Basics of Accounting MCQ Quiz - Objective Question with Answer for Basics of Accounting - Download Free PDF

The correct option is option 2

Additional Information:

• Capital = Assets - Liabilities = $120,000 - $50,000 = $70,000.

The correct option is option 3 

Additional Information:

• $10,000 / 5 = $2,000 per year.

The correct option is option 1

Additional Information:

•  Outstanding wages are unpaid obligations (liabilities).

The correct option is option 3 

Additional Information:

• Accrual accounting matches income and expenses to the period incurred.

The correct option is option 2

Additional Information:

• It ensures that total debits equal total credits.

The correct answer is historical cost.

 Key PointsFixed assets - Long-term tangible assets employed in corporate operations are referred to as fixed assets.

They are categorized as property, plant, and equipment (PP&E) on the balance sheet because they offer long-term financial benefits and have a useful life of more than a year.Important PointsGross Book Value of a fixed assets - 

• A fixed asset's gross book value is its historical cost or a sum that has been substituted for historical cost in the accounting records or financial statements.
• This number is known as net book value when it is displayed after cumulative depreciation.

Thus , Gross Book Value of Fixed assets is known as historical cost.

Key Points

• Real Accounts: These account types are related to assets or properties. They are further classified as Tangible real account and Intangible real accounts.

 Important PointsTangible Real Accounts: These include assets that have a physical existence and can be touched. For example – Building A/c, cash A/c, stationery A/c, inventory A/c, etc.

Intangible Real Accounts: These assets do not have any physical existence and cannot be touched. However, these can be measured in terms of money and have value. For Example – Goodwill, Patent, Copyright, Trademark, etc.

Real Account Rules:

• Debit what comes into the business.
• Credit what goes out of business.

For Example: Furniture purchased by an entity in cash. Debit furniture A/c  and credit cash A/c.

Note: Asset value increases when a real account is debited, while asset value decreases when a real account is credited. In the aforementioned example, furniture is acquired, which causes an increase in furniture and a decrease in cash.

Hence, it can be concluded that a credit entry in a real account means a decrease in value of an asset.

The correct answer is Notes to Account of Balance Sheet.

Contingent liabilities reflect in footnotes of financial statements.

Key Points Meaning- 

Liabilities that are depend on the outcome of an uncertain event are known as contingent liabilities.

Reporting of Contingent Liabilities-

• These liabilities are recorded in financial statements only when it is possible to estimate the value of contingent liabilities and the probability of happening of the event is more than 50 %.
• When probability of happening of uncertain event is less than 50 % or cannot be properly estimated, it is recorded in footnotes (Notes to Account of financial statements) of financial statements.

Additional Information Chairman's report- 

• A report by the chair of a company to the members of the company, included in the annual report and accounts, that provides a summary of the company's actions throughout the financial period.

Shareholders notice-

• When a shareholder notifies the company and the selling shareholder in writing that they plan to use their secondary refusal right with regard to a portion of the transfer shares in connection with a proposed shareholder transfer, this is referred to as a "Shareholder Notice."

Balance sheet-

• A financial statement that summarizes a company's assets, liabilities, and shareholder equity at end of the accounting period is referred to as a balance sheet.

The correct answer is keep correct and complete record of business transactions

Key Points

• Bookkeeping is actually just one part of the accounting process which deals with the recording of the transactions. 
• It provides the primary information in the accounting process. 
• Bookkeeping is the activities concerned with the systematic recording and classification of financial data of an organization in an orderly manner.
• It is essentially a record-keeping function done to assist in the process of accounting.
• It is mainly concerned with recording financial data relating to business operations.

Important Points 

Objectives of Bookkeeping:

• The main objective of book-keeping is to keep a complete and accurate record of all the financial transactions in a systematic orderly, logical manner. This ensures that the financial effects of these transactions are reflected in the books of accounts.
• Then the second main objective is to ascertain the overall effect of all recorded transactions on the final statement of the company. Book-keeping will eventually ascertain the final accounts of the company, namely the Profit and Loss Account and the Balance Sheet.

Insurance Premium:

• An insurance premium is the amount of money an individual or business pays for an insurance policy. Insurance premiums are paid for policies that cover healthcare, auto, home, and life insurance.
• The life insurance premium should be classified as unearned revenue because against this amount still the company has to render service.  
• Actually, the insurance company will treat each year pro-rata amount of premium received as income.  

Unearned Revenue:

1. Unearned revenue, sometimes referred to as deferred revenue, is payment received by a company from a customer for products or services that will be delivered at some point in the future. 
2. The term is used in accrual accounting, in which revenue is recognized only when the payment has been received by a company AND the products or services have been delivered to the customer. 
3. Some examples of unearned revenue include advance rent payments, annual subscriptions for a software license, and prepaid insurance.

Therefore, Life insurance premiums received by an insurance company should be classified as unearned revenue.

1. Accrued Asset: The revenue a company earns over a period of time but has not collected by the end of a reporting period. For example, if a company makes $1 million in revenue but has not collected $250,000 before it must make its quarterly statement, it lists that amount as its accrued assets.
2. Accrued Liability: Accrued liabilities are liabilities that reflect expenses that have not yet been paid or logged under accounts payable during an accounting period; in other words, a company's obligation to pay for goods and services that have been provided for which invoices have not yet been received.
3. Prepaid Expenses: Prepaid expenses are future expenses that have been paid in advance. In other words, prepaid expenses are costs that have been paid but are not yet used up or have not yet expired.

The correct answer is Stockholder's equity = Assets - Liabilities.

Key Points 

• According to Kohler "Accountancy refers to the entire body of the theory and process of accounting".
• In simple words accounting is the act of recording, classifying, and summarising transactions of an organization and interpreting the results.
• All properties held by a businessman and used without any intention of gaining a profit are called assets for example Cash, Land and Building, Plant and Machinery, etc.
• The liabilities are the total amount payable by a business entity to outsiders. Some examples of liabilities are creditors, loan payable, etc.
• Capital or stockholder's equity is the total amount invested by the owner in the business in the form of cash and other assets.
• The accounting equation always signifies that the total assets of a business are always equal to the total liabilities and owner's equity.
• The accounting equation is:
  • Stockholder's equity = Assets - Liabilities​.

The correct answer is Every debit has a corresponding credit.

Preparation of trial balance is based on double entry system. It is prepared to check whether the value of total debits is equal to value of total credits.

Key Points

Trial Balance:

•  A trial balance is a statement where the totals of the debit and credit account columns add up to the same amount as the totals of all the ledgers.
• The main reason for making a trial balance is to make sure that the numbers in financial records (journals and ledgers) are correct.
• If the total sum of debits is the same as the total sum, the trial balance is said to be balanced.

The correct answer is real account.

Key Points Real account-

• Real Accounts are those that have to do with real estate, belongings, or other types of property. 
• Real accounts can therefore be classified as either tangible real accounts or intangible real accounts.
• Tangible real accounts are Machinery A/c, Vehicle A/c, Building A/c etc.
• Intangible real accounts are trademarks, patents, goodwill, copyrights etc.
• The golden rule is 'Debit what comes in and Credit what goes out.'

​Additional InformationPersonal account-

• Personal Accounts are those that have to do with specific people, businesses, organizations, groups of associations, etc.
• The personal accounts may be Natural person a/c, Artificial person a/c, and Representative person a/c.
• The golden rule is 'Debit the Receiver, Credit the Giver.'

Nominal account-

• Nominal Accounts are related to gains, losses, and income. These consist of wages, salaries, rent, and other accounts.
• The golden rule is 'Debit All Expenses and Losses, Credit All Incomes and Gains.'

The correct answer is Cash Cycle.

Key Points​The time gap between the payment for raw material purchases and collection of cash from sales is referred as the Cash Cycle for the Company.

Cash Cycle or Cash Operating Cycle-

• The amount of days that pass between paying suppliers and collecting money from sales is referred to as the cash operating cycle, also known as the working capital cycle or the cash conversion cycle.
• Formula of Cash Operating Cycle= Inventory days + Receivables days – Payables days

Additional Information

Operating Cycle-

• It refers to the typical lag time that exists between the initial purchase of inputs into a process and the realization of any resulting monetary value.

Confusion Points

•  Cash Cycle and operating cycle do not mean the same.
• Cash cycle takes into account gap between payment of raw material and cash receipt from sale.
• However, Operating cycle includes both cash and credit aspects of payment and sale.

The correct answer is Building account.

Key Points

Building account is a real account.

Real account

• It is also a general ledger.
• It contains transactions related to the liabilities and assets of a company.
• Here, the assets can be further subdivided into tangible and intangible assets.
• Unlike a nominal account, a real account does not close when a financial year completes.
• It is carried forward to the following year.
• Real accounts are not listed in the income statement.
• Real accounts denote assets, liabilities and equity.
• Real account includes-
  • Cash
  • Accounts receivable
  • Fixed assets
  • Accounts payable
  • Retained earnings

Additional Information

Nominal account

• It is a general ledger containing the transactions of a business, namely – expenses, incomes, profits and losses.
• It is an account used to keep track of financial transactions over a set period of time, usually a year.
• It begins with a zero balance and is closed at the end of each accounting year.
• The rule is- "Debit all expenses and losses; Credit all incomes and gains".
• Examples of nominal accounts are Commission Received, Salary Account, Rent Account and Interest Account.