Chapter 13: Preparation of Final Accounts (JAIIB – Paper 3)
1. What is the primary purpose of preparing a Trial Balance?
A. To record transactions in chronological order
B. To prepare the cash book
C. To calculate net profit
D. To check the arithmetical accuracy of ledger balances
A Trial Balance is prepared to verify the correctness of debit and credit balances in the ledger accounts. It ensures that total debits equal total credits.
2. A ledger account shows a debit balance of ₹15,000, while another account shows a credit balance of ₹15,000. How will these appear in the Trial Balance?
A. ₹15,000 on debit side and ₹15,000 on credit side
B. Both ₹15,000 on debit side
C. Both ₹15,000 on credit side
D. ₹30,000 on debit side
Each ledger balance is shown separately: debit balances on debit side and credit balances on credit side. Hence, ₹15,000 on each side.
3. Which of the following errors will not affect the agreement of a Trial Balance?
A. Posting a debit as credit
B. Error in totaling debit column
C. Compensating errors
D. Omission of one side of an entry
Compensating errors cancel out each other, so the Trial Balance may still tally despite the errors.
4. Trial Balance of a firm shows total debit side ₹1,20,000 and total credit side ₹1,18,000. What does this indicate?
A. Accounts are correct
B. There is an error of ₹2,000
C. Profit is ₹2,000
D. Loss is ₹2,000
If debit and credit sides of Trial Balance do not match, it indicates error(s). Here, mismatch of ₹2,000 shows an error exists.
5. If wages of ₹5,000 are posted twice in the ledger, how will the Trial Balance be affected?
A. Debit side will exceed by ₹5,000
B. Credit side will exceed by ₹5,000
C. Trial Balance will still tally
D. Credit side will exceed by ₹10,000
Since wages are an expense, they carry a debit balance. If posted twice, debit side of Trial Balance will show excess of ₹5,000.
6. Adjustment entries are passed for which of the following purposes?
A. To record all transactions in cash book
B. To close the books of accounts
C. To bring accounts up to date and match revenues with expenses
D. To calculate depreciation only
Adjustment entries are made at the end of an accounting period to recognize accrued, outstanding, prepaid items, and ensure matching of income and expenses.
7. Rent of ₹12,000 is outstanding at year-end. What will be the correct adjustment entry?
A. Rent A/c Dr. 12,000 To Cash A/c 12,000
B. Rent A/c Dr. 12,000 To Outstanding Rent A/c 12,000
C. Outstanding Rent A/c Dr. 12,000 To Rent A/c 12,000
D. Profit & Loss A/c Dr. 12,000 To Rent A/c 12,000
For outstanding expenses: Expense A/c Dr. To Outstanding Expense A/c. Hence, Rent A/c Dr. To Outstanding Rent A/c.
8. Prepaid Insurance of ₹5,000 appears at the end of the year. How should this be treated in the final accounts?
A. Added to Insurance Expense in P&L A/c
B. Shown as a liability in Balance Sheet
C. Deducted from Cash Balance
D. Deducted from Insurance Expense in P&L A/c and shown as Asset
Prepaid expenses reduce the expense in P&L and are shown as assets in Balance Sheet, since they are benefits receivable in future.
9. Depreciation on Machinery ₹20,000 was not recorded. Which adjustment entry is correct?
A. Depreciation A/c Dr. 20,000 To Machinery A/c 20,000
B. Machinery A/c Dr. 20,000 To Depreciation A/c 20,000
C. Profit & Loss A/c Dr. 20,000 To Machinery A/c 20,000
D. Machinery Repair A/c Dr. 20,000 To Depreciation A/c 20,000
Depreciation is recorded as: Depreciation A/c Dr. To Asset A/c. Here, Depreciation A/c Dr. To Machinery A/c.
10. Goods worth ₹10,000 distributed as free samples were not recorded. The correct adjustment will be:
A. Sales A/c Dr. 10,000 To Cash A/c 10,000
B. Advertisement A/c Dr. 10,000 To Cash A/c 10,000
C. Advertisement A/c Dr. 10,000 To Purchases A/c 10,000
D. Purchases A/c Dr. 10,000 To Advertisement A/c 10,000
Free samples are treated as advertisement expenses. Adjustment entry: Advertisement A/c Dr. To Purchases A/c.
11. Which of the following financial statements is prepared first from the Trial Balance?
A. Balance Sheet
B. Trading Account
C. Profit & Loss Account
D. Cash Flow Statement
The Trading Account is prepared first to ascertain gross profit or loss, which is then transferred to the Profit & Loss Account.
12. The net profit of a business is transferred to which account in the final accounts?
A. General Reserve
B. Profit & Loss A/c (Debit side)
C. Balance Sheet (Assets side)
D. Capital Account (or Reserves & Surplus in Balance Sheet)
Net profit increases owner’s equity and is transferred to Capital Account in sole proprietorship or to Reserves & Surplus in companies.
13. Which of the following items appears only in the Balance Sheet and not in the Trading or Profit & Loss Account?
A. Sundry Debtors
B. Gross Profit
C. Net Profit
D. Wages
Sundry Debtors is a real account balance shown under Assets in Balance Sheet. Gross and Net Profit are results of trading and P&L accounts.
14. The Trial Balance shows Opening Stock ₹50,000, Purchases ₹2,00,000, Sales ₹3,00,000 and Closing Stock ₹60,000. What is the Gross Profit?
15. Which of the following is a capital expenditure that should appear in the Balance Sheet and not in the Profit & Loss Account?
A. Wages for factory workers
B. Purchase of Machinery
C. Repairs to Machinery
D. Rent of Factory Building
Purchase of machinery is a capital expenditure shown in Balance Sheet under Fixed Assets, while the others are revenue expenditures.
16. A debtor of ₹5,000 became insolvent and nothing could be recovered. What is the correct adjustment entry?
A. Bad Debts A/c Dr. 5,000 To Debtors A/c 5,000
B. Debtors A/c Dr. 5,000 To Bad Debts A/c 5,000
C. Provision for Doubtful Debts A/c Dr. 5,000 To Debtors A/c 5,000
D. Profit & Loss A/c Dr. 5,000 To Debtors A/c 5,000
When a debtor becomes irrecoverable, the entry is Bad Debts A/c Dr. To Debtors A/c, reducing accounts receivable.
17. Provision for Doubtful Debts is created to cover:
A. Cash discounts allowed to debtors
B. Bad debts already written off
C. Possible future bad debts
D. Depreciation on fixed assets
Provision for Doubtful Debts is a charge against profit to cover expected losses from debtors that may not pay in the future.
18. Interest accrued on investments ₹4,000 is to be adjusted. How should this be shown in the financial statements?
A. Added to Investments in Balance Sheet
B. Added to Interest Income in P&L A/c and shown as Asset
C. Deducted from Cash Balance
D. Shown as liability in Balance Sheet
Accrued income increases income in P&L and is shown as an asset in Balance Sheet because it is receivable in future.
19. A firm has Sundry Debtors ₹50,000 and it decides to create a provision for doubtful debts at 5%. What will be the amount of provision?
A. ₹2,000
B. ₹2,500
C. ₹3,000
D. ₹2,500
Provision = 5% of 50,000 = ₹2,500. This reduces profit and is deducted from Sundry Debtors in Balance Sheet.
20. If closing stock of ₹40,000 is omitted from the Trial Balance, how will it be shown in the final accounts?
A. Added to Purchases in Trading A/c only
B. Shown on credit side of Trading A/c and as Asset in Balance Sheet
C. Deducted from Sales and shown in Balance Sheet
D. Shown only in Balance Sheet
Closing stock not in Trial Balance is an adjustment item. It is shown on the credit side of Trading A/c and also under Current Assets in Balance Sheet.
