A-AS Level (CIE) Accounting Paper-1: Specimen Questions with Answers 39 - 40 of 93

Question 39

Question

MCQ▾

Which of the following transactions will ‘Decrease the assets and decrease the capital’

Choices

Choice (4)

a.

Payment of liability

b.

Purchase of asset on credit

c.

Sale of asset in cash

d.

Drawings or expenses

Answer

d.

Explanation

  • When the amount of an asset increases, such an increase in the asset is recorded on the debit side of the account and on the other hand if the amount of the asset reduces, such reduction in the value of asset is recorded on the credit side of the asset account.
  • On the credit side of the capital account an increase in the capital is recorded and the decrease in the capital is recorded on the debit side of the capital a/c. For example, if the proprietor brings in additional capital in the business, the capital account will be credited with the new amount. Similarly, if the proprietor withdraws some money for his personal use, i.e.. , makes drawings, the capital account will be debited.

Question 40

Question

MCQ▾

Income and Expenditure Account records transactions of:

Choices

Choice (4)

a.

Revenue nature only

b.

Capital nature only

c.

Income of only revenue nature and expenditure of revenue and capital nature.

d.

All of the above

Answer

a.

Explanation

It is a nominal account and hence the rule of nominal account, i.e.. , Debit all expenses or losses and credit all incomes and gains are followed while preparing it.

  • Only items of revenue nature are recorded in it. All items of capital nature are ignored while preparing it. For example, amount received from the sale of furniture will not be recorded in it but the profit earned or loss suffered on the sale of furniture will be recorded in it.
  • Opening and closing balance are not recorded of cash and bank.
  • This account is prepared in the same way a Profit and Loss Account is prepared. As such, all adjustments relating to the current year such as depreciation, outstanding expenses, prepaid expenses, earned income etc. are taken into consideration while preparing the income and expenditure account.
  • It excludes all items of income and expenditure which do not pertain to the current period. In other words, all items relating to previous years and future years are excluded while preparing it.

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