Accounting — Part 2 MCQs with Explanations

In accounting, for an item to be recognized as an asset on a business's balance sheet, it must be owned by the business. Ownership implies that the business has legal control and rights over the asset, allowing it to use, sell, or otherwise benefit from the asset's economic value. Options A, C, and D are not sufficient conditions for an item to be classified as an asset: Option A: Possessed implies physical control but does not necessarily guarantee legal ownership. Possession alone does not confer the rights associated with ownership. Option C: Controlled may indicate influence or management over an asset, but it does not necessarily imply legal ownership. Control alone is not sufficient for an item to be recognized as an asset on the balance sheet. Option D: Used suggests the utilization of an asset, but again, it does not guarantee legal ownership. Using an asset does not automatically confer ownership rights. Therefore, Option B: Owned is the correct choice because ownership is a fundamental requirement for an item to be classified as an asset in accounting.

Future economic benefits is the most important characteristic that all assets of a business have.

Capital + Liabilities = assets is the basic accounting equation. The fundamental accounting equation, also called the balance sheet equation, represents the relationship between the assets, liabilities, and owner's equity of a person or business. It is the foundation for the double-entry bookkeeping system.

Creditors are a liability. Creditors means the persons to whom business owes money. Creditors are the persons to whom the money is payable by the business in future. So it is a liability of business towards creditors to pay them in future so it comes under current liabilities in balance sheet.

Owner's claim on total assets is equity. Total claims include liabilities, which are all the debts that the business owes but has not yet paid out, as well as owners' equity, the value of the business that was granted by owner investment.

Cash and cash equivalent are the asset from the following. Cash and cash equivalents (CCE) are the most liquid current assets found on a business's balance sheet. Cash equivalents are short-term commitments "with temporarily idle cash and easily convertible into a known cash amount".

Drawings is the withdrawal of cash and goods by the owner of the business for his/her personal use. Assets in the form of Cash or Goods which are withdrawn from a business by the owner(s) for their personal use are termed as drawings.

Net loss occurs when Expenses are greater than income. A net loss, sometimes referred to as a net operating loss (NOL), occurs when expenses exceed the income or total revenue produced for a given period of time.

Double entry implies that recording two aspects of every transaction. The double-entry system of accounting or bookkeeping means that for every business transaction, amounts must be recorded in a minimum of two accounts.

Rent expenses account is the nominal account. In other words, nominal accounts are the accounts that report revenues, expenses, gains, and losses.

Cash account can be classified as a real account. A real account is an account that retains and rolls forward its ending balance from period to period. The areas in the balance sheet in which real accounts are found are assets, liabilities, and equity.

Capital increases if revenue increases. The extent to which an increase in revenue will affect company's working capital depends on how efficiently business operates.

Capital of a business decreases if there is an increase in Drawings. Drawing is always deducted from capital.

Net income equal to Revenues minus Expenses. Revenue is the income generated before any expenses are taken out. Therefore, when a company is said to have "top-line growth," the company's revenue is growing. Revenue is also called net sales which is revenue minus any returns of purchased merchandise.

Payment of expenses will reduce the assets. When an expense is recorded at the same time it is paid for with cash, the cash (asset) account declines, while the amount of the expense reduces the retained earnings account.

Assets - Liabilities = Capital is correct. The Accounting Equation states that the Assets are always equal to the sum of Capital & Liabilities.

Fresh capital introduction will increase Assets and Equity. Capital will increase the Equity. Cash at Bank will increase the Asset.

Current Assets - Current Liabilities = Working capital. Working capital is calculated as current assets minus current liabilities.

The process of recording in Journal is done frequently during the accounting period. An organization begins its accounting cycle with the recording of transactions using journal entries.

General Journal, sometimes also known as the Book of Original Entry, because it is the first place a transaction is entered into the books. Journal Entries are made from source documents, which can be anything from receipts to invoices to bank statements.

The process of recording transactions in different journals is called Journalising. Journalizing is the process of recording a business transaction in the accounting records. This activity only applies to the double-entry bookkeeping system.

Every business transaction affects at least two accounts, our accounting system is known as a double-entry system.

Discount allowed is a kind of deduction from Account Receivable.

The other name of Journal is Day Book. A journal is also named the book of original entry, from when transactions were written in a journal prior to manually posting them to the accounts in the general ledger or subsidiary ledger.

The Journal entry in which two or more account is debited or credited is referred to as Compound entry. A compound journal entry is an accounting entry in which there is more than one debit, more than one credit, or more than one of both debits and credits.

Goods returned by customer should be debited to Return inward account.

Discount allowed is Expense of business. When the buyer receives a discount, this is recorded as a reduction in the expense (or asset) associated with the purchase, or in a separate account that tracks discounts.

Purchases will be debited if a business purchases goods on credit.

Drawings accounts will be debited if the business's owner withdraws cash from business for personal use. Goods withdrawn for personal use by the owner of a business reduce inventory and are recorded on a drawings account.

Journals are also referred to as Book of original entries. The information in these books is then summarized and posted into a general ledger, from which financial statements are produced.

The standard format of Journal does not include Assets column. An asset purchased on account is not recorded in the purchase journal. But many are of opinion to record all credit transactions in multi-column purchase journal.

In Chronological order, data is entered into the Journal. Journal entries are typically entered in chronological order and debits are entered before credits – debits are entered in a column to the left, and credits are entered to the right.

Cash account will be credited if a company purchases building for cash. Cash is credited because cash is an asset account that decreased because cash was used to pay the bill.

Discount for quick repayment of debt is normally referred to as Cash discount. It is called cash discount which might be offered or received.

Sales return journal records "goods returned by customers". Sales Return (Journal) Book Sales return books are used to record the goods returned by customers to them on credit.

The sales journal is used to record all of the company sales on credit. Most often these sales are made up of inventory sales or other merchandise sales.

Transactions that a business does not record in any specialized journal are recorded in General journal.

Purchase return journal records "goods returned by the business". The Purchases Returns Book is written up from the credit notes received from the suppliers.

Sales and purchase journal doesn't record Cash sales and purchases.

Cash received from debtor is recorded in Cash receipts journal. The cash receipts journal is a special journal used to record cash received by a business.