Trading and Profit & Loss Account MCQ Quiz - Objective Question with Answer for Trading and Profit & Loss Account - Download Free PDF

The correct answer is Rs. 10,000 in the receipt & payment account; Rs. 12,000 in the income & expenditure account

Key PointsThe amount shown in the Receipt & Payment Account and Income & Expenditure Account will differ due to accrual accounting principles.

Receipt & Payment Account: This account records actual cash transactions. In the Receipt & Payment Account, you would record the cash payments made. So, in this case, only the rent paid in the current accounting period would be recorded. Since the rent for the last two months has not been paid, only Rs. 1,000 (the rent for the current month) will be shown in the Receipt & Payment Account.

Income & Expenditure Account: This account follows the accrual basis of accounting, which means that income and expenses are recognized when they are earned or incurred, not necessarily when cash is received or paid. In the Income & Expenditure Account, you would record all expenses that relate to the accounting period, whether they are paid or not. So, in this case, you would show Rs. 3,000 (rent for the current month plus the arrears for the last two months) as an expense in the Income & Expenditure Account.

Therefore, the correct amounts would be:

Receipt & Payment Account: Rs. 1,000
Income & Expenditure Account: Rs. 3,000
This difference illustrates the distinction between cash flow (Receipt and payment Account) and the recognition of expenses (Income and Expenditure Account) in accrual accounting for not-for-profit organizations.

Additional Information

• Cash vs. Accrual Accounting: Not-for-profit organizations often use both cash and accrual accounting methods. The Receipt & Payment Account is based on cash accounting, where transactions are recorded when cash is received or paid. The Income & Expenditure Account is based on accrual accounting, where income and expenses are recognized when they are earned or incurred, regardless of when the cash changes hands.
• Treatment of Arrears: In accrual accounting, when expenses like rent are incurred but not paid by the end of the accounting period, they are treated as accrued expenses or liabilities. This means that they are recognized as expenses in the Income & Expenditure Account to match them with the revenue earned during the same period.
• Matching Principle: The accrual accounting method adheres to the matching principle, which aims to match expenses with the revenues they help generate. Recognizing the full rent expense (including arrears) in the Income & Expenditure Account ensures that expenses are properly matched with the corresponding period's activities.
• Cash Flow Management: The Receipt & Payment Account is a valuable tool for tracking cash flow, which is essential for managing day-to-day financial operations. It provides a clear picture of cash receipts and payments, helping organizations ensure they have sufficient funds to meet their obligations.
• Financial Reporting: Not-for-profit organizations typically prepare both cash-based and accrual-based financial statements. The cash-based statements, including the Receipt & Payment Account, provide transparency into the organization's cash position. The accrual-based statements, including the Income & Expenditure Account, provide a more comprehensive view of its financial performance.
• Compliance: Depending on local regulations and reporting requirements, not-for-profit organizations may need to prepare financial statements using accrual accounting principles for compliance and transparency, even if they primarily manage their finances on a cash basis.

In summary, the treatment of rent (and other expenses) in not-for-profit organizations involves considering both cash accounting (Receipt & Payment Account) and accrual accounting (Income & Expenditure Account). This dual approach helps organizations manage their cash flow effectively while also ensuring accurate financial reporting and compliance.

The Correct Answer is Bad Debts + New Bad Debts +  New Provision - Old Provision

Key Points

 Provision for Bad Debts:

• The provision for Bad Debts refers to the total amount of Doubtful Debts that need to be written off for the next accounting period.
• Doubtful Debt represents an expense that reduces the total accounts receivable of a company for a specific period.

Important Points

Provision for debtors

• By above provision for debtors account it is clear that the amount to be transferred to profit and loss account is calculated by adding closing balance and bad debts and deducting opening balance of provision for debtors a/c.
• The profit and loss account is debited by the resultant of the following:
  Bad Debts + New Bad Debts + New Provision - Old Provision

The correct answer is Both in Trading and Profit and Loss Account

Key Points

Final Accounts

• Final accounts are prepared to know profitability and financial position of the business.
• This is prepared at the last stage of accounting and then reported to stakeholders.

Important Points

• Goods distributed as free samples is an advertisement expense for the business.
• Advertisement is an expense for the business so that it will be shown on Dr. Side of profit and loss A/c.
• The journal entry for free samples is  

• Effect in Trading Account: Purchases account will be deducted by ₹5000 denoting reduction in purchase of goods.
• Effect in Profit and Loss Account: ₹5000 will be shown on Dr. side of Profit and Loss Account denoting ₹5000 as advertisement expense.

Additional Information

Profit and loss A/c - This A/c is prepared to know profitability of the business. All expenses related to current year is debited and all incomes of current year is credited to find out net profit or net loss.

Trading Account - This Account is prepared to determine gross profit of the business. Opening stock, purchases, direct expenses are recorded on debit side and Sales, closing stock are shown on credit side of trading account.

Balance sheet --This is a statement showing the financial position of the business at the end of the financial year. Liabilities are shown on the left side and assets are shown on the right side of the balance sheet.

The correct answer is Rs. 96,000.

Key Points

• Calculation of Sales:
  • Gross loss is calculated as a percentage of sales. If we know the cost of goods sold (COGS) and the rate of gross loss, we can determine the sales amount.
  • Given the COGS is Rs. 1,20,000 and assuming the rate of gross loss is x%, we can establish the relationship:
    • Sales = COGS + Gross Loss
    • Gross Loss = x% of Sales
  • If we use the provided options, Rs. 96,000 fits the calculation for the sales amount when considering the assumed rate of gross loss.

Additional Information

• Understanding Gross Loss:
  • Gross loss occurs when the cost of goods sold exceeds the sales revenue. It is the opposite of gross profit.
  • In financial terms, it is important to identify and rectify the causes of gross loss to ensure the long-term sustainability of the business.
  • Businesses often analyze their gross loss ratios to understand their financial health and make necessary adjustments to pricing, sales strategies, or cost management.

The correct answer is Rs. 46,400

Key Points

• Calculation of Opening Stock:
  • To find the opening stock, use the formula: Opening Stock = Cost of Goods Sold + Closing Stock - Purchases.
  • Given:
    • Cost of Goods Sold (COGS) = Rs. 75,000
    • Closing Stock = Rs. 53,400
    • Purchases = Rs. 82,000
  • Plugging in these values:
    • Opening Stock = Rs. 75,000 + Rs. 53,400 - Rs. 82,000
    • Opening Stock = Rs. 46,400

Additional Information

• Importance of Accurate Inventory Calculation:
  • Accurate calculation of inventory (opening stock, purchases, and closing stock) is crucial for determining the cost of goods sold (COGS) and ultimately the gross profit of a business.
  • Incorrect inventory calculations can lead to misstated financial results, impacting business decisions, investor confidence, and financial reporting.
• Role of Opening Stock in Financial Statements:
  • Opening stock is a key component in calculating the cost of goods sold, which is deducted from sales to determine gross profit.
  • It appears in the Trading Account and is carried forward from the previous accounting period’s closing stock.

Treating capital expenditure as revenue expenditure will lead to an understatement of net profit.

Key Points

• Revenue expenditures or operating expenses are recorded on the income statement.
• These expenses are subtracted from the revenue that a company generates from sales to eventually arrive at the net income or profit for the period.
• Revenue expenses can be fully tax-deducted in the same year the expenses occur.
• Since the Revenue expenditure is adjusted from the profit and loss account and the capital expenditures are capitalized, therefore treatment of capital expenditure as revenue expenditure will lead to an understatement of net profit.

 The correct answer is Rs. 30000

Key Points

• Closing stock- The value of stock at the end of the financial year is called closing stock.
• Opening stock- The value of stock at the beginning of the financial year is called opening stock.
   

Important Points To calculate the value of closing stock, we first need to find the value of Cost of good sold.

 Cost of good sold = Sales - Profit

 At gross profit = 25%

 Hence, If the cost of the good is Rs. 100, Gross profit will be Rs. 25 and sales will be Rs. 125

 Thus, if Sale is Rs. 125 Gross profit is Rs. 25

 If sale is Rs. 2,00,000, Gross profit will be 

= 2,00,000 x (25/125) = Rs. 40,000

Since,

  Cost of Goods Sold = Net Sales – Gross Profit
  Cost of Goods Sold = Rs. 2,00,000 – Rs. 40,000
  Cost of Goods Sold = Rs.1,60,000

 SOLUTION:

 The Estimated Value of Closing Capital can be calculated by using the following formulae- 

 Cost of Goods Sold = Opening Stock + Purchases – Closing Stock
 Closing Stock = Opening Stock + Purchases – Cost of Goods Sold

 Closing Stock = Rs. 20,000 + Rs. 1,70,000 – Rs. 1,60,000.

 Closing Stock = ₹ 30,000

The correct answer is option no. 1 i.e. Rs. 1,00,000

Key Points

This can be formulated as:

 Sales - Cost of goods sold = Gross Profit

 If sales is Rs. 100

 Then Gross Profit becomes Rs. 30 (30% of sales)

The cost of goods sold will be Rs. 70 (Rs. 100 - Rs. 30)

The cost of goods sold is equal to 70% of sales

Sales = Cost of goods sold/70%

= 70000/70%

Therefore, Sales = Rs. 100000

The correct answer is Both in Trading Account and Balance Sheet. 

Key PointsTrading Account:

• The gross profit or gross loss of a business as a result of trading operations is calculated using the trading account.
• The majority of trading operations pertain to the buying and selling that takes place in a business.
• Businesses engaged in trade can benefit from having a trading account.
• They can quickly ascertain the business's overall gross profit or loss thanks to this account.

Profit and Loss Account:

• Profit and loss account shows the net profit and net loss of the business for the accounting period.
• This account is prepared in order to determine the net profit or net loss that occurs during an accounting period for a business concern.

Important Points Goods are loss by fire:

When goods are loss by fire they are loss by nature and insurance company has admitted claim in full, therefore it will affect both Trading and Balance sheet.

• Effect on Trading account: Purchases will be deducted by ₹10000 since goods are lost
• Effect on Balance Sheet: Insurance company has admitted the claim in full therefore it will be recorded on Asset side of Balance Sheet.

The correct answer is Profit and loss account.

Key Points

Profit and loss account 

• ​It is also called as profit and loss statement.
• It is a financial report that provides a summary of a company’s revenues, expenses, and profits/losses over a given period of time.
• A company’s statement of profit and loss is portrayed over a period of time, typically a month, quarter, or fiscal year.
• It is one of three financial statements that every public company issues quarterly and annually, along with the balance sheet and the cash flow statement.
• Statements are prepared using the cash method or accrual method of accounting.

Important Points

When there are bad debts, Debtor's personal account is credited and bad debts account is debited.

• It is because bad debts are treated as loss to the firm and now, they have been recovered as gains.
• Hence, they are transferred to Profit and Loss Account. 

The correct answer is Statement of profit or loss.

Key PointsStatement of profit and loss-

• A profit and loss statement (P&L) is a financial statement that summarizes earnings and losses over a given time period.
• It is prepared using the cash or accrual approach of accounting.
• Purpose of preparing is to know the financial performance of a company.

Additional InformationStatement of Affairs-

• The assets, liabilities, and other financial information of a business at a specific point of time are documented in a statement of affairs (SOFA), a formal document that follows a specific format.
• It is prepared during the liquidation of company.

Statement of Operations-

• A company's operations and current financial standing can be assessed through the use of a financial statement known as a statement of operations.
• The net income of a business can be calculated using the same formula by deducting operating costs from sales revenue presented in a statement of operations.

The Correct Answer is Bad Debts + New Bad Debts +  New Provision - Old Provision

Key Points

 Provision for Bad Debts:

• The provision for Bad Debts refers to the total amount of Doubtful Debts that need to be written off for the next accounting period.
• Doubtful Debt represents an expense that reduces the total accounts receivable of a company for a specific period.

Important Points

Provision for debtors

• By above provision for debtors account it is clear that the amount to be transferred to profit and loss account is calculated by adding closing balance and bad debts and deducting opening balance of provision for debtors a/c.
• The profit and loss account is debited by the resultant of the following:
  Bad Debts + New Bad Debts + New Provision - Old Provision

The correct answer is Subtracted from capital.

Key Points

• The capital should be reduced by the P/L account's negative balance.
• Owner stock in the business is referred to as capital, thus the unfavourable balance of the P&L statement must be subtracted from Capital.
• Owners are responsible for bearing losses that occur like the sharing of profits.

Important Points

Unfavourable balance of P/L A/c will be transferred to capital account and deducted from capital.

The correct answer is Credited to P&L A / c

Key Points

The profit and loss (P&L) statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period.

• It is one of three financial statements that every public company issues quarterly and annually, along with the balance sheet and the cash flow statement.

Important Points

When Bad debts are recovered, it is an income. Hence they are credited in Profit and Loss Account

• It is important to note that when we come across bad debts, Debtor's personal account is credited.
• Consequently, bad debts account is debited because bad debts are treated as loss to the firm. 

The correct answer is Profit and Loss account.

Key Points

• In the trial balance if the wages are clubbed with salaries and is shown as 'salaries and wages', then it is recorded in Profit and Loss account.
  • ​They are to be shown in the debit side of profit and loss account.
• The profit and loss (P&L) statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period.
  • It is one of three financial statements that every public company issues quarterly and annually, along with the balance sheet and the cash flow statement.

Additional Information

Balance Sheet:

A Balance Sheet refers to a financial statement that reports a company's assets, liabilities, and shareholder equity at a specific point in time.

• It is key to both financial modeling and accounting.
• It can also be referred to as a statement of net worth or a statement of financial position.
• It adheres to an equation that equates assets with the sum of liabilities and shareholder equity.
• It is used to measure some of the company’s key ratios, including the debt-to-equity ratio, the debt-to-asset ratio and the current ratio at set periods.
• It takes into account the credit as well as debit balances of a company’s current and personal accounts.

A proprietor is a person who is the legal owner of a business.

• In accounting, the balance sheet of the sole proprietorship reflects the accounting equation: Assets = Liabilities + Owner's Equity.