Test: Recording Of Transactions - 2 - Commerce MCQ

Proprietor is a creditor of the business for Capital.
Explanation:
- The term "proprietor" refers to the owner of the business.
- A "creditor" is a person or entity to whom money is owed.
- In this scenario, the proprietor is considered a creditor of the business for the amount of capital they have invested in the business.
- Capital refers to the owner's equity or the initial investment made by the proprietor to start the business.
- The proprietor's capital is considered a liability to the business, as the business is obligated to repay the proprietor their initial investment.
- Therefore, the correct answer is option D: Capital.

Difference between assets and liabilities:
Introduction:
Assets and liabilities are two key components of a company's balance sheet. Understanding the difference between these two concepts is essential for financial analysis and decision-making.
Assets:
- Assets are resources owned by a company that have economic value and can be converted into cash or used to generate future cash flows.
- They represent the company's financial strength and are classified into current assets (expected to be converted into cash within one year) and non-current assets (expected to provide economic benefit for more than one year).
- Examples of assets include cash, accounts receivable, inventory, property, plant, and equipment.
Liabilities:
- Liabilities are obligations or debts that a company owes to external parties, such as lenders, suppliers, or employees.
- They represent the company's financial obligations and are classified into current liabilities (expected to be settled within one year) and non-current liabilities (due in more than one year).
- Examples of liabilities include accounts payable, loans, bonds, and accrued expenses.
Differences:
1. Ownership:
- Assets are owned by the company and represent its resources, while liabilities are owed to external parties.
2. Economic value:
- Assets have economic value and can generate future cash flows, while liabilities represent obligations to make future payments.
3. Classification:
- Assets are classified into current and non-current assets based on their liquidity and expected time of conversion, while liabilities are classified into current and non-current liabilities based on their maturity.
4. Financial position:
- Assets contribute to a company's financial strength and value, while liabilities represent the company's financial obligations and potential risks.
5. Impact on equity:
- Assets increase equity when they generate profits or appreciate in value, while liabilities decrease equity when they require future payments.
Conclusion:
Understanding the difference between assets and liabilities is crucial for evaluating a company's financial position, analyzing its performance, and making informed decisions. Assets represent a company's resources and financial strength, while liabilities represent its obligations and potential risks.

Cash Memo is a source of document prepared by the seller of the goods for cash.

Explanation:

• Definition: A cash memo is a commercial document prepared by the seller of goods at the time of sale to the buyer. It is a proof of the transaction and contains details of the goods sold, their quantity, price, and the total amount payable by the buyer.


• Prepared by the seller: The cash memo is generated by the seller of the goods, not the buyer.


• For cash payment: The primary purpose of a cash memo is to record a sale made for cash payments. It is used when the buyer pays the seller immediately, in cash.


• Details included: A cash memo typically includes information such as the seller's name, address, contact details, date of sale, a description of the goods sold, their quantities, unit prices, total amount payable, and any applicable taxes or discounts.


• Legal validity: Cash memos serve as legally valid documents and are used for accounting purposes by the seller. They provide proof of the sale and can be used for future reference or in case of any disputes or returns.

Therefore, the correct answer is B: source of document prepared by the seller of the goods for cash.

When additional capital is introduced in a business, it has an impact on both the assets and the capital of the business. Here is a detailed explanation of how additional capital affects these elements:
1. Assets:
- Assets are the resources owned by a business that have economic value. Examples of assets include cash, inventory, equipment, and property.
- Additional capital increases the total value of assets in the business.
- This is because the new capital can be used to purchase additional assets or increase the value of existing assets.
- As a result, the total assets of the business will increase.
2. Capital:
- Capital refers to the financial resources that are invested in a business by its owners or shareholders.
- Additional capital increases the amount of capital invested in the business.
- It represents the owner's equity in the business and helps to strengthen the financial position of the business.
- The increase in capital indicates that the owners are willing to contribute more funds to support the business operations and growth.
Therefore, the correct answer is B: Assets and Capital. Additional capital introduced in the business will increase both the assets and the capital of the business.

Purchases is an expense of the business – so it decreases the profit (and hence the equity) and if it is on credit then it increases the liability.

Separately, if any of the purchases are unsold then we have inventory.
If we have inventory then this is an asset so assets increase and profit (so equity) also increases

Purchase book records credit purchases of goods only. Whenever goods are purchased, Purchases account is debited. In all cases of purchases, goods come into the business (as per the rule i.e. "Debit what comes in"), so purchases account has to be debited. The document on the basis of which purchase book is prepared is known as "Credit memo".

Assets will always be equal to Capital, Liabilities
Explanation:
Assets are the resources owned by a company or individual that have economic value. They can include cash, investments, property, inventory, and other tangible or intangible items. On the other hand, liabilities are the obligations or debts that a company or individual owes to others.
In accounting, the basic equation is Assets = Liabilities + Capital. This equation is known as the balance sheet equation or the accounting equation. It represents the fundamental relationship between a company's assets, liabilities, and owner's equity (capital).
Here's a breakdown of the equation:
Assets: Resources owned by a company or individual that have economic value.
Liabilities: Obligations or debts that a company or individual owes to others.
Capital (Owner's Equity): The owner's investment in the business or the residual interest in the assets of the company after deducting liabilities.
Therefore, in all circumstances, assets will always be equal to the sum of capital and liabilities. This equation ensures that the balance sheet remains balanced and provides a snapshot of the financial position of a company at a given point in time.

Transfer Voucher is prepared for:

A transfer voucher is prepared for the following purposes:

• Cash Purchase: A transfer voucher is prepared when a cash purchase is made. This is when an organization buys goods or services and pays for them in cash.


• Payment of Salary for Cash: A transfer voucher is prepared when cash is used to pay employee salaries. This is a common practice in some organizations where employees receive their salaries in cash.


• Purchase Return and Sales Return: A transfer voucher is prepared when there is a purchase return or sales return. This occurs when goods purchased or sold are returned to the supplier or customer due to various reasons such as defects, wrong quantity, etc.


• Cash Sale: A transfer voucher is prepared when there is a cash sale. This is when an organization sells goods or services and receives payment in cash.

Answer: C. Purchase return and sales return

In summary, a transfer voucher is prepared for cash purchases, payment of salary in cash, purchase return and sales return, and cash sales.

To analyze the effect on assets and liabilities when a company pays its creditors by cheque, we need to consider the impact on the relevant accounts.
Effect on Assets:
When the company pays its creditors by cheque, the following assets are affected:
- Bank: The bank account is reduced as the company uses funds from the account to make the payment.
Effect on Liabilities:
The effect on liabilities depends on the nature of the payment. In this case, the company is paying its creditors, which means it is reducing its accounts payable, resulting in a decrease in liabilities.
Therefore, the overall effect on assets and liabilities can be summarized as follows:
- Assets: Bank account is reduced.
- Liabilities: Accounts payable (creditors) are reduced.
Conclusion:
The effect of paying creditors by cheque is a reduction in both assets (bank) and liabilities (accounts payable).
Therefore, the correct answer is B: Reduce Bank and Reduce Liability.

Correct answer is D, because in double entry system every transaction has double effect, so when we collect money from our debtors by cheque, it will increase our bank balance and at the same time it also decrease debtors. so, simultaneously increase and decrease in assets with the same amount means no effect on assets and liabilities.

Bookkeeping and Credit Sales

When it comes to recording credit sales of goods, the appropriate book to use is the Sales Book. The Sales Book is a specialized accounting book used to record all credit sales made by a business.

Explanation:
The Sales Book serves as a central record for all credit sales transactions. Here are some key points to understand about the Sales Book:

• Definition: The Sales Book is a subsidiary ledger that contains individual entries for each credit sale made by a business.


• Recording: Every credit sale is recorded in the Sales Book, which includes details such as the date of the sale, the customer's name, the description of the goods sold, the quantity, the unit price, and the total amount.


• Organization: The Sales Book is typically organized in chronological order, with each entry assigned a unique serial number for easy reference.


• Source Document: The source document for a credit sale recorded in the Sales Book is usually the sales invoice.


• Posting: Entries from the Sales Book are periodically transferred to the general ledger, ensuring that the financial records of the business are accurate and up-to-date.

Conclusion:
In summary, the Sales Book is the appropriate book in which credit sales of goods are recorded. It serves as a detailed record of all credit sales transactions, providing a comprehensive overview of the business's sales activities.

Answer:
The document that evidences the account of the named person being debited for the stated reason is known as a Debit Note. Here is a detailed explanation of each option:
1. Debit Note:
- A debit note is a document used to inform a customer that their account has been debited, usually due to an overcharge or return of goods.
- It provides details such as the customer's name, account number, the reason for the debit, and the amount debited from their account.
2. Cheque:
- A cheque is a written order from an account holder to their bank, instructing the bank to pay a specific amount of money to a specified person or organization.
- Cheques are used for making payments, not for documenting debits in an account.
3. Credit Note:
- A credit note is a document used to inform a customer that their account has been credited, usually due to an overpayment or return of goods.
- It provides details such as the customer's name, account number, the reason for the credit, and the amount credited to their account.
- Credit notes document credits, not debits.
4. Cash Memo:
- A cash memo is a document used for recording cash transactions.
- It provides details such as the date of the transaction, the items purchased, the total amount paid in cash, and any change given.
- Cash memos do not document debits in an account.
Therefore, the correct answer is A. Debit Note.

Explanation:

Assets are resources that are owned by a company and have future economic value. They can be tangible or intangible and are used to generate revenue.

In this case, the example of an asset is a factory owned by the company. This is because:
- The factory is a tangible asset that can be physically seen and touched.
- It is owned by the company, meaning that it belongs to the company and is under its control.
- The factory has future economic value as it can be used to produce goods or provide services, which can generate revenue for the company.
Summary:

An example of an asset is a factory owned by the company. It is a tangible asset that is owned by the company and has future economic value.

To determine which of the following is not an asset, we need to understand the definition of an asset.
Definition of an asset:
An asset is a resource that is owned or controlled by an individual or an organization and has economic value. Assets are expected to provide future benefits or generate cash flows.
Now, let's analyze each option to identify the one that does not fit the definition of an asset:
A: Loan
- A loan represents a liability for the borrower, not an asset. It is an obligation to repay funds borrowed from a lender. Therefore, a loan is not an asset.
B: Building
- A building is a physical asset that is owned and has economic value. It can generate rental income or be used for the operations of a business. Therefore, a building is an asset.
C: Land
- Land is a tangible asset that is owned and has economic value. It can be used for various purposes such as building construction, agriculture, or development. Therefore, land is an asset.
D: Investment
- An investment represents the allocation of funds with the expectation of generating a return or income in the future. It can include stocks, bonds, real estate, or other financial instruments. Investments have economic value and can generate cash flows, so they are considered assets.
Conclusion:
Based on the analysis above, the option that is not an asset is A: Loan. A loan represents a liability rather than an asset.

Liability:

An overdrawn balance on the firm's bank account

Explanation:
A liability refers to an obligation or debt owed by a company or individual. It represents a claim on the company's assets by external parties. In the given options, the only choice that represents a liability is an overdrawn balance on the firm's bank account. Here's why:

An overdrawn balance on the firm's bank account: When a firm's bank account has a negative balance, it means that the firm has withdrawn more money than it currently has in the account. This creates a liability because the firm owes the bank the amount overdrawn. It represents a debt that needs to be repaid.

On the other hand, the other options mentioned are not liabilities:

Factory owned by the firm: This represents an asset, as the firm owns the factory and it can be used to generate income.

Money owned by the firm: This also represents an asset, as the firm has ownership and control over the money.

Cash in hand: Similarly, cash in hand represents an asset, as the firm has immediate access to the cash.

Therefore, the correct answer is option D: An overdrawn balance on the firm's bank account.

Correct Statement: When assets increase are debited
Explanation:
- The correct statement is option B: When assets increase are debited.
- In accounting, assets are resources owned by a business that have economic value.
- When assets increase, it means that the business has acquired more resources or its existing resources have appreciated in value.
- Debit and credit are the two sides of every accounting transaction.
- The debit side is used to record increases in assets, expenses, and losses, while the credit side is used to record decreases in assets, revenues, and gains.
- Therefore, when assets increase, they are recorded on the debit side of the accounting equation.
- This means that an entry is made on the left side of the ledger account for the asset being increased.
- The corresponding entry on the credit side would be used for the source of the asset increase, such as cash or accounts payable.
- It is important to note that different types of assets may have different specific ledger accounts, but the general principle of debiting asset increases remains the same.
In summary, when assets increase, they are debited in the accounting records.

Source of documents are:
- Cash Memo: A cash memo is a document that is issued by a seller to a buyer as a proof of purchase for goods or services. It includes details such as the date of purchase, description of the items or services purchased, quantity, price, and total amount paid in cash. Cash memos are commonly used in retail or small businesses.
- Invoice: An invoice is a document issued by a seller to a buyer as a request for payment for goods or services provided. It includes details such as the date of the transaction, description of the items or services sold, quantity, price, and total amount due. Invoices are commonly used in business-to-business transactions.
- Both: Both cash memos and invoices are sources of documents for transactions.
- None: None of the above options are correct.
Explanation:
- Cash memos and invoices are both commonly used documents in business transactions. They serve as proof of purchase and request for payment respectively.
- Cash memos are typically used in retail or small businesses where cash transactions are more common.
- Invoices are commonly used in business-to-business transactions, especially when credit is involved.
- Both cash memos and invoices contain important information about the transaction, such as the date, description of items or services, quantity, price, and total amount.
- The answer to the question is option C, as both cash memos and invoices are valid sources of documents in transactions.

The final balance of purchase book is debited to:
The correct answer is option C: Purchases account.
Here is a detailed explanation:
1. Purchase book: It is a subsidiary book where all the purchases made by a business are recorded. It contains details such as the date of purchase, name of the supplier, description of goods, quantity, rate, and amount.
2. Debit and credit: In accounting, debits and credits are used to record transactions. Debits represent an increase in assets or expenses, while credits represent a decrease in liabilities, equity, or revenue.
3. Purchases account: This is a nominal account that represents the total amount of purchases made by a business during a specific period. It is classified as an expense account and is debited when purchases are made.
4. Final balance: The final balance of the purchase book represents the total amount of purchases made by the business during a specific period. It is calculated by adding up all the individual amounts recorded in the purchase book.
5. Debiting purchases account: Since the purchases account is an expense account, the final balance of the purchase book is debited to the purchases account. This ensures that the total amount of purchases is properly recorded as an expense in the financial statements.
In conclusion, the final balance of the purchase book is debited to the purchases account. This helps in accurately reflecting the total amount of purchases made by the business as an expense in the financial statements.

Explanation:
The periodic total of purchases return journal is posted to the Purchase returns account. Here is a detailed explanation:
- The purchases return journal is a record of all goods that have been returned to the supplier for various reasons such as damaged goods, incorrect delivery, or dissatisfaction with the product.
- The purpose of the purchases return journal is to keep track of these returns and to update the relevant accounts accordingly.
- The periodic total of the purchases return journal is the sum of all the returns made during a specific period, such as a month or a year.
- This total is then posted or transferred to the Purchase returns account in the general ledger.
- The Purchase returns account is a contra account to the Purchase account. It is used to record and track all returns and allowances related to purchases.
- By posting the periodic total of the purchases return journal to the Purchase returns account, we can accurately reflect the amount of returns in the financial statements.
- The Purchase returns account is typically included in the expenses section of the income statement or profit and loss account.
- This account helps in calculating the net purchases by deducting the returns from the total purchases made during a specific period.
- The balance in the Purchase returns account is usually a credit balance, indicating the total value of returns made.
- This credit balance is then subtracted from the debit balance in the Purchase account to determine the net purchases.
In conclusion, the periodic total of the purchases return journal is posted to the Purchase returns account.

Answer:
The voucher that is prepared for the payment of salary, purchase of goods, and payment made to any creditor is called a Debit voucher.
Here is a detailed explanation of why a debit voucher is used for these purposes:
1. Payment of Salary: When a company pays its employees' salaries, it prepares a debit voucher to record the transaction. The voucher contains details such as the employee's name, the amount of salary paid, and the date of payment.
2. Purchase of Goods: When a company purchases goods from a supplier, it prepares a debit voucher to document the purchase. The voucher includes information about the supplier, the quantity and cost of the goods purchased, and the date of purchase.
3. Payment to Creditors: If a company has outstanding debts to be paid to its creditors, it uses a debit voucher to record the payment. The voucher includes details such as the creditor's name, the amount paid, and the date of payment.
In summary:
- A debit voucher is prepared for various transactions, including salary payments, purchase of goods, and payments made to creditors.
- The voucher contains relevant details such as names, amounts, and dates to ensure accurate record-keeping.
- The use of a debit voucher helps businesses maintain a systematic and organized approach to financial transactions.
Therefore, the correct answer is B: Debit voucher.