Chapter 2: Basic Accountancy Procedures (JAIIB – Paper 3)
1. Which of the following is NOT a fundamental accounting concept?
A. Business Entity Concept
B. Money Measurement Concept
C. Principle of Opportunity Cost
D. Going Concern Concept
Opportunity Cost is an economic concept, not an accounting concept. The fundamental accounting concepts are Business Entity, Money Measurement, Going Concern, and Accounting Period.
2. The Going Concern Concept assumes:
A. The business will continue operations in the foreseeable future
B. The business will close down in one year
C. The business will distribute all profits immediately
D. The business will only operate for a limited contract period
The Going Concern Concept assumes the entity will continue its operations for the foreseeable future and will not liquidate or curtail its activities.
3. Under the Business Entity Concept, which of the following statements is correct?
A. Owner’s personal expenses are recorded in business books
B. Business and owner are considered the same
C. Business records only profits, not losses
D. Business is treated as separate from its owner
Business Entity Concept requires treating the business and owner separately. Hence, personal expenses of the owner are not recorded in business books.
4. Which accounting concept justifies recording closing stock at cost or market price whichever is lower?
A. Money Measurement Concept
B. Conservatism Concept
C. Dual Aspect Concept
D. Matching Concept
Conservatism (Prudence) Concept states that anticipated losses should be recorded, but anticipated gains should not. Hence, stock is valued at cost or market whichever is lower.
5. If an auditor believes that the Going Concern assumption is not valid, which of the following is most likely?
A. Assets are valued at historical cost
B. Liabilities are classified as long-term and short-term
C. Assets are valued at liquidation or realizable value
D. Business continues to record prepaid expenses
If Going Concern is doubtful, financial statements are prepared on liquidation basis where assets are valued at realizable value rather than historical cost.
6. The Double Entry System of accounting means:
A. Recording every transaction twice in two books
B. Maintaining separate books for income and expenses
C. Every transaction affects only one account
D. Every transaction has two aspects – debit and credit
Double Entry System means every transaction has two aspects: Debit and Credit, which must be recorded in equal amounts.
7. Which of the following is the correct rule of Double Entry System?
A. Debit the receiver, Credit the giver
B. Debit the income, Credit the expense
C. Debit liabilities, Credit assets
D. Debit the profit, Credit the loss
The Personal Account rule states: Debit the receiver, Credit the giver. Other rules apply to Real and Nominal accounts.
8. A business purchases machinery worth ₹50,000 on credit. Which accounts are affected?
A. Cash A/c (Dr.), Machinery A/c (Cr.)
B. Machinery A/c (Dr.), Cash A/c (Cr.)
C. Machinery A/c (Dr.), Creditor’s A/c (Cr.)
D. Creditor’s A/c (Dr.), Machinery A/c (Cr.)
Since the machinery is bought on credit, Machinery A/c is debited (asset increases) and Creditor’s A/c is credited (liability increases).
9. Which of the following is an example of Nominal Account entry under Double Entry System?
A. Bank A/c Dr. To Cash A/c
B. Salary A/c Dr. To Cash A/c
C. Furniture A/c Dr. To Creditor A/c
D. Cash A/c Dr. To Capital A/c
Salary is a Nominal Account (expense). So, Salary A/c is debited and Cash A/c is credited when payment is made.
10. In Double Entry System, the accounting equation must always satisfy:
A. Assets + Liabilities = Capital
B. Liabilities = Capital – Assets
C. Assets = Liabilities – Capital
D. Assets = Liabilities + Capital
In Double Entry System, Assets are always equal to Liabilities plus Capital. This forms the basis of the accounting equation.
11. The Principle of Conservatism in accounting means:
A. Anticipate profits and losses both
B. Anticipate no profits but provide for all possible losses
C. Ignore losses unless they actually occur
D. Record profits immediately when expected
Conservatism (Prudence) states that profits should not be anticipated, but all possible losses must be accounted for to avoid overstating financial health.
12. Which of the following accounting practices is based on the Principle of Conservatism?
A. Charging depreciation on fixed assets
B. Following the accrual basis of accounting
C. Preparing accounts annually
D. Valuing stock at cost or market price whichever is lower
Valuing stock at cost or market price whichever is lower is a direct application of Conservatism, ensuring assets are not overstated.
13. If a company expects a lawsuit loss of ₹5 lakh, how should it be treated as per the Conservatism principle?
A. Provide for the possible loss in the books
B. Ignore it until the court judgment comes
C. Record it only in the notes to accounts
D. Record it as profit adjustment
Conservatism requires recognizing anticipated losses. Hence, provision for the expected lawsuit loss should be made in the accounts.
14. Which of the following best reflects the effect of Conservatism on financial statements?
A. Overstatement of income and assets
B. Ignoring all liabilities
C. Understatement of income and assets
D. Showing assets always at historical cost
Conservatism often leads to understatement of income and assets, since expected losses are recorded and profits are recognized only when realized.
15. Provision for doubtful debts in accounts is an application of which principle?
A. Going Concern Principle
B. Matching Principle
C. Consistency Principle
D. Conservatism Principle
Provision for doubtful debts ensures expected losses from non-recovery are recognized in advance. This is an application of the Conservatism Principle.
16. The principle of Revenue Recognition states that revenue should be recognized:
A. When it is earned, regardless of when cash is received
B. Only when cash is actually received
C. At the time of signing the sales contract
D. At the end of accounting year, irrespective of transactions
Revenue is recognized when it is earned, i.e., goods are delivered or services rendered, regardless of cash receipt timing.
17. A trader sells goods worth ₹1,00,000 on credit in March 2025. Payment will be received in April 2025. In which year should revenue be recognized?
A. 2026-27
B. 2025-26 when payment is received
C. Not to be recognized until cash comes
D. 2024-25 when sales took place
Revenue is recognized in March 2025 (FY 2024-25) when the sale was made, not when cash is received.
18. Which of the following is an exception where revenue is recognized on cash basis rather than accrual?
A. Sale of goods by a trader
B. Service charges billed by a company
C. Revenue from lottery sales
D. Interest income of a bank
Revenue from uncertain sources like lottery, dividend etc. is recognized on cash basis due to uncertainty in realization.
19. The main difference between Revenue Recognition and Realisation is:
A. Recognition is cash-based, Realisation is accrual-based
B. Recognition is recording in accounts, Realisation is actual inflow of cash
C. Recognition applies only to services, Realisation applies to goods
D. Both mean the same in accounting
Revenue Recognition means recording revenue when it is earned, while Realisation means actual receipt of cash or settlement of claim.
20. A company receives advance payment from a customer in January for goods to be delivered in March. When should the revenue be recognized?
A. January, when cash is received
B. End of financial year
C. Only when customer gives confirmation
D. March, when goods are delivered
Revenue should be recognized in March when goods are delivered and the earning process is complete, not when advance is received.
21. Under the Accrual Basis of accounting, revenues and expenses are recorded:
A. Only when cash is received or paid
B. At the end of the financial year only
C. When they are earned or incurred, regardless of cash flow
D. Only when audited
In accrual accounting, revenues and expenses are recognized when earned or incurred, irrespective of cash receipt or payment.
22. Which of the following best describes the Cash Basis of accounting?
A. Transactions are recorded only when cash is received or paid
B. Transactions are recorded when they are legally due
C. Transactions are recorded on a daily basis
D. Only revenue is recorded, not expenses
Cash Basis records transactions only when cash is received or paid, ignoring outstanding incomes and expenses.
23. A company pays ₹12,000 in March 2025 as rent for January to March 2025. Under the accrual system, how much rent expense is recognized in March?
A. ₹12,000
B. ₹4,000
C. ₹8,000
D. Nil
Under accrual basis, expenses are matched to the period they relate to. Rent for March is ₹4,000 (₹12,000 ÷ 3 months).
24. Which accounting basis provides a more accurate picture of profitability?
A. Cash Basis, since it is simple
B. Both Cash and Accrual equally
C. Cash Basis, as it ignores outstanding items
D. Accrual Basis, as it matches revenues and expenses
Accrual Basis matches income and expenses to the period in which they occur, giving a true and fair view of profitability.
25. Government accounts in India are generally maintained on which basis?
A. Accrual Basis
B. Cash Basis
C. Hybrid Basis
D. Accrual basis for revenue and cash basis for expenses
Government accounts in India are maintained on Cash Basis, meaning revenues and expenses are recorded only when cash is received or paid.
