TEST YOUR UNDERSTANDING
Q. 1. Do you think that a transaction can break the Accounting Equation?
Ans. No, a transaction can change the Accounting Equation but cannot break it.
Q. 2. Goods costing Rs. 10,000 have been sold for cash at 25% profit. How will you show the transaction in the Accounting Equation?
Ans. Increase cash by Rs. 12,500; Decrease stock by Rs. 10,000; and Increase capital by Rs. 2,500.
Q. 3. The capital of a business is Rs. 2,00,000 and outside liabilities are Rs. 1,50,000. Calculate the total assets of the business.
Ans. Rs. 3,50,000 (Capital + Outside Liabilities = Assets).
Q. 4. If total assets of a business are Rs. 1,30,000 and capital is Rs. 80,000, calculate the outside liabilities.
Ans. Rs. 50,000 (Liabilities = Total Assets – Capital).
Q. 5. If total assets of the business are Rs. 4,50,000 and outside liabilities are Rs. 2,00,000, calculate owner’s equity.
Ans. Assets = Owner’s Equity + Liabilities
Rs.4,50,000 = Owner’s Equity + Rs. 2,00,000
Owner’s Equity = Rs. 2,50,000.
Q. 6. To record an increase in an Asset Account, it must be debited. Why?
Ans. Asset is a Real Account and the applicable rule is Debit what comes in, Credit what goes out. Increase in asset means asset has come in, thus, asset is debited.
Q. 7. To record an increase in a Liability Account, it must be credited. Why?
Ans. Liability is a Personal Account and the applicable rule is Debit the receiver, Credit the giver. Increase in liability means the firm has received benefit for which payment is yet to be made. thus, liability is credited.
Q. 8. When an asset is purchased in cash or an expense is incurred in cash, cash is credited. Why? Ans. Cash is a Real Account. On purchase of asset against payment in cash, cash has gone out. Thus, Cash Account is credited.
Q. 9. A liability is met by issuing a cheque. Which account will you credit and why?
Ans. Bank Account will be credited because payment has been made by issue of cheque.
Bank Account is a Personal Account. Bank is paying out of the business deposits.
Q. 10. Rent is paid for the month of April, 2010 in March, 2010. The accounting year ended on 31st March, 2010. The accountant has shown it on the assets side of the Balance Sheet. Has he given the correct treatment? Give reasons.
Ans. Yes, the accountant has given the correct treatment because rent for April 2010 is a Prepaid Expense for the year 2009-10. Prepaid expenses are shown as an asset in the Balance Sheet.
Q. 11. Ajay, a dealer in furniture, received advance against sales of tables and chairs. In your opinion how should this advance be treated and why?
Ans. The advance received should be treated as a liability because Ajay has not yet made the sales.
Q. 12. Profit earned by the business means an increase in the proprietor’s capital. Is it correct?
Ans. Yes, it is correct because the net profit earned by the proprietor’s business is added to his capital.
Q. 13. A debit balance always signifies a balance in the Assets Account. Is it correct?
Ans, No, it is not correct. A debit balance may signify a balance in Assets Account or an expense.
Q. 14. A credit balance always signifies a balance in the Liabilities Account. Is it correct? Ans, No, it is not correct. A crebit balance may signify a balance in Liabilities Account or an Income.
Q. 15. Name the side on which increase in Capital Account is recorded. (MSE Chandigarh 2009)
Ans, Credit Side.
Q. 16. Why are the rules of debit and credit same for liability and capital? (Delhi 2012)
Ans. Due to business entity concept whereby business is treated as a separate entity from its owner.
Q. 17. Briefly explain the Accounting Equation.
Ans. The accounting equation is a mathematical equation which shows that the assets and liabilities of a firm are equal, i.e., Assets = Liabilities + Capital. It is based on Dual Aspect Concept of accounting.
Q. 18. What does Owner’s equity means?
Ans. Owner’s equity means balance standing to the credit of Capital Account of the proprietor.
Q. 19. Give an example of decrease in an asset and decrease in a liability.
Ans. Cash paid to a creditor.
Q. 20. Give an example of a transaction where an asset will increase and also the liability.
Ans. Goods purchased on credit.
Q. 21. Give an example of a transaction where an asset and owner’s capital will increase.
Ans. Capital introduced by the proprietor.
Q. 22. Give an example of a transaction due to which owner’s capital and an asset will decrease.
Ans. Goods taken by the proprietor for personal use.
Q. 23. Which transaction decreases one asset and increases another asset?
Ans. Amount received from a debtor.
Q. 24. Give an example of a transaction which increases one liability and decreases another.
Ans. Acceptance of Bill Payable.
Q. 25. Give an example of a transaction which has effect on two items on the assets side.
Ans. Sales of goods on credit.
Q. 26. Indicate how Accounting Equation is affected if machinery is purchased for cash?
Ans. It will result in cash being reduced and Machinery Account being increased.
Q. 27. Indicate how Accounting Equation is affected if cash is received against services rendered?
Ans. Cash increases and so does the capital.
Q. 28. Indicate how Accounting Equation is affected if payment is made to a creditor?
Ans. Cash decreases and so does the liability (creditor).
Q. 29. What is an Account?
Ans, An account is a summarised record of transactions at one place relating to a particular head.
Q. 30. What are the three classes of accounts?
Ans, Three classes of accounts are:
(i) Personal Accounts (ii) Real Accounts and (iii) Nominal Account
Q. 31. What is a Personal Account?
Ans. Personal Accounts are the accounts which relate to persons, i.e., individuals, firms,
companies, etc.
Q. 32. What is the rule for Personal Account?
Ans. Rule for Personal Account is ‘Debit the Receiver, Credit the Giver’.
Q. 33. Is Capital Account a Personal Account? If yes, why?
Ans. Capital Account is a Personal Account because it is the amount due to the proprietor by the firm.
Q. 34. When is a Capital Account debited?
Ans. Capital Account is debited when the proprietor makes a drawings and with the amount of loss.
Q. 35. When is Capital Account credited?
Ans. Capital Account is credited when the proprietor introduces further capital and with the
amount of profit.
Q. 36. What is a Real Account?
Ans. Real Account is the account which relates to tangible or intangible asset.
Q. 37. What is the rule for Real Account?
Ans, Rule for Real Account is ‘Debit what comes in, Credit what goes out’.
Q. 38. What is a Nominal Account?
Ans. Nominal Account is the account which relates to expenses, losses, gains, revenues, etc.
Q. 39. What is the rule for Nominal Account?
Ans. Rule for Nominal Account is ‘Debit all expenses and losses and credit all incomes and gains.
Q. 40. What are the two sides of an Account called?
Ans. The two sides of an account are Debit and Credit.
Q. 41. What is the object of preparing an Account?
Ans. The objective of preparing an account is to summarise all transactions relating to a particular head in one account. Balance of all the accounts leads to preparation of Trial Balance.
Q. 42. Give two examples of Personal Account.
Ans. Two examples of Personal Account are:
(i) Capital Account and (ii) Creditor’s Account.
Q. 43. Give two examples of Real Account.
Ans. Two examples of Real Account are:
(i) Land Account and (ii) Computers Account.
Q. 44. Give two examples of Nominal Account.
Ans. Two examples of Nominal Account are:
(i) Salary Account and (ii) Commission Received Account.
Q. 45. What does a debit balance in a Personal Account signify?
Ans. A debit balance in Personal Account means the amount receivable from the person.
Q. 46. What does a credit balance in a Personal Account signify?
Ans. A credit balance in a Personal Account means the amount payable to the person.
Q. 47. What does a debit in an Asset Account signify?
Ans. A debit in an Asset Account means further assets purchased by the firm.
Q. 48. What does a credit in an Asset Account signify?
Ans. A credit in an Asset Account means the assets sold or discarded by the firm.
Q. 49. What does a debit in a Nominal Account signify?
Ans. A debit in the Nominal Account means the amount of expense incurred by the firm under that head of account.
Q. 50. What does a credit in a Nominal Account (Income Account) signify?
Ans. A credit in the Nominal Account means the amount of income earned by the firm under that head of account.
Q. 51. What does a credit balance in a Capital Account signify?
Ans. A credit balance in the Capital Account signifies the amount invested by the proprietor as on date.
Q. 52. What is signified by a debit cash balance?
Ans. A debit cash balance signifies cash in hand.
Q. 53. What is signified by a debit bank balance?
Ans. A debit bank balance signifies balance lying deposited in the bank.
Q. 54. What is signified by a credit bank balance?
Ans. A credit bank balance signifies amount payable to the bank by the firm.