Test: Accounting Concepts, Principles And Conventions - 1 - CA Foundation MCQ

A nominal account is a general ledger or temporary account formed and maintained by a business. It includes all necessary records of the business's expenses, losses, gains and revenues for a particular financial year.

Money owed from an outsider is considered a liability because it represents an obligation or debt that a company owes. Liabilities are reported on a company's balance sheet and have an impact on its financial statements. Understanding liabilities is important for financial analysis and decision-making.

The conservatism principle is an accounting principle that requires accountants to provide for all losses, but not anticipate profits. This principle is based on the idea that a cautious approach should be taken when estimating income and assets. It helps businesses deal with uncertainty and unforeseen conditions.

Dual aspect concept

• As per dual aspect concept each transaction affects at least two accounts.
• While doing journal entries according to double accounting system one account is debited while another one is credited.

• Accountants prepare financial statements at arbitrary points in time in accordance with the periodicity assumption. This assumption is also known as the time period assumption. 
• The periodicity assumption states that accountants can assume that a company's ongoing activities can be reported at regular intervals, such as monthly, quarterly, or annually. The reporting must be provided consistently for the same time periods to ensure comparability over time. 
• Accounting concepts are the directions to be followed when dealing with different accounting events. They form the core of all accounting standards and principles.

The entity concept, also known as the business entity principle, dictates that the business and its owner are separate entities for accounting purposes. This means that the personal financial affairs of the owner should not be mixed with the business's financial affairs. Including personal medical expenses in the company’s income statement violates this principle because it confuses the owner's personal transactions with those of the business.

Net Profit= Closing Capital+ Drawings- Capital Introduced- Opening Capital 

= 1,25,000+ 35,000- 25,000- 90,000

= Rs. 45,000

The correct option is D.

The realization principle is the concept that revenue can only be recognized once the underlying goods or services associated with the revenue have been delivered or rendered, respectively. Thus, revenue can only be recognized after it has been earned. So since the amount is not realised and dividends are paid out of profits that are realised in cash, it cannot be paid by the gains in holdings.

The term that refers to the general agreement on the usage and practices in social or economic life in the context of accounting is: B: Accounting convention
Accounting conventions are accepted standards, norms, or practices that guide the preparation of financial statements. They are not formal laws but are guidelines that have gained acceptance over time due to their general use and applicability in accounting and financial reporting.

Fundamental Accounting Assumptions.So unless specified otherwise, it will be assumed that such principles were implemented in the final accounts of the company. The three main assumptions we will deal with are – going concern, consistency, and accrual basis.

Recording capital contributed by the owner as a liability ensures adherence to the principle of separate entity.  The separate entity concept assumes that a business has its own identity, separate from its owners, creditors, debtors, and managers. This means that the transactions of a business and its owners are recorded separately. 

Description: Accounting Equation as per the dual aspect concept is:
Assets= Capital + Liabilities
When Ram starts business:
A= C + L
Cash= Capital+ Liability
90,000= 90,000+ Nil
When gods are bought on Credit:
A= C+ L
Cash+ Goods= Capital+ Creditors
90,000+ 23,000= 90,000+ 23,000
1,13,000= 90,000+ 23,000

The financial statement that represents the accounting equation (Assets = Liabilities + Owner’s Equity) is: C: Balance Sheet
The balance sheet is designed to show a company's financial position at a specific point in time and directly reflects the accounting equation by listing all assets, liabilities, and the owner’s equity.

The option that is not a fundamental accounting assumption is: C: Conservatism
Conservatism is an accounting principle rather than a fundamental assumption. The fundamental assumptions typically include going concern, consistency, and accrual basis of accounting. Conservatism, on the other hand, guides how uncertainty and risk are treated in accounting, dictating that potential expenses and liabilities should be recognized sooner rather than later, while assets and revenues should not be overstated.

The concept of money measurement states that only those transactions and happenings in an organisation which can be expressed in terms of money such as sale of goods or payment of expenses or receipt of income, etc. are to be recorded in the book of accounts. 

All such transactions or happenings which can not be expressed in monetary terms, for example, the appointment of a manager, capabilities of its human resources or creativity of its research department or image of the organisation among people in general do not find a place in the accounting records of a firm.

Kanika Enterprises follows the written down value method of depreciating machinery year after year due to: C: Consistency.
Consistency in accounting means that a company uses the same accounting methods from one period to the next, ensuring that financial statements are comparable across periods. By consistently using the written down value method, the enterprise maintains uniformity in how depreciation is calculated and reported.

Cash of Rs. 2,000 withdrawn for personal expenses will be debited to: A: Drawings A/c
The Drawings Account is used to record the owner's withdrawals from the business for personal use. In this transaction, since cash is being taken out of the business by the owner, the Drawings Account is debited, reflecting a reduction in equity, and the Cash Account is credited, reflecting a reduction in assets.

If nothing is specifically mentioned in the financial statements about the three fundamental accounting assumptions (going concern, consistency, and accrual), it is generally presumed that: B: They have been followed.
The assumption is that these fundamental principles are adhered to when preparing financial statements unless explicitly stated otherwise. This presumption allows for uniformity and comparability across different financial statements.

The total profit for the year 2008-09 as per the accrual concept would be Rs. 45,000. This can be calculated by: Sales (Rs. 1,20,000) - Cost of goods sold (Rs. 60,000 (purchased goods) + Rs. 10,000 (closing stock)) - Expenses (Rs. 20,000 - Rs. 5,000 (outstanding expenses)) = Rs. 45,000. It is important to note that the Rs. 20,000 in expenses and Rs. 5,000 in outstanding expenses are considered in the calculation, as per the accrual concept expenses are recognized in the period in which they are incurred, rather than when they are paid.

The option that is not regarded as a fundamental concept identified by AS-1 (Accounting Standard 1) is:
d) conservatism concept
AS-1 primarily focuses on the following fundamental concepts:

• The going concern concept
• The prudence concept (often referred to as conservatism)
• The separate entity concept

In this context, the conservatism concept is sometimes mentioned in discussions but is not officially listed as one of the fundamental concepts in AS-1.

The effect on the Net Assets if cash is received from debtors of Rs. 50,000 is: C: No change

Receiving cash from debtors simply converts one asset (accounts receivable) into another (cash), while the total value of assets remains the same. Therefore, there is no overall change in the net assets.

According to Business Entity Concept, the owner of the enterprise pays the interest on drawings to the business as both(business and the owner) are considered seperate.

Correct, the answer is: C: Decrease in one asset, decrease in other
The Dual Aspect concept in accounting asserts that every financial transaction has equal and opposite effects in at least two different accounts. If there is a decrease in one asset and a decrease in another, it does not comply with the dual aspect concept because there is no corresponding increase to balance the decreases, which would be necessary to maintain the equality of the accounting equation (Assets = Liabilities + Owner’s Equity).

According to the accrual concept of accounting, a financial or business transaction is recorded: B: when the transaction occurs
The accrual basis of accounting recognizes revenues and expenses when they are earned or incurred, regardless of when the cash transactions actually take place. This approach provides a more accurate picture of a company's financial position and performance by recording the economic activity when it happens, not just when cash changes hands.

The effect on fixed assets when an asset is purchased for Rs. 6,60,000, with Rs. 1,20,000 paid in cash and the balance covered by a bill drawn for 60 days, would be: C: Rs. 6,60,000
Fixed assets should be recorded at the total purchase price, regardless of the payment method used. In this case, the entire cost of the asset, Rs. 6,60,000, should be recorded as an increase in fixed assets. The fact that part of the payment was deferred by drawing a bill does not affect the recorded value of the fixed asset.

The objective of conservatism in accounting is: B: Anticipate losses but not profits
Conservatism is an accounting principle where there is a preference for caution in the face of uncertainty. This guideline suggests that an accountant should choose solutions that result in lower profits and asset values but do not underestimate liabilities or expenses. Essentially, it means recognizing all probable losses when they are known, but not to anticipate profits. This helps ensure that financial statements do not overstate the financial health of a business.

The item that is not classified as a fundamental accounting assumption is: B: Business entity.
The fundamental accounting assumptions typically include consistency, going concern, and accrual. The business entity concept, while a fundamental principle in accounting, classifies a business as separate from its owners, but it is not considered one of the "fundamental assumptions" that guide the preparation of financial statements under that specific designation.

Unpaid expenses are correctly classified as: A: Outstanding Liabilities
Outstanding liabilities refer to expenses that have been incurred during a period but have not yet been paid by the end of that period. They are also sometimes referred to as accrued liabilities.

The obligations of an enterprise other than the owner’s fund are known as: B: Liabilities
Liabilities are the financial obligations of a business, excluding the owner's equity, and include things like loans, accounts payable, mortgages, deferred revenues, bonds, warranties, and accrued expenses.

The cost concept in accounting primarily recognizes: B: Historical Cost
The historical cost concept states that assets and transactions should be recorded at their original cost at the time of acquisition, not at their current market value or any other value. This provides a basis for accounting that is verifiable and avoids the potential subjectivity of current market valuations.