Free Accounting Principles MCQs with Answers

• A. Assets increase and capital increases
• B. One asset increases and another asset decreases
• C. Assets decrease and liabilities increase
• D. Liabilities increase and capital decreases

Explanation: Furniture increases one asset, while the cash used for the purchase decreases another asset.

• A. One debit and no corresponding credit
• B. Equal debit and credit entries
• C. Two credit entries of equal value
• D. A debit entry only for cash items

Explanation: Double-entry bookkeeping records the two aspects of every transaction. The total debit amount must equal the total credit amount, which…

• A. When payment is made in January
• B. When the annual budget is approved
• C. When the service is received in December
• D. When the supplier sends a reminder

Explanation: Accrual accounting records expenses when they are incurred, rather than when cash is paid.

• A. Recording owner withdrawals as business expenses
• B. Reporting revenue and related costs in the same period
• C. Recording every payment when cash leaves the business
• D. Ignoring expenses that cannot be paid immediately

Explanation: The matching concept charges expenses against the revenue they help generate in the same accounting period.

• A. Recognise probable losses but not uncertain gains
• B. Record all expected gains before they are earned
• C. Overstate liabilities to make accounts safer
• D. Ignore losses until cash settlement occurs

Explanation: Prudence requires caution when estimates involve uncertainty. Probable losses are recognised when appropriate, but gains are generally…

• A. Prudence
• B. Consistency
• C. Materiality
• D. Realisation

Explanation: Consistency means applying accounting methods in the same way from period to period.

• A. Continue operating for the foreseeable future
• B. Earn a profit in every accounting period
• C. Avoid borrowing throughout its existence
• D. Sell all assets at their market values

Explanation: Going concern assumes that the entity will continue its operations for the foreseeable future.

• A. Recording the owner's personal rent as business expense
• B. Recording owner investment as business capital
• C. Combining the owner's bank account with business cash
• D. Treating owner withdrawals as business revenue

Explanation: The business entity concept treats the business as separate from its owner.

• A. Wages paid to factory workers
• B. Purchase of a machine for production
• C. Electricity used during the month
• D. Routine repairs to office furniture

Explanation: Buying a production machine provides benefit over several accounting periods, so it is capital expenditure and is recorded as an asset…

• A. Assets and current profit to be understated
• B. Assets and current profit to be overstated
• C. Liabilities and current profit to be understated
• D. Capital and liabilities to be overstated

Explanation: Routine repairs are revenue expenditure and should be charged as an expense.

• A. Rs. 530,000
• B. Rs. 1,170,000
• C. Rs. 320,000
• D. Rs. 850,000

Explanation: The accounting equation is Assets = Liabilities + Owner's Equity. Therefore, equity equals Rs. 850,000 minus Rs. 320,000, or Rs. 530,000.

• A. Assets and equity increase
• B. Assets and liabilities increase
• C. Liabilities and equity increase
• D. Assets and expenses increase

Explanation: The cash received becomes a business asset, while the owner's claim on the business increases as equity.

• A. Cash account
• B. Sales account
• C. Purchases account
• D. Inventory account

Explanation: Cash is received, so the Cash account is debited. Sales revenue is credited to record the income earned from the transaction.

• A. Purchase of equipment for immediate cash
• B. Payment of an expense incurred earlier
• C. Cash sale made on the same day
• D. Owner's cash investment

Explanation: Under cash basis, the expense is recorded when payment is made, whereas accrual basis records it when it is incurred.

• A. Revenue
• B. An expense
• C. A liability
• D. Owner's equity

Explanation: The business has received cash but still owes the customer services. Until the services are provided, the amount is unearned revenue and…

• A. Changing inventory methods whenever profit falls
• B. Applying the same accounting method from period to period
• C. Recording all costs only when cash is paid
• D. Recognising expected gains before they occur

Explanation: Consistency means applying accounting methods in the same manner across accounting periods, unless a justified change is needed.

• A. A business expense
• B. A reduction in drawings or equity
• C. An increase in business revenue
• D. A business liability

Explanation: The owner and the business are treated as separate accounting units. Cash taken for personal use reduces the owner's equity through…

• A. Purchase of land for business use
• B. Construction of a factory building
• C. Annual insurance premium for the office
• D. Installation of a new production line

Explanation: An annual insurance premium supports the current period and does not create a long-term asset.

• A. Revenue expenditure
• B. Capital expenditure
• C. Deferred income
• D. A contingent liability

Explanation: Freight and installation are necessary to bring the machine to its working condition.

• A. The gain is realised or permitted by the applicable reporting rules
• B. The owner approves the increase privately
• C. The building is insured for a higher amount
• D. The original cost is fully depreciated

Explanation: Prudence discourages recognising uncertain gains while requiring care in recognising probable losses.