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Accounting Equation Effects Test 44

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Accounting Equation Effects Test 44
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  • Question 1
    1 / -0
    If a radio seller-proprietor buys a radio for his personal use from out of business funds, the amount paid for the radio will be treated as "drawings" of the proprietor because of __________.
    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. 
    Hence, the above case will be considered as drawings as per the business entity concept,
  • Question 2
    1 / -0
    According to the conservation concept, which of the following is recommended?
    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. Charging of small capital items, like crockery to revenue.

  • Question 3
    1 / -0
    If the principle of conservatism is stretched without reservation, its likely effect may be ___________________.
    Solution
    If the principle of conservatism is stretched without reservation, its likely effect may be
    1. Creation of secret reserves
    2. Violation of the doctrine of full disclosure
    3. Reported profit less than the actual profit
  • Question 4
    1 / -0
    An increase in one liability may lead to _________________.
    Solution
    An increase in one liability may lead to
    1. Increase in another asset or 
    2. Decrease in liability
  • Question 5
    1 / -0
    Apart from statutory requirements good accounting practice also demands all significant information should be fully and fairly disclosed in the financial statements. This is as per _________________.
    Solution

    The principle of full disclosure requires that all material and relevant facts concerning financial performance of an enterprise must be fully and completely disclosed in the financial statements and their accompanying footnotes. 

    This is to enable the users to make correct assessment about the profitability and financial soundness of the enterprise and help them to take informed decisions.

    Hence, the convention of disclosure is a good accounting practice for the firm.

  • Question 6
    1 / -0
    A businessman purchases goods worth Rs.25,00,000Rs.25,00,000 and sold 80%80\% of such goods during the accounting year ending on 3131st March, 20112011. The market value of the remaining goods was Rs.7,50,000Rs.7,50,000. He valued the closing stock @ Rs.5,00,000Rs.5,00,000 and not at Rs.7,50,000Rs.7,50,000 due to ___________.
    Solution
    Conservatism convention- This convention ensures that uncertainties and risks inherent in business transactions should be given a proper consideration. as per this convention the accountants follow the rule 'anticipate no profit but provide for all possible losses'.
    Purchase ==Rs. 25,00,00025,00,00080%80% of the goods have been sold.
    So, cost of goods sold ==Rs. 20,00,00020,00,000
    Stock remains at cost of Rs. 5,00,0005,00,000.
    Since, market value of the stock left is Rs. 7,50,0007,50,000 which is higher than the cost of stock. So, stock is valued at Rs. 5,00,0005,00,000.
  • Question 7
    1 / -0
    Which of the following accounting equation is correct?
    Solution
    According to accounting equation
    Capital ++ Trade Liabilities ==Assets(or)
    Capital ++ Trade Liabilities ==Fixed Assets ++ Current Assets
    Capital =7,000=7,000
    Assets==Assets (8,000)(8,000)++ Cash at Bank (4,000)(4,000)++ Cash (3,000)=(3,000)=Rs. 15,00015,000.
    Therefore Liabilities= Capital + Trade Payable
    =Rs.7000+Rs.8000
    =Rs.15000
  • Question 8
    1 / -0
    If a machinery is purchased for Rs. 1,00,000, the asset would be recorded in the books at Rs. 1,00,000 even if its market value at that time happens to be Rs. 1,40,000. In case a year after, the market value of this asset comes down to Rs. 90,000, it will ordinarily continue to be show at Rs. 1,00,000 and not at Rs. 90,000 due to _______________.
    Solution
    Cost Concept states that an asset should be recorded at its cost price. Therefore, in this case, The assets shall be recorded at 100,000 as it is the cost price of the asset and the market price shall not be taken into consideration.
  • Question 9
    1 / -0
    As per which concept, a clear distinction is made between assets and expenses?
    Solution
    As per Going Concern Concept, a clear distinction is made between assets and expenses as it is not fair to charge the whole amount of asset to the current accounting year as benefits from that assets will also be received in future years.
  • Question 10
    1 / -0
    Inclusion of personal expenses of using car in the business expenses would violate the concept of __________.
    Solution
    In accounting,business organization and owners are two different identify. Thus business has its own existence separate from owners, creditors etc. This concept is called business entity concept. It means that personal transactions of owners are treated separately from those of the business.
    Therefore any personal expenses incurred by owners of a business will not appear in the income statement of the entity. It has to be considered as drawings and to be deducted from capital.
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