Question by C.A.(Dr.) G.S.Grewal – Series 5
- Capital and Revenue Expenditure is differentiated following the Materiality Concept.
- An Expenditure is Revenue in nature when it benefits the _______ period only.
- Revenue Expenditure is transferred to:
(a) Balance Sheet.
(b) Profit and Loss Account.
(c) Partly to Balance Sheet and Partly to Profit and Loss Account.
(d) Trading Account.
Answer – Series 5
Reason Expenses are recognised in the Profit and Loss Account applying the Matching Concept which requires that expenses be set out in the Profit and Loss Account incurred to earn the revenue. An expense is capitalised only if they are traced directly to definable stream of future benefits. Thus, expense is differentiated between revenue and capital due to Going Concern Concept.
Reason: Profit earned or loss incurred during an accounting period is ascertained by comparing the revenue incomes and revenue expenditure. They are transferred to Profit and Loss Account to ascertain it.
Question – Series 10
- Wages paid to Anil for installation of machinery should be debited to Wages Account.
- An example of deferred Revenue Expenditure is _______.
- Capital Expenses and Receipts are transferred to
(a) Trading Account
(b) Profit and Loss Account
(c) Trial Balance
(d) Balance Sheet
Answer – Series 10
Reason Wages paid to Anil for installation of machinery. It is a principal that expenses incurred on acquiring and making the asset ready for use is a capital expenditure and is debited to that particular asset account. Therefore, Wages paid to Anil for installing the machinery will be debited to Machinery Account.
- Deferred Revenue Expenditure
Reason: Capital expenses are the expenses which result enduring benefit. Capital Receipts are receipts arising from introduction of Capital, Receipt of loans and proceeds from sale of assets etc. They result in increase in liability or decrease in assets. Thus, They are shown in the Balance Sheet.
Question – Series 13
- Bank overdraft is shown as a Current Asset.
- A trader bought goods of ₹ 50,000. He sold the goods for ₹ 80,000 incurring expenses of ₹ 12,000 (including carriage outwards of ₹ 1,000). His gross profit is _______.
- Opening Stock ₹ 1,00,000; Closing Stock ₹ 60,000; Purchases ₹ 50,000 and Gross Profit is 10% of sales. The gross profit is:
(a) ₹ 10,000
(b) ₹ 12,000
(c) ₹ 20,000
(d) ₹ 15,000
Answer – Series 13
Reason Bank overdraft means amount overdrawn from the bank and thus, payable to it. It is a current liability of the enterprise as it is payable within a period of twelve months.
- ₹ 19,000
Reason: Cost of goods sold is ₹ 90,000 (₹ 1,00,000 (Opening Stock) + ₹ 50,000 (Purchases) – ₹ 60,000 (Closing Stock), which is 90% of Sales (Gross Profit being 10% of Sales).
Therefore, Sales is ₹ 90,000 X 100/90 = ₹ 1,00,000
Gross Profit = Sales – Cost of Goods Sold i.e., Rs, 1,00,000 – ₹ 90,000 = ₹ 10,000.
Question – Series 18
- Carriage on goods sold is shown in Balance Sheet.
- Income tax paid for the owner is debited to ______ .
- Commission received in Advance existing in the Trial Balance is shown on the:-
(a) Assets side of the Balance Sheet
(b) Liability side of the Balance Sheet
(c) Debit side of the Profit and Loss A/c
(d) Credit Side of the Profit and Loss A/c
Answer – Series 18
Reason: Carriage on Goods Sold is treated as indirect expenses are therefore shown in the Profit and Loss A/c. Carriage on Goods sold is an expense related to sales. It is thus, an indirect expense shown in the Profit and Loss Account.
- Capital A/c
Reason: As the commission received in advance is liability, till it becomes due, as soon as it will become due it will be treated as income. Commission received in advance is in the nature of amount received against which service is yet to be rendered. Once the service has been rendered, it will become an income. Till that time it is liability and is shown on the liabilities side of the Balance Sheet.
Question – Series 21
- Trading Account is prepared to determine the financial position of the business.
- Profit and Loss Account shows the _______ or _______ by the business during the accounting period.
- Balance Sheet gives information regarding:-
(a) financial position during a particular period.
(b) profit earning capacity for a particular period.
(c) financial position as on a particular date.
(d) operating efficiency of the firm
Answer – Series 21
Reason: Trading Account is the account that shows the net result of buying, direct expenses and selling of goods and /or services. The net result of the account is either gross profit or gross loss.
- profit earned, loss incurred
Reason: Balance Sheet is a statement that shows the financial position of the enterprise. Financial position is always true at a particular point of time because with every transaction and event the financial position changes.
Question – Series 32
- Loan of ₹ 1,10,000 was taken on 1st November, 2019 at 10%. The amount of interest on Loan to be debited to Profit and Loss Account is ₹ 11,000.
- If gross profit is ₹ 20,000, Commission paid is ₹ 2,000, Commission Received is ₹ 3,000. The amount of operating profit will be ₹ ________.
- Returns Outward in Trial Balance are deducted from
Answer – Series 32
Reason: Since the word p.a. is not written so interest on loan debited to Profit and Loss Account will be ₹ 11,000.
Reason: Returns Outward means returning the goods purchased. Thus, it is Purchases Return. Purchases are shown at net amount in the Trading Account i.e., Purchases – Purchases Return.
Question – Series 43
- It is necessary to differentiate between Capital Expenditure and Revenue Expenditure because of guidelines of different financial institutions.
- Cost of Goods Purchased for resale is an example of _______.
- A Preliminary expense is an example of:
(a) Revenue Expenditure
(b) Deferred Revenue Expenditure
(c) Capital Expenditure
(d) they are Capital in Nature
Answer – Series 43
Reason: The distinction of transaction into Capital and Revenue is made for the purpose of placing them in Profit and Loss Account and Balance Sheet. .
- Revenue Expenditure
Reason: Preliminary expenses are written off over a period of time and till that time the amount not written off is carried in the balance sheet under the head Miscellaneous Expenditure.
Question Series – 49
1 Capital and Revenue Expenditure is differentiated following Materiality Concept
- Cost of goods purchased for resale is an example of _______.
- Capital Expenditure incurred by an enterprise is transferred to:
(a) Profit and Loss Account
(b) Partly to Balance Sheet and Partly to Profit and Loss Account
(c) Balance Sheet
(d) Trading Account
Answer Series – 49
Reason: Expenses are recognised in the Profit and Loss Account applying the Matching Concept which requires that expenses be set out in the Profit and Loss Account incurred to earn the revenue. An expense is capitalised only if they are traced directly to definable stream of future benefits.
- Revenue Expenditure
Reason: Capital expenditure is placed on the asset side of the balance sheet as they will generate benefit for more than one accounting period and will be transfer to Profit and Loss Account of the year on the basis of utilisation of the benefit in particular accounting year.
Question Series – 50
- Insurance premium paid in advance is Prepaid Expense.
- The nature of Deferred Revenue Expenditure is _______.
- Overhauling expense of second hand machinery purchased are:
(a) Revenue Expenses
(b) Capital Expenses
(c) Deferred Revenue Expenses
(d) Prepaid Expenses
Answer Series – 50
Reason: Prepaid Expenses are revenue expenses but, relating to future period that have been paid in advance. They are categorised as prepaid expenses and not Deferred Revenue Expenditure or Capital Expenditure.
Reason: The expenses incurred on overhauling of machinery are Capital expenses because they have been incurred on a new asset purchased to make it fit for use. It has resulted in an enduring benefit.
Question Series – 51
1 Amount spent for replacement of worn out part of machine is Revenue Expense.
- Receipt on account of advices rendered by a chartered accountant firm is _______.
- A Machinery with a Book Value of ₹ 2,50,000 was damaged in firm against which it received a claim of ₹ 2,00,000. Insurance claim so received is:
(a) Capital Expenditure
(b) Revenue Receipt
(c) Capital Receipt
(d) Revenue Expenditure
Answer Series – 51
Reason: The amount spent for replacing the worn out part of the machine is towards maintaining the existing machine. Thus, the expense is revenue expense.
- Revenue Receipt.
Reason: The amount received on account of insurance claim is a capital receipt because it has been received against damage of machinery in a fire. Machinery is a Capital Asset and thus Insurance Claim is also Capital Receipt.
Question – Series 72
- Closing stock is included in Trading Account and on the assets side of the balance sheet, if it is given as an adjustment.
- Unearned income means income received in ______.
- Prepaid Rent is shown as
(a) An asset
(b) A liability
(c) An expense
(d) An Income
Answer – Series 72
Reason: Closing stock, if given as an adjustment is accounted in the Final Accounts as follows:
On the credit side of Trading Account, and
On the assets side of Balance Sheet as Current Assets.
Giving effect to Dual Aspect Concept.
Reason: Prepaid Rent is shown as an asset because the benefit of rent paid relates to next accounting year. Such part of the expense is known as prepaid expense. It is necessary to adjust unexpired part of expense in the amount of expense under that head and prepaid expense is to be shown as an asset in the Balance Sheet to get true and fair view of financial performance and position of the business and to show correct profit or loss for the year.
Question – Series 73
- Interest received on loan is an income for the business.
2 If Outstanding Salary exists in the Trial Balance, it is shown in the _____.
- Outstanding Income is
(a) An asset
(b) A liability
(c) An expense
(d) An income
Answer – Series 73
Reason: Interest received on Loan is an income for the business become it is earned by the use of firms’ resources (money). It is shown on the credit side of Profit and Loss Account.
- Balance Sheet
Reason: Outstanding Income is an Asset because it is income earned but not received. Outstanding Incomes or Accrued Incomes of the year are accounted following the accrual concept of accounting.
Question – Series 74
- Provision for Discount on Debtors is shown in the Balance Sheet as deduction from Debtors.
- Income received in advance is debited to income account and credited to ______ while making adjustment entries.
- Manager is entitled to commission of 5% on profits before charging the commission. The Profit is ₹ 2,10,000; therefore, the commission will be
(a) ₹ 10,000
(b) ₹ 10,500
(c) ₹ 11,100
(d) ₹ 11,500
Answer – Series 74
Reason: Provision for Discount on Debtors is the estimated amount of discount that may have to be allowed to debtors against payment made by them. Therefore, in the Balance Sheet, it is deducted from Debtors i.e., Debtors are shown at their net realisable amount.
- Income Received in Advance
Reason: Profit = ₹ 2,10,000
Manager’s Commission before charging such commission = ₹ 2,10,000 X 5/100 = ₹ 10,500.
Question – Series 79
- Return Outwards is deducted from sales, when Trading Account is prepared.
- Salaries and Wages are transferred (debited) to ______ Account.
- The arrangement of various assets and liabilities in a proper order is termed as
Answer – Series 79
Reason: While preparing Trading Account from sales return outwards get deducted to arrive at gross profit or loss.
- Profit and Loss
Reason: The arrangement of various assets and liabilities in proper order is termed as Marshalling. Assets and Liabilities when shown in order of permanence or Liquidity in the Balance Sheet. Therefore, they should be arranged in either of the two orders.
Question – Series 80
- ₹ 1,200 spent on the repairs of a machine is Revenue Expenditure.
- Brokerage paid for purchase of land is Capital expenditure because _______.
- Expenses incurred to get the Manager’s Office air-conditioned is
(a) Capital Expenditure.
(b) Revenue Expenditure.
(c) Deferred Revenue Expenditure.
(d) Capital Income.
Answer – Series 80
Reason: Revenue Expenditure is the expense incurred on operations of a business. It is an expense benefit of which is exhausted within the accounting period. It is either transferred to Trading Account or Profit and Loss Account.
Thus, Repair Expense of machinery is a revenue expense.
- It is an expense that is incurred for purchase of fixed asset i.e., Land.
Reason: It is a Capital Expenditure because it givens benefit of enduring nature.
Question – Series 95
- Bad Debts Recovered Account will be transferred to Profit and Loss Account.
- Trading Account is prepared to find out ________.
- The entry for creating a provision for bad debts is:
a) Debit Provision for Bad Debts A/c and Credit Creditor A/c.
b) Debit Provision for Bad Debts A/c and Credit Profit and Loss A/c.
c) Debit Provision for Bad Debts A/c and Credit Bad Debts A/c
d) Debit Profit and Loss A/c and Credit Provision for Bad Debts A/c
Answer – Series 95
Reason: Bad debt is a loss and is transferred to the debit of Profit and Loss Account. Bad debt written off if recovered is an income for the enterprise. It is transferred to the credit of the Profit and Loss Account.
- Gross Profit or Gross Loss
Reason: Provision for bad debts means that a provision is being made for a possible loss and not against actual loss. Therefore, creditor’s account is not affected. Since it is a provision against loss, it will be debited to Profit and Loss Account.
Question – Series 96
- Opening balance of debtors is ₹ 20,000. Provision for Doubtful Debts is 5% and Provision for discount on debtors is 10% The amount provided for provision for discount on debtors will be ₹ 1,500.
- Bank overdraft is shown as a ___________.
- The Profit and Loss Account shows the
a) Financial results of the business for a period.
b) Financial position of the business for a period.
c) Financial results of the business on a particular date.
d) Cost of goods sold during the business.
Answer – Series 96
Reason: After providing for doubtful debts of ₹ 1,000 (5% of ₹ 20,000), provision for discount will be made @ 10%. The amount to be provided will be ₹ 1,900 (10% of ₹ 19,000)
- Current Liability
Reason: Profit and Loss Account is a statement that shows the profit earned or loss incurred during an accounting period. In other words, it shows the financial results of the business for an accounting period.
Question – Series 97
- Closing stock in the trial balance implies that it is adjusted in the Cost of Sales Account..
- Depreciation is a charge against ___________ .
- If a trader’s net sales amount to ₹ 36,000, his gross profit is 60% of sales and net profit is 40% of sales, his expenses are
a) ₹ 14,200
b) ₹ 8,800
c) ₹ 14,600
d) ₹ 7,200.
Answer – Series 97
Reason: Adjusted Purchases Account shows the cost of materials consumed for making the sale. Cost of Material Consumed is Opening Stock + Purchases – Closing Stock. Closing Stock appearing in the trial balance means that the entry for closing stock is recorded in the books of account. Since Double Entry System is followed, it means it has been credited to Adjusted Purchases Account.
Reason: Gross Profit is 60% of sales i.e., ₹ 21,600. Net Profit is 40% of sales i.e., ₹ 14,400. Therefore the expenses are ₹ 7,200.
Question Series 98
- Balance Sheet gives information regarding the Financial Position as on a particular date.
- Interest on drawings is _________ for the business.
- If Capital at the end is ₹ 70,000, Fresh Capital introduced is ₹ 50,000, Drawings ₹ 80,000, Loss is ₹ 1,00,000 then Capital in the beginning is equal to
a) ₹ 1,20,000
b) ₹ 1,80,000
c) ₹ 2,00,000
d) ₹ 3,00,000
Answer – Series 98
Reason: Balance Sheet is a statement that shows the financial position of the enterprise. Financial Position is always true on a particular point of time because with every transaction and event the financial position changes.
Reason: Closing Capital = Opening Capital + Capital introduced during the year – Drawings – Loss
₹ 70,000 = Opening Capital + ₹ 50,000 – ₹ 80,000 – ₹ 1,00,000
Opening Capital = ₹ 80,000 + ₹ 1,00,000 + ₹ 50,000 – ₹ 70,000 = ₹ 2,00,000.