Tag: basis of accounting

Questions Related to basis of accounting

Name the accounting concept on the basis of which income statement is prepared ______________.

commercial applications bases of accounting cash and mercantile system basis of accounting basis of accounting system

  1. Realization concept

  2. Matching concept

  3. Accrual concept

  4. Cost concept

Show answer
Correct Option: C
Explanation:

Under accrual basis of accounting, expenses are matched with the related revenues and/ or are reported when the expense occurs, not when the cash is paid. The result of accrual accounting is an income statement that better measures the profitability of a company during a specific time period.

Match the items of the following two lists and indicate the correct answer:

List - I List - II
(i) Earning ability of firm (a) Basis of Accounting
(ii) Conservation (b) P/V ratio
(iii) Cash profit (c) Cash flow statement
(iv) Cash and Accrual (d) Prudence
commercial applications bases of accounting cash and mercantile system basis of accounting basis of accounting system

  1. $(i) - (b), (ii) - (d), (iii) - (c), (iv) - (a)$

  2. $(i) - (b), (ii) - (a), (iii) - (d), (iv) - (c)$

  3. $(i) - (c), (ii) - (d), (iii) - (a), (iv) - (b)$

  4. $(i) - (c), (ii) - (d), (iii) - (b), (iv) - (a)$

Show answer
Correct Option: A
Explanation:
  • A basis of accounting is the time various financial transactions are recorded. The cash basis (EU VAT vocabulary Cash accounting) and the accrual basis is the two primary methods of tracking income and expenses in accounting.
  • In accounting, the convention of conservatism, also known as the doctrine of prudence, is a policy of anticipating possible future losses but not future gains. 
  • Profitability ratio is used to evaluate the company's ability to generate income as compared to its expenses and other cost associated with the generation of income during a particular period. 
  • The cash flow statement or statement of cash flows measures the sources of a company's cash and its uses of cash over a specific time period.

Break-even analysis helps in __________.

commercial applications bases of accounting cash and mercantile system basis of accounting basis of accounting system

  1. Formulating price policy

  2. Determining the amount of overhead cost to be changed at various levels of operations

  3. Forecasting the profit

  4. All of these

Show answer
Correct Option: D
Explanation:

Break-even analysis helps in formulating price policy, determining the amount of overhead cost to be charged at various levels of operations and forecasting profit.

 Break-even analysis is done to find out the activity level that is required for achieving a no profit no los situation, wherein where cost=sales. 

System in which entry is recorded for cash as well as credit transactions is known as _____________.

commercial applications bases of accounting cash and mercantile system basis of accounting basis of accounting system

  1. Cash system

  2. Credit system

  3. Accrual System

  4. Non-accrual system

Show answer
Correct Option: C
Explanation:

Accrual system is an accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged. For example -In a credit sale, the sale is entered into the books when the invoice is generated rather than when cash is collected. 

Expenses/Income are recorded when it is earned irrespective of cash being received/paid as per _____________.

commercial applications bases of accounting cash and mercantile system basis of accounting basis of accounting system

  1. Cash basis

  2. Accrual basis

  3. Both of the above

  4. None of the above

Show answer
Correct Option: B
Explanation:

Under accrual basis of accounting, expenses are matched with the related revenues and/ or are reported when the expense occurs, not when the cash is paid. The result of accrual accounting is an income statement that better measures the profitability of a company during a specific time period.

______ is the Accounting method that recognizes the impact of transactions on the financial statements in the time periods when revenue and expenses occurs.

commercial applications bases of accounting cash and mercantile system basis of accounting basis of accounting system

  1. Cash basis

  2. Hybrid basis

  3. Accrual basis

  4. Double entry basis

Show answer
Correct Option: C
Explanation:

There are two methods of accounting on the basis of business transactions are recorded i.e. cash system and accrual system.

If the transactions are recorded in books of account when cash is physically received is known as cash system of accounting irrespective of the period of revenue or expense. 
On the other side, if revenue and expense are recorded in the books of account based on the period of occurrence, its called accrual system of accounting irrespective of cash actually paid or not. 

Transactions affecting cash balance only are recorded in the books of accounts.

commercial applications bases of accounting cash and mercantile system basis of accounting basis of accounting system

  1. True

  2. False

Show answer
Correct Option: B
Explanation:

False. In the books of accounts, transactions whether cash or on credit both are recorded in the books of accounts. Accrual basis of accounting records transactions by recognizing economic events regardless whether cash is received or not. 

The accounting system that affects at least two accounts is called __________ .

commercial applications bases of accounting cash and mercantile system basis of accounting basis of accounting system

  1. Single entry system

  2. Double entry system

  3. Double account system

  4. Duplicate system of accounting

Show answer
Correct Option: B
Explanation:

Dual aspect is the foundation or basic principle of accounting. It provides the very basis for recording business transactions into the book of accounts. This concept states that every transaction has a dual or two-fold effect and should therefore be recorded at two places. In other words, at least two accounts will be involved in recording a transaction.

The double-entry system also requires that for all transactions, the amounts entered as debits must be equal to the amounts entered as credits.

In a mercantile system of accounting adjustment is required for _______.

commercial applications bases of accounting cash and mercantile system basis of accounting basis of accounting system

  1. Prepaid expenses

  2. Outstanding expenses

  3. Accrued income/income received in advance

  4. All the three

Show answer
Correct Option: D
Explanation:

Accrual accounting is the base of present accounting. It is also known as the mercantile system of accounting wherein the transactions are recognized as and when they take place. 

Under this method, the revenue is recorded when it is earned, and the expenses are reported when they are incurred. 
Hence, in this question accounting adjustment is required for prepaid expenses, outstanding expenses, accrued income/income received in advance.

______ is the Accounting method that recognizes the impact of transactions on the financial statements in the time periods when cash is disbursed or received.

commercial applications bases of accounting cash and mercantile system basis of accounting basis of accounting system

  1. Cash basis

  2. Hybrid basis

  3. Accrual basis

  4. Double entry basis

Show answer
Correct Option: A
Explanation:

There are two methods of accounting on the basis of business transactions are recorded i.e. cash system and accrual system.

If revenue and expense are recorded in the books of account based on the period of occurrence, its called accrual system of accounting irrespective of cash actually paid or not.
If the transactions are recorded in books of account when cash is physically received is known as cash system of accounting irrespective of the period of revenue or expense.