Practice Questions

Current assets are cash, receivables, and inventory—expected to be liquidated within a year

Registered (Authorized) Capital:

Maximum capital a company can raise.

Not specifically “called up” in any situation.

Issued Capital:

Part of authorized capital actually offered to shareholders.

Can be called up anytime by the company, not restricted to winding up.

Reserve Capital ✅

Portion of unpaid capital that can only be called up in the event of winding up.

Shareholders are liable to pay this portion only if the company is closing.

Revised Capital:

Authorized capital after it is increased or decreased.

Not related to being called up.

Expenses are the costs incurred to earn revenue.

Non-profits do not distribute profits; surplus or deficit is adjusted in the capital fund.

Livestock values fluctuate, so revaluation method is used to reflect actual market value.

Debt-equity ratio shows the proportion of borrowed funds vs. owner’s equity

Incentive wage plans pay employees based on output or results. “Payment by result” is the general term for this approach.

Bad debts are amounts owed by debtors that are written off as loss when considered irrecoverable.

If a bad debt is later recovered, it becomes income for the business.

Therefore, it is shown on the credit side of the Profit & Loss Account as “Bad Debts Recovered”.

Other options:

Debit side of P&L: Would indicate an expense, which is incorrect.

Sundry Debtors Account: Only adjusts the debtor’s balance, not recorded as income in P&L.

Separately in Balance Sheet: Not shown separately; it affects profit.

Outstanding wages are wages incurred but not yet paid by the business at the end of the accounting period.

They represent an obligation to pay, so they are a liability.

They do not appear in the Trading or Profit & Loss Account directly, but when preparing the Profit & Loss Account, they are added to the wages/expenses to calculate total expenses.

Work-in-progress (WIP) refers to partially completed goods in a manufacturing process.

Accounting principle for valuation of WIP: Conservative / Lower of Cost or Market (Net Realizable Value).

Cost price: Expenses incurred so far in producing the goods.

Market price / Net realizable value: Estimated selling price minus completion and selling costs.

This ensures that assets are not overstated in the financial statements.

Other options:

Market price: Could overstate WIP.

Cost price: Ignores possible fall in realizable value.

Selling price: Not used for valuation in accounts.

Cost price or market price which ever is less

When forfeited shares are reissued, any profit made on the reissue (i.e., the amount received over the original issue price) is not treated as revenue.

Instead, it is transferred to a Capital Reserve Account because it is a capital profit.

Capital Reserve is used for purposes like writing off capital losses, issuing bonus shares, or strengthening the financial position of the company.

Other options:

Share Capital: Only records the nominal value of shares issued.

Profit & Loss Account: For revenue profits, not capital profits.

Reserve Capital: Portion of uncalled capital, not related to profit on reissue.

The current standard for depreciation accounting is:

IAS 16 – Property, Plant, and Equipment

It deals with:

Depreciable amount = Cost − Residual value

Allocation of cost over the useful life of assets

Methods like Straight-Line, Diminishing Balance, and Units of Production

Summary:

Depreciation accounting should follow IAS 16, not IAS IV.

Period costs are costs that are not directly tied to the production of goods and are incurred over a period of time.

Examples: Rent, Salaries of office staff, Depreciation of office building.

These costs are generally fixed in nature, i.e., they remain constant irrespective of the level of production.

Other options:

Variable costs: Change with production level (e.g., raw materials, direct labor).

Overhead: Can include both fixed and variable components.

Prime cost: Direct costs of production (Direct materials + Direct labor).

Purchase Book (also called Purchase Day Book) is a special journal used to record all credit purchases of goods made by the business.

Cash purchases are not recorded in the Purchase Book; they are recorded in the Cash Book.

Summary:

Credit Purchases → Purchase Book

Cash Purchases → Cash Book

This helps in organizing transactions efficiently before posting them to the ledger.

Floating assets are assets that are used in the business for a short period and keep circulating in the normal course of business.

Examples: Cash, Stock, Debtors, Bills Receivable.

They are also called circulating assets because they change form quickly (e.g., stock → debtors → cash).

Other options:

Fixed assets: Long-term assets like land, building, machinery.

Fictitious assets: Intangible or deferred expenses, e.g., preliminary expenses, which do not have real existence.

In consignment transactions, the consignee sells goods on behalf of the consignor.

The consignee prepares a detailed statement showing:

Sales made

Expenses incurred (like freight, insurance, commission)

Amount due to the consignor

This statement is sent periodically to the consignor and is called Account Sales.

Other options:

Invoice: A bill for goods sold, issued at the time of sale.

Pro-forma invoice: Preliminary invoice sent before goods are dispatched.

Sales account: Ledger account recording sales, not a periodic statement from consignee.

Noting charges are fees paid to a notary when a bill of exchange or promissory note is dishonoured.

These charges are incurred to protect the interests of the holder (payee) of the bill, not the drawer.

Therefore, noting charges are an expense to the holder and not an expense to the drawer.

Example:

If a bill of ₹10,000 is dishonoured, the holder pays ₹50 as noting charges. The holder can claim this amount from the drawer, but the drawer does not record it as an expense until payment is demanded.

Stock undervaluation means valuing closing stock less than its actual market or cost value.

This reduces the reported profit in the Profit & Loss Account.

The difference between the actual value of stock and the undervalued stock acts as a hidden or secret reserve.

Secret reserves help the business to strengthen its financial position without showing it openly.

Other options:

Profit overstated: Incorrect — profit is understated, not overstated.

Price of shares increased: No direct effect.

General reserve created: Not automatically — only secret reserve is formed.

A Balance Sheet shows actual assets and liabilities of a business at a particular date.

Current Liabilities, Fixed Liabilities, and Long-term Liabilities are actual obligations and are shown on the balance sheet.

Contingent Liability is a potential or possible obligation that may arise depending on the outcome of a future event (e.g., a lawsuit).

Since it is not certain, it is disclosed in the notes to accounts, not in the main balance sheet.

A personal account records transactions related to individuals, firms, or organizations.

Credit balance in a personal account means the business owes money to that person or entity.

Therefore, it represents an amount payable (liability).

Examples:

Creditor’s account showing ₹10,000 credit → The business owes ₹10,000 to the creditor.

Other options:

Amount receivable: Would be a debit balance in a personal account.

Expense / Assets: Not indicated by a personal account’s credit balance.

Wasting assets are assets that get used up or exhausted over time, like mines, quarries, or oil wells.

Depreciation for such assets should be based on actual usage or production, not merely the passage of time.

The Output Method (also called Units of Production Method) calculates depreciation according to the quantity of output or production during the accounting period.

Other methods:

Insurance Policy Method: Related to insuring the asset, not suitable for wasting assets.

Annuity Method: Spreads cost with interest, not based on actual usage.

Revaluation Method: Adjusts asset value, not primarily a depreciation method.

Hence, the Output Method is best for wasting assets.

In a Co-operative Society, the Receipts & Payments Account (R&P Account) and Income & Expenditure Account (I&E Account) are prepared from the balances of ledger accounts.

The General Ledger contains all the ledger accounts of members, cash, bank, income, and expenditure.

Sub-Day Books (like Cash Book, Purchase Book, Sales Book) are special journals used to record daily transactions but are not directly used to prepare the R&P Account.

Special Ledger is not a standard term in accounting.

The uncalled portion of capital is also known as Reserve Capital 

Reserve Capital is the part of authorized capital of a company or cooperative society that has not yet been called for payment.

It is kept aside to be called upon only in case of winding up or when the society needs additional funds.

It is not demanded from members during normal operations.

Other related terms:

Called-up Capital: Portion of capital that members have already been asked to pay.

Paid-up Capital: Portion of capital actually paid by members.

If whitewashing expense is debited to the Building Account, it is an error of principle ✅.


Building Account is a capital account (asset account) and should include capital expenditure only (like cost of construction, purchase, or improvements).

Whitewashing is a revenue expenditure (maintenance expense) and should be recorded in the Repairs & Maintenance Account or directly in the Profit & Loss Account.

Charging a revenue expense to a capital account violates accounting principles.

Type of Error: Error of Principle – violating the basic accounting principle that capital and revenue items must be treated separately.

Since the sale of scrap is not part of normal business sales, it cannot be recorded in the Sales Book.

Therefore, it is recorded in the Journal Proper, which is used for transactions not covered by special books.

Claims against the assets of a business firm can come from:

Owners – called Capital / Owners’ Equity

Creditors / outsiders – called Outsiders’ Equity / Liabilities

Therefore, claims by outsiders (like creditors, suppliers, banks) on the firm’s assets are referred to as Outsiders’ Equity.

Other options:

Owners’ Equity / Capital: Claim of owners, not outsiders.

Total Equity: Sum of owners’ and outsiders’ claims (not specific).

Interest on drawings is charged to a partner for withdrawing money from the business for personal use.

It reduces the partner’s capital, so it is adjusted in the Capital Account of that partner.

Other options:

Interest: This is a general heading, but the actual adjustment is in Capital.

Trading Account: Only deals with revenue and direct expenses of business.

Bank Account: Used for cash transactions, not for adjusting drawings interest.

A sinking fund is a fund created by an organization to:

Replace fixed assets when they become obsolete, or

Repay long-term liabilities at the time of maturity.

It is a long-term provision to ensure that funds are available when needed, without affecting regular operations.

Other options:

Capital Reserve: Created from capital profits, not for repayment or replacement.

Reserve Capital: Portion of uncalled capital kept as a backup, not actively used.

Common Good Fund: Used for community or member welfare purposes.

The nominal accounts (like revenue, expenses, losses, and gains) are temporary accounts that are closed at the end of the accounting period. Their balances are transferred to the Trading Account or Profit & Loss Account to calculate the net profit or loss.

Net own funds are calculated as total own funds minus accumulated losses.

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