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Financial Statements 2 Test 4

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Financial Statements 2 Test 4
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  • Question 1
    1 / -0
     When income is received but the whole amount of it does not belong to the current period it is called as:
    Solution
    Sometimes, a certain income is received but the whole amount of it does not belong  to the current period. The portion of the income which belongs to the next accounting period is termed as income received in advance. It is also known as Unearned Income or Pre-received Income. Income received in advance is adjusted by recording the following entry:
    Concerned Income A/c Dr.
        To Income Received in advance A/c
    The effect of this entry will be that the balance in the income account will be equal to the amount of income earned for the current accounting period and the new account of income received in advance will be shown as a liability in the balance sheet.  
  • Question 2
    1 / -0
    What are the other names for income received in advance?
    Solution
    Sometimes a certain income is received but the whole amount of it does not belong to the current period. The portion of the income which belongs to the next accounting period is termed as income received in advance. The other names for income received in advance is known as an Unearned Income or Pre-received Income. Income received in advance is adjusted by recording the following entry:
    Concerned Income A/c Dr. 
          To Income received in advance A/c
    The effect of this entry will be that the balance in the income account will, be equal to the amount of income earned for the current accounting period, and the new account of income received in advance will be shown on the liability side of the balance sheet.
  • Question 3
    1 / -0
    Income received in advance will be deducted from _______. 
    Solution
    Sometimes, a certain income is received but the whole amount of it does not belong to the current period. The portion of income which belongs to the next accounting period is termed as income received in advance or an Unearned Income. Income received in advance is adjusted by recording the following entry:
    Concerned Income A/c Dr.
                 To Income Received in Advance A/c
    The effect of this entry will be that the balance in the income account will be equal to the amount of income earned for the current accounting period, and the new account of income received in advance will be shown as a liability in the balance sheet. The amount of income received in advance will be deducted from the credit side of profit and loss account.
  • Question 4
    1 / -0
    Accrued income will appear on the ____ side of the balance sheet. 
    Solution
    It may happen that certain items of income such as interest on loan, commission, rent, etc. are earned during the current accounting year but have not been actually received by the end of the same year. Such incomes are known as accrued income. The adjusting entry for accrued income is:
    Accrued Income A/c Dr.
         To Concerned Income A/c 
    The amount of accrued income will be added to the related income in the profit and loss account and the new account of accrued income will appear on the asset side of the balance sheet.
  • Question 5
    1 / -0
    The account of accrued income will be shown on _________ side.
    Solution
    It may happen that certain items of income such as interest on loan, commission, rent, etc. are earned during the accounting year but have not been actually received by the end of the same year. Such incomes are known as accrued income. The adjusting entry for accrued income is:
    Accrued Income A/c Dr.
          To Concerned Income A/c
    The amount of accrued income will be added to the related income in the profit and loss account on the credit side and the new account of accrued income will appear on the asset side of the balance sheet.
  • Question 6
    1 / -0
    Reserve for doubtful debts is created when recovery of bad debts is _________.
    Solution
    It is quite possible that the whole of the amount may not be realised in future.  However, it is not possible to accurately know the amount of such bad debts. Hence, we make a reasonable estimate of such loss and provide the same. Such provision is called provision for bad debts and is created by debiting profit and loss account. Reserve for doubtful debts is created when the recovery of bad debts id doubtful. Provision for doubtful debts is also shown as a deduction from the debtors on the asset side of the balance sheet.
  • Question 7
    1 / -0
    Depreciation is charged beacuse of ___________.
    Solution
    Depreciation is the decline in the value of an assets on account of wear and tear or passage of time. It is treated as a business expense and is debited to profit and loss account. It actually amounts to writing off  a portion of the cost of an asset which has been used in the business for the purpose of earning profits. In the balance sheet, the asset is shown at cost minus the amount of depreciation.
  • Question 8
    1 / -0
    If the amount of bad debts appears in trial balance it is only recorded on ________.
    Solution
    Sometimes, some people fail to pay their dues either partially or completely. The amount that is irrecoverable is a loss and known as "Bad Debts". Bad Debts refer to the amount that the firm has not been able to realize from its debtors. It is regarded as a loss. The following entry is passed when a debit becomes bad:
    Bad Debts A/c Dr.
         To Debtor's A/c
    As an effect of this entry, the debtor's account is closed and a new account called bad debts account is opened which is transferred, at the end of the year, to the Profit and Loss Account (debit side). Items appearing in the trial balance are only recorded in the debit side of profit and loss account.
  • Question 9
    1 / -0
    Depreciation is treated as a business expense and is debited to ________.
    Solution
    Depreciation is the decline in the value of assets on account of wear and tear and passage of time. It is treated as a business expense and is debited to profit and loss account. This, in effect, amounts to writing-off a portion of the cost of an asset which has been used in the business for the purpose of earning profits. The entry for providing depreciation is:
    Depreciation A/c Dr. 
          To Concerned Asset A/c 
    In the balance sheet, the asset will be shown at cost minus the amount of depreciation.
  • Question 10
    1 / -0
    Reserve for doubtful debts is made out of __________  profit .
    Solution
    It is quite possible that the whole amount may not be realised in future. However, it is not possible to actually know the amount of such debts. Hence, a reasonable estimate of such loss is made and provided the same. Such provision is called provision for bad debts and is created by debiting profit and loss account. The following journal entry is recorded as:
    Profit and Loss A/c Dr.
           To Provision for Doubtful Debts A/c
    It is shown as a deduction from the debtors on the asset side of the balance sheet. Reserve for doubtful debts is made out of revenue profit. 
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