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📘 Chapter 2 Class 11 Accountancy CBSE Code 055

Basic
Accounting Terms

Master all 30+ terms from Part A and Part B — Capital, Drawings, Assets, Liabilities, Receipts, Expenditure, Trade Receivables, Trade Payables, Discount, Bad Debts and more. Notes, 50 MCQs, and a built-in 20-question quiz.

30+Terms
50MCQs
20Quiz Qs
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📌 Why This Chapter Matters

The Language Before the Language

Chapter 1 taught you that accounting is the "Language of Business." Chapter 2 teaches you the vocabulary of that language. Every term here — Capital, Asset, Liability, Debtor, Creditor, Revenue, Expense — appears in every journal entry, every ledger account, every balance sheet you will ever make. Master these terms now, and the rest of Accountancy becomes significantly easier.

📗 Part A — As Per Syllabus Contents

1. Business Transaction

A Business Transaction is any event or activity that involves the exchange of money or money's worth between two or more parties and brings about a change in the financial position of the business.

Cash Transaction — Payment or receipt in cash immediately. Example: Paid rent ₹10,000 in cash.
Credit Transaction — Payment or receipt deferred to a future date. Example: Bought goods from Ramesh on credit.
Internal Transaction — Does not involve an outside party. Example: Charging depreciation on machinery.
External Transaction — Involves a party outside the business. Example: Purchased goods from a supplier.
Key Rule: Only events that can be expressed in money are recorded. Signing a contract, winning an award, or hiring a manager — these are events but NOT business transactions until money changes hands.

2. Account

An Account is a summarised record of all transactions relating to a particular person, asset, liability, expense, or income. It shows all increases and decreases and the final balance for that item.

Every account has two sides — the Debit side (Dr.) on the left and the Credit side (Cr.) on the right. This is called the "T-format" of an account.

Types of Accounts: Personal Account (persons, firms, companies), Real Account (tangible & intangible assets), Nominal Account (expenses, losses, incomes, gains) — covered in detail in Chapter 7.

3. Capital

Capital is the amount of money or money's worth invested by the owner (proprietor) in the business. It represents the owner's financial stake in the business — the owner's claim on the assets of the business.

Capital Formula
Capital = Total Assets − Total Liabilities
Capital increases when profit is earned or fresh investment is made. Capital decreases when loss occurs or drawings are made.
Example: Priya starts a business by depositing ₹5,00,000 cash and bringing furniture worth ₹1,00,000. Her Capital = ₹6,00,000. This is shown on the Liabilities side of the Balance Sheet because the business owes this amount to the owner.

4. Drawings

Drawings refer to any amount of cash, goods, or other assets withdrawn by the owner from the business for personal use. Drawings are NOT a business expense — they are a reduction of the owner's Capital.

Cash withdrawn by owner for personal expenses
Goods taken from business for family consumption
Owner's personal bills paid through business bank account
Assets taken by owner for personal use (e.g., a vehicle)
Exam Alert: Drawings reduce Capital. They are deducted from Capital while preparing the Balance Sheet. Drawings are never shown as an expense in the Profit & Loss Account.

5. Liability

Liability is the financial obligation of the business — amounts owed by the business to outsiders (other than the owner). Liabilities are broadly classified as:

TypeMeaningExamplesBalance Sheet Position
Non-Current (Long-term) LiabilitiesObligations payable after more than one yearLong-term bank loan, Debentures, Mortgage loanNon-Current Liabilities
Current LiabilitiesObligations payable within one accounting yearCreditors, Bills Payable, Bank Overdraft, Outstanding expenses, Advance received from customersCurrent Liabilities
Contingent LiabilitiesPotential liabilities depending on a future eventPending lawsuits, Guarantees given to a third partyShown as a footnote — not on the Balance Sheet itself

6. Asset

Assets are economic resources owned or controlled by the business that are expected to provide future economic benefit. Assets are classified as:

NC

Non-Current Assets — Tangible

Physical assets held for long-term use (more than one year) in the business, not for resale. Examples: Land, Building, Machinery, Furniture, Vehicles, Equipment.

NI

Non-Current Assets — Intangible

Non-physical assets with long-term value. Examples: Goodwill, Patents, Trademarks, Copyrights, Brand value. No physical existence but have monetary value.

CA

Current Assets

Assets expected to be converted into cash or used within one accounting year. Examples: Stock of goods, Debtors, Bills Receivable, Cash in hand, Bank balance, Prepaid expenses, Accrued income.

WA

Wasting Assets

Natural resources that are depleted over time through use. Examples: Mines, Quarries, Oil wells, Timber forests. Their value reduces as the resource is extracted.

FA

Fictitious Assets

Not real assets — these are deferred revenue expenditures or accumulated losses shown temporarily on the asset side. Examples: Preliminary expenses, Discount on issue of shares, Advertising expenses to be written off.

LA

Liquid Assets

Assets that can be immediately converted to cash without loss of value. Examples: Cash in hand, Cash at bank, Short-term marketable investments, Government securities.

7. Receipts

A Receipt is any amount of money received by the business. Receipts are classified into two types:

BasisCapital ReceiptRevenue Receipt
MeaningNon-recurring receipt that creates a long-term obligation or reduces an assetRecurring receipt arising from the regular operating activities of the business
FrequencyNon-recurring (happens once or rarely)Recurring (happens repeatedly in the normal course)
Accounting TreatmentShown on the Balance Sheet (Liabilities side or reduces assets)Credited to Trading A/c or Profit & Loss A/c
ExamplesSale of machinery, Capital introduced by owner, Loan taken from bank, Issue of sharesSales of goods, Rent received, Commission received, Interest received on investments, Dividend received
Exam Tip: Capital Receipts appear on the Balance Sheet. Revenue Receipts appear in the Profit & Loss Account. This distinction is very frequently tested in CBSE MCQs.

8. Expenditure

Expenditure refers to the amount spent by the business. There are three types — a very important CBSE topic:

CE

Capital Expenditure

Expenditure that provides benefit for more than one accounting year. Increases the earning capacity of the business. It is shown as an Asset on the Balance Sheet. Examples: Purchasing machinery, Building a warehouse, Installing air-conditioning in a factory.

RE

Revenue Expenditure

Expenditure whose benefit expires within the current accounting year. Incurred in the regular course of business to earn revenue. Charged to Profit & Loss Account. Examples: Salaries, Rent, Electricity, Repairs, Purchase of goods for resale.

DE

Deferred Revenue Expenditure

A revenue expenditure that is so large that its benefit extends over more than one year. Written off gradually over the years. Examples: Heavy advertising expense at launch (e.g., ₹50 lakh ad campaign), Preliminary expenses, Research & Development costs.

9. Expense

An Expense is a cost incurred by the business to earn revenue during an accounting period. Expenses are recurring in nature and reduce profit. They are charged to the Profit & Loss Account.

Salaries paid to employees
Rent paid for business premises
Electricity and utility bills
Postage and stationery
Advertisement expenses
Carriage on purchases (Freight inward)
Depreciation on assets
Insurance premium
Expense vs Expenditure: All expenses are expenditures, but not all expenditures are expenses. Capital Expenditure is not an expense — it is an asset. Only Revenue Expenditure is called an Expense.

10. Income

Income is the total amount earned by the business from all sources — operating and non-operating — during an accounting period. Income includes both revenue receipts and gains. It is the sum of all inflows that increase the owner's equity.

Income vs Revenue: Revenue is the income from the main business activities (e.g., sales). Income is the broader term that includes revenue as well as other earnings (e.g., rent received by a manufacturing company). All revenue is income, but not all income is revenue.

11. Profits, Gains, and Losses

TermMeaningExample
ProfitExcess of Revenue over Expenses from the regular operations of the business during a period. Increases Capital.Sales ₹10 lakh, Expenses ₹7 lakh → Profit = ₹3 lakh
GainProfit earned from non-trading or incidental activities — not the main business. Also increases Capital.Sold old machinery at a profit of ₹50,000 (Capital Gain), Interest received on investment
LossExcess of Expenses over Revenue from operations. Decreases Capital. Can also mean loss from incidental events.Goods destroyed by fire, Loss on sale of asset, Net operating loss
Profit / Loss Formula
Profit (or Loss) = Revenue − Expenses
Positive result = Profit (added to Capital). Negative result = Loss (deducted from Capital).

12. Purchases and Purchase Returns

Purchases refer to goods bought by the business for the purpose of resale or for use in the production process. Purchases can be cash or credit.

Cash Purchases — Goods bought and payment made immediately in cash. Debit: Purchases A/c, Credit: Cash A/c.
Credit Purchases — Goods bought and payment to be made in the future. Creates a Creditor for the business.
Purchases Return (Return Outwards) — Goods returned by us to our supplier due to defects, damage, or wrong specifications. Reduces Purchases.
Net Purchases = Gross Purchases − Purchases Returns. Always calculate net figures for the Trading Account.

13. Sales and Sales Returns

Sales refer to goods sold by the business to customers — both cash and credit. Sales is the primary source of revenue for a trading business.

Cash Sales — Goods sold and payment received immediately. Creates no debtor.
Credit Sales — Goods sold but payment to be received in the future. Creates a Debtor for the business.
Sales Return (Return Inwards) — Goods returned to us by the customer due to defects or dissatisfaction. Reduces Sales.
Net Sales = Gross Sales − Sales Returns. Always use net figures for the Trading Account.

14. Stock (Inventory)

Stock refers to goods purchased for resale but not yet sold at a given date. Stock is a Current Asset shown on the Balance Sheet.

Opening Stock — Stock of goods at the beginning of the accounting period. Debited to the Trading Account.
Closing Stock — Stock of goods remaining unsold at the end of the accounting period. Shown on the Asset side of the Balance Sheet and credited to the Trading Account.
COGS Formula: Cost of Goods Sold = Opening Stock + Purchases − Closing Stock. Used in the Trading Account to find Gross Profit.

15. Trade Receivables — Debtors and Bills Receivable

Trade Receivables are amounts owed to the business by its customers for goods sold or services rendered on credit. Trade Receivables include:

Debtors (Sundry Debtors) — Persons or businesses who owe money to our business on account of credit sales made to them. They are a Current Asset. Example: We sold goods to Ram on credit → Ram is our Debtor.
Bills Receivable — A written promise (bill of exchange or promissory note) made by the debtor to pay a specific amount on a specific date. Also a Current Asset. More legally binding than a simple book debt.
Key Distinction: Debtors are informal credit customers (recorded in the books). Bills Receivable are formal written promises to pay — they can be discounted with a bank before the due date.

16. Trade Payables — Creditors and Bills Payable

Trade Payables are amounts owed by the business to its suppliers for goods purchased or services received on credit. Trade Payables include:

Creditors (Sundry Creditors) — Persons or businesses to whom our business owes money on account of credit purchases. They are a Current Liability. Example: We bought goods from Shyam on credit → Shyam is our Creditor.
Bills Payable — A written promise made by us (the buyer) to pay a specific amount to the supplier on a specific date. Also a Current Liability. More formal than book credit.

17. Goods

Goods are the items or commodities in which the business deals — the items that the business buys and sells as part of its normal trading activities.

Critical Distinction — Same item, different classification: A furniture dealer's chairs = Goods (traded). A school's chairs = Fixed Asset (used, not traded). The classification depends entirely on the nature of the business.

18. Cost

Cost is the amount of money or money's worth given up in exchange for an asset or service. In accounting, assets are recorded at their Historical Cost — the original purchase price — not at market value. This is the Cost Principle (Historical Cost Concept).

19. Voucher

A Voucher is a written document that provides evidence and authorisation for a business transaction. Every entry in the books of accounts must be supported by a voucher. Vouchers are the starting point of the accounting process.

CV

Cash Voucher

Prepared for cash receipts (Debit Voucher) and cash payments (Credit Voucher). Evidence of cash transactions.

TV

Transfer Voucher (Journal Voucher)

Prepared for non-cash transactions — credit entries, adjustments, depreciation, write-offs. No cash involved.

SD

Source Documents

Cash memos, invoices, receipts, pay-in slips, salary sheets — these form the basis for preparing vouchers.

20. Discount

A Discount is a reduction in the price of goods or amount to be paid. There are two completely different types of discount — and both are frequently tested in CBSE:

BasisTrade DiscountCash Discount
MeaningDeduction given from the list/catalogue price at the time of sale to encourage bulk purchasesDeduction allowed to a debtor for making early or prompt payment of the amount due
PurposeTo encourage bulk buying / wholesale purchasesTo encourage early/prompt payment — improves cash flow
When givenAt the time of sale (deducted from the invoice itself)At the time of payment of the debt
Recorded in books?No — only the net amount (after deduction) is recorded. Trade discount does not appear anywhere in the books.Yes — recorded in books. Shown in the Discount column of Cash Book. Discount Allowed (by seller) is an expense; Discount Received (by buyer) is an income.
Shown on invoice?Yes — deducted from the list price on the invoiceNo — mentioned as a condition but not deducted on the invoice
ExampleList price ₹10,000; Trade Discount 10% = ₹1,000; Invoice amount = ₹9,000 (only ₹9,000 recorded)Amount due ₹9,000; Pay within 7 days → get 2% discount. If paid in time: Cash received ₹8,820, Discount Allowed ₹180 (recorded in books)
📘 Part B — Other Important Accounting Terms

21. Proprietor

The Proprietor is the person who owns and manages the business. In a sole proprietorship, the proprietor is the single owner who has invested capital, controls operations, and has unlimited personal liability for the debts of the business. In accounting, the proprietor is treated as separate from the business (Business Entity Concept).

22. Entity

In accounting, Entity refers to the business unit that is treated as completely separate from its owner(s) and from other businesses. This is the Business Entity Concept — one of the fundamental accounting assumptions. The books of accounts record only those transactions that relate to the business entity, not the personal transactions of the owner.

Example: If the owner pays his child's school fees from the business bank account, this is recorded as "Drawings" — not as a business expense — because it is a personal transaction of the owner, not a business transaction.

23. Books of Accounts

Books of Accounts are the formal records in which all financial transactions of a business are systematically recorded. The main books of accounts are:

Journal — Book of Original Entry. All transactions first recorded here in chronological order.
Cash Book — Records all cash and bank transactions. Serves as both a Journal and a Ledger for cash.
Ledger — Principal Book of Accounts. All journal entries are posted here into individual accounts.
Subsidiary Books — Purchase Book, Sales Book, Purchase Return Book, Sales Return Book, Bills Receivable Book, Bills Payable Book, Journal Proper.

24. Entry

An Entry is a record of a business transaction in the books of accounts. Every entry has a Debit aspect and a Credit aspect (Double Entry System). Types of entries include:

Simple Entry — One account debited and one account credited. Example: Paid rent ₹5,000 (Rent A/c Dr, Cash A/c Cr).
Compound Entry — More than two accounts involved in a single transaction. Example: Paid ₹10,000 to a creditor in full settlement of ₹11,000 (Creditors Dr ₹11,000; Cash Cr ₹10,000; Discount Received Cr ₹1,000).

25. Debit and Credit

Debit (Dr.) is the left side of an account. Credit (Cr.) is the right side of an account. In Double Entry System, every transaction has equal debit and credit effects.

Type of AccountDebit meansCredit means
Personal AccountThe receiver (of goods/cash)The giver (of goods/cash)
Real AccountWhat comes in (asset increases)What goes out (asset decreases)
Nominal AccountAll expenses and lossesAll incomes and gains
Simple way to remember Modern Approach: Assets ↑ = Debit | Assets ↓ = Credit | Liabilities ↑ = Credit | Liabilities ↓ = Debit | Income ↑ = Credit | Expenses ↑ = Debit

26. Live Stock

Live Stock refers to animals (cattle, poultry, sheep, horses, etc.) kept by a business — particularly farms or agricultural businesses — for the purpose of earning income. Live Stock is treated as an Asset in the books of accounts. It appears on the Asset side of the Balance Sheet.

Example: A dairy farm has 50 cows valued at ₹5,00,000. These cows are "Live Stock" and are shown as assets in the books. They generate revenue through milk sales.

27. Invoice

An Invoice is a commercial document prepared by the seller and sent to the buyer. It contains details of the goods sold or services rendered, quantity, rate, total amount, applicable taxes (GST), trade discount, and terms of payment. The invoice is a key source document for recording purchase and sale transactions.

Sales Invoice — Prepared by us when we sell goods. This becomes the Purchases Invoice for the buyer.
Purchase Invoice — Received by us when we buy goods. This is the seller's sales invoice.

28. Allowance

An Allowance is a deduction made from the invoice price or the amount due, given to the buyer for reasons such as inferior quality, slight damage, shortage in quantity, or other agreed-upon adjustments — without the goods being physically returned. It is different from a discount and different from a return.

Example: We sold goods worth ₹50,000 to Ramesh. He found 10% goods were of slightly inferior quality but agreed to keep them if we give an allowance of ₹3,000. No goods are returned — instead ₹3,000 is deducted from the amount he owes us.

29. Bad Debts

Bad Debts are debts that are irrecoverable — amounts owed by debtors that the business has given up hope of collecting, usually because the debtor has gone bankrupt, absconded, or refused to pay. Bad Debts are a loss to the business and are charged to the Profit & Loss Account.

Accounting Entry: Bad Debts A/c Dr | Debtor's A/c Cr (removes the debt from the books)
Provision for Doubtful Debts — When a debt is doubtful but not yet confirmed as bad, a provision is created (an application of the Prudence concept).
Bad Debts vs Provision: Bad Debt = confirmed loss, already written off. Provision for Doubtful Debt = anticipated loss, created in advance. Both are charged to P&L Account but at different stages.

30. Solvent and Insolvent

Solvent — A person or business is solvent when their total Assets exceed or are equal to their total Liabilities. They are able to pay their debts as they fall due. Assets ≥ Liabilities.
Insolvent — A person or business is insolvent when their total Liabilities exceed their total Assets. They are unable to pay their debts. The court may declare them bankrupt. Liabilities > Assets.
Solvency Test
Solvent = Assets ≥ Liabilities
If Liabilities exceed Assets → Insolvent → Court declares Bankruptcy → Assets distributed to creditors
⚡ Quick Recall — Chapter 2 Key Points
Capital = Assets − Liabilities. Profit adds to Capital; Loss and Drawings reduce Capital. Drawings reduce Capital — they are NEVER an expense in P&L Account. Non-Current Assets: Tangible (Land, Machinery) & Intangible (Goodwill, Patent). Current Assets: Stock, Debtors, Cash. Capital Receipt → Balance Sheet. Revenue Receipt → Profit & Loss Account. Capital Expenditure → Asset (Balance Sheet). Revenue Expenditure → P&L Account. Deferred Revenue → Written off gradually. Trade Discount — NOT recorded in books. Cash Discount — IS recorded in books. Debtor = owes money TO us (Current Asset). Creditor = we owe money TO them (Current Liability). Bills Receivable = Current Asset. Bills Payable = Current Liability. Same item: Goods for a trader, Fixed Asset for a non-trader. Context determines classification. Bad Debts = confirmed loss → P&L A/c. Provision for Doubtful Debts = anticipated loss → also P&L A/c. Solvent: Assets ≥ Liabilities. Insolvent: Liabilities > Assets (bankruptcy). Fictitious Assets = not real assets — deferred revenue expenditure shown temporarily on asset side.
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Ch 1: Introduction to Accounting
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Ch 3: Theory Base of Accounting

50 MCQs — Basic Accounting Terms

Four difficulty levels: Easy (1–15) · Moderate (16–30) · Difficult (31–40) · CUET Level (41–50). Correct answers highlighted green with explanation.

🟢 Easy — Q 1 to 15
1
The amount invested by the owner in the business is called:
ARevenue
BCapital
CProfit
DDrawings
Answer: B — Capital. Capital is the amount invested by the proprietor in the business. It represents the owner's claim on the assets and is shown on the Liabilities side of the Balance Sheet.
2
Goods withdrawn by the owner from the business for personal use are called:
AExpenses
BLosses
CDrawings
DSales
Answer: C — Drawings. Drawings include cash or goods taken by the owner for personal use. Drawings reduce Capital and are NOT a business expense. They never appear in the P&L Account.
3
Which of the following is a Current Asset?
AMachinery
BLand
CDebtors
DGoodwill
Answer: C — Debtors. Debtors are current assets because they are expected to be converted to cash within one year. Machinery and Land are Fixed Assets; Goodwill is an Intangible Non-Current Asset.
4
A person to whom the business owes money is called:
ADebtor
BCreditor
CProprietor
DInvestor
Answer: B — Creditor. A Creditor is a person to whom the business owes money — typically a supplier from whom goods were purchased on credit. Creditors are a Current Liability on the Balance Sheet.
5
Trade Discount is:
ARecorded separately in books of accounts
BGiven for prompt payment of debt
CNot recorded in books of accounts
DA type of income for the buyer
Answer: C — Not recorded in books. Trade Discount is deducted from the invoice price itself — only the net amount is recorded. Cash Discount IS recorded in the books.
6
Goodwill is an example of:
ACurrent Asset
BTangible Fixed Asset
CIntangible Non-Current Asset
DFictitious Asset
Answer: C — Intangible Non-Current Asset. Goodwill has no physical existence but has monetary value and provides long-term benefit. It is an Intangible Non-Current Asset, not Fictitious (which is a deferred loss).
7
Which of the following increases Capital?
ADrawings
BLoss
CProfit
DExpenses
Answer: C — Profit. Profit is added to Capital because it belongs to the owner. Loss and Drawings both decrease Capital. Expenses reduce profit, which in turn reduces Capital.
8
Preliminary expenses shown on the Asset side of the Balance Sheet are an example of:
ATangible Fixed Asset
BIntangible Asset
CCurrent Asset
DFictitious Asset
Answer: D — Fictitious Asset. Preliminary expenses are not real assets — they are deferred revenue expenditures (losses not yet written off) shown temporarily on the asset side of the Balance Sheet.
9
Goods returned by the customer to the business are called:
APurchase Return / Return Outwards
BTrade Discount
CSales Return / Return Inwards
DAllowance
Answer: C — Sales Return / Return Inwards. When customers return goods to us, it is Sales Return (Return Inwards) — reduces our Sales. Purchase Return (Return Outwards) is when we return goods to our supplier.
10
If Assets = ₹12,00,000 and Liabilities = ₹5,00,000, what is the Capital?
A₹17,00,000
B₹7,00,000
C₹5,00,000
D₹12,00,000
Answer: B — ₹7,00,000. Capital = Assets − Liabilities = ₹12,00,000 − ₹5,00,000 = ₹7,00,000. This is the fundamental accounting equation rearranged.
11
Commission received is an example of:
ACapital Receipt
BRevenue Receipt
CCapital Expenditure
DRevenue Expenditure
Answer: B — Revenue Receipt. Commission received is a regular income from operations — a recurring Revenue Receipt credited to the P&L Account. Sale of an asset would be a Capital Receipt.
12
A furniture dealer purchases 20 chairs for selling. These chairs are classified as:
AFixed Assets
BGoods / Stock
CIntangible Assets
DInvestments
Answer: B — Goods / Stock. For a furniture dealer, chairs are items traded in — they are Goods or Stock (Current Asset). If a school buys chairs for use, they would be Fixed Assets. Context determines classification.
13
Cash Discount is given to:
AEncourage bulk buying
BReduce the list price on the invoice
CEncourage early or prompt payment of debt
DCompensate for damaged goods
Answer: C — Encourage early or prompt payment. Cash Discount is allowed to debtors who pay before or on the due date. Unlike Trade Discount, Cash Discount is recorded in the books of accounts.
14
Which of the following is NOT a liability?
ABank Loan
BCreditors
CBills Payable
DBills Receivable
Answer: D — Bills Receivable. Bills Receivable is an amount the business will receive in the future — it is a Current Asset. Bank Loan, Creditors, and Bills Payable are all liabilities.
15
A person is said to be insolvent when:
AAssets exceed Liabilities
BRevenue exceeds Expenses
CLiabilities exceed Assets
DCapital exceeds Drawings
Answer: C — Liabilities exceed Assets. When a person's total liabilities are more than their total assets, they cannot repay debts and are declared insolvent (bankrupt).
🟡 Moderate — Q 16 to 30
16
Rent paid by the business is an example of:
ACapital Expenditure
BRevenue Expenditure
CDeferred Revenue Expenditure
DCapital Receipt
Answer: B — Revenue Expenditure. Rent is paid for use of premises within the current accounting year — its benefit expires within the year. It is a Revenue Expenditure charged to the P&L Account.
17
Stock of goods unsold at the end of the accounting period is shown in the Balance Sheet as:
ACurrent Asset
BFixed Asset
CCurrent Liability
DLong-term Liability
Answer: A — Current Asset. Closing Stock is a Current Asset because it is expected to be sold (converted to cash) within the next accounting period.
18
Purchase of machinery worth ₹5,00,000 is an example of:
ACapital Expenditure
BRevenue Expenditure
CRevenue Receipt
DCapital Receipt
Answer: A — Capital Expenditure. Machinery provides benefit for more than one accounting period — it is Capital Expenditure recorded as a Fixed Asset on the Balance Sheet, not charged to P&L Account.
19
Opening Stock + Purchases − Closing Stock = ?
AGross Profit
BNet Profit
CCost of Goods Sold
DNet Sales
Answer: C — Cost of Goods Sold (COGS). The formula: Opening Stock + Purchases − Closing Stock = COGS. This is used in the Trading Account to find Gross Profit = Net Sales − COGS.
20
Which of the following is an example of a Capital Receipt?
ARent received
BCommission received
CLoan taken from bank
DInterest received on investments
Answer: C — Loan taken from bank. A bank loan is a Capital Receipt — it creates a long-term liability and is shown on the Balance Sheet. Rent, Commission, and Interest received are Revenue Receipts credited to P&L Account.
21
A heavy advertisement campaign costing ₹40 lakh benefits the next 4 years. It is an example of:
ACapital Expenditure
BRevenue Expenditure
CDeferred Revenue Expenditure
DCapital Receipt
Answer: C — Deferred Revenue Expenditure. This is a revenue expense (advertising) so large that its benefit spans multiple years. It is written off gradually (₹10 lakh per year for 4 years) and shown as a Fictitious Asset until fully written off.
22
Which document is prepared by the seller and sent to the buyer showing details of goods sold?
AVoucher
BReceipt
CInvoice
DBills Receivable
Answer: C — Invoice. An Invoice is a commercial document prepared by the seller giving details of goods sold — quantity, rate, amount, GST, trade discount, and terms. It is the source document for recording purchase/sale transactions.
23
Irrecoverable debts that are written off from the books are called:
AProvision for Doubtful Debts
BAllowance
CBad Debts
DTrade Discount
Answer: C — Bad Debts. Bad Debts are amounts owed by debtors that the business has given up hope of collecting. They are confirmed losses charged to the P&L Account (Bad Debts A/c Dr, Debtor's A/c Cr).
24
Animals kept by a farm as assets for earning income are called:
AGoods
BWasting Assets
CLive Stock
DCurrent Assets
Answer: C — Live Stock. Animals like cows, horses, poultry kept by farms for earning income (milk, eggs, labour) are classified as Live Stock — they are shown as Assets on the Balance Sheet.
25
Which of the following is a deduction given without returning the goods — for inferior quality?
ATrade Discount
BCash Discount
CSales Return
DAllowance
Answer: D — Allowance. An Allowance is a price reduction given for inferior quality or slight damage without physically returning the goods. It is different from a return and different from a discount.
26
The business is treated as separate from its owner under which concept?
AGoing Concern Concept
BDual Aspect Concept
CBusiness Entity Concept
DMatching Concept
Answer: C — Business Entity Concept. The Business Entity Concept (Entity Concept) treats the business as completely separate from its owner. Only business transactions are recorded — personal transactions of the owner are excluded.
27
A written promise by the debtor to pay a specific amount on a specific future date is called:
AInvoice
BVoucher
CBills Receivable
DCash Memo
Answer: C — Bills Receivable. Bills Receivable is a formal written promise (bill of exchange or promissory note) made by the debtor to pay us. It is a Current Asset and can be discounted with a bank before the due date.
28
Profit earned from sale of old machinery (not the main business) is an example of:
ARevenue
BIncome from operations
CGain
DDrawings
Answer: C — Gain. A Gain is a profit from non-trading or incidental activities. Selling old machinery is not the main business — so the profit is called a Gain (Capital Gain), not Revenue.
29
Assets recorded at original purchase price — not at current market value — is due to which principle?
AMatching Principle
BPrudence Principle
CHistorical Cost (Cost) Principle
DMateriality Principle
Answer: C — Historical Cost Principle. Assets are valued at their original purchase cost in accounting, not at current market value. This is the Historical Cost (Cost) Principle — one of the foundations of accounting.
30
An amount reduced from the amount due to the debtor — without returning the goods — for minor quality issues is called:
ACash Discount
BTrade Discount
CPurchase Return
DAllowance
Answer: D — Allowance. An Allowance is granted when goods are kept despite minor issues — no return of goods. It reduces the amount the customer owes. Different from both Discount and Return.
🔴 Difficult — Q 31 to 40
31
Mines and quarries are examples of which type of asset?
AFictitious Assets
BIntangible Assets
CWasting Assets
DCurrent Assets
Answer: C — Wasting Assets. Mines, quarries, oil wells, and timber forests are Wasting Assets — natural resources that deplete over time as the resource is extracted. Their value reduces with use, unlike regular fixed assets.
32
Discount Allowed by the seller to the buyer is, for the seller:
AAn Income
BA Gain
CAn Expense (loss of income)
DA Liability
Answer: C — An Expense. Discount Allowed by the seller is an expense (it reduces the amount received). For the buyer, it is Discount Received — an income. These are opposite perspectives of the same cash discount.
33
Which of the following is the CORRECT distinction between Bad Debts and Provision for Doubtful Debts?
ABoth are the same thing
BProvision is a confirmed loss; Bad Debt is an anticipated loss
CBad Debt is a confirmed loss; Provision is created for anticipated losses
DNeither is charged to the P&L Account
Answer: C. Bad Debt = confirmed, already written off. Provision for Doubtful Debts = created in advance for debts that may become bad (Prudence concept). Both are charged to the P&L Account but at different stages.
34
The owner paid his personal electricity bill from the business bank account. This is recorded as:
AElectricity Expense
BRevenue Expenditure
CDrawings
DCapital Expenditure
Answer: C — Drawings. Personal bills of the owner paid through business accounts are Drawings — not business expenses. Business Entity Concept keeps the owner's personal transactions separate from business records.
35
Bills Payable differs from Creditors in that:
ABills Payable is an Asset; Creditors is a Liability
BCreditors result from cash purchases
CBills Payable is a formal written promise to pay; Creditors is an informal book debt
DThere is no difference — both mean the same thing
Answer: C. Bills Payable is a formal, legally binding written promise (bill of exchange accepted by us) to pay on a specific date. Creditors arise from informal credit purchases recorded only in books. Both are Current Liabilities.
36
A compound entry involves:
AOne account debited, one account credited
BMore than two accounts involved in a single entry
COnly cash transactions
DOnly credit transactions
Answer: B — More than two accounts. A compound entry involves more than two accounts in one journal entry. Example: Paying a creditor ₹9,800 in full settlement of ₹10,000 — Creditors Dr ₹10,000; Cash Cr ₹9,800; Discount Received Cr ₹200.
37
Which of the following is shown as a FOOTNOTE to the Balance Sheet, not on the Balance Sheet itself?
ACurrent Liabilities
BLong-term Liabilities
CContingent Liabilities
DCapital
Answer: C — Contingent Liabilities. Contingent Liabilities (pending lawsuits, guarantees) are potential liabilities that depend on a future uncertain event. They are NOT shown on the Balance Sheet — only disclosed as a footnote per the Full Disclosure principle.
38
Sale of old machinery results in loss of ₹20,000. This ₹20,000 is:
ARevenue Loss (from operations)
BBad Debt
CCapital Loss (from incidental activity)
DDeferred Revenue Expenditure
Answer: C — Capital Loss. Loss on sale of a fixed asset is a Capital Loss — it arises from an incidental activity (not the main business) and is shown in the Profit & Loss Account as a non-operating loss.
39
A dairy farm has 50 cows. For accounting purposes, these cows are classified as:
AGoods (Stock)
BWasting Assets
CLive Stock (Asset)
DFictitious Assets
Answer: C — Live Stock (Asset). Cows kept for milk production are Live Stock — treated as assets of the business. If a butcher buys cows for slaughter and sale, they would be Goods/Stock. Context determines classification.
40
Which of the following correctly shows the effect of Drawings on the accounting equation?
AAssets increase, Capital increases
BAssets increase, Liabilities increase
CAssets decrease, Capital decreases
DAssets decrease, Liabilities increase
Answer: C — Assets decrease, Capital decreases. When cash or goods are withdrawn as Drawings: Cash/Goods (Asset) decreases, and Capital decreases by the same amount. The accounting equation remains balanced.
🏆 CUET Level — Q 41 to 50
41
CUET: Assertion (A): Trade Discount is not recorded in books of accounts. Reason (R): Trade Discount is deducted from the invoice price itself and only the net amount is recorded.
ABoth A and R are true, and R is the correct explanation of A
BBoth A and R are true, but R is NOT the correct explanation
CA is true, R is false
DA is false, R is true
Answer: A. Both are true and R correctly explains A. Trade Discount is deducted before recording — only the net invoice amount enters the books. There is no separate Trade Discount account anywhere in the ledger.
42
CUET: Which pair is INCORRECTLY matched?
ADebtors — Current Asset
BBills Payable — Current Liability
CGoodwill — Fictitious Asset
DClosing Stock — Current Asset
Answer: C — Goodwill is NOT a Fictitious Asset. Goodwill is an Intangible Non-Current Asset with real value (reputation, brand, customer loyalty). Fictitious Assets are deferred losses (preliminary expenses). This is a common exam trap.
43
CUET: A company receives ₹10,00,000 from the sale of its factory land. This is:
ARevenue Receipt — credited to P&L Account
BCapital Receipt — recorded on the Balance Sheet
CRevenue Expenditure
DCapital Expenditure
Answer: B — Capital Receipt. Sale of fixed assets (factory land) is a Capital Receipt — non-recurring and affects the Balance Sheet (reduces the asset). Only the profit/loss on sale goes to P&L Account, not the full sale proceeds.
44
CUET: Opening Stock ₹40,000; Purchases ₹2,00,000; Purchase Returns ₹10,000; Closing Stock ₹50,000. What is the Cost of Goods Sold?
A₹1,90,000
B₹2,40,000
C₹1,80,000
D₹2,00,000
Answer: C — ₹1,80,000. COGS = Opening Stock + Net Purchases − Closing Stock = ₹40,000 + (₹2,00,000 − ₹10,000) − ₹50,000 = ₹40,000 + ₹1,90,000 − ₹50,000 = ₹1,80,000.
45
CUET: The same item — a car — can be classified differently by different businesses. Choose the CORRECT statement:
AA car is always a Fixed Asset regardless of the business
BA car is always Goods regardless of the business
CA car is Goods for a car dealer; a Fixed Asset for a transport company
DA car is a Wasting Asset for all businesses
Answer: C. Classification depends on the nature and purpose of the business. A car is Goods (traded) for a dealer; a Fixed Asset (used) for a transport company; and a Current Asset if meant for resale.
46
CUET: List Price ₹50,000; Trade Discount 20%; Amount to be recorded in Purchase A/c:
A₹50,000
B₹10,000
C₹40,000
D₹60,000
Answer: C — ₹40,000. Trade Discount = 20% of ₹50,000 = ₹10,000. Net amount = ₹50,000 − ₹10,000 = ₹40,000. Only ₹40,000 is recorded in the Purchase A/c. Trade Discount (₹10,000) is NOT recorded anywhere in the books.
47
CUET: Capital at start = ₹2,00,000. Profit during year = ₹50,000. Drawings = ₹20,000. Fresh capital introduced = ₹30,000. Capital at year end = ?
A₹2,50,000
B₹2,30,000
C₹2,60,000
D₹2,80,000
Answer: C — ₹2,60,000. Closing Capital = Opening Capital + Profit + Fresh Capital − Drawings = ₹2,00,000 + ₹50,000 + ₹30,000 − ₹20,000 = ₹2,60,000. This is a fundamental capital account calculation.
48
CUET: Which of the following is the MOST accurate difference between Revenue Expenditure and Capital Expenditure?
ARevenue Expenditure is larger in amount than Capital Expenditure
BCapital Expenditure provides benefit beyond the current year; Revenue Expenditure provides benefit only within the current year
CCapital Expenditure is always paid in cash; Revenue Expenditure is always paid on credit
DRevenue Expenditure creates assets; Capital Expenditure creates liabilities
Answer: B. The defining distinction: Capital Expenditure → benefit for more than one year → shown as Asset. Revenue Expenditure → benefit within current year → charged to P&L Account. Amount or mode of payment does not determine the classification.
49
CUET: A debtor owes ₹50,000. He pays ₹47,000 in full settlement and the seller allows the balance. What are the accounting entries for the seller?
ACash Dr ₹50,000; Debtor Cr ₹50,000
BCash Dr ₹47,000; Discount Allowed Dr ₹3,000; Debtor Cr ₹50,000
CCash Dr ₹47,000; Debtor Cr ₹47,000
DDebtor Dr ₹3,000; Cash Dr ₹47,000; Sales Cr ₹50,000
Answer: B. When a debtor pays less in full settlement: Cash Dr ₹47,000 (received); Discount Allowed Dr ₹3,000 (expense for seller); Debtor Cr ₹50,000 (full debt cleared). Discount Allowed is an expense in the P&L Account for the seller.
50
CUET: Total Assets = ₹15,00,000; Capital = ₹8,00,000; Long-term Loan = ₹4,00,000. What are the Current Liabilities?
A₹4,00,000
B₹7,00,000
C₹3,00,000
D₹11,00,000
Answer: C — ₹3,00,000. Assets = Capital + Liabilities. Total Liabilities = Assets − Capital = ₹15,00,000 − ₹8,00,000 = ₹7,00,000. Current Liabilities = Total Liabilities − Long-term Loan = ₹7,00,000 − ₹4,00,000 = ₹3,00,000.

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