increase in the asset’s value
- C) Depreciation is an operating expense
- D) Depreciation is charged only on tangible assets
Answer: A. Depreciation is charged on non-current assets
Explanation:
Depreciation applies to non-current assets (fixed assets) as they lose value over time due to usage, wear and tear.
16. The main objective of preparing a Trial Balance is to:
- A) Detect frauds
- B) Check if the books are balanced
- C) Prepare the Profit and Loss Account
- D) Prepare the Balance Sheet
Answer: B. Check if the books are balanced
Explanation:
A Trial Balance ensures that the total debits equal the total credits, helping to detect errors in the bookkeeping process.
17. A firm incurred the following transactions:
- Cash sales: ₹20,000
- Credit sales: ₹30,000
What will be the total sales shown in the books of accounts?
Answer: ₹50,000
Explanation:
The total sales amount includes both cash sales and credit sales, so ₹20,000 + ₹30,000 = ₹50,000.
18. The journal entry for payment of ₹500 for electricity is:
- A) Debit Cash, Credit Electricity Expenses
- B) Debit Electricity Expenses, Credit Cash
- C) Debit Cash, Credit Accounts Payable
- D) Debit Expenses, Credit Accounts Receivable
Answer: B. Debit Electricity Expenses, Credit Cash
Explanation:
The payment of electricity expense is recorded as a debit to Electricity Expenses (as it increases the expense) and a credit to Cash (decreasing the cash balance).
19. Explain the term “Ledger.” What is its purpose in accounting? (3 Marks)
Answer:
A Ledger is a book or electronic record where all the accounting transactions are recorded after being classified from the journal. It is also referred to as the “book of final entry” because all entries are transferred from the journal to the ledger accounts.
Purpose of the Ledger:
- Classification of Transactions: It helps in classifying transactions into various accounts like assets, liabilities, income, and expenses.
- Detailed Information: Each account in the ledger shows the cumulative effect of all the transactions related to it. For example, the “Cash Account” will show all the cash-related transactions.
- Preparation of Financial Statements: The ledger helps in summarizing the data, which is then used to prepare the Trial Balance and Financial Statements (Balance Sheet and Profit & Loss Account).
20. Differentiate between “Capital Expenditure” and “Revenue Expenditure.” (3 Marks)
Answer:
- Capital Expenditure:
- Definition: Expenditures made to acquire or improve long-term assets (like machinery, land, or buildings). These expenses are capitalized, meaning they are added to the cost of the asset and depreciated over time.
- Example: Purchase of machinery, installation costs.
- Effect: Capital expenditures increase the value of the asset and are not fully charged to the Profit and Loss Account in the current year.
- Revenue Expenditure:
- Definition: Expenditures incurred for the day-to-day functioning of the business, like repairs or maintenance, that do not result in the acquisition of long-term assets.
- Example: Rent, salaries, office supplies.
- Effect: These are charged as expenses in the Profit and Loss Account and do not add value to the company’s assets. They are typically incurred for the current accounting period.
21. What is “Depreciation”? Explain the different methods of depreciation. (3 Marks)
Answer:
Depreciation is the process of allocating the cost of a tangible asset over its useful life. It is an accounting method used to reflect the wear and tear, usage, or obsolescence of an asset.
Methods of Depreciation:
- Straight Line Method (SLM):
- Explanation: Depreciation is charged equally every year over the useful life of the asset.
- Formula: Depreciation=Cost of Asset−Residual ValueUseful Life\text{Depreciation} = \frac{\text{Cost of Asset} – \text{Residual Value}}{\text{Useful Life}}Depreciation=Useful LifeCost of Asset−Residual Value
- Example: If a machine costs ₹10,000 with a residual value of ₹1,000 and a useful life of 5 years, the annual depreciation is ₹1,800.
- Reducing Balance Method (RBM):
- Explanation: Depreciation is calculated on the reducing balance (book value) of the asset at the beginning of each year, leading to higher depreciation in the initial years.
- Formula: Depreciation=Book Value at the Beginning of the Year×Depreciation Rate\text{Depreciation} = \text{Book Value at the Beginning of the Year} \times \text{Depreciation Rate}Depreciation=Book Value at the Beginning of the Year×Depreciation Rate
- Example: If the depreciation rate is 20%, the depreciation will reduce each year as the value of the asset decreases.
- Units of Production Method:
- Explanation: Depreciation is based on the actual usage or output of the asset, making it suitable for machinery or vehicles.
- Formula: Depreciation=Cost of Asset−Residual ValueTotal Estimated Units×Units Used in the Year\text{Depreciation} = \frac{\text{Cost of Asset} – \text{Residual Value}}{\text{Total Estimated Units}} \times \text{Units Used in the Year}Depreciation=Total Estimated UnitsCost of Asset−Residual Value×Units Used in the Year
- Example: If a car is expected to run for 100,000 miles, and it runs 20,000 miles in a year, depreciation is calculated based on this usage.
22. Prepare a Bank Reconciliation Statement with the following details:
- Cash Book Balance: ₹5,000 (Credit)
- Pass Book Balance: ₹6,000 (Credit)
- Unpresented Cheques: ₹500
- Bank Charges: ₹50
- Deposits not credited by the bank: ₹200
Answer:
Bank Reconciliation Statement:
| Particulars | Amount (₹) |
|---|---|
| Bank Balance as per Pass Book | 6,000 |
| Add: Deposits not credited | 200 |
| Less: Unpresented Cheques | (500) |
| Less: Bank Charges | (50) |
| Balance as per Cash Book | 5,650 |
Explanation:
- The Cash Book Balance is ₹5,000 (credit), and the Pass Book Balance is ₹6,000 (credit).
- The deposits not credited by the bank are added to the Pass Book Balance.
- Unpresented cheques are deducted, as they haven’t yet been processed by the bank.
- Bank charges are deducted from the Pass Book Balance, as they have been charged but not recorded in the Cash Book.
23. What is the purpose of a Trial Balance? How is it prepared? (4 Marks)
Answer:
A Trial Balance is a list of all the ledger accounts and their balances, showing whether the total debits equal the total credits. Its purpose is to ensure that the accounting entries are mathematically correct and the books are balanced.
Steps to prepare a Trial Balance:
- List all ledger accounts:
Each account is listed with its debit or credit balance. - Ensure debit equals credit:
The sum of all debit balances should equal the sum of all credit balances. - Identify errors if totals don’t match:
If the totals don’t match, the trial balance helps identify potential errors, such as transposition mistakes or incorrect postings.
Example:
| Account Name | Debit (₹) | Credit (₹) |
|---|---|---|
| Cash | 10,000 | |
| Accounts Payable | 5,000 | |
| Sales | 3,000 | |
| Purchase | 7,000 | |
| Capital | 9,000 |
24. Define “Income and Expenditure Account.” How is it different from the Profit and Loss Account? (4 Marks)
Answer:
The Income and Expenditure Account is used by non-profit organizations (like clubs and societies) to show the surplus or deficit during a financial period. It summarizes the revenues and expenses related to the organization’s activities.
Differences between Income and Expenditure Account and Profit and Loss Account:
- Purpose:
- The Income and Expenditure Account is used by non-profit organizations to show the net result of their activities.
- The Profit and Loss Account is used by profit-oriented businesses to show the profit or loss from operations.
- Surplus/Deficit:
- Income and Expenditure Account shows Surplus (if income exceeds expenditure) or Deficit (if expenditure exceeds income).
- Profit and Loss Account shows Profit or Loss based on business activities.
- Capital vs. Revenue:
- In the Income and Expenditure Account, all income and expenses are considered revenue, excluding capital transactions like the sale of assets.
- The Profit and Loss Account includes all revenues and expenses related to business operations.
25. What are the types of errors that can occur in accounting? (4 Marks)
Answer:
Types of Errors in Accounting:
- Errors of Omission:
A transaction is completely omitted from the books of accounts.
Example: Not recording a cash sale in the journal. - Errors of Commission:
A transaction is recorded in the wrong account, but within the same class of accounts.
Example: Debiting a wrong supplier’s account instead of the correct one. - Errors of Principle:
A transaction is recorded in the wrong class of account.
Example: Charging a capital expenditure to a revenue account. - Compensating Errors:
Errors that cancel each other out, resulting in the trial balance being balanced even though mistakes exist.
Example: An overstatement of one amount balanced by an understatement of another. - Clerical Errors:
Simple mistakes like wrong calculations, wrong postings, or transpositions (e.g., writing ₹3,000 as ₹30,000).
26. What is a “Cash Flow Statement”? Why is it important? (4 Marks)
Answer:
A Cash Flow Statement is a financial report that shows the inflows and outflows of cash and cash equivalents during a specific period, categorized into operating, investing, and financing activities.
Importance of the Cash Flow Statement:
- Liquidity Management:
It helps businesses assess their ability to generate enough cash to meet obligations, such as paying bills or debts. - Investment Decisions:
Investors use cash flow statements to evaluate the cash-generating capacity of a company, helping them make informed decisions. - Operational Efficiency:
By analyzing the operating cash flow, businesses can determine how well they manage their core operations in terms of cash generation. - Financial Health Indicator:
It helps stakeholders determine if a company is generating sufficient cash from its operations to support its investments and growth.
27. What are the key differences between “Accounts Payable” and “Accounts Receivable”? (3 Marks)
Answer:
- Accounts Payable (AP):
- Definition: Money a business owes to its creditors or suppliers for goods or services received.
- Nature: Liability account, recorded as a credit.
- Example: Outstanding bills for inventory or services purchased on credit.
- Accounts Receivable (AR):
- Definition: Money owed to a business by its customers for goods or services sold on credit.
- Nature: Asset account, recorded as a debit.
- Example: Outstanding payments from customers for sales made on credit.
28. What is “Closing Stock” and why is it important in accounting? (3 Marks)
Answer:
Closing Stock refers to the value of goods unsold at the end of an accounting period, which are carried forward to the next period. It is important because it helps in calculating the cost of goods sold (COGS) and affects the net profit of the business.
Importance:
- Accurate Profit Calculation:
Closing stock helps determine the correct COGS, which is necessary for accurate profit calculation. - Balance Sheet Representation:
Closing stock is shown as an asset on the balance sheet, reflecting the value of unsold inventory.
29. Define “Trial Balance.” What are its limitations? (3 Marks)
Answer:
A Trial Balance is a statement that lists all the ledger balances (both debit and credit) to verify the mathematical accuracy of the books of accounts.
Limitations of Trial Balance:
- Doesn’t Detect All Errors: It can’t detect errors like omitted transactions or errors of principle.
- Doesn’t Ensure Accuracy: A balanced trial balance doesn’t guarantee that the books are entirely correct.
- Limited Scope: It only verifies arithmetic correctness but doesn’t check for correct recording or proper classification of transactions.
30. What is the significance of “Financial Statements”? (4 Marks)
Answer:
Financial Statements are formal records of the financial activities of a business. They include the Balance Sheet, Profit and Loss Account, and Cash Flow Statement.
Significance:
- Assess Financial Performance:
They provide insight into the profitability, liquidity, and solvency of a business. - Decision Making:
Investors, creditors, and management use financial statements to make informed decisions regarding investment, lending, and operational strategies. - Legal and Regulatory Compliance:
Financial statements help ensure that a company complies with accounting standards, tax laws, and other regulations.