Accounting — Additional Practice — Part 2: 16 MCQs with Explanations

Sale of the goods the business deals in is recorded in the sales account. Returns inwards are goods coming back from customers, and returns outwards are goods going back to suppliers.

Sales returns are goods received back from customers, so they are called returns inwards because the stock flows inward. They are debited, since they reduce the value of sales.

A discount is a reduction in the invoice price, granted either as a trade discount before entry or as a cash discount for prompt payment.

Cash introduced by the owner to start the business is capital, a liability of the business to its owner under the entity concept. A loan would be an outside liability.

A concession on defective goods retained by the buyer is an allowance, not a discount, because the goods themselves are not returned. The seller debits allowance.

A voucher is the written evidence supporting a transaction, which is why every journal entry requires one before it is posted.

Buildings and furniture are fixed assets because they are acquired for use in the business rather than for resale. They are also tangible, but the classification asked for here is by purpose.

A customer who buys on credit owes the business money and is therefore a debtor. Creditors are the opposite, that is, suppliers the business pays.

Discount received reduces the amount payable to a supplier and is treated as income, credited to the profit and loss account.

Liabilities are the obligations of the business arising from past events, whose settlement causes an outflow of resources.

The amount invested by the proprietor is capital, which the accounting equation treats as the owner's claim on the assets of the business.

Book keeping is the systematic maintenance of the books of account. Accountancy is the broader discipline that includes classification, summarising and interpretation.

Accounting is the art of recording, classifying and summarising financial events in a significant way and interpreting the results, which is why it goes beyond mere book keeping.

The day-to-day maintenance of accounts in books is book keeping, the recording stage of the wider accountancy process.

Goods sent back by a customer are sales returns, also called returns inwards, and are debited to reduce sales.

The double-entry system is the modern method because every transaction records both aspects, debit and credit, which makes the books self-verifying through the trial balance.