Accounting Equation Effects Test 11

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Accounting Equation Effects Test 11

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Question 1
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Accounting records transactions in terms of____________.

A
Commodity units.

B
Monetary units.

C
Production units.

D
None of these.

Solution

Accounting records transactions in terms of monetary units. As per Money measurement concept, only those transactions or events which can be converted in monetary terms are to be recorded. Hence, an event like efficiency of the manager cannot be recorded in the books of accounts.
Question 2
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An accounting convention which provides that when doubt, choose the solution least likely to overstate assets and income is_________.

A
Consistency

B
Materiality

C
Conservatism

D
Continuity

Solution

The concept of conservatism (also called ‘prudence’) provides guidance for recording transactions in the books of accounts and is based on the policy of playing safe.
The concept states that a conscious approach should be adopted in ascertaining income so that profits of the enterprise are not overstated.
The concept of conservatism requires that profits should not to be recorded until realised but all losses, even those which may have a remote possibility, are to be provided in the books of accounts.
Question 3
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The fundamental accounting equation Assets = Capital + Liabilities is the formal expression of __________.

A
Dual aspect concept

B
Matching concept

C
Going concern concept

D
Money measurement concept

Solution

Dual aspect is the foundation or basic principle of accounting. This concept states that every transaction has a dual or two-fold effect and should therefore be recorded at two places.
The duality principle is commonly expressed in terms of fundamental Accounting Equation, which is as follows :
Assets = Liabilities + Capital
In other words, the equation states that the assets of a business are always equal to the claims of owners and the outsiders. The claims also called equity of owners is termed as Capital(owners’ equity) and that of outsiders, as Liabilities(creditors equity).
Question 4
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Which of the following is an example of 'REVENUE' for the purpose of AS-9?

A
Appreciation in the value of a fixed asset.

B
Gain resulting from changes in foreign exchange rates.

C
Royalties receivable.

D
Realized gain resulting from the discharge of an obligation at less than its carrying amount.

Solution

AS-9 deals with the bases for recognition of revenue in the statement of profit and loss of an enterprise. The Standard is concerned with the recognition of revenue arising in the course of the ordinary activities of the enterprise from:
–the sale of goods,
–the rendering of services, and
–the use by others of enterprise resources yielding interest, royalties and dividends.
Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends.
Question 5
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The owner of a company included his personal travel expenses in the company's income statements. Indicate the accounting principle that is violated.

A
Cost principle

B
Going concern concept

C
Entity concept

D
Conservatism

Solution

The business entity concept states that the transactions associated with a business must be separately recorded from those of its owners or other businesses. Doing so requires the use of separate accounting records for the organisation that completely exclude the assets and liabilities of any other entity or the owner. Without this concept, the records of multiple entities would be intermingled, making it quite difficult to discern the financial or taxable results of single business.
Question 6
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Vivek started business with a capital of $$Rs.20,000$$ and purchased goods worth $$Rs.2,000$$ on credit. These transactions may be expressed in the form of an accounting equation such as __________.

A
$$Rs. 22,000 = Rs. 20,000 + Rs. 2,000$$

B
$$Rs. 20,000 = Rs. 22,000 - Rs. 2,000$$

C
$$Rs. 22,000 = Rs. 22,000 + Rs. 0$$

D
$$Rs. 22,000 = Rs. 0 + Rs. 22,000$$

Solution

Accounting Equation may be defined as:

Share Capital+Liabilities=Fixed Assets+Current Assets

Here , Vivek has contributed $$Rs.20000$$ as Capital, this will result an increase in cash by $$Rs.20000$$. Goods purchased on credit for $$Rs.2000$$ result in an increase in stock by $$Rs. 2000$$ and increase in current liabilities.

Therefore equation will be:
Capital+ Current Liabilities = Cash+Goods
$$Rs.20000$$+$$Rs.2000$$ = $$Rs.20000$$+$$Rs.2000$$.
Question 7
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Land was reported at its selling price which is substantially higher than its cost. The increase in value was included in the income statement. Which accounting principle is violated?

A
Cost principle

B
Going concern concept

C
Entity concept

D
Conservatism

Solution

If Land was reported at its selling price which is substantially higher than its cost. The increase in value was included in the income statement. The principle which is violated is cost principle.
According to cost principle, the amount of gross fixed assets should appear at the historical cost which the cost of acquiring the asset.
Question 8
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Window dressing is prohibited due to ____________.

A
Convention of conservation

B
Convention of disclosure

C
Convention of materiality

D
Accrual concept

Solution

As per the convention of disclosure, accountant should show the correct information in the book of account. Same information should be disclosed by him. In window dressing, accountant or businessman changes the information in accounting records for getting benefits from outside parties. So, as per convention of disclosure, it should be prohibited.
Question 9
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Provision for bad debts is made under the principle of_____________.

A
Full disclosure

B
Conservatism

C
Industry practice

D
Consistency

Solution

The convention of conservatism is the convention of caution, or the policy of playing safe. This principle requires that in the situation of uncertainty and doubt, the business transactions should be recorded in such a manner that the profits and assets are not overstated and losses and liabilities are not understated. The following are some examples:
1. Closing stock is valued at cost price or Net realisable value, whichever is lower.
2. Joint life insurance policy is shown only at surrender value as against the amount paid.
3. Provision for doubtful debt is created in anticipation of bad debts etc.
4. Provision for pending law suit against the firm, which may either be decided in its favour.
Question 10
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According to the money measurement concept, the following will be recorded in the books of accounts________________.

A
Quality control in business.

B
Commission payable to a salesman.

C
Extra profits made due to introduction of a budgetary control system.

D
All of these.

Solution

The concept of money measurement states that only those transactions and happenings in an organisation which can be expressed in terms of money such as sale of goods or payment of expenses or receipt of income, etc. are to be recorded in the book of accounts.
All such transactions or happenings which can not be expressed in monetary terms, for example, the appointment of a manager, do not find a place in the accounting records of a firm.
Hence, in the above case, only commission payable to a salesman will be recorded in the books of accounts.

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Accounting Equation Effects Test 11

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Accounting Equation Effects Test 11

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Question 1

Commodity units.

Monetary units.

Production units.

None of these.

Solution

Question 2

Consistency

Materiality

Conservatism

Continuity

Solution

Question 3

Dual aspect concept

Matching concept

Going concern concept

Money measurement concept

Solution

Question 4

Appreciation in the value of a fixed asset.

Gain resulting from changes in foreign exchange rates.

Royalties receivable.

Realized gain resulting from the discharge of an obligation at less than its carrying amount.

Solution

Question 5

Cost principle

Going concern concept

Entity concept

Conservatism

Solution

Question 6

$$Rs. 22,000 = Rs. 20,000 + Rs. 2,000$$

$$Rs. 20,000 = Rs. 22,000 - Rs. 2,000$$

$$Rs. 22,000 = Rs. 22,000 + Rs. 0$$

$$Rs. 22,000 = Rs. 0 + Rs. 22,000$$

Solution

Question 7

Cost principle

Going concern concept

Entity concept

Conservatism

Solution

Question 8

Convention of conservation

Convention of disclosure

Convention of materiality

Accrual concept

Solution

Question 9

Full disclosure

Conservatism

Industry practice

Consistency

Solution

Question 10

Quality control in business.

Commission payable to a salesman.

Extra profits made due to introduction of a budgetary control system.

All of these.

Solution

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