1. The "Going Concern Concept" assumes that:
Revenue is recognized only when cash is received.
The business will be liquidated in the near future.
The owner and the business are the same entity.
The business will continue its operations for an indefinite period.
Explanation:
The Going Concern assumption is fundamental to accounting. It implies the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations. This justifies charging depreciation over useful life rather than liquidation value.
2. The accounting equation "Assets = Liabilities + Capital" is based on which concept?
Realization Concept
Cost Concept
Dual Aspect Concept
Matching Concept
Explanation:
The Dual Aspect Concept states that every transaction has two effects: a debit and a credit of equal amount. This forms the basis of Double Entry Bookkeeping and the Accounting Equation.
3. Which is the correct sequence in the accounting cycle?
Trial Balance -> Journal -> Ledger -> Final Accounts
Ledger -> Journal -> Trial Balance -> Final Accounts
Journal -> Trial Balance -> Ledger -> Final Accounts
Journal -> Ledger -> Trial Balance -> Final Accounts
Explanation:
Transactions are first recorded in the Journal (Original Entry), posted to the Ledger (Classification), summarized in the Trial Balance, and finally analyzed in Final Accounts.
4. Under the "Accrual Concept", revenue is recognized when:
The sale transaction is completed/earned, regardless of cash receipt.
Cash is received.
The goods are manufactured.
The order is received.
Explanation:
Accrual basis records transactions when they occur (mercantile system), not when cash changes hands. This gives a truer picture of profit/loss.
5. The "Consistency Concept" implies that:
Accounting methods should remain the same year after year to allow comparison.
The owner should not draw money from the business.
The business should always make a profit.
Assets should always be valued at market price.
Explanation:
Consistency ensures that financial statements are comparable over different periods. Frequent changes in methods (e.g., depreciation from SLM to WDV) distort comparison.
6. The "Money Measurement Concept" limits accounting because:
It ignores non-monetary aspects like employee skill, quality of management, and customer satisfaction.
It requires complex calculations.
It ignores inflation.
It is not applicable to small businesses.
Explanation:
Accounting only records transactions that can be expressed in monetary terms. Crucial qualitative factors that affect business success are often not reflected in the books.
7. The "Materiality Convention" suggests that:
Insignificant details that do not affect decision-making can be ignored or aggregated.
All items are material.
Assets should be valued at gold price.
Every single penny must be accounted for strictly.
Explanation:
Accounting should focus on information that is "material" (significant) to the user. For example, a calculator bought for office use is expensed immediately rather than depreciated over 5 years because the amount is immaterial.
8. Which of the following is a "Real Account"?
Cash Account
Ram's Account (Debtor)
Salary Account
Bank Overdraft Account
Explanation:
Real Accounts relate to assets and properties (Tangible or Intangible). Cash is a tangible asset. Salary is Nominal (Expense). Ram is Personal. Overdraft is Personal (Liability).
9. Making a "Provision for Bad and Doubtful Debts" is an application of which concept?
Going Concern Concept
Matching Concept
Cost Concept
Conservatism (Prudence) Concept
Explanation:
Conservatism states: "Anticipate no profit, but provide for all possible losses." Creating a provision for bad debts anticipates a future loss.
10. Which of the following is known as the "Book of Original Entry"?
Balance Sheet
Trial Balance
Ledger
Journal
Explanation:
Transactions are recorded chronologically in the Journal first, hence it is the Book of Original Entry. The Ledger is the Book of Final Entry.
11. The "Realisation Concept" implies that revenue is recognized when:
Cash is actually received.
An order is received.
A legal right to receive money arises (Sale is effected).
Goods are manufactured.
Explanation:
Revenue is considered realized when the title of goods passes to the buyer, creating a legal obligation to pay. Cash receipt is not necessary.
12. Which accounting concept states that "For every debit, there is a corresponding credit"?
Money Measurement Concept
Dual Aspect Concept
Going Concern Concept
Periodicity Concept
Explanation:
This concept is the foundation of the Double Entry System. Accounting Equation (Assets = Liabilities + Equity) is derived from this.
13. Under the "Business Entity Concept", Capital invested by the owner is treated as:
Income of the business.
Expense of the business.
A Liability of the business to the owner.
An Asset of the business.
Explanation:
Since the business and owner are separate entities, the money given by the owner to the business is a claim the owner has on the business, hence a Liability (Internal Liability).
14. In "Cash Basis" of accounting, outstanding expenses are:
Recorded as expenses.
Not recorded.
Recorded as assets.
Recorded as liabilities.
Explanation:
Cash basis records transactions only when cash flows. Expenses incurred but not paid (outstanding) are ignored until paid. Accrual basis records them.
15. Charging the cost of a pen to expenses instead of capitalizing it (even though it will last 2 years) is an application of:
Cost Concept
Materiality Concept
Dual Aspect Concept
Matching Concept
Explanation:
Though the pen is an asset, its cost is immaterial. Tracking its depreciation is not worth the effort. Hence, Materiality allows it to be expensed.
16. According to the "Realization Concept", when should profit be recognized?
When the customer pays cash.
When goods are produced.
When an order is received.
When goods are delivered to the customer.
Explanation:
Realization usually occurs when goods are transferred to the buyer, transferring risks and rewards. This creates the legal right to receive payment.
17. The "Historical Cost Concept" means assets are recorded at:
Acquisition Cost.
Resale Value.
Market Value.
Liquidation Value.
Explanation:
Assets are recorded at the price paid to acquire them, not at their changing market values. This ensures objectivity.
18. The "Accounting Period Concept" suggests that the life of a business should be:
Ended every 5 years.
Dependent on the owner.
Infinite.
Divided into appropriate segments (usually 1 year) for measurement of performance.
Explanation:
To provide timely information, the indefinite life of a business is cut into smaller periods (typically 12 months) for reporting.
19. If a business borrows ?10,000 from a bank, how does it affect the accounting equation?
Assets increase, Capital increases.
Assets increase, Liabilities increase.
Assets decrease, Liabilities decrease.
No change.
Explanation:
Cash (Asset) comes in (+10,000), and Bank Loan (Liability) is created (+10,000). Equation balances.
20. "Substance over Form" implies that:
Legal form is more important than economic reality.
Written contracts are the only evidence.
Economic reality should prevail over legal form if they diverge.
Format of accounts is most important.
Explanation:
Example: In a Finance Lease, the lessee records the asset even though legal title is with the lessor, because in substance/reality, the lessee uses it.
21. Which of the following equations is INCORRECT?
Assets = Liabilities + Capital
Liabilities = Assets - Capital
Assets + Liabilities = Capital
Capital = Assets - Liabilities
Explanation:
The fundamental accounting equation is Assets = Liabilities + Capital. Therefore, A+L=C is mathematically incorrect.