Test: Journal Entries - 1 - Commerce MCQ

D: All of the above

In double-entry accounting, a debit is an accounting entry that signifies an increase in an asset account or a decrease in a liability or capital account. The word "debit" comes from the Latin word "debere," which means "to owe."

Here are some examples of how debits are used in accounting:

• Increase in an asset account: If a business purchases a new asset, such as a piece of equipment, it will debit the asset account to increase its value and credit the cash account to reduce the amount of cash on hand.

• Decrease in a liability account: If a business pays off a liability, such as a loan, it will debit the cash account to reduce the amount of cash on hand and credit the liability account to decrease the amount owed.

• Decrease in a capital account: If a business withdraws capital from the business, it will debit the capital account to decrease the amount of capital invested in the business and credit the cash account to increase the amount of cash on hand.

In double-entry accounting, every debit must have a corresponding credit, and the total debits and credits must always be equal. This system helps to ensure the accuracy and integrity of financial statements and allows stakeholders to understand the financial position and performance of a business.

Bank Overdraft is an artificial Personal account, so will be classified as Personal Account.

The correct answer is 'A' - Journal. When a transaction cannot be recorded in any of the subsidiary books, it will be recorded in journal. In the given case, purchase of second hand computer on credit cannot be recorded in cash book as it is on credit. It can also not be recorded in Purchase book as purchase book shows purchase of goods in trade and not of purchase of any other asset. Therefore, purchase of second hand computer will be recorded in Journal. Such journal is called Journal Proper.

When the proprietor withdraws goods for personal use of Rs 10,000 it should be credited/deducted from the stock while calculating cost of goods sold and hence are deducted from purchases.  

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.

B: Computer Dr. 11,500; Bad-debts Dr. 13,500; To A 25,000

In this scenario, 'B' has received a computer from 'A' in full settlement of a debt owed by 'A'. The journal entry to record this transaction in the books of 'B' would be as follows:

Debit: Computer (Asset) 11,500 Debit: Bad-debts (Expense) 13,500 Credit: A (Accounts Receivable) 25,000

The debit entries in this journal entry increase the value of the computer asset and the bad-debts expense, while the credit entry reduces the amount owed by 'A' to 'B'.

Option A is incorrect because it does not account for the fact that the computer was received in full settlement of a debt. Option C is incorrect because it does not account for the fact that 'A' has become insolvent and is unable to pay the full amount of the debt. Option D is incorrect because it does not account for the fact that the computer was received in full settlement of a debt and separates the value of the computer and the bad-debts into separate accounts.

It is important to accurately record transactions in the books of a business to ensure the accuracy and integrity of financial statements and to provide a clear and complete record of the financial position and performance of the business.

"Debit the receiver, and credit the giver" is a golden rule for Personal A/c. Personal accounts are the accounts for individual, firms, companies etc. By debit the receiver means the person who is receiving goods on credit will be debited and the person who is giving will be credited.  

The correct answer is 'D' - Representative Personal Account. Unexpired expenses is Representative Personal Account. This is because these accounts are not in the name of any person or any organisation.

Correct option is D)

Recovery of bad debts written off previously will be credited to profit and loss A/c because it is an income. Hence, the correct option is D.

C: Debit the receiver, credit the giver

In double-entry accounting, the general rule for personal accounts is to debit the receiver and credit the giver. Personal accounts are accounts that relate to individuals or organizations that are not part of the business. Examples of personal accounts include customers, suppliers, and owner's equity accounts.

The rule to debit the receiver and credit the giver applies to transactions involving the transfer of assets or the settlement of liabilities. For example, if a business receives cash from a customer, it would debit the cash account to increase its value and credit the customer's account to reduce the amount owed. If the business pays a supplier for goods or services, it would debit the supplier's account to reduce the amount owed and credit the cash account to reduce its value.

Option A is incorrect because the rule to debit what comes in and credit what goes out applies to real accounts, which are accounts that relate to assets, liabilities, and capital. Option B is incorrect because the rule to debit all expenses and losses and credit all incomes and gains applies to nominal accounts, which are accounts that relate to revenues, expenses, and gains or losses. Option D is incorrect because there is a specific rule for personal accounts in double-entry accounting.

It is important to understand the different types of accounts and the rules for recording transactions in order to accurately prepare financial statements and effectively manage a business.

A credit to the Account receivable account of Rs. 2,100.

In double-entry accounting, the receipt of a payment for an outstanding account receivable is recorded as a credit to the cash received account and a debit to the account receivable account.

In this case, Sunset Tours has an account receivable from Mohan in the amount of Rs. 3,500. On January 20, Mohan makes a partial payment of Rs. 2,100. To record this transaction, Sunset Tours would credit the cash received account for the amount of the payment and debit the account receivable account to reduce the amount owed.

The journal entry would be: Cash Received (Credit) Rs. 2,100 Account Receivable (Debit) Rs. 2,100

Rent paid is credited to cash account because cash is paid for rent & payment of cash reduces the cash balance.

C: Debtors Account

In double-entry accounting, a bad debt is a debt that is unlikely to be collected from a customer or debtor due to their inability or unwillingness to pay. When a business writes off a bad debt, it records the loss in its financial statements by debiting the bad-debts expense account and crediting the debtors account. This reduces the value of the debtors account and increases the value of the bad-debts expense account.

For example, if a business has an outstanding account receivable from a customer in the amount of Rs. 10,000 and determines that the debt is unlikely to be collected, it would record a bad-debts expense of Rs. 10,000 by debiting the bad-debts expense account and crediting the debtors account.

The journal entry would be:

Bad-debts Expense (Debit) Rs. 10,000 Debtors (Credit) Rs. 10,000

Option A is incorrect because the bad-debts account is an expense account and would be debited, not credited. Option B is incorrect because creditors are not involved in the transaction. Option D is incorrect because there are specific accounts that are affected by the write-off of a bad debt.

It is important to understand the rules for recording transactions in order to accurately prepare financial statements and effectively manage a business.

A: Rs. 1,00,000

In accounting, the total assets of a business can be calculated by adding its capital to its liabilities. This relationship is represented by the accounting equation:

Assets = Liabilities + Capital

In this case, the capital of the business is Rs. 75,000 and the liability is Rs. 25,000. To calculate the total assets of the business, we can substitute these values into the equation:

Assets = Rs. 25,000 + Rs. 75,000 = Rs. 1,00,000

Thus, the total assets of the business are Rs. 1,00,000.

C: To give a precise explanation for proper understanding of the entry.

Narration is a brief explanation or description that is provided along with a journal entry to give context and clarify the purpose of the transaction. Narration helps to provide a clear and concise explanation of the entry, making it easier to understand the impact of the transaction on the financial statements of the business.

Narration is typically included with journal entries to ensure that the entries are accurately understood and can be properly analyzed by users of the financial statements. It is not included for the purpose of disclosing profit or loss, or for any secret or hidden purpose.

Option A is incorrect because narration is not necessarily intended to signify the impact of the entry on profitability. Option B is incorrect because narration does not necessarily disclose the profit or loss of a transaction. Option D is incorrect because narration is not intended to have any hidden or secret meaning.

It is important to include clear and concise narration with journal entries in order to accurately and effectively communicate the purpose and impact of transactions on the financial statements of a business.

Freehold land and Buildings is the odd one out because the other accounts are related to business assets, while Freehold land and Buildings is a type of real estate property. Office furniture & Equipment, Inventory of materials, and Plant and Machinery are all assets that a business uses in its operations and that depreciate over time. Freehold land and Buildings, on the other hand, is a type of property that a business may own, but it is not typically considered a business asset in the same way as the other accounts.

B: Expense is the correct answer. Salaries are an example of an expense in accounting because they represent a cost that a business incurs in order to operate. Expenses are costs that are incurred in order to generate revenue and are typically recorded as a reduction in the business's net income.

A: Revenue is the total amount of income that a business generates from the sale of goods or services.

C: Asset is a resource that a business owns or controls, such as cash, inventory, and equipment, that is expected to provide future economic benefits.

D: Liability is a financial obligation that a business owes to another party, such as a loan or unpaid bills.

D: Liability is the correct answer. Accounts payable is a type of liability that represents the amount of money that a business owes to its suppliers for goods or services that it has received but has not yet paid for. In other words, accounts payable is a debt that the business owes to its creditors.

A: Revenue is the total amount of income that a business generates from the sale of goods or services.

B: Expense is a cost that a business incurs in order to generate revenue and is typically recorded as a reduction in the business's net income.

C: Asset is a resource that a business owns or controls, such as cash, inventory, and equipment, that is expected to provide future economic benefits.

A: Personal is the correct answer. Proprietor's account is a type of personal account in accounting that represents the owner's personal investments in the business and the profits or losses that the owner has earned from the business. The proprietor's account is used to track the owner's financial interest in the business and to determine the owner's net income or loss from the business.

B: Real accounts are accounts that represent assets or liabilities that are tangible, such as cash, inventory, and equipment.

C: Nominal accounts are accounts that represent expenses and revenues, such as salaries, rent, and utilities.

D: None of the above is not a valid answer in this context.

The correct answer is 'B' - Personal A/c. “Debit the receiver and credit the giver” is the golden rule for a personal account. This means that whenever something is received, it is debited to the account of the receiver and credited to the giver. This is because, in a personal account, the transactions are between two people and not between the business and an asset, liability, income or expense.

A bill payable is a document which shows the amount owed for goods or services received on credit (meaning not paid at the time that the goods or services were received). The provider of the goods or services is referred to as the supplier or vendor. Hence, a bill payable is also known as an unpaid vendor invoice.

C: Asset is the correct answer. Building is a type of business asset in accounting, specifically a fixed asset. Fixed assets are long-term physical assets that a business uses in its operations, such as buildings, machinery, and equipment. They are expected to provide economic benefits to the business for more than one year. Buildings are typically recorded as assets on a company's balance sheet and are depreciated over their useful lives.

A: Revenue is the total amount of income that a business generates from the sale of goods or services.

B: Expense is a cost that a business incurs in order to generate revenue and is typically recorded as a reduction in the business's net income.

D: Liability is a financial obligation that a business owes to another party, such as a loan or unpaid bills.

Cash account is a real account. Real accounts show up on a company's balance sheet, which is the financial statement that lists all the accounts that a company has and their balances.

C: Profit & Loss A/c Dr. 40,000 Insurance claim receivable A/c Dr. 60,000 To Purchase A/c 1,00,000 is the correct answer.

This journal entry reflects the fact that a diamond ring worth Rs. 1,00,000 was stolen from the shop, and an insurance claim of Rs. 60,000 was admitted by the insurance company. The insurance company has not yet disbursed the claim, so it is recorded as an insurance claim receivable on the company's balance sheet. The company has incurred a loss of Rs. 40,000, which is the difference between the value of the stolen diamond ring and the amount of the insurance claim that has been admitted. This loss is recorded in the Profit & Loss A/c.

The other options do not correctly reflect the information provided in the question. Option A does not account for the insurance claim or the loss, and Option B incorrectly records the loss in the Insurance claim receivable A/c instead of the Profit & Loss A/c. Option D incorrectly records the insurance company as a creditor rather than a debtor.

C: Asset is the correct answer. Inventory is a type of business asset in accounting, specifically a current asset. Current assets are assets that are expected to be converted into cash or used up within one year or the company's operating cycle, whichever is longer. Inventory represents the raw materials, work-in-progress, and finished goods that a business holds for sale. It is recorded as an asset on a company's balance sheet and is valued using various methods, such as the first-in, first-out (FIFO) method or the average cost method.

A: Revenue is the total amount of income that a business generates from the sale of goods or services.

B: Expense is a cost that a business incurs in order to generate revenue and is typically recorded as a reduction in the business's net income.

D: Liability is a financial obligation that a business owes to another party, such as a loan or unpaid bills.

The correct option is D.
The goods taken by the proprietor for personal use, reduce the inventory of the business. Hence, it is placed on a temporary drawings account. It reduces the Owner's equity account. It is not an expense of the business.  

If wages are paid for construction of business premises the amount of wages will be debited to the premises account because, according to IFRS, any expense that brings the asset to use or brings the asset in existence should be added to the cost of that machinery. 

Cash account is credited because cash is being paid for incurring the wages.

C: Drawings Account

The transaction is based on the separate entity concept which signifies that business and its proprietor are treated two separate legal entity.

Withdrawal of cash by proprietor should be debited to drawing account in the books of the business. Same amount should be credited by the proprietor in cash account.

B: Personal A/c

The Capital Account is a Personal Account. Personal accounts represent people or entities with whom the business has a financial relationship, such as owners, partners, customers, and suppliers. Personal accounts can be either debited or credited, depending on the nature of the transaction.

Real accounts represent assets, expenses, and losses, and are always debited when an increase in value occurs. Nominal accounts represent income, gains, and expenses, and are always credited when an increase in value occurs.

In double-entry bookkeeping, every transaction involves at least one debit and one credit, with the total debits always equal to the total credits. This helps to ensure the accuracy and completeness of the financial records.

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