Essential Bookkeeping & Accounting Questions Explained
This guide breaks down fundamental bookkeeping and accounting concepts through clear questions and detailed explanations. It’s designed to improve understanding for students and professionals alike.
Q1. What is the primary objective of bookkeeping?
- (a) Preparation of tax returns
- (b) Recording all financial transactions systematically
- (c) Forecasting future sales
- (d) Conducting audit of financial statements
Answer: (b)
Explanation: Bookkeeping focuses on the systematic recording of day‑to‑day financial transactions. Other options relate to higher‑level accounting, analysis, or auditing functions.
Q2. In double‑entry accounting, every transaction affects at least:
- (a) One account
- (b) Two accounts, one debited and one credited
- (c) Three accounts
- (d) Only asset accounts
Answer: (b)
Explanation: The core principle of double‑entry bookkeeping requires each transaction to have equal debit and credit entries, impacting at least two accounts.
Q3. How is the accounting equation expressed?
- (a) Assets = Liabilities – Equity
- (b) Assets + Liabilities = Equity
- (c) Assets = Liabilities + Equity
- (d) Liabilities = Assets + Equity
Answer: (c)
Explanation: This fundamental equation shows that what a business owns (assets) is financed by what it owes to outsiders (liabilities) plus the owners’ claim (equity).
Q4. Which journal is used to record credit purchases of goods?
- (a) Cash book
- (b) Sales journal
- (c) Purchase journal
- (d) General journal
Answer: (c)
Explanation: The purchase journal (or purchases day book) is a specialized book for recording all credit purchases of merchandise. Cash purchases are recorded in the cash book.
Q5. What is the purpose of preparing a trial balance?
- (a) Determine the net profit for the period
- (b) Verify that total debits equal total credits
- (c) List all assets and liabilities
- (d) Show cash flows
Answer: (b)
Explanation: A trial balance checks the arithmetical accuracy of ledger postings by ensuring the total of all debit balances equals the total of all credit balances.
Q6. Which error will NOT affect the agreement of a trial balance?
- (a) Omitting a transaction completely
- (b) Posting a debit amount to the credit side of the same account
- (c) Recording a transaction twice on the same side
- (d) Compensating errors (equal and opposite errors)
Answer: (d)
Explanation: Compensating errors cancel each other’s effect on debit and credit totals, so the trial balance will still balance despite the underlying mistakes.
Q7. Why is depreciation charged?
- (a) Reduce the market value of an asset
- (b) Allocate the cost of a tangible fixed asset over its useful life
- (c) Increase net profit in the early years
- (d) Record cash outflow for asset purchase
Answer: (b)
Explanation: Depreciation is the systematic allocation of a tangible fixed asset’s historical cost to expense over its estimated useful economic life.
Q8. What does the straight‑line method of depreciation result in?
- (a) Higher depreciation expense in earlier years
- (b) Equal depreciation expense each year
- (c) No depreciation in the first year
- (d) Depreciation based on usage
Answer: (b)
Explanation: Under the straight‑line method, (Cost – Salvage value) ÷ Useful life gives a constant annual depreciation charge throughout the asset’s life.
Q9. Which account is credited when goods are returned by a customer?
- (a) Sales Returns Account
- (b) Accounts Receivable
- (c) Sales Account
- (d) Inventory Account
Answer: (a)
Explanation: Sales Returns (or Returns Inward) is a contra‑revenue account. It is credited to reduce the total sales revenue when goods are returned by customers.
Q10. Why is a bank reconciliation statement prepared?
- (a) Ascertain the cash balance as per cash book
- (b) Explain differences between the bank statement balance and the cash book balance
- (c) Record bank charges
- (d) Prepare the cash flow statement
Answer: (b)
Explanation: It identifies and explains discrepancies (e.g., outstanding cheques, deposits in transit) between the bank’s records and the entity’s own cash book records.
Q11. Which of the following is a nominal account?
- (a) Machinery
- (b) Capital
- (c) Rent Received
- (d) Sundry Creditors
Answer: (c)
Explanation: Nominal accounts relate to incomes, expenses, gains, and losses, and are closed at the end of the accounting period. Rent Received is an income account.
Q12. Where is closing stock shown?
- (a) On the debit side of the Trading Account and as an asset in the Balance Sheet
- (b) On the credit side of the Trading Account and as a liability in the Balance Sheet
- (c) Only in the Profit and Loss Account
- (d) Only in the Cash Book
Answer: (a)
Explanation: Closing stock is credited to the Trading Account to calculate the correct cost of goods sold and gross profit. It then appears as a current asset in the Balance Sheet.
Q13. How are prepaid expenses classified?
- (a) Liabilities
- (b) Expenses
- (c) Assets
- (d) Revenues
Answer: (c)
Explanation: Prepaid expenses represent payments made for economic benefits (like insurance or rent) not yet consumed. They are classified as current assets until the benefit is realized.
Q14. What is true about the accrual basis of accounting?
- (a) Revenues are recorded when cash is received
- (b) Expenses are recorded when cash is paid
- (c) Revenues are recorded when earned, irrespective of cash receipt
- (d) Only cash transactions are recorded
Answer: (c)
Explanation: Accrual accounting recognizes revenues when they are earned and expenses when they are incurred, regardless of the timing of the related cash flows.
Q15. What is the purpose of a suspense account?
- (a) Record permanent differences
- (b) Temporarily hold an amount until the correct account is identified
- (c) Close the books at year‑end
- (d) Record depreciation
Answer: (b)
Explanation: A suspense account is a temporary holding account used to balance the trial balance while errors are investigated and corrected.
Q16. Which is NOT a component of the traditional final accounts for a sole proprietorship?
- (a) Trading Account
- (b) Profit and Loss Account
- (c) Balance Sheet
- (d) Cash Flow Statement
Answer: (d)
Explanation: While a cash flow statement is a key financial statement, the traditional “final accounts” for a sole proprietor specifically comprise the Trading Account, Profit & Loss Account, and Balance Sheet.
Q17. How do you record goods taken by the proprietor for personal use?
- (a) Debiting Drawings and crediting Purchases
- (b) Debiting Drawings and crediting Stock
- (c) Debiting Stock and crediting Drawings
- (d) Debiting Cash and crediting Drawings
Answer: (b)
Explanation: This withdrawal of goods reduces inventory (stock) and increases the proprietor’s drawings. The correct entry is to debit the Drawings account and credit the Stock (or Purchases) account.
Q18. In a bank reconciliation, how is an unpresented cheque treated when starting with the cash book balance?
- (a) Subtracted from the cash book balance
- (b) Added to the cash book balance
- (c) Subtracted from the bank statement balance
- (d) Added to the bank statement balance
Answer: (b)
Explanation: An unpresented cheque has been recorded as a payment (credit) in the cash book but not yet cleared by the bank. To reconcile to the bank statement balance, it is added to the cash book balance.
Q19. Which error is disclosed by preparing a trial balance?
- (a) Error of principle
- (b) Compensating error
- (c) Error of omission
- (d) Error of posting a wrong amount to the correct account
Answer: (d)
Explanation: Posting a wrong amount (e.g., debiting ₹500 instead of ₹5,000) creates an imbalance between total debits and credits, which the trial balance will reveal.
Q20. What does a “contra entry” in a cash book refer to?
- (a) An entry that affects both cash and bank columns
- (b) An entry that reverses a previous entry
- (c) An entry recorded only in the journal
- (d) An entry for credit sales
Answer: (a)
Explanation: Contra entries record transactions that involve both the cash and bank columns, such as cash deposited into the bank or cash withdrawn from the bank for office use.
Q21. Which account is debited when a provision for doubtful debts is created?
- (a) Bad Debts Expense
- (b) Provision for Doubtful Debts
- (c) Sundry Debtors
- (d) Profit and Loss Account
Answer: (a)
Explanation: Creating a provision is an expense. The entry is to debit Bad Debts Expense (or Provision for Doubtful Debts Expense) and credit the liability account “Provision for Doubtful Debts.”
Q22. In consignment accounting, how is the consignee’s commission recorded?
- (a) Debited to Consignee’s Account and credited to Commission Earned
- (b) Credited to Consignee’s Account and debited to Commission Earned
- (c) Debited to Consignor’s Account and credited to Cash
- (d) Credited to Consignor’s Account and debited to Expenses
Answer: (a)
Explanation: From the consignor’s books, the commission payable to the consignee is an expense. It is recorded by debiting the Consignee’s Account (increasing amount payable) and crediting Commission Earned (or similar income account for the consignee).
Q23. Which statement about a cash discount is correct?
- (a) It is recorded in the purchase book
- (b) It is given to encourage early payment and is recorded in the cash book
- (c) It increases the invoice amount
- (d) It is a trade discount
Answer: (b)
Explanation: A cash discount is a reduction granted for prompt payment of an invoice. It is recorded in the cash book (or bank column) at the time the cash is received or paid.
Q24. Why does a sole proprietor’s capital account show a credit balance?
- (a) It represents an asset of the business
- (b) It represents the proprietor’s claim (equity) in the business
- (c) It is a liability
- (d) It records withdrawals only
Answer: (b)
Explanation: The capital account represents the owner’s equity or claim on the business assets. It is credited for investments and net profits, and debited for drawings, normally resulting in a credit balance.
Q25. Which is NOT a qualitative characteristic of financial information?
- (a) Relevance
- (b) Reliability
- (c) Comparability
- (d) Profitability
Answer: (d)
Explanation: Relevance, faithful representation (reliability), and comparability are fundamental qualitative characteristics of useful financial information. Profitability is a measure of financial performance, not a
