Q1. A Trading Account is primarily prepared to ascertain the:
(a) Net profit of the business
(b) Gross profit or gross loss
(c) Financial position of the business
(d) Cash flow from operating activities
Answer: (b)
Explanation: The Trading Account shows the result of buying and selling goods; its balance (debit or credit) represents gross profit or gross loss.
Q2. Which of the following items is debited to the Trading Account?
(a) Sales
(b) Closing stock
(c) Purchases returns
(d) Carriage outwards
Answer: (c)
Explanation: Purchases returns reduce the cost of purchases and are therefore debited (i.e., subtracted) in the Trading Account.
Q3. Closing stock appears on the credit side of the Trading Account because it:
(a) Increases the cost of goods sold
(b) Reduces the gross profit
(c) Represents unsold goods that are an asset
(d) Is treated as an expense
Answer: (c)
Explanation: Closing stock is an asset (unsold inventory) and is shown on the credit side to reduce the cost of goods sold, thereby increasing gross profit.
Q4. The formula for Cost of Goods Sold (COGS) in a Trading Account is:
(a) Opening Stock + Purchases – Closing Stock
(b) Opening Stock + Purchases + Closing Stock
(c) Sales – Gross Profit
(d) Purchases – Sales
Answer: (a)
Explanation: COGS = Opening Stock + Purchases (including direct expenses) – Closing Stock.
Q5. Which of the following is not shown in the Trading Account of a trading concern?
(a) Wages
(b) Carriage inwards
(c) Office rent
(d) Purchase returns
Answer: (c)
Explanation: Office rent is an indirect expense and appears in the Profit and Loss Account, not the Trading Account.
Q6. If the debit side of the Trading Account exceeds the credit side, the balance represents:
(a) Gross profit
(b) Net profit
(c) Gross loss
(d) Net loss
Answer: (c)
Explanation: A debit balance in the Trading Account indicates that the cost of goods sold exceeds sales, i.e., a gross loss.
Q7. Sales returns are recorded on the:
(a) Debit side of the Trading Account
(b) Credit side of the Trading Account
(c) Debit side of the Profit and Loss Account
(d) Credit side of the Balance Sheet
Answer: (b)
Explanation: Sales returns reduce sales and are therefore shown on the credit side (as a deduction) of the Trading Account.
Q8. Carriage inwards is treated as a:
(a) Indirect expense
(b) Direct expense
(c) Capital expenditure
(d) Revenue receipt
Answer: (b)
Explanation: Carriage inwards is a direct expense incurred to bring goods to the place of business and is debited in the Trading Account.
Q9. The Trading Account is prepared before the:
(a) Balance Sheet
(b) Profit and Loss Account
(c) Cash Flow Statement
(d) Trial Balance
Answer: (b)
Explanation: The Trading Account is prepared first to ascertain gross profit/loss, which is then transferred to the Profit and Loss Account.
Q10. Which of the following statements is true about the Trading Account?
(a) It shows the net profit of the business.
(b) It is prepared only for manufacturing concerns.
(c) Its balance is transferred to the Profit and Loss Account.
(d) It includes income from investments.
Answer: (c)
Explanation: The gross profit or gross loss from the Trading Account is transferred to the Profit and Loss Account to ascertain net profit.
Q11. In the Trading Account, ‘Opening Stock’ is shown on the:
(a) Credit side
(b) Debit side
(c) Both sides
(d) Not shown
Answer: (b)
Explanation: Opening stock represents goods available at the start of the period and is debited to the Trading Account.
Q12. Which of the following would increase the gross profit shown in the Trading Account?
(a) Increase in closing stock
(b) Increase in purchases returns
(c) Increase in carriage inwards
(d) Increase in sales returns
Answer: (a)
Explanation: A higher closing stock reduces the cost of goods sold, thereby increasing gross profit.
Q13. Freight paid on goods purchased is classified as:
(a) Direct expense
(b) Indirect expense
(c) Other income
(d) Capital expenditure
Answer: (a)
Explanation: Freight on purchases (carriage inwards) is a direct expense and is debited in the Trading Account.
Q14. The Trading Account does not include:
(a) Sales
(b) Purchase returns
(c) Discount received
(d) Wages
Answer: (c)
Explanation: Discount received is an indirect income and appears in the Profit and Loss Account, not the Trading Account.
Q15. If a business has no opening stock, the Trading Account will start with:
(a) Zero
(b) Purchases only
(c) Closing stock
(d) Sales
Answer: (b)
Explanation: In the absence of opening stock, the Trading Account begins with purchases (plus direct expenses) as the initial cost of goods available for sale.
Q16. Which of the following is a direct expense normally debited to the Trading Account?
(a) Salary to office staff
(b) Advertising expenses
(c) Factory lighting
(d) Legal fees
Answer: (c)
Explanation: Factory lighting is a direct expense related to production or storage of goods and is debited in the Trading Account.
Q17. The gross profit ratio is calculated as:
(a) (Gross Profit / Sales) × 100
(b) (Gross Profit / Purchases) × 100
(c) (Net Profit / Sales) × 100
(d) (Closing Stock / Opening Stock) × 100
Answer: (a)
Explanation: Gross profit ratio expresses gross profit as a percentage of net sales.
Q18. In a Trading Account, ‘Purchase Returns’ are shown on the:
(a) Debit side as an addition
(b) Credit side as a deduction
(c) Debit side as a deduction
(d) Credit side as an addition
Answer: (b)
Explanation: Purchase returns reduce the cost of purchases and are therefore credited (shown as a deduction) in the Trading Account.
Q19. Which of the following statements is correct regarding the treatment of ‘Closing Stock’ in final accounts?
(a) It is shown on the asset side of the Balance Sheet only.
(b) It is shown on the credit side of the Trading Account and the asset side of the Balance Sheet.
(c) It is shown on the debit side of the Trading Account and the liability side of the Balance Sheet.
(d) It is ignored in final accounts if the business is a service concern.
Answer: (b)
Explanation: Closing stock appears on the credit side of the Trading Account (to reduce COGS) and as a current asset in the Balance Sheet.
Q20. If the credit side of the Trading Account exceeds the debit side, the balance is:
(a) Gross loss
(b) Net profit
(c) Gross profit
(d) Net loss
Answer: (c)
Explanation: A credit balance indicates that sales exceed the cost of goods sold, i.e., gross profit.
Q21. Which of the following items would be debited to the Trading Account of a manufacturing concern?
(a) Finished goods stock
(b) Raw material purchases
(c) Sales of finished goods
(d) Dividend received
Answer: (b)
Explanation: Raw material purchases are a direct cost and are debited in the Trading Account (or Manufacturing Account) of a manufacturing concern.
Q22. The Trading Account is prepared to ascertain the:
(a) Net profit after tax
B) Gross profit or gross loss
C) Financial position
D) Cash flow from investing activities
Answer: (b)
Explanation: Same as Q1 – the Trading Account shows gross profit/loss.
Q23. In the Trading Account, ‘Wages’ paid to factory workers are:
(a) Indirect expense
(b) Direct expense
(c) Other income
(d) Capital expenditure
Answer: (b)
Explanation: Wages paid to workers directly involved in production or handling of goods are direct expenses and are debited in the Trading Account.
Q24. Which of the following is not a component of the Cost of Goods Sold?
(a) Opening stock
(b) Closing stock
(c) Sales
(d) Purchases
Answer: (c)
Explanation: Sales are revenue; they are not part of the cost of goods sold.
Q25. The Trading Account is a part of the:
(a) Only final accounts of a partnership firm
(b) Final accounts of any business engaged in buying and selling goods
(c) Final accounts of only nonprofit organizations
(d) Only the balance sheet of a company
Answer: (b)
Explanation: The Trading Account is prepared for any trading (or manufacturing) concern to determine gross profit/loss before preparing the Profit and Loss Account and Balance Sheet.
