Q1. The Profit and Loss Account shows the result of business operations for a period. Which of the following is NOT shown in it?
(a) Sales revenue
(b) Cost of goods sold
(c) Depreciation expense
(d) Share capital
Answer: (d)
Explanation: Share capital is an equity item and appears in the Balance Sheet, not in the Profit and Loss Account.
Q2. Gross profit is calculated as:
(a) Net sales – Operating expenses
(b) Net sales – Cost of goods sold
(c) Net profit – Interest expense
(d) Total assets – Total liabilities
Answer: (b)
Explanation: Gross profit = Net sales (or revenue) – Cost of goods sold (COGS).
Q3. Which of the following items would be recorded on the credit side of a Trial Balance?
(a) Debtors
(b) Furniture
(c) Capital
(d) Salaries expense
Answer: (c)
Explanation: Capital (owner’s equity) has a credit balance; assets and expenses have debit balances.
Q4. In the Balance Sheet, “Accumulated Depreciation” is shown under:
(a) Current Assets
(b) Fixed Assets (as a deduction)
(c) Current Liabilities
(d) Shareholders’ Equity
Answer: (b)
Explanation: Accumulated depreciation is a contra‑asset account deducted from the related fixed asset to show its net book value.
Q5. Which of the following is a current liability?
(a) Long‑term loan
(b) Debentures redeemable after 5 years
(c) Bills payable
(d) Plant and machinery
Answer: (c)
Explanation: Bills payable are obligations due within the operating cycle (usually <12 months) and thus are current liabilities.
Q6. The matching principle requires that:
(a) Revenues be recorded when cash is received
(b) Expenses be recorded in the period in which they help generate revenue
(c) Assets be recorded at market value
(d) Liabilities be recorded only when paid
Answer: (b)
Explanation: Matching concept states expenses should be recognised in the same period as the revenues they helped to earn.
Q7. Which of the following would increase both total assets and total equity?
(a) Taking a bank loan
(b) Purchasing equipment for cash
(c) Issuing share capital for cash
(d) Paying dividends
Answer: (c)
Explanation: Issuing shares for cash raises cash (asset) and share capital (equity) equally.
Q8. Depreciation charged on machinery for the year is:
(a) An expense in the Profit and Loss Account and reduces the machinery value in the Balance Sheet
(b) Only an expense in the Profit and Loss Account
(c) Only a reduction in the Balance Sheet
(d) Not recorded unless the asset is sold
Answer: (a)
Explanation: Depreciation is an expense (P&L) and accumulated depreciation reduces the carrying amount of the asset (Balance Sheet).
Q9. Prepaid insurance appearing in the Balance Sheet is classified as:
(a) Current Asset
(b) Fixed Asset
(c) Current Liability
(d) Long‑term Liability
Answer: (a)
Explanation: Prepaid expenses are benefits to be received within the next accounting period, hence current assets.
Q10. Which of the following statements is true about the Balance Sheet?
(a) It shows the profitability of the firm for a period
(b) It is prepared after the Trading and Profit and Loss Account
(c) It records only cash transactions
(d) It does not need to balance
Answer: (b)
Explanation: The Balance Sheet is prepared after the Profit and Loss Account to reflect the financial position at the end of the period.
Q11. Net profit is transferred to:
(a) The Trading Account
(b) The Profit and Loss Appropriation Account
(c) The Balance Sheet under Reserves and Surplus
(d) The Cash Book
Answer: (c)
Explanation: After appropriations (dividends, transfers to reserves), the remaining profit is added to retained earnings, which appears under equity in the Balance Sheet.
Q12. Which of the following is NOT a component of working capital?
(a) Inventory
(b) Accounts receivable
(c) Long‑term investments
(d) Accounts payable
Answer: (c)
Explanation: Working capital = Current assets – Current liabilities; long‑term investments are non‑current assets.
Q13. If a firm’s current ratio is less than 1, it indicates:
(a) Strong liquidity
(b) Adequate short‑term solvency
(c) Potential liquidity problems
(d) High profitability
Answer: (c)
Explanation: A current ratio below 1 means current liabilities exceed current assets, signalling possible difficulty meeting short‑term obligations.
Q14. Which of the following would be shown on the debit side of a Trading Account?
(a) Sales returns
(b) Opening stock
(c) Closing stock
(d) Gross profit
Answer: (b)
Explanation: Opening stock is added to the cost of goods sold and appears on the debit side of the Trading Account.
Q15. Interest received on bank deposits is recorded in:
(a) Trading Account
(b) Profit and Loss Account (as other income)
(c) Balance Sheet under Assets
(d) Trading Account as a deduction from purchases
Answer: (b)
Explanation: Interest income is non‑operating revenue and appears on the credit side of the Profit and Loss Account.
Q16. Which of the following errors will affect the agreement of a Trial Balance?
(a) Error of principle
(b) Error of omission
(c) Error of commission (posting to wrong account but same side)
(d) Error of original entry
Answer: (b)
Explanation: Complete omission of a transaction removes both debit and credit entries, causing the trial balance to be out of agreement.
Q17. Provision for doubtful debts is created:
(a) To increase profit
(b) To reduce the value of debtors to their realizable amount
(c) To increase cash balance
(d) To record actual bad debts written off
Answer: (b)
Explanation: The provision is a contra‑asset that reduces debtors to reflect expected realizable value, following prudence.
Q18. In a Balance Sheet, “Share Premium” is shown under:
(a) Current Liabilities
(b) Fixed Assets
(c) Shareholders’ Equity (Reserves and Surplus)
(d) Long‑term Liabilities
Answer: (c)
Explanation: Share premium is part of shareholders’ equity and appears under reserves and surplus.
Q19. Which of the following transactions will increase both an asset and a liability?
(a) Payment of salaries
(b) Purchase of inventory on credit
(c) Issue of shares for cash
(d) Depreciation charged on machinery
Answer: (b)
Explanation: Buying inventory on credit raises inventory (asset) and creates accounts payable (liability).
Q20. The term “Capital Employed” is best defined as:
(a) Total assets minus current liabilities
(b) Share capital plus long‑term borrowings
(c) Fixed assets plus working capital
(d) Total equity
Answer: (c)
Explanation: Capital employed = Fixed assets + Working capital (or Total assets – Current liabilities), representing the funds invested in the business.
Q21. Which of the following appears on the credit side of a Profit and Loss Account?
(a) Salaries expense
(b) Rent expense
(c) Discount received
(d) Depreciation expense
Answer: (c)
Explanation: Discount received is income and is credited to the Profit and Loss Account.
Q22. If the closing stock is overstated, the effect on net profit will be:
(a) Understated
(b) Overstated
(c) No effect
(d) Cannot be determined
Answer: (b)
Explanation: Overstated closing stock reduces cost of goods sold, thereby inflating gross profit and net profit.
Q23. Which of the following is NOT shown in the Balance Sheet of a sole proprietorship?
(a) Capital
(b) Loan from bank
(c) Drawings
(d) Revenue from sales
Answer: (d)
Explanation: Revenue is a temporary account closed to the Profit and Loss Account; it does not appear in the Balance Sheet.
Q24. The purpose of preparing a Trial Balance is to:
(a) Ascertain the financial position
(b) Check the arithmetical accuracy of ledger postings
(c) Determine the net profit
(d) Prepare the cash flow statement
Answer: (b)
Explanation: A Trial Balance lists all ledger balances to verify that total debits equal total credits before preparing final accounts.
Q25. Which of the following statements about the Balance Sheet is correct?
(a) It is prepared for a period of time
(b) It shows the excess of assets over liabilities as profit
(c) It must always balance: Assets = Liabilities + Equity
(d) It includes only cash and bank balances
Answer: (c)
Explanation: The fundamental accounting equation ensures that a properly prepared Balance Sheet always balances: Assets = Liabilities + Owner’s Equity.
