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Accounting Equation Effects Test 13

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Accounting Equation Effects Test 13
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  • Question 1
    1 / -0
    Revenue is generally recognised at the point of sale denotes the concept of _______.
    Solution

    The revenue recognition principle is a cornerstone of accrual accounting together with the matching principle. They both determine the accounting period in which revenues and expenses are recognized. 

    According to the principle, revenues are recognized when they are realized or realizable, and are earned (usually when goods are transferred or services rendered), no matter when cash is received.

    In conclusion, the revenue shall be recognized at the point where sale is made, and not when the cash is received.

  • Question 2
    1 / -0
    Recognition of expenses in the same period as associated revenues is called ________concept.
    Solution
    The process of ascertaining the amount of profit earned or the loss incurred during a particular period involves deduction of related expenses from the revenue earned during that period. 
    The matching concept emphasises exactly on this aspect. It states that expenses incurred in an accounting period should be matched with revenues during that period.
    It follows from this that the revenue and expenses incurred to earn these revenues must belong to the same accounting period.
  • Question 3
    1 / -0
    If a firm believes that some of its debtors may default, it should act on this by making sure that all possible losses are recorded in the books. This is an example of the______concept.
    Solution

    The convention of conservatism mean that 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 4
    1 / -0
    The_______concept requires that accounting transaction should be free from the bias of accountants and others.
    Solution
    The objectivity concept requires that accounting transaction should be free from the bias of accountants and others. 
    This principle states that accounts should be prepared independently of biases and subjective methods. 
    This can be possible when each of the transaction is supported by verifiable documents or vouchers.
  • Question 5
    1 / -0
    The fact that a business is separate from its owner is best exemplified by the ________ concept.
    Solution
    The concept of business entity assumes that business has a distinct and separate entity from its owners. It means that for the purposes of accounting, the business and its owners are to be treated as two separate entities. Keeping this in view, when a person brings in some money as capital into his business, in accounting records, it is treated as liability of the business to the owner. 
    Here, one separate entity (owner) is assumed to be giving money to another distinct entity (business unit). 
    Similarly, when the owner withdraws any money from the business for his personal expenses(drawings), it is treated as reduction of the owner’s capital and consequently a reduction in the liabilities of the business.
  • Question 6
    1 / -0
    If a firm receives an order for goods, it would not be included in the sales figure owing to_____________concepts.
    Solution
    If a firm receives an order for goods, it would not be included in the sales figure owing to Revenue recognition concepts.  
    According, to this concept revenue can only be recognized when the underlying goods or services associated with the revenue has been delivered or rendered, respectively. Hence, in the given case sale will be recorded in the books, when goods are delivered.
  • Question 7
    1 / -0
    A concept that a business enterprise will not be sold or liquidated in the near future is known as_______.
    Solution
    The concept of going concern assumes that a business firm would continue to carry out its operations indefinitely, i.e. for a fairly long period of time and would not be liquidated in the foreseeable future. 
    This is an important assumption of accounting as it provides the very basis for showing the value of assets in the balance sheet.
  • Question 8
    1 / -0
    What is entity concept?
    Solution
    The concept of business entity assumes that business has a distinct and separate entity from its owners. It means that for the purposes of accounting, the business and its owners are to be treated as two separate entities. 
    Keeping this in view, when a person brings in some money as capital into his business, in accounting records, it is treated as liability of the business to the owner. 
    Here, one separate entity (owner) is assumed to be giving money to another distinct entity (business unit). 
    Similarly, when the owner withdraws any money from the business for his personal expenses(drawings), it is treated as reduction of the owner’s capital and consequently a reduction in the liabilities of the business.
  • Question 9
    1 / -0
    Concept under which comparison of one accounting period with the other period is possible is known as ___________ .
    Solution
    The accounting information provided by the financial statements would be useful in drawing conclusions regarding the working of an enterprise only when it allows comparisons over a period of time as well as with the working of other enterprises. 
    Thus, both inter-firm and inter-period comparisons are required to be made. This can be possible only when accounting policies and practices followed by enterprises are uniform and are consistent over the period of time.
  • Question 10
    1 / -0
    Amount invested in business by the proprietor is  ___________ .
    Solution
    Amount invested by the owner in the firm is known as capital. It may be brought in the form of cash or assets by the owner for the business entity capital as an obligation and a claim on the assets of business. It is, therefore, shown as capital on the liabilities side of the balance sheet. In other words, the capital means the interest of owner or owners in the assets of the business firm.
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