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Tamil Nadu HSE First Year Accountancy study materials
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Tamil Nadu HSE First Year Accountancy practice questions

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Question 1Introduction to Accounting

Which branch of accounting is mainly concerned with recording business transactions and preparing final accounts for a financial year?

  1. Social accounting
  2. Management accounting
  3. Financial accounting Correct answer.
  4. Cost accounting

Explanation

Financial accounting records transactions systematically in the books of accounts and ends with the preparation of the trading and profit and loss account and the balance sheet for a period. It is meant chiefly for owners and external users who need the overall result of the business.

Question 2Introduction to Accounting

The accounting principle that requires a business to record its transactions separately from those of its owner is known as

  1. Business entity concept Correct answer.
  2. Money measurement concept
  3. Going concern concept
  4. Dual aspect concept

Explanation

The business entity concept treats the business as an entity separate from its proprietor, so personal transactions of the owner are kept out of the books. Capital contributed by the owner is shown as a liability of the business to the owner.

Question 3Introduction to Accounting

A trader purchased furniture for office use. Under which accounting element should this be classified?

  1. Current liability
  2. Fixed asset Correct answer.
  3. Current asset
  4. Intangible asset

Explanation

Furniture bought for use in the office is held for long-term use in the business rather than for resale, so it is a fixed asset. It is depreciated over its useful life and appears under fixed assets in the balance sheet.

Question 4Introduction to Accounting

Which of the following is a user of accounting information who is interested mainly in the ability of the business to pay interest and repay the principal on time?

  1. Lender Correct answer.
  2. Customer
  3. Employee
  4. Government

Explanation

A lender such as a bank supplies funds and wants to judge the solvency and repayment capacity of the business before and after lending. Profitability and liquidity information in the financial statements help the lender assess this risk.

Question 5Introduction to Accounting

The rule 'debit the receiver, credit the giver' applies to which type of account?

  1. Nominal account
  2. Real account
  3. Personal account Correct answer.
  4. Valuation account

Explanation

Personal accounts cover persons, firms and representative accounts such as capital and drawings. The traditional golden rule for them is to debit the receiver and credit the giver, whatever the reason for the receipt or payment.

Question 6Introduction to Accounting

Which of the following is a limitation of accounting rather than an advantage?

  1. It records only transactions of a financial character Correct answer.
  2. It supplies information for decision making
  3. It helps in comparing results of different years
  4. It provides a systematic record of transactions

Explanation

Accounting records only those events that can be measured in money, so qualitative factors such as employee loyalty or market reputation are left out. This money measurement limitation reduces the completeness of the records.

Question 7Introduction to Accounting

A firm received a cheque of Rs. 12,000 from a customer to whom goods had been sold on credit earlier. What is the correct journal entry?

  1. Cash A/c Dr. 12,000; Customer's A/c Cr. 12,000
  2. Bank A/c Dr. 12,000; Customer's A/c Cr. 12,000 Correct answer.
  3. Customer's A/c Dr. 12,000; Bank A/c Cr. 12,000
  4. Bank A/c Dr. 12,000; Sales A/c Cr. 12,000

Explanation

The cheque increases the bank balance, so Bank account is debited, and it settles the amount due from the customer, so the customer's personal account is credited. Sales were already recorded when the credit sale took place.

Question 8Introduction to Accounting

Which of the following is a correct statement of the dual aspect concept?

  1. Every debit has an equal and corresponding credit Correct answer.
  2. Only cash transactions are recorded in the books
  3. Every transaction affects only one account
  4. Assets are always equal to the owner's capital

Explanation

The dual aspect concept states that every business transaction has two effects of equal amount, one debit and one credit. This equality keeps the accounting equation and the trial balance in balance.

Question 9Introduction to Accounting

A trader paid Rs. 4,000 for rent and Rs. 1,000 for salaries. How will these be posted to the ledger?

  1. Rent A/c Cr. 4,000 and Salaries A/c Cr. 1,000
  2. Rent A/c Dr. 4,000 and Salaries A/c Dr. 1,000 Correct answer.
  3. Cash A/c Dr. 5,000; Rent A/c Cr. 5,000
  4. Rent A/c Dr. 5,000; Salaries A/c Cr. 1,000

Explanation

Rent and salaries are nominal accounts representing expenses, and the rule is to debit all expenses and losses. Each expense is therefore debited separately with its own amount, and Cash account is credited with the total of Rs. 5,000.

Question 10Introduction to Accounting

Which of the following transactions results in an increase in one asset and a decrease in another asset?

  1. Machinery purchased for cash Correct answer.
  2. Capital introduced in cash
  3. Cash paid to a creditor
  4. Goods purchased on credit

Explanation

Buying machinery for cash increases the fixed asset machinery and reduces the asset cash by the same amount, so total assets are unchanged. Such an entry is called a contra entry within assets.

Question 11Introduction to Accounting

A firm paid Rs. 600 as carriage on goods purchased. Which account should be debited?

  1. Freight account
  2. Purchases account
  3. Carriage account Correct answer.
  4. Goods account

Explanation

Carriage paid on purchases is a direct expense and is debited to the Carriage account, from where it is transferred to the trading account. It is not added to the Purchases account in the journal entry, though it is shown as part of the cost of goods in the trading account.

Question 12Introduction to Accounting

Which of the following best describes the meaning of 'drawings' in accounting?

  1. Goods returned by a customer
  2. Cash or goods withdrawn by the owner for personal use Correct answer.
  3. Amount withdrawn from the bank for business payments
  4. Loss suffered on the sale of an asset

Explanation

Drawings are the money or goods taken out of the business by the proprietor for personal or domestic use. Under the business entity concept, drawings reduce the owner's capital and are not a business expense.

Question 13Introduction to Accounting

A trader's trial balance shows total debits of Rs. 1,45,000 and total credits of Rs. 1,42,000. Which error is most likely?

  1. Compensating errors of equal amount
  2. A one-sided posting of Rs. 3,000 Correct answer.
  3. A transaction completely omitted from the books
  4. An amount posted to the wrong account of the same side

Explanation

A difference of Rs. 3,000 between the two sides of the trial balance points to a one-sided error, such as posting only the debit or only the credit of a transaction. Errors of complete omission, wrong account on the same side and compensating errors do not disturb the trial balance.

Question 14Introduction to Accounting

Which of the following accounts normally carries a credit balance?

  1. Bank overdraft Correct answer.
  2. Carriage inward
  3. Discount allowed
  4. Prepaid insurance

Explanation

A bank overdraft is a liability of the business, representing an amount owed to the bank, so it carries a credit balance. Liabilities, capital, incomes and gains normally show credit balances.

Question 15Introduction to Accounting

A machine costing Rs. 80,000 was sold for Rs. 65,000 when its book value was Rs. 60,000. How should the sale be recorded?

  1. Debit Machinery 60,000; credit Cash 65,000 and Profit 5,000
  2. Debit Cash 65,000 and credit Machinery 65,000
  3. Debit Cash 65,000 and Profit on sale 5,000; credit Machinery 60,000 Correct answer.
  4. Debit Cash 65,000; credit Machinery 80,000 and Loss on sale 15,000

Explanation

Cash increases by Rs. 65,000 and the asset's book value of Rs. 60,000 is removed, leaving a gain of Rs. 5,000. The entry debits Cash and credits Machinery at book value, with the profit credited to the Profit on Sale account.

Question 16Introduction to Accounting

Which of the following is an example of a capital expenditure?

  1. Payment of annual insurance premium on the building
  2. Installation of a new lift in the building Correct answer.
  3. Whitewashing of the office building
  4. Replacement of a worn-out part that restores the asset to working condition

Explanation

Installing a new lift adds a new facility to the building and increases its earning capacity, so it is capital expenditure and is added to the cost of the asset. Ordinary repairs and routine expenses are revenue expenditure.

Question 17Introduction to Accounting

Which qualitative characteristic of accounting information requires that similar items be treated in the same way from one period to the next?

  1. Timeliness
  2. Consistency Correct answer.
  3. Relevance
  4. Materiality

Explanation

Consistency means applying the same accounting policies and methods period after period so that the results of different years can be compared meaningfully. A change in method is allowed only when it is required for a better presentation, and it must be disclosed.

Question 18Introduction to Accounting

A firm follows the practice of recording a sale only when cash is received from the customer. Which basis of accounting is being followed, and what is its main defect?

  1. Cash basis; it records all liabilities of the business
  2. Cash basis; it fails to show the true profit when credit transactions are large Correct answer.
  3. Accrual basis; it ignores outstanding expenses
  4. Accrual basis; it records income before it is received

Explanation

Recording revenue only on receipt of cash is the cash basis of accounting. Its main defect is that credit sales and credit purchases of the year are left out, so the profit or loss shown does not reflect the true position of the business.

Question 19Introduction to Accounting

A trader's trial balance agrees in total. Which of the following errors could still remain undetected?

  1. Posting of Rs. 500 to the debit side instead of the credit side
  2. Recording a credit sale of Rs. 2,000 as Rs. 200 in both the sales book and the customer's account Correct answer.
  3. Wrong totalling of the sales book
  4. Omission of the credit posting of a purchase of Rs. 7,000

Explanation

When the same wrong amount is entered in both the personal account and the book of original entry, the two sides of the trial balance remain equal, so the error stays hidden. Such an error affects the profit and the debtor balance but not the agreement of the trial balance.

Question 20Introduction to Accounting

An asset was purchased for Rs. 1,20,000 and Rs. 5,000 was spent on its installation. After two years, the book value was Rs. 90,000 and the asset was sold for Rs. 95,000. What is the correct amount and nature of the result on sale?

  1. Profit of Rs. 20,000, credited to the asset account
  2. Loss of Rs. 5,000, debited to Loss on Sale account
  3. Profit of Rs. 25,000, credited to the Capital account
  4. Profit of Rs. 5,000, credited to Profit on Sale of Asset account Correct answer.

Explanation

The cost of the asset includes installation, giving Rs. 1,25,000, and the book value after depreciation is given as Rs. 90,000. Sale proceeds of Rs. 95,000 exceed the book value by Rs. 5,000, which is a profit credited to the Profit on Sale of Asset account.

Question 21Conceptual Framework of Accounting

Which branch of accounting is mainly concerned with recording transactions and preparing final accounts for a business as a whole?

  1. Management accounting
  2. Financial accounting Correct answer.
  3. Social accounting
  4. Cost accounting

Explanation

Financial accounting records business transactions in the books of account and summarises them in the trading, profit and loss account and balance sheet for the entity as a whole. Cost accounting deals with cost ascertainment and control, and management accounting supplies information for internal decisions. Social accounting measures the social performance of an organisation.

Question 22Conceptual Framework of Accounting

According to the dual aspect concept, which statement about every business transaction is correct?

  1. It must increase one asset and decrease another asset
  2. It must be recorded only when cash is received or paid
  3. It affects only the cash account and the capital account
  4. It affects at least two accounts, and the total debits equal the total credits Correct answer.

Explanation

The dual aspect concept states that every transaction has two effects, a debit and a credit, of equal amount. Hence every transaction is recorded in at least two accounts and the accounting equation, assets equal liabilities plus capital, always holds. This is the foundation of the double entry system.

Question 23Conceptual Framework of Accounting

A firm treats a small expenditure on a waste paper basket as a revenue expense although the basket will be used for several years. Which accounting concept supports this treatment?

  1. Realisation
  2. Accrual
  3. Materiality Correct answer.
  4. Consistency

Explanation

The materiality concept permits items of small value to be treated according to their nature rather than their technical classification, because their treatment will not influence the decisions of users. A waste paper basket of trivial value is therefore charged as an expense instead of being capitalised and depreciated.

Question 24Conceptual Framework of Accounting

Which of the following is an internal user of accounting information?

  1. The income tax department
  2. The production manager of the company Correct answer.
  3. A bank considering a loan application
  4. A supplier of raw materials

Explanation

Internal users are persons within the organisation who use accounting information for planning and control, such as managers and employees. The production manager needs cost and performance data to run the department. Suppliers, banks and tax authorities are external users who rely on published reports.

Question 25Conceptual Framework of Accounting

Which of the following is a fundamental accounting assumption according to the framework followed in Indian accountancy?

  1. Conservatism
  2. Materiality
  3. Going concern Correct answer.
  4. Consistency

Explanation

The fundamental accounting assumptions are going concern, consistency and accrual. Going concern assumes the business will continue in operation for the foreseeable future, so assets are shown at cost less depreciation rather than at break-up value. Materiality and conservatism are modifying principles rather than fundamental assumptions.

Question 26Conceptual Framework of Accounting

Which qualitative characteristic of accounting information requires that information must be free from material error and bias and represent faithfully what it purports to represent?

  1. Timeliness
  2. Comparability
  3. Understandability
  4. Reliability Correct answer.

Explanation

Reliability means the information is dependable, free from material error and bias, and faithfully represents the transactions it claims to represent. Comparability, timeliness and understandability are other qualitative characteristics but do not carry the requirement of faithful, error-free representation.

Question 27Conceptual Framework of Accounting

A trader received a cheque of Rs. 20,000 on 28 March from a customer but deposited it in the bank on 2 April. Under which basis of accounting is the sale recorded in March?

  1. Accrual basis Correct answer.
  2. Single entry basis
  3. Hybrid basis
  4. Cash basis

Explanation

Under the accrual basis, revenue is recognised when it is earned, that is when the goods are sold and the customer becomes liable, irrespective of when cash is received. Since the sale occurred in March, it is recorded in March even though the cheque was banked in April.

Question 28Conceptual Framework of Accounting

A firm follows the reducing balance method of depreciation for plant but switches to the straight line method without any change in the pattern of use. Which accounting concept is violated?

  1. Dual aspect
  2. Consistency Correct answer.
  3. Matching
  4. Going concern

Explanation

The consistency concept requires a firm to apply the same accounting methods and procedures from one period to the next so that the financial statements remain comparable. A change in the depreciation method without justification breaks comparability between years and violates consistency.

Question 29Conceptual Framework of Accounting

Goods costing Rs. 10,000 were destroyed by fire. The insurance company admitted a claim of Rs. 7,000. Following the convention of conservatism, what amount should be charged to the profit and loss account?

  1. Rs. 3,000 Correct answer.
  2. Rs. 10,000
  3. Nil
  4. Rs. 7,000

Explanation

Conservatism requires that anticipated losses be provided for but anticipated profits be ignored. The loss of Rs. 10,000 is certain, and only Rs. 7,000 is recoverable as a confirmed claim, so the net unrecoverable loss of Rs. 3,000 is written off to the profit and loss account.

Question 30Conceptual Framework of Accounting

A business purchased machinery for Rs. 5,00,000 on 1 April. It expects to use the machine for 8 years and estimates a scrap value of Rs. 20,000. Which accounting principle justifies spreading the cost over the useful life instead of charging it in the year of purchase?

  1. Full disclosure principle
  2. Matching principle Correct answer.
  3. Realisation principle
  4. Dual aspect principle

Explanation

The matching principle requires that the cost of an asset that helps to earn revenue over several periods be allocated as depreciation over those periods, so that expense is matched with the revenue it generates. Charging the whole cost in the year of purchase would distort the profit of that year.

Question 31Conceptual Framework of Accounting

Which of the following is an example of a contingent liability that a firm should disclose by way of a note rather than record in the balance sheet?

  1. Provision for doubtful debts
  2. Outstanding wages payable to workers
  3. A pending lawsuit where the outcome is uncertain and the amount cannot be reliably estimated Correct answer.
  4. An unsecured loan taken from a bank

Explanation

A contingent liability is a possible obligation whose existence depends on a future uncertain event, and it is disclosed in a note when the outflow is not probable or cannot be measured reliably. A pending lawsuit of uncertain outcome fits this description. Loans, outstanding wages and provisions are actual liabilities or charges that appear in the accounts.

Question 32Conceptual Framework of Accounting

Under the business entity concept, a proprietor who withdraws Rs. 15,000 from the business bank account for personal use records it as:

  1. Salary expense in the profit and loss account
  2. A liability payable to the proprietor
  3. Drawings, reducing capital Correct answer.
  4. Purchase of goods in the business

Explanation

The business entity concept treats the owner and the business as separate, so money taken by the proprietor for personal use is not a business expense but drawings. Drawings reduce the owner's capital in the balance sheet and never appear in the profit and loss account.

Question 33Conceptual Framework of Accounting

Which measurement basis requires assets and liabilities to be recorded at the amount paid or the consideration given at the time of acquisition?

  1. Present value
  2. Current cost
  3. Historical cost Correct answer.
  4. Realisable value

Explanation

The historical cost basis records assets at the cash or cash equivalent paid, and liabilities at the amount received, at the time of the transaction. Current cost, realisable value and present value are alternative measurement bases that reflect later conditions rather than the original acquisition price.

Question 34Conceptual Framework of Accounting

A firm provides for a possible loss on a pending court case even though the case may be decided in its favour. Which convention is being applied, and what is its limitation?

  1. Consistency; it may reduce comparability between years
  2. Conservatism; it may lead to the creation of secret reserves Correct answer.
  3. Materiality; it may understate the value of small assets
  4. Matching; it may overstate the revenue of the period

Explanation

Conservatism provides for all anticipated losses but ignores anticipated gains, so a possible loss is provided for even when the outcome is uncertain. Its main criticism is that excessive provision can create secret reserves, understating profit and assets and reducing the reliability of the statements.

Question 35Conceptual Framework of Accounting

A company reports its sales, cost of goods sold and net profit for the year in a summarised statement. Which objective of accounting is mainly served by this statement?

  1. Showing the liquidity position on a particular date
  2. Providing information about the financial performance of the business Correct answer.
  3. Disclosing the accounting policies followed
  4. Recording the source and application of funds

Explanation

The income statement measures the financial performance of the business over a period by matching revenues with the expenses incurred to earn them, ending in the net profit or loss. The balance sheet, by contrast, shows the financial position on a particular date.

Question 36Conceptual Framework of Accounting

A firm records a sale of Rs. 50,000 when the goods are delivered to the customer, although payment is promised after 60 days. Which principle determines the timing of this revenue?

  1. Entity principle
  2. Prudence principle
  3. Cost principle
  4. Realisation principle Correct answer.

Explanation

The realisation principle states that revenue is recognised when the goods are transferred or the service is rendered and the right to receive payment arises, not when cash is actually collected. Delivery of goods to the customer therefore fixes the point of recognition.

Question 37Conceptual Framework of Accounting

A firm includes a note in its financial statements stating that it has changed the method of valuing stock from FIFO to weighted average and that the effect of the change is disclosed. Which convention is satisfied by this disclosure?

  1. Materiality
  2. Consistency
  3. Full disclosure Correct answer.
  4. Conservatism

Explanation

The full disclosure convention requires that all material facts affecting the financial statements, including changes in accounting methods and their effects, be disclosed so that users are not misled. A change from FIFO to weighted average is material and must be explained in the notes.

Question 38Conceptual Framework of Accounting

A firm prepares its accounts on the accrual basis, makes a provision for doubtful debts, values closing stock at the lower of cost or realisable value, and discloses its depreciation policy. Which pair of concepts is most directly responsible for valuing closing stock at the lower of cost or realisable value?

  1. Going concern and dual aspect
  2. Materiality and consistency
  3. Conservatism and matching Correct answer.
  4. Realisation and full disclosure

Explanation

Valuing closing stock at the lower of cost or realisable value applies conservatism, since a fall in value is recognised at once while a rise is not. It also serves matching, because the closing stock figure carried forward must be matched against the revenue of the following period.

Question 39Conceptual Framework of Accounting

Which statement best explains why the going concern assumption allows a business to classify an asset with a five-year life as a fixed asset rather than as a deferred expense?

  1. The asset has a realisable value higher than its cost
  2. The asset was purchased with borrowed funds
  3. The business is expected to continue long enough to use the asset over its useful life Correct answer.
  4. The asset will be sold within the next accounting year

Explanation

Going concern assumes the entity will continue in operation for the foreseeable future, so assets are held for use over their useful lives rather than for immediate sale. This justifies carrying them as fixed assets and allocating their cost as depreciation over those lives.

Question 40Conceptual Framework of Accounting

A firm earned revenue of Rs. 8,00,000 in a year but received only Rs. 6,50,000 in cash, and it incurred expenses of Rs. 5,00,000 of which Rs. 40,000 is still unpaid. What is the profit for the year under the accrual basis, and which concept explains the difference from cash profit?

  1. Rs. 2,60,000, explained by the materiality concept
  2. Rs. 3,00,000, explained by the accrual concept Correct answer.
  3. Rs. 3,40,000, explained by the consistency concept
  4. Rs. 1,50,000, explained by the cash concept

Explanation

Under accrual accounting, profit is revenue earned less expenses incurred, that is Rs. 8,00,000 minus Rs. 5,00,000, giving Rs. 3,00,000. The unpaid expense and the uncollected revenue are recognised because they belong to this year, which is precisely the effect of the accrual concept.

Question 41Accounting Equation and Transaction Analysis

A business has assets of Rs. 5,00,000 and capital of Rs. 3,50,000. What is the amount of liabilities according to the accounting equation?

  1. Rs. 8,50,000
  2. Rs. 3,50,000
  3. Rs. 1,50,000 Correct answer.
  4. Rs. 5,00,000

Explanation

The accounting equation states Assets = Liabilities + Capital, so Liabilities = Assets − Capital. Here that gives Rs. 5,00,000 − Rs. 3,50,000 = Rs. 1,50,000. Capital and assets are added, not subtracted, and the difference is the liability figure.

Question 42Accounting Equation and Transaction Analysis

Which of the following is the correct form of the accounting equation?

  1. Assets = Capital − Liabilities
  2. Assets = Liabilities + Capital Correct answer.
  3. Capital = Assets + Liabilities
  4. Liabilities = Assets + Capital

Explanation

The dual aspect concept requires that resources owned equal the claims of outsiders and owners combined. Hence Assets = Liabilities + Capital is the standard equation. Rearranged forms such as Capital = Assets − Liabilities are valid, but the other options add claims incorrectly.

Question 43Accounting Equation and Transaction Analysis

A firm purchases furniture for Rs. 40,000 on credit. What is the effect on the accounting equation?

  1. Only capital decreases by Rs. 40,000
  2. Assets increase by Rs. 40,000 and capital increases by Rs. 40,000
  3. Assets increase by Rs. 40,000 and liabilities increase by Rs. 40,000 Correct answer.
  4. Assets decrease by Rs. 40,000 and liabilities decrease by Rs. 40,000

Explanation

Furniture is an asset and the amount owed to the supplier is a liability. A credit purchase therefore increases both sides equally, keeping the equation balanced. Capital is unaffected because no profit or owner transaction arises.

Question 44Accounting Equation and Transaction Analysis

The proprietor withdraws Rs. 15,000 cash for personal use. How does this affect the accounting equation?

  1. Assets decrease by Rs. 15,000 and capital decreases by Rs. 15,000 Correct answer.
  2. Assets decrease by Rs. 15,000 and liabilities decrease by Rs. 15,000
  3. Liabilities increase by Rs. 15,000 and capital decreases by Rs. 15,000
  4. Assets increase by Rs. 15,000 and capital increases by Rs. 15,000

Explanation

Drawings are amounts taken by the owner, so they reduce the owner's claim (capital). Cash, an asset, falls by the same amount, so the equation stays balanced. No outside party is involved, so liabilities do not change.

Question 45Accounting Equation and Transaction Analysis

Which of these transactions results in a decrease in one asset and an increase in another asset, with no change in capital or liabilities?

  1. Purchasing machinery by paying cash Correct answer.
  2. Selling goods to a customer on credit at cost
  3. Receiving cash from a debtor
  4. Paying a creditor in cash

Explanation

Buying machinery for cash swaps one asset for another, so total assets and total capital remain unchanged. Only the composition of assets changes. Transactions involving creditors or profit affect liabilities or capital.

Question 46Accounting Equation and Transaction Analysis

Capital is Rs. 80,000, liabilities are Rs. 20,000 and drawings are Rs. 10,000. What are the total assets?

  1. Rs. 1,00,000
  2. Rs. 90,000 Correct answer.
  3. Rs. 1,10,000
  4. Rs. 70,000

Explanation

Drawings reduce capital, so adjusted capital is Rs. 80,000 − Rs. 10,000 = Rs. 70,000. Adding liabilities of Rs. 20,000 gives assets of Rs. 90,000. Failing to deduct drawings produces the wrong total.

Question 47Accounting Equation and Transaction Analysis

A business earns a profit of Rs. 25,000, all of which is retained. What is the effect on the accounting equation?

  1. Assets decrease by Rs. 25,000 and capital increases by Rs. 25,000
  2. Capital increases by Rs. 25,000 and liabilities decrease by Rs. 25,000
  3. Assets increase by Rs. 25,000 and liabilities increase by Rs. 25,000
  4. Assets increase by Rs. 25,000 and capital increases by Rs. 25,000 Correct answer.

Explanation

Profit belongs to the owner and therefore increases capital. The corresponding increase appears in assets, such as cash or receivables, so both sides rise equally. Liabilities are unaffected because no outside claim is created.

Question 48Accounting Equation and Transaction Analysis

A firm settles a creditor's account of Rs. 30,000 by cheque. What is the effect on the accounting equation?

  1. Only liabilities decrease by Rs. 30,000
  2. Assets decrease by Rs. 30,000 and capital decreases by Rs. 30,000
  3. Liabilities decrease by Rs. 30,000 and capital increases by Rs. 30,000
  4. Assets decrease by Rs. 30,000 and liabilities decrease by Rs. 30,000 Correct answer.

Explanation

Paying by cheque reduces the bank balance, an asset, and also extinguishes the creditor, a liability. Both sides fall by the same amount, so the equation remains balanced. Capital does not change because settling a debt is not an expense.

Question 49Accounting Equation and Transaction Analysis

A trader starts business with cash Rs. 2,00,000 and a bank loan of Rs. 50,000. What are the total assets at the start?

  1. Rs. 1,50,000
  2. Rs. 50,000
  3. Rs. 2,50,000 Correct answer.
  4. Rs. 2,00,000

Explanation

The loan brings in additional cash, so total assets are the owner's contribution plus the borrowed amount. That is Rs. 2,00,000 + Rs. 50,000 = Rs. 2,50,000. The loan is a liability, not a reduction of assets.

Question 50Accounting Equation and Transaction Analysis

If total assets are Rs. 6,00,000 and capital is Rs. 4,50,000, and the firm then incurs a loss of Rs. 50,000, what are the liabilities after the loss?

  1. Rs. 2,00,000 Correct answer.
  2. Rs. 1,50,000
  3. Rs. 2,50,000
  4. Rs. 1,00,000

Explanation

A loss reduces capital, so revised capital is Rs. 4,50,000 − Rs. 50,000 = Rs. 4,00,000. Liabilities equal assets minus capital: Rs. 6,00,000 − Rs. 4,00,000 = Rs. 2,00,000. The loss must be deducted before solving.