State whether the following statements are True or False with reasons. (Weightage 5 Marks)
1. Partnership Final Account
1) Partnership firm is a Non-Trading Concern.
Ans:- False
Explanation:
The partnership is a trading concern. The main aim of the partnership firm is to earn maximum profit. It undertakes either manufacturing or distributive activities with the sole aim of earning profit and distributing that profit among the partners in a specific ratio. It is never formed for charitable purposes.
2) Profit and Loss Account is a Real Account.
Ans:- False.
Explanation:
Profit and Loss Account contains all indirect expenses and indirect incomes of the firm. Therefore, Profit and Loss Account is a Nominal Account and not a real account.
3) Carriage inward is a carriage on purchase.
Ans:- True
Explanation:
Total transport expenses incurred on bringing the goods from the market to the place of business is called the carriage. When goods are purchased, the carriage is supposed to be borne by the firm. It is known as carriage inward. It means carriage paid on purchase.
4) Adjustments are recorded in Partner’s Current Account in Fixed Capital Method.
Ans:- True
Explanation:
In the Fixed Capital Method, as the name suggests capital balances generally remain fixed. Under this method, adjustments are not to be recorded in the Capital Account. All adjustments are recorded in a separate account called Partners’ Current Accounts.
5) Prepaid expenses are treated as liabilities.
Ans:- False
Explanation:
Prepaid expenses are expenses which are paid before they are due. Therefore, they are considered an asset of the business organisation.
6) If the partnership deed is silent, partners share profits and losses in proportion to their capital.
Ans:- False
Explanation:
As per the provisions made under Indian Partnership Act 1932, when partnership deed is silent about profit and loss sharing ratio, partners are supposed to share profits and losses in equal proportion, and not in their capital ratio
7) Balance Sheet is an Account.
Ans:- False
Explanation:
Financial statement showing all assets and liabilities is called the Balance sheet. It is not an account. It is a position statement which shows various assets owned by the firm and various liabilities owned by it. On the left-hand side, all liabilities are listed and on the right-hand side all assets are recorded.
8) Wages paid for the installation of Machinery is a Revenue expenditure.
Ans:- False
Explanation:
Wages paid for the installation of machinery is a capital expenditure and therefore it is added to the cost of machinery. It is, generally, paid once in the life of an asset. It is long-term and capital expenditure.
9) Income received in advance is a liability.
Ans:- True
Explanation:
When income in respect to next year, it is received in the current year, it is known as income received in advance. So, in next year the firm will not be able to receive that amount and therefore it is considered as a liability for the current year.
10) R.D.D. is created on Creditors.
Ans:- False.
Explanation:
R.D.D. stands for Reserve for Doubtful Debts. It is created on the value of debtors. Such provision is made against profit and loss account. In the future if the loss is incurred on account of bad debts, such amount is used to run the business.
11) Depreciation is not calculated on Current Assets.
Ans:- True
Explanation:
Current Assets mean liquid assets having no fixed tenure therefore depreciation cannot be calculated on it. Depreciation is calculated and charged on fixed assets for their use, wear and tear, etc.
12) Goodwill is an intangible asset.
Ans:- True
Explanation:
Goodwill is a reputation of a business computed in terms of money. Reputation can be experienced but can’t be seen or felt. Therefore, Goodwill is an intangible asset.
13) Indirect expenses are debited to the Trading Account.
Ans:- False
Explanation:
Indirect expenses mean expenses that are not directly related to the production of goods and services. Therefore, indirect expenses cannot be debited to the Trading Account. All indirect expenses are debited to the Profit and Loss Account.
14) Bank loan is a current liability.
Ans:- False.
Explanation:
The loan usually taken for the period more than 1 year say 5 years from the bank is called Bank Loan. It is a long term loan. It is not repaid within 1 year but paid in installments over a number of years. It might be paid in lumpsum at the expiry of the term.
15) Net profit is a debit balance of Profit and Loss Account.
Ans:- False
Explanation:
In a Profit and Loss Account, when the credit side total i.e. a total of incomes is more than the debit side total, i.e. expenses it is known as a credit balance. When incomes exceed expenses there is profit. Therefore the credit balance of Profit and Loss Account indicates net profit.
2. Not for Profit’ Concern
1) Not for Profit Concerns do not have profit motive.
Ans: – True.
Explanation:
Not for profit concerns’, main aim is to give services to its members or to the society at large. They do not carry any Trading activity or Manufacturing activity so there is no question of having profit motive for ‘Not for Profit’ concerns.
2) Charitable Institutions prepare Profit and Loss Accounts at the end of every financial year.
Ans: – False.
Explanation:
Charitable Institutions, Not for Profit concerns, do not undertake any trading activities and hence instead of Profit and Loss Account prepare Income-Expenditure Account to record all revenue expenses/losses and revenue incomes/gains of current year.
3) There is no difference between Receipts and Payments Account and Income and Expenditure Account.
Ans: – False.
Explanation:
In the receipts and Payments Account, all receipts and payments transactions in cash or through bank are recorded irrespective of the current year, previous year or next year while in Income Expenditure Account, only current year’s incomes and expenses (revenue) are recorded.
4) Income and Expenditure Account represents either surplus or deficit.
Ans: – True.
Explanation:
In Income and Expenditure Account, all revenue incomes and expenses are recorded and at the end of the specified period, the difference is found out which is known as ‘Surplus’ (revenue incomes are more than revenue expenses) or ‘Deficit’ (revenue expenses are more than revenue incomes).
5) Receipts and Payments Accounts do not have any opening balance.
Ans: – False.
Explanation:
Receipts and Payments Account is just like a cash book of trading concern and opening balance (Cash or Bank or Cash and Bank) must be there to start a recording of transactions.
6) Not for Profit concerns do not prepare Balance Sheet.
Ans: – False.
Explanation:
To know the financial position of the organisation, at the end of the particular period, Not for Profit concerns prepare Balance Sheet.
7) Purchases of Sports Equipment is a Capital Expenditure.
Ans: – True.
Explanation:
Generally, life span of sports equipment’s is more than one year, so purchase of sports equipment is considered as capital expenditure.
8) Income and Expenditure Account is Real Account.
Ans: – False.
Explanation:
In Income and Expenditure Account, all the revenue incomes and revenue expenses are recorded and therefore it is a Nominal Account and not a real Account.
9) Receipts and Payments Account contains only the transactions relating to the current year.
Ans: – False
Explanation:
In receipts and Payments Account, transactions of the not only the current year but of the previous year or of next year are also recorded.
10) Excess of Assets over liabilities is called Capital Fund.
Ans: – True.
Explanation:
For ‘Not for Profit’ concerns in the Balance Sheet, when total of Assets is more than the total of Liabilities, the difference of amount is considered as ‘Capital Fund’.
3. Admission of Partner
1) A new Partner can bring capital in cash or kind.
Ans:- True
Reason
As per the provision of partnership deed, when any person is admitted to the firm, he has to bring some amount as capital which can be in cash or in-kind of assets to get rights in the assets and definite share in the future profit of the firm.
2) When goodwill is paid privately to the partners, it is not recorded in the books.
Ans:- True
Reason.
When goodwill is paid privately to the partners, by a newly admitted person, then in such case no transaction takes place in the business and firm as such is not all benefited. Hence it is not recorded in the books of accounts.
3) The gain ratio is calculated at the time of admission of a partner.
Ans:- False.
Reason:
At the time of admission of a person, in the business, sacrifices are made by the old partners in favour of a new partner. It means there is no question of any gain to the partners, so we can say that Gain ratio is not calculated at the time of admission of a partner.
4) Revaluation profit is distributed among all partners including new partners.
Ans:- False
Reason:
Revaluation profit arises due to efforts and hard work of the old partners in the past and hence profit earned on revaluation of assets and liabilities at the time of admission of a person as a partner in the business belongs to old partners. So, such profit is not distributed among all partners including a new partner. It distributed only among old partners.
5) Change in the relationship between the partners is called the Reconstitution of partnership.
Ans:- True.
Reason:
When any person joins the business as a partner, a change in the relationship takes place. The old agreement is terminated and a new agreement is prepared. There is a change in profit or loss sharing ratio and the relationship of the partners which is known as the Reconstitution of Partnership.
6) A new partner always bring his share of goodwill in cash.
Ans:- False
Reason.
When a new person is admitted to the partnership firm, the old partners surrender a certain share in profit and give it to a new partner. In exchange for that new partner is required to bring goodwill in cash or in kind. If he is unable to bring cash for goodwill, then Goodwill is raised and adjusted to the new partner’s capital A/c.
7) When the goodwill is written off, a goodwill account is debited.
Ans:-False.
Reason:
To write off goodwill means to decrease or wipe out the value of goodwill. When goodwill as an asset of the business is raised, Goodwill A/c is debited in the books of Account. Conversely, when Goodwill is written off from the business, the Goodwill A/c is credited in the books of business.
8) The new ratio minus old ratio is equal to the sacrifice ratio.
Ans:- False.
Reason:
When a new partner is admitted, old partners have to sacrifice their profit share in favour of new partner and their old ratio gets reduced and whatever ratio left becomes a new ratio. Hence, as per equation: New Ratio = Old Ratio – Sacrifice Ratio. By interchanging the terms, Sacrifice Ratio = Old Ratio – New Ratio.
9) Usually, when a new partner is admitted to the firm there will be an increase in the capital of the firm.
Ans:- True
Reason:
When a new partner is admitted to the firm, he brings his share of capital and goodwill, in cash or in-kind, to enjoy the right of sharing the future profit, and hence there will be an increase in the capital of the firm.
10) Cash/ Bank Account is credited when goodwill is withdrawn by the old partners.
Ans:- True
Reason:
When a new partner brings his share of goodwill, old partners have the right to withdraw it in cash. Therefore, when old partners withdraw the amount of goodwill, cash goes out of the firm and not goodwill. Hence Cash/Bank A/c is credited.
4. Retirement of Partner
1) Gain ratio means New ratio minus Old ratio.
Ans:– True
Explanation:
As per definition, the profit-sharing ratio which is acquired by the continuing partners from the retiring partner is called gain ratio. If the gain ratio added to the old ratio we will get New ratio. It means New ratio = Old ratio + Gain ratio by interchanging the terms, we will get Gain ratio = New ratio – Old ratio.
2) Retiring partner’s share in profit up to the date of his retirement will be debited to Profit and Loss Suspense Account.
Ans:- True
Explanation:
If a partner retires from the firm during the accounting year, the profit or loss for the period from the date of last balance sheet to the date of retirement is calculated on the basis of last year’s profit or average profit and it is credited to retiring partner’s capital A/c and for time being it debited to a new account called Profit and Loss Expense A/c. This is because final accounts cannot be prepared on any date during the accounting year.
3) On the retirement of a partner, a sacrifice ratio is considered.
Ans:- False
Explanation:
On the retirement of a partner, his share is acquired by continuing partners in a certain proportion and it is nothing but a gain for them. Therefore, on the retirement of a partner instead of sacrifice ratio gain ratio is considered.
4) Retiring partner is called an outgoing partner.
Ans: – True
Explanation:
When a person retires from the firm due to health issues, financial issues, or personal reasons then it is known as a person retires from the business, and for the business, he is an outgoing partner.
5) On retirement of a partner, remaining partner will share the goodwill in their profit sharing ratio.
Ans: – False
Explanation:
On the retirement of a partner, after giving retiring. partner’s share in goodwill and if goodwill is written off, then remaining partners will adjust the goodwill in their new profit sharing ratio. (If raised to full extent and written off)
6) Retiring partner is not entitled to share in general reserve and accumulated profit.
Ans:- False
Explanation:
General reserve and accumulated profit are created out of past undistributed profit, such profits are the outcome of hard work of all the partners including retiring partners. Hence, retiring partner’s has the right to share general reserve and accumulated profit. He is, therefore, entitled to get a share in general reserve and accumulated profit.
5. Death of Partner
1) A deceased partner is not entitled to the Goodwill of the firm.
Ans:- False
Reason.
A deceased partner’s contribution was there in the development of business and goodwill is the value of the business in terms of money. Hence, a deceased partner is entitled to receive the goodwill of the firm.
2) A deceased partner is entitled to his share of General Reserve.
Ans:- True.
Reason
General reserve is created out of past undistributed profit. Past profit is earned due to the efforts and hard work of all the partners including a partner who is now dead. Hence a deceased partner has right on it and therefore a deceased partner is entitled to receive his share of General reserve.
3) If Goodwill is written off a deceased partner’s capital account is debited.
Ans:- False
Reason
When the benefits of goodwill are given to the deceased partner, his capital account is credited and when such goodwill is written off, capital accounts of remaining partners are debited.
4) After the death of a partner, the entire amount due to the deceased partner is paid to the legal representative of the deceased partner.
Ans:- True.
Reason
After the death of a partner, the entire amount due to the deceased partner is paid to the legal representative of the deceased partner as he is the only person who has legal right on that amount.
5) For recording the Profit or Loss up to the date of death, Profit and Loss Appropriation Account is operated.
Ans:- False.
Reason
For recording the profit or loss up to the death, Profit and Loss suspense Account is created and operated. This is because final accounts cannot be prepared on the date of the death of a partner. Till that period a separate account called Profit and Loss Suspense A/c is prepared.
6. Dissolution of Partnership Firm
1) The firm must be dissolved on the retirement of a partner.
Ans:- False
Reason.
On the retirement of a partner, if partnership agreement allows, then the remaining partner can continue the business activities. It means firm is not to dissolve.
2) On dissolution Cash/Bank Account is closed automatically.
Ans: – True.
Reason.
As firm is dissolved, there is no question of any business activities to be carried out further and so Cash/Bank Account is also not necessary. Therefore on dissolution Cash/Bank Account is closed automatically.
3) On dissolution, Bank Overdraft is transferred to Realisation Account.
Ans:- True
Reason.
As a sundry liability of the business, bank overdraft is a liability of a firm and hence, it is transferred to realisation Account at the time of dissolution and paid as third party Liability.
4) A solvent partner having debit balance to his Capital Account does not share the deficiency of insolvent partner Capital Account.
Ans:- False.
Reason.
In the partnership, the partner’s liability is unlimited so, a solvent partner having the debit balance to his Capital Account should share the deficiency of insolvent partner capital account.
5) At the time of the dissolution of partnership, all assets should be transferred to Realisation Account.
Ans:- False.
Reason.
At the time of the dissolution of the partnership, a cash account and Bank A/c are not transferred to realization A/c. Similarly, if an asset is taken over by a partner or by any creditor then that asset is transferred to the concerned person’s account and not to the realization Account.
6) The debit balance of insolvent partner’s Capital Account is known as a capital deficiency.
Ans:- True.
Reason.
Debit balance of Partners’ Capital Account means an excess of drawings than the capital credit balance. In the case of an insolvent partner, the debit balance of Capital Account means liabilities which he cannot pay. It means capital deficiency.
7) At the time of dissolution, a loan from the partner will be transferred to Realisation Account.
Ans:-False
Reason.
At the time of dissolution, a loan from a partner will be paid after the payment of liabilities of third parties to the firm. It is not transferred to a realisation Account. Partner’s Loan A/c is separately opened and paid accordingly.
8) Dissolution takes place when the relation among the partner’s comes to an end.
Ans:- True.
Reason.
As per definition, Dissolution means to wind up or to close down, and it is possible only when relations among the partners in a partnership firm comes to an end.
9) The insolvency loss at the time of dissolution of the firm is shared by the solvent partners in their profit sharing ratio.
Ans:- True.
Reason: In the partnership, partners’ liability is unlimited and in case of insolvency loss, legally solvent partners are ultimately liable and are suppose to bear the loss of an insolvent partner in their profit sharing ratio.
10) Realisation Loss is not transferred to the insolvent partner’s capital account.
Ans:- False.
Reason.
All partners of the firm are responsible for Loss on realisation and hence loss on realisation is supposed to be transferred to all Partners’ Capital Account, without any discrimination of solvent or insolvent.
7. Bills of Exchange
1) Inland bill is one which is drawn in one country and payable in another country.
Ans:- False.
Reason
Inland bill means, a bill drawn, accepted, and made payable within the territory of one and the same, country. So, a bill is drawn in one country and payable in another country can’t be a inland bill.
2) Retirement of bill means payment of the bill before due date.
Ans:- True
Reason
Payment of the bill, by the acceptor of the bill to the holder of the bill before the due date, is known as Retirement of the bill. So retirement of the bill means payment of the bill before the due date.
3) Drawee can transfer the ownership of the bill.
Ans:- False
Reason
Drawee is a debtor. He has to pay the amount of the bill to its holder on the due date. Hence he cannot transfer its ownership to another person. Drawer can transfer the ownership of the bill as he is the owner of the bill.
4) Acceptance of bills without making any changes in the terms of the bill is called qualified acceptance.
Ans:- False.
Reason
Acceptance of the bill with some changes as regards the terms, amount, place, etc. of a bill is known as qualified acceptance. Acceptance of the bill without making changes as regards the term is called general acceptance.
5) Discounting is a device to convert the bill into its present value.
Ans:- True.
Reason
When the drawer or holder of the bill approaches the bank to discount the bill, the bank pays the bill amount after deducting a certain amount (which is known as discounting charges). It means the conversion of the bill into its present value in cash. So, we can say that discounting is a device to convert the bill into its present value.
6) A bill of exchange must be presented to the acceptor on the due date.
Ans:- True.
Reason.
To get the payment of the bill from the acceptor, the holder of the bill is required to present it to the acceptor on its due date. Acceptor either honours the bill or dishonours the bill.
7) If a bill is discounted by the holder, no entry is passed in his book when the bill is honoured on the due date.
Ans:- True.
Reason
On discounting the bill the holder gives the possession of the bill to the bank. On the maturity date, the bank has to present the bill to the drawee to collect the payment. When discounted bill is honoured, the transaction takes place between drawee and bank.
8) Noting charges are to be borne by the drawer
Ans:- False.
Reason
Noting charges are to be borne by the drawee only as due to his act of non-payment, the bill is dishonoured and the drawer is not able to get money on its due date.
9) If a bill is drawn payable ‘on-demand’ no grace days are allowed.
Ans:- True.
Reason
‘On-demand’ means the amount of the bill is to be paid by drawee immediately on presentation of the bill as no time period is mentioned on it. In demand bill 3 days grace are not allowed by law.
10) There are three parties to a promissory note.
Ans:- False
Reason
There are only two parties to a promissory note, i.e. Drawer or maker of the note and drawee or payee of the note.
8. Company Accounts – Issue of Shares
1) Directors can forfeit the shares for any reason.
Ans:- False.
Reason:
After paying money on a share application, When a share applicant fails to pay the call money or premium on shares in spite of repeated reminders and warnings directors/company can forfeit the shares.
2) Once the application money is received, directors can immediately proceed for allotment of shares.
Ans:- False
Reason:
Directors can proceed for allotment of shares only after receiving the minimum subscription amount of the issued amount by cheque or other instrument complying all legal requirements.
3) Joint-stock company form of the business organisation came into existence after the industrial revolution.
Ans:- True
Reason:
As the volume and scale of trade and industry expanded, specially after the industrial revolution, a very large unit of commercial organisation requiring large capital and greater managerial skill, called Joint stock company came into existence.
4) Equity shareholders get a guaranteed rate of dividend every year.
Ans:- False
Reason:
One of the features for equity shares is the rate of dividend payable on equity shares keeps on changing from one year to another. So, there is no question of guaranteed dividend every year for equity shareholders.
5) Face value of shares and market value of shares is always the same.
Ans:- False
Reason:
Face value of shares means issue price of shares while market value of shares means trading price of shares at stock exchange. Face value of shares remains the same and fixed. However, market price changes as per the performance of the company. Hence face value and market value of shares are not the same.
6) Sweat shares are issued to the public.
Ans:- False
Sweat shares are issued by a company to its directors or employees at a discount or for consideration other than cash. Sweat shares are not issued to public.
9. Analysis of Financial Statements
1) Financial Statement includes only Balance Sheets.
ans:-False.
Reason:
Financial statements include Balance Sheet and Profit and Loss A/c. This is because financial statements are prepared by business organisations to find out efficiency, solvency, profitability, growth, strength and status of the business. For this they need information from the balance sheet as well as from Profit and Loss A/c.
2) Analysis of financial statements is a tool but not a remedy.
Ans:- True.
Reason:
Based on analysis of financial statement one can get idea of financial strength and weakness of the business. However, based on this one cannot take decision about the business on various issues. Hence analysis of financial statement is a tool but not a remedy.
3) Purchase of Fixed Assets is operating cash flow.
Ans:- False.
Reason:
Purchase of fixed assets is cash flow from investing activities. It is not a day to day operations activities like office/selling/distribution finance expenses/activities.
4) Dividend paid is not a source of fund
Ans:- True.
Reason:
Dividend is always paid on shares issued by a company is an expense. Shares itself is a source of fund. In payment of dividend cash goes out from the company. It is an out flow of cash and not a source of fund.
5) Gross Profit depends upon Net Sales.
Ans:- True.
Reason: Gross profit ratio discloses the relation between gross profit and total net sales. Gross profit ratio is an income-based ratio, where gross profit is an income. There is direct relation between net sales and gross profit. Higher the net sales higher the gross profit.
6) Payment of cash against purchase of stock is use of fund.
Ans:- True.
Reason:
Cash payment for purchase of stock is made from cash balance or/and from bank balance which is a part of business fund. When stock or materials we purchase we use cash for payment.
7) Ratio Analysis is useful for inter-firm comparison
Ans:- True.
Reason:
The comparision of the operating performance of a business entity with the other business entities is known as inter-firm comparision. This ratio analysis assist to know how and to what extent a business entity is strong or weak as compared to other business entity
8) The short term deposits are considered as cash equivalent.
Ans:- True.
Reason:
The short-term deposits are liquid assets. It means deposits kept for some period (usually less than one year) and they are kept with an intention to get money quickly as and when required. They are as good as cash and considered as cash equivalent
9) Activity Ratios Turnover Ratios are the same.
Ans:- True.
Reason:
Turnover ratio is an efficiency ratio to check how efficiently company is using different assets to extract earnings from them. Activity ratio are financial analysis tools used to measure a business ability to convert its assets into cash. From both these definitions we can say that Activity ratios and Turnover ratios are same.
10) Current Ratio measures the liquidity of the business.
ans:- True.
Reason:
Current ratio shows relation between current assets and current liabilities. If the proportion of current assets is higher than current liabilities, liquidity position of business entity is considered good. More liquidity means more short-term solvency. From the above it is proved that current ratio measures the liquidity of the business.
11)Ratio analysis measures profitability efficiency and financial soundness of the business.
Ans:- True.
Reason:
With the help of profitability ratios (Gross profit, Net profit and Operating profit) one can get the idea of profitability efficiency of the firm and with the help of liquidity ratios (Current ratio and liquid ratio) one can get the idea of solvency or financial soundness of the business.
12) Usually the current ratio should be 3:1.
Ans:- False.
Reason:
Usually the current ratio should be 2:1. It means current assets are double of current liabilities. It shows the short-term solvency of business enterprises.
10. Computer In Accounting
1) Alt + D are the short keys for delete voucher entry.
Ans:- This statement is True.
Reason:
To delete voucher entry, people use Alt + D key
2) In Tally F6 Function key is for payment voucher.
Ans:- This statement is False.
Reason:
In Tally, F6 Function key is useful for receipt vouchers.
3) Legal software is fully functional software without any restriction.
Ans:- This statement is True.
Reason:
The Bases of the legal software are fully functional, safe and legal, so one can use this kind of software without any hesitation and restriction.
4) Salary Account comes under Indirect Expenses.
ans:- This statement is True.
Reason:
When the expenses are made for purchase of goods, and for manufacturing process, they are known as direct expense. Salary does not fall in that category and so it comes under indirect expense category.
5) Accounting software may not be customized to meet the special requirement of the user.
ans:- This statement is False.
Reason:
Customized Accounting software is prepared to meet the special requirement of the user which is not readily available in the market