INTRODUCTION TO ACCOUNTING – Summary NOTES

1. Definition of Accounting
Accounting is the systematic process of identifying, recording, classifying, summarizing,
interpreting, and communicating financial information.

American Institute of Certified Public Accountants (AICPA) defines accounting as:

“The art of recording, classifying, and summarizing in a significant manner and in terms of
money, transactions and events which are, in part at least, of a financial character.”

2. Objectives of Accounting
1. Record Transactions
2. Determine Profit or Loss
3. Ascertain Financial Position (Balance Sheet)
4. Provide Information to Stakeholders
5. Compliance with Law

3. Functions of Accounting
• Book-keeping (recording)
• Analyzing and interpreting financial data
• Reporting to users (investors, management, tax authorities)
• Helping in decision-making

4. Branches of Accounting
Branch Focus
Financial Accounting Recording & reporting of transactions
Cost Accounting Cost control and cost determination
Branch Focus
Management Accounting Decision-making and planning
Tax Accounting Tax computation and filing
Social Responsibility Accounting Environmental & social costs
5. Users of Accounting Information
Internal Users: Management, Employees, Owners
External Users: Creditors, Investors, Government, Tax Authorities

6. Accounting Cycle (Steps)

1. Identifying Transactions
2. Recording in Journal
3. Posting to Ledger
4. Trial Balance Preparation
5. Adjustments
6. Final Accounts – P&L, Balance Sheet
7. Closing the Books

7. Basic Accounting Terms

Term Meaning
Assets Resources owned by business
Liabilities Amounts owed by business
Capital Owner’s investment
Revenue Income from business activities
Expenses Costs incurred to earn revenue
Profit Revenue – Expenses
Drawings Withdrawal by owner for personal use

8. Bookkeeping vs Accounting

Bookkeeping Accounting
Recording transactions Summarizing, interpreting, reporting
Routine in nature Analytical & complex
Bookkeeping Accounting
No decision-making Supports decision-making
9. Types of Accounts
1. Personal Account – Related to individuals/organizations
Rule: Debit the receiver, Credit the giver
2. Real Account – Assets & properties
Rule: Debit what comes in, Credit what goes out
3. Nominal Account – Expenses, losses, incomes, gains
Rule: Debit all expenses/losses, Credit all incomes/gains

10. Accounting Equations

Assets = Liabilities + Capital

MEMORY AIDS
"Golden Rules of Accounting":

• Personal A/c → Debit the Receiver, Credit the Giver

• Real A/c → Debit What Comes In, Credit What Goes Out
• Nominal A/c → Debit Expenses & Losses, Credit Incomes & Gains

PYQs (UPSC EPFO/APFC)

1. Q (2021): Which of the following is a Personal Account?
A) Bank Account
B) Salary Account
C) Rent Paid
D) Furniture
Ans: A
Explanation: Bank is a legal person, so it is a personal account.
2. Q (2017): Which accounting concept states that business and owner are separate entities?
A) Conservatism
B) Going Concern
C) Business Entity
D) Accrual
Ans: C
SOURCES
• NCERT Class 11 Accountancy Part 1
• CA Foundation Study Material
• UPSC EPFO Previous Year Papers
• Edutap & Unacademy Notes
• ICSI & ICAI Accounting Glossary

MCQs: Introduction to Accounting (1–25)

1. Accounting is the process of — A)

Decision-making
B) Budgeting
C) Recording, classifying & summarizing
D) Tax filing
Ans: C
Explanation: As per AICPA, accounting involves recording, classifying, summarizing financial
data.

2. Which is not a branch of accounting?

A) Financial Accounting
B) Social Accounting
C) Environmental Accounting
D) Theoretical Accounting
Ans: D
Explanation: Theoretical accounting is not a recognized branch.
3. Who are the internal users of accounting?
A) Bankers
B) Management
C) Government
D) Tax Authorities
Ans: B

4. Double Entry System means — A)

Recording transaction twice
B) Debit and Credit for every transaction
C) Posting twice
D) Journal and Ledger both
Ans: B

5. Which of the following is a nominal account?

A) Cash
B) Rent Paid
C) Debtors
D) Furniture
Ans: B

6. "Debit the receiver, credit the giver" applies to — A)

Nominal A/c
B) Real A/c
C) Personal A/c
D) Capital A/c
Ans: C

7. Accounting equation is — A)
Capital = Assets + Liabilities

Ans: B
B) Assets = Liabilities + Capital C)
Assets = Liabilities – Capital
D) Capital = Assets – Liabilities
8. Which is not an objective of accounting?
A) Tax planning
B) Recording of transactions
C) Profit calculation
D) Financial reporting
Ans: A

9. Revenue is — A)
Liability
B) Asset
C) Income D) Capital
Ans: C

10. Bookkeeping is concerned with — A)

Interpretation
B) Decision making
C) Final accounts
D) Recording transactions
Ans: D

11. Users of financial statements include —

A) Investors B) Lenders
C) Creditors
D) All of these
Ans: D

Ans: C
12. Trial Balance is prepared to — A)
Record transactions
B) Summarize transactions
C) Check arithmetical accuracy
D) Pay tax
13. Capital is — A)
Asset
B) Expense
C) Liability
D) Owner’s equity
Ans: D

14. Real account rule is —

A) Debit what comes in, Credit what goes out
B) Debit the receiver, Credit the giver
C) Debit expenses, Credit income
D) None of these
Ans: A

15. Which account is both real and personal?

A) Cash
B) Bank
C) Salary
D) Rent
Ans: B

16. Drawings reduce — A)

Assets
B) Liabilities
C) Capital
D) Revenue
Ans: C

Ans: D
17. Expenses are shown on the — A)
Balance Sheet
B) Trial Balance
C) Trading Account
D) Profit & Loss Account

Ans: E
18. Which is an example of a fixed asset?
A) Inventory
B) Debtors
C) Plant & Machinery
D) Cash
Ans: C

19. Matching principle relates to —

A) Matching Debits with Credits
B) Matching Revenue with Expenses
C) Matching Assets with Liabilities
D) Matching Trial Balance
Ans: B

20. Which account does rent paid belong to?

A) Personal B)
Real
C) Nominal
D) Capital
Ans: C

21. Which of the following is not an expense?

A) Wages
B) Rent
C) Salary
D) Capital
Ans: D

22. Accounting information is useful for — A)

Managers
B) Investors
C) Creditors
D) All of the above
Ans: D
23. A purchase of goods on credit will affect — A)
One account
B) Two accounts
C) Three accounts
D) No account
Ans: B

24. Basic objective of bookkeeping is — A)

Planning
B) Auditing
C) Recording D) Analysis
Ans: C

25. Which is not shown in final accounts?

A) Trial Balance
B) Profit & Loss A/c
C) Balance Sheet
D) Trading A/c
Ans: A

Excellent! Here's a detailed breakdown of the next UPSC EPFO/APFC topic:

Topic: Meaning of an Economic Event (UPSC APFC Standard)

1. What is an Economic Event?

An economic event is any transaction or occurrence that:

Affects the financial position of an entity, and

Can be measured in monetary terms.
➡ It is the starting point for accounting.
Only economic events are recorded in the books of accounts, not non-financial ones.

2. Examples of Economic Events

Economic Event Reason (Recorded?)

Purchase of goods for cash Affects inventory and cash

Paying salaries Affects cash and expenses

Manager resigning No monetary value

Issue of shares Affects capital and cash

Fire damaging factory Affects fixed assets (if valued)

Planning a business strategy No immediate financial effect

3. Classification of Economic Events

➤ Internal Economic Events

• Occur within the organization

• E.g., Depreciation, consumption of raw material

➤ External Economic Events

• Involve outsiders
• E.g., Sales, Purchase, Payment to creditors

4. Criteria to Identify an Economic Event

1. Monetary measurability
2. Effect on assets, liabilities, capital, income, or expenses
3. Involves exchange or consumption
4. Documented with evidence (invoice, bill, contract)

Summary Points
• Only economic events are recorded in financial accounting.
• Non-economic events (like employee satisfaction or CEO change) are not recorded,
though they may influence business operations.
• Understanding the difference helps in identifying what to record or ignore in books.

MCQs on Meaning of an Economic Event

(With Source/Exam Reference + Answer + Explanation)

1. Which of the following qualifies as an economic event?

A) A company hires a new CEO
B) Purchase of machinery for ₹10 lakh
C) Employee's birthday celebration
D) Training session for staff
Ans: B
Explanation: Purchase affects financial position and can be measured.
Source: CA Foundation Mock Test 2022

2. Which of the following is not an economic event?

A) Payment of salary
B) Goods sold to customer
C) Change in company’s logo design
D) Purchase of land
Ans: C
Explanation: Logo change isn’t quantifiable in monetary terms unless expenditure is involved.
Source: UPSC EPFO Model Test Series – Edutap
3. Economic events must be — A)
Legal
B) Ethical
C) Measurable in money terms
D) Approved by board
Ans: C
Explanation: As per the Money Measurement Concept in accounting.
Source: CA Foundation Dec 2021

4. Which statement is true about non-economic events?

A) They are recorded only at year-end
B) They are recorded only in trial balance
C) They are not recorded in accounting
D) They are recorded in balance sheet
Ans: C
Explanation: Non-economic events aren’t measurable in monetary terms.
Source: UPSC EPFO APFC 2017 (Concept-based)

5. When depreciation is charged, it is an example of — A)

External event
B) Internal economic event
C) Non-economic event
D) Policy change
Ans: B
Explanation: Internal, as it happens within the entity.
Source: SSC CGL 2020 Tier-II

6. Fire damaging inventory is — A)

Non-economic event
B) External economic event
C) Internal economic event
D) Immaterial event
Ans: B
Explanation: Involves external cause with financial impact.
Source: ICAI CPT 2019
7. Which of the following is both an economic and external event?
A) Employee resignation
B) Transfer of stock to warehouse
C) Paying rent to landlord
D) Manager's promotion
Ans: C
Explanation: Involves third party and monetary flow.
Source: Edutap Test Series – UPSC EPFO AO/EO

8. Which of the following is not required for an event to be classified as economic?

A) Change in cash position
B) Involvement of outsiders
C) Measurable in monetary terms
D) Effect on financial position
Ans: B
Explanation: Internal events also qualify without outsiders.
Source: SSC CHSL 2021

9. Sale of goods on credit is — A)

Not an economic event
B) Internal event
C) Non-recordable event
D) External economic event
Ans: D
Explanation: Sale is monetary and involves customer.
Source: CA Foundation Nov 2022

10. Trial balance includes — A)

Only internal events
B) Only external events
C) All economic events recorded
D) Budgeted transactions
Ans: C
Explanation: It lists balances after recording economic events.
Source: Edutap UPSC EPFO Practice Paper 2023
MCQs 11–25 on Meaning of an Economic Event
(With Exam Source + Answer + Explanation)

11. Donation of goods to a charitable trust by business is — A)

Not recorded
B) Recorded as expense
C) Recorded as asset
D) Ignored
Ans: B
Explanation: Outflow of business resources = expense.
Source: CA Foundation Dec 2021

12. Opening a new branch is — A)

An accounting transaction
B) A non-economic event
C) Not a measurable event
D) A social event
Ans: B
Explanation: Unless costs are incurred and measured, the intent of opening is not recordable.
Source: UPSC EPFO Model Paper – Edutap

13. Which is an example of an internal economic event?

A) Paying electricity bill
B) Depreciation on assets
C) Paying interest to bank
D) Receiving payment from customer
Ans: B
Explanation: Depreciation occurs internally, without external involvement.
Source: SSC CGL 2020 Tier-I

14. Payment of taxes is classified as — A)

Internal event
B) External economic event
C) Accounting error
D) Bookkeeping adjustment
Ans: B
Explanation: Paid to government → external party involved.
Source: ICAI CPT 2018

15. The resignation of a manager is not recorded because — A) It

is not important
B) It does not affect balance sheet C)
It has no monetary value
D) Company policy doesn’t allow
Ans: C
Explanation: Resignation has no direct financial value; thus, not an economic event.
Source: UPSC EPFO 2021 (concept-based)

16. Hiring a lawyer for legal services is — A)

Non-financial
B) Not an economic event
C) Economic event if paid for
D) Not a business event
Ans: C
Explanation: Payment = measurable → economic event.
Source: CA Foundation May 2023

17. Credit sale increases —

A) Assets and revenue
B) Assets and liabilities
C) Expenses and liabilities
D) Assets and capital
Ans: A
Explanation: Debtors (asset) ↑ and income (revenue) ↑.
Source: SSC CGL 2019

18. Receipt of interest income is — A)

External economic event
B) Internal economic event
C) Not recorded
D) Contingent event
Ans: A
Explanation: It involves outside party (bank, customer).
Source: CA Inter Accounting

19. Buying a laptop on EMI is — A)

Ignored in accounting
B) Not an event
C) Economic event with liability
D) Internal event
Ans: C
Explanation: Asset acquired + liability created = recordable.
Source: UPSC EPFO Mock Test – Unacademy

20. Stock theft without insurance claim is — A)

Internal event
B) Non-monetary event
C) Economic event with loss
D) Ignored
Ans: C
Explanation: Loss of asset is recordable even without compensation.
Source: SSC CGL 2018

21. Manager’s travel for inspection is — A)

Internal event
B) Non-monetary event
C) Part of budget
D) Measured only annually
Ans: A
Explanation: Internal use of company resources with measurable expense. Source:
CA CPT 2020

22. Only recordable events in accounting are — A)

Business related
B) Measurable in money
C) Legal only
D) All of these
Ans: B
Explanation: As per Money Measurement concept. Source:
UPSC EPFO 2020 – Theory Qs

23. Entering into a contract without advance is — A)

Not an economic event
B) Recorded as liability
C) Recorded as income
D) External event
Ans: A
Explanation: No financial flow = not recorded.
Source: ICAI Foundation 2021

24. A non-profit trust receiving donation is — A)

Not an economic event
B) Not recorded
C) Economic event
D) Personal event
Ans: C
Explanation: Monetary inflow qualifies as economic event.
Source: UPSC EPFO Practice Test 2023

25. Which of the following explains why only economic events are recorded?
A) Prudence Principle
B) Dual Aspect Concept
C) Money Measurement Concept
D) Realisation Concept
Ans: C
Explanation: Events measurable in monetary terms can be recorded.
Source: UPSC EPFO 2017 (Accounting Theory section)

MCQs 25–50: Meaning of an Economic Event

(Full Options + Answer + Explanation + Source)

MCQ 25
25. Which of the following explains why only economic events are recorded?
A) Prudence Principle
B) Dual Aspect Concept
C) Money Measurement Concept
D) Realisation Concept
Explanation: Only transactions measurable in money are recorded.
UPSC EPFO 2017 (Accounting Theory)

MCQ 26
26. Consumption of raw material in production is — A)
Internal economic event
B) External economic event
C) Non-economic event
D) Social event
Explanation: Happens within business and has monetary impact.
CA Foundation 2022

MCQ 27
27. Borrowing funds from a bank is — A)
Internal event
B) Contingent event
C) Non-economic event
D) External economic event
Explanation: Involves third party + monetary impact.
SSC CGL 2022

MCQ 28
28. Planning for an advertisement campaign is — A)
Internal economic event
B) Non-economic event
C) External economic event
D) Forecasting event
Explanation: No actual monetary outflow yet. UPSC
EPFO Model Test

MCQ 29
29. A speech by a manager in AGM is — A)
External event
B) Internal economic event
C) Non-economic event
D) Legal event
Explanation: Not measurable in money.
CA Inter

MCQ 30
30. Receiving free samples from a vendor is — A)
Internal event
B) Non-economic event
C) Not recorded
D) Economic event if valued
Explanation: If assignable value exists, it becomes recordable. ICAI
CPT 2021
MCQ 31
31. Exchange of assets (e.g., bartering furniture for a laptop) is — A)
Non-economic event
B) Economic event
C) Internal event
D) Contingent event
Explanation: Measurable in terms of fair value.
CA Foundation 2023

MCQ 32
32. Foreign exchange loss due to currency depreciation is — A)
Internal event
B) External event
C) Economic event
D) Bookkeeping error
Explanation: Impacts value of foreign assets/liabilities.
UPSC EPFO Concept Test

MCQ 33
33. Issuance of shares to the public is — A)
External economic event
B) Internal event
C) Non-economic event
D) Capital budgeting
Explanation: Involves outsiders and affects capital.
UPSC EPFO PYQ 2017

MCQ 34
34. Buying office stationery on credit is — A)
Internal event
B) Non-monetary event
C) Economic event
D) Off-book event
Explanation: Office supplies (asset) and liability recorded.
SSC CGL 2019

MCQ 35
35. Business receives a gift from client — A)
Economic event if valuable
B) Non-recordable
C) Internal event
D) Irregular income
Explanation: Valued gifts affect income.
CA CPT 2022

MCQ 36
36. Bank auto-credits interest to firm’s account — A)
Non-recordable
B) Internal event
C) Economic event
D) Accrual entry only
Explanation: Income earned = recordable.
SSC CHSL 2020

MCQ 37
37. Extreme heat slows down factory production — A)
External economic event
B) Internal event
C) Non-economic unless quantifiable
D) Forecasted event
Explanation: Only recorded if monetary loss is calculated.
UPSC EPFO Conceptual
MCQ 38
38. Expected profit on unsold goods is —
A) Economic event
B) Not recorded due to conservatism
C) Internal economic event
D) Realised revenue
Explanation: Anticipated profits aren’t recorded.
ICAI Accounting Concept

MCQ 39
39. Creating provision for depreciation is — A)
Internal economic event
B) External economic event
C) Tax adjustment
D) Loss allocation
Explanation: Depreciation affects financials.
SSC CGL 2021

MCQ 40
40. Declaring performance-based bonus to employees — A)
Social event
B) External event
C) Economic event if liability created
D) Not an event
Explanation: If it becomes payable, it's recordable.
CA Inter 2022

MCQ 41
41. Owner brings ₹5 lakh as capital — A)
External economic event
B) Internal adjustment
C) Non-cash event
D) Contra entry
Explanation: Owner treated separate from business.
UPSC EPFO Theory Test

MCQ 42
42. Rent due but not paid yet — A)
Non-economic
B) Accrued expense = economic event
C) Bookkeeping error
D) Year-end adjustment only
Explanation: Expense is recorded on accrual basis.
ICAI CPT 2020

MCQ 43
43. Appreciation letter from client — A)
Internal record
B) External economic event
C) Public relations expense
D) Non-economic event
Explanation: Not a measurable transaction.
SSC CHSL 2019

MCQ 44
44. Goods damaged in transit (not insured) — A)
Non-recordable
B) Contra event
C) Economic event
D) Internal adjustment
Explanation: Loss of stock is measurable.
CA Foundation 2023

MCQ 45
45. Staff training cost —
A) Non-economic
B) Economic event if paid
C) Internal only
D) Contingent event
Explanation: Expense when incurred.
UPSC EPFO Practice Set

MCQ 46
46. New tax policy announced (not yet in effect) — A)
Non-economic until applicable
B) External event
C) Internal policy
D) Deferred liability
Explanation: Only recorded when law is enacted or applicable. CA
Inter – Theory

MCQ 47
47. Allowing trade discount on sale — A)
Non-economic
B) Expense
C) Economic event
D) Unrecorded event
Explanation: Affects sale value. ICAI
CPT 2021

MCQ 48
48. Installing a new machine — A)
Economic event
B) Non-monetary
C) Contingent expense
D) Internal estimate
Explanation: Increases asset base.
SSC CGL 2021
MCQ 49
49. Forecasting profits for next year — A)
Economic event
B) Revenue estimate
C) Bookkeeping process
D) Not an economic event
Explanation: Future estimates are not recorded.
CA CPT 2020

MCQ 50
50. Goods withdrawn by owner for personal use — A)
Liability creation
B) Revenue event
C) Drawings = economic event
D) Contra entry
Explanation: Affects owner’s capital.
UPSC EPFO AO/EO Practice Test

1. Understanding the Process of Accounting

A. Definition
Accounting is the process of identifying, measuring, recording, classifying, summarizing, and
communicating financial transactions.
B. Steps in the Accounting Process
1. Identifying transactions
→ Only economic events (measurable in monetary terms) are considered.
2. Recording (Journalizing)
→ All identified transactions are recorded chronologically in the journal.
3. Classifying (Ledger Posting)
→ Entries from the journal are posted to respective ledger accounts.
4. Summarizing
→ Preparation of trial balance, trading & profit/loss account, and balance sheet.
5. Interpreting and Analyzing
→ Making sense of financial statements for decision-making.
6. Communicating
→ Providing financial reports to stakeholders like investors, government, managers, etc.

C. Types of Accounts
• Personal Accounts: Deals with persons or organizations.
• Real Accounts: Tangible/intangible assets (Cash, Building).
• Nominal Accounts: Expenses, losses, incomes, and gains.

D. Golden Rules of Accounting

• Personal Account: Debit the receiver, credit the giver
• Real Account: Debit what comes in, credit what goes out
• Nominal Account: Debit all expenses/losses, credit all incomes/gains

2. Objective of Accounting
A. Primary Objectives
• Record Financial Transactions systematically
• Ascertain Profit or Loss through the Income Statement
• Determine Financial Position via Balance Sheet
• Provide Financial Information for decision-making
• Maintain Accountability and Control over assets and liabilities
B. Secondary Objectives
• Assisting in taxation matters
• Helping in budgeting and forecasting
• Providing evidence in legal matters
• Aiding internal control and audit

MCQs 1–25: Understanding the Process of Accounting

1. The process of accounting begins with — A)

Recording
B) Classifying
C) Identifying transactions
D) Preparing trial balance
Explanation: Only monetary events are first identified.
Source: CA Foundation 2021

2. Which of the following is not a step in the accounting cycle?

A) Summarizing
B) Reporting
C) Auditing
D) Classifying
Explanation: Auditing is outside the accounting cycle. Source:
SSC CGL 2022

3. Posting from journal to ledger is called — A)

Summarizing
B) Classifying
C) Recording
D) Communicating
Explanation: Ledger classification groups similar accounts.
Source: CA Foundation 2022
4. Which document records transactions in chronological order?
A) Ledger
B) Balance Sheet
C) Journal
D) Trial Balance
Explanation: Journal is the book of original entry.
Source: UPSC EPFO Model Test – Edutap

5. Financial position is determined through — A)

Trial Balance
B) Profit & Loss Account
C) Journal
D) Balance Sheet
Explanation: Balance sheet shows assets and liabilities.
Source: CA Inter 2020

6. Which account shows incomes and expenses?

A) Balance Sheet
B) Ledger
C) Trial Balance
D) Profit & Loss Account
Explanation: Shows profit or loss for the period.
Source: SSC CHSL 2021

7. Trial balance is prepared to —

A) Find net profit
B) Check arithmetical accuracy
C) Show financial position
D) Record transactions
Explanation: Ensures total debits = total credits.
Source: CA CPT 2019

8. Which is the first book where transactions are recorded?

A) Ledger
B) Journal
C) Cash Book
D) Trial Balance
Explanation: Journal = primary book of entry.
Source: UPSC EPFO AO/EO 2021 Mock Test

9. Golden Rule for nominal accounts is —

A) Debit the receiver, credit the giver
B) Debit what comes in, credit what goes out
C) Debit all expenses, credit all incomes
D) Debit assets, credit liabilities
Explanation: Applies to incomes and expenses.
Source: SSC CGL 2020

10. Which step comes immediately after journalizing?

A) Trial balance
B) Ledger posting
C) Balance sheet
D) Final account
Explanation: Journal entries are posted to ledger accounts.
Source: CA Foundation 2022

11. Which account records the real transactions of business?

A) Personal Account B)
Real Account
C) Nominal Account
D) Capital Account
Explanation: Real accounts include assets.
Source: CA Inter 2021

12. “Debit the receiver, credit the giver” relates to — A)

Real Account
B) Nominal Account
C) Personal Account
D) None of the above
Explanation: Applied to accounts of people/organizations.
Source: SSC CHSL 2022

13. The final output of accounting is — A)

Ledger
B) Financial statements
C) Journal
D) Trial balance
Explanation: Financial statements are communicated to users.
Source: UPSC EPFO Test Series – Byju’s

14. Classifying means —

A) Entering transaction in journal
B) Posting to balance sheet
C) Grouping similar transactions
D) None of the above
Explanation: Classification is done in ledger.
Source: CA Foundation 2021

15. Cash account is a type of —

A) Personal Account B) Real
Account
C) Nominal Account D)
Liability Account
Explanation: Real accounts deal with assets.
Source: SSC CGL 2018

16. Which of the following is a nominal account?

A) Capital
B) Debtors
C) Rent paid
D) Building
Explanation: Rent is an expense.
Source: CA CPT 2020
17. Ledger is known as —
A) Journal
B) Book of final entry
C) Book of adjustment
D) Balance book
Explanation: All journal entries are posted here.
Source: CA Inter 2020

18. Which step is not a part of the accounting process?

A) Communicating
B) Recording C) Analyzing
D) Budgeting
Explanation: Budgeting is managerial, not accounting.
Source: UPSC EPFO 2021 Conceptual

19. Preparation of P&L account belongs to — A)

Summarizing
B) Classifying
C) Recording
D) Auditing
Explanation: It summarizes revenue and expenses.
Source: CA Foundation Nov 2022

20. Which account is credited when goods are sold on credit?

A) Cash
B) Sales
C) Purchases
D) Capital
Explanation: Sales is an income → credited.
Source: SSC CGL 2020

21. Which of the following statements is false?

A) Journal is a book of original entry
B) Ledger is a book of final entry
C) Trial balance checks accounting standards
D) P&L account shows net result
Explanation: Trial balance checks arithmetical accuracy, not standards. Source:
CA CPT 2022

22. Real accounts show —

A) Profit/loss
B) Assets and liabilities
C) Capital only
D) Owner's equity
Explanation: Includes assets like cash, machinery, etc.
Source: SSC CHSL 2019

23. Which of the following is the correct sequence?

A) Journal → Trial Balance → Ledger
B) Ledger → Journal → Balance Sheet
C) Journal → Ledger → Trial Balance
D) Ledger → Balance Sheet → Journal
Explanation: Standard order in accounting cycle.
Source: UPSC EPFO Edutap Mock

24. The step after trial balance is — A)

Journal
B) Ledger
C) Final accounts
D) Analysis
Explanation: Final accounts include P&L and balance sheet.
Source: CA Foundation 2021

25. If total debits and credits don’t match in trial balance, it means — A)
Financial position is strong
B) Profit has occurred
C) There’s an error in books
D) Business is losing
Explanation: Imbalance in trial balance = mistake in records.
Source: SSC CGL 2021
MCQs 26–50: Understanding the Process of Accounting

26. Which of the following is not part of the double-entry system?

A) Debit
B) Credit
C) Ledger
D) Balance sheet
Explanation: Balance Sheet is a summary report, not an entry step. Source:
CA CPT 2022

27. Which type of account is 'Capital Account'?

A) Nominal
B) Personal
C) Real
D) Expense
Explanation: It represents the owner, hence personal.
Source: SSC CHSL 2021

28. Final accounts include — A)

Only trial balance
B) Cash flow and journal
C) Trading, P&L, Balance Sheet
D) Ledger and journal
Explanation: These give summary and position of business.
Source: CA Inter 2021

29. A sales return is recorded in — A)

Journal Proper
B) Sales Return Book
C) Ledger
D) Trial Balance
Explanation:

Special subsidiary book. Source:

SSC CGL 2022

30. If goods worth ₹10,000 are purchased for cash, what account is credited?
A) Purchases
B) Cash
C) Capital
D) Debtors
Explanation: Cash goes out = credited (real account).
Source: CA Foundation 2021

31. The 'book of final entry' is — A)

Journal
B) Ledger
C) Trial balance
D) Cash book
Explanation: Final posting from journal is done in ledger.
Source: SSC CHSL 2020

32. What is the main purpose of journalizing a transaction?

A) To classify transactions
B) To record in summary
C) To record original transaction in chronological order
D) To post in ledger
Explanation: Journal is the first book of entry.
Source: UPSC EPFO AO/EO Test Series

33. Cash received from debtors is — A)

Expense
B) Capital
C) Receipt
D) Loan
Explanation: It's an inflow of cash.
Source: CA CPT 2020

34. In which book is a credit purchase of goods recorded?

A) Cash Book
B) Purchase Book
C) Journal Proper
D) Ledger
Explanation: Purchase book handles credit purchases.
Source: SSC CGL 2021

35. Which is not a type of subsidiary book?

A) Sales Book
B) Purchases Book
C) Balance Sheet
D) Journal Proper
Explanation: Balance sheet is not a book of entry.
Source: CA Foundation 2020

36. Ledger account balances are transferred to — A)

Journal
B) Trial Balance
C) Final Accounts
D) Cash Book
Explanation: Trial balance ensures debit = credit.
Source: SSC CHSL 2022

37. The balance sheet provides information about — A)

Profit or loss
B) Assets and liabilities
C) Sales
D) Expenses
Explanation: Shows financial position at a point in time.
Source: CA Inter 2021
Explanation:

38. Which of the following is not a real account?

A) Furniture
B) Cash
C) Rent paid
D) Machinery
Rent is a nominal (expense) account. Source:
SSC CGL 2020

39. Trial Balance is prepared — A)

After preparing final accounts
B) Before journal
C) Before final accounts
D) Before ledger
Explanation: TB checks accuracy before final statements.
Source: CA Foundation 2022

40. What is the effect of a transaction on accounting equation?

A) Always increases profit
B) May not affect liabilities
C) Keeps the equation balanced
D) Reduces capital only
Explanation: All transactions maintain A = L + C.
Source: UPSC EPFO Test (Edutap)

41. Real account follows which rule?

A) Debit the receiver, credit the giver
B) Debit what comes in, credit what goes out
C) Debit expenses, credit incomes
D) Debit liabilities, credit assets Explanation: Applies to assets.
Source: SSC CHSL 2019
42. Which of the following does not belong to final accounts?
A) Trading Account
B) Profit & Loss Account
C) Balance Sheet
D) Ledger
Explanation: Ledger is part of the process, not final output.
Source: CA CPT 2020

43. Trial Balance is prepared from — A)

Journal entries
B) Cash book
C) Ledger balances
D) Final accounts
Explanation: It's a summary of ledger balances.
Source: SSC CGL 2019

44. The main purpose of ledger is to — A)

Record transactions chronologically
B) Classify transactions
C) Summarize financial reports
D) Forecast profits
Explanation: It helps group similar transactions.
Source: CA Foundation 2021

45. In which step is the trial balance used?

A) Identifying
B) Communicating
C) Summarizing
D) Recording
Explanation: Trial balance is part of the summary.
Source: UPSC EPFO Mock Test

46. Which of the following is an example of personal account?

A) Bank A/c
Explanation:

B) Furniture A/c
C) Rent A/c
D) Sales A/c
Explanation: Bank is an artificial person.
Source: SSC CHSL 2020

47. Income is recorded on — A)

Debit side of P&L
B) Credit side of P&L
C) Asset side of Balance Sheet
D) Debit side of ledger
Income → credit. Source:
CA CPT 2019

48. Which account is affected when goods are purchased on credit?

A) Cash
B) Purchases and Creditor
C) Sales
D) Capital
Explanation: Purchase (expense) increases and liability is created.
Source: UPSC EPFO Test Series

49. If total debit = total credit, trial balance is — A)

Incomplete
B) Unbalanced
C) Correct
D) Rejected
Explanation: Indicates arithmetical accuracy.
Source: SSC CGL 2020
50. The accounting equation is — A)
Assets = Liabilities
B) Assets = Capital
C) Assets = Liabilities + Capital
D) Assets = Revenues – Expenses
Explanation: Basic equation in double-entry system.
Source: CA Inter 2022

Topic: Objective of Accounting

(For UPSC EPFO/APFC – concise + relevant)

1. Primary Objectives of Accounting

Objective Description
Systematic record of all financial transactions using the double-
Recording Transactions entry system.
Done through the Profit & Loss Account, showing operational
Determining Profit or Loss performance.
Ascertaining Financial Using Balance Sheet to know assets, liabilities, and capital on a
Position specific date.
Communicating To internal (management) and external users (shareholders,
Information government, lenders).
Ensures financial records are accurate and available for audit and
Compliance & Audit
taxation.

2. Secondary Objectives of Accounting

Objective Description
Assist in Decision- Helps management and investors plan, forecast, and decide
Making strategically.
Evidence in Legal
Acts as valid proof of business transactions in legal proceedings.
Explanation:

Matters
Accurate accounting helps in proper calculation and payment of
Tax Assessment taxes.
Helps detect fraud, error, and inefficiency through systematic
Aid in Internal Control records.
Budgeting and Past records help create budgets and estimate future financial
Forecasting performance.

3. Users of Accounting Information

Internal Users External Users

Management Investors
Employees Creditors
Department heads Government & Tax authorities

4. Limitations of Accounting (for awareness in UPSC)

• Ignores non-monetary factors (e.g., employee morale, brand value)
• Based on historical cost, not present value
• Subjective estimates in depreciation, provisions, etc.
• Does not show market value of assets

MCQs 1–25: Objective of Accounting

(Fully explained – UPSC EPFO/APFC standard)

1. The main objective of accounting is to — A)

Maintain employee records
B) Record only cash transactions
C) Provide financial information
D) File tax returns
Explanation: Financial reporting is the central aim.
Source: CA Foundation 2022

2. Which of the following is a primary objective of accounting?

A) Tax planning
B) Inventory control
C) Recording financial transactions
D) Filing GST
Explanation: It is the foundation of accounting.
Source: SSC CGL 2021

3. The statement of financial position is called — A)

Profit & Loss Statement
B) Balance Sheet
C) Ledger
D) Cash Flow Statement
Explanation: It shows assets, liabilities, capital. Source:
CA CPT 2020

4. Which of these is a secondary objective of accounting?

A) Determining tax liability
B) Recording transactions
C) Preparing P&L
D) Creating journal entries
Explanation: Tax planning is a secondary use.
Source: CA Foundation 2021

5. Who among the following is an internal user of accounting information?

A) Government
B) Shareholder
C) Management
D) Bank
Explanation: Managers use it for planning and control.
Source: SSC CHSL 2022

6. Which of the following is an external user of accounting information?

A) CEO
B) Accounts Manager
C) Shareholders
D) Department heads
Explanation: Shareholders are outside the management.
Source: CA CPT 2022

7. Accounting provides information regarding — A)

Budgeted results
B) Historical financial transactions
C) Expected profits
D) Customer satisfaction
Explanation: Based on past, not future projections.
Source: SSC CGL 2020
8. Profit and Loss Account is prepared to — A)
Know the business position
B) Ascertain liabilities
C) Determine net result of business
D) Classify accounts
Explanation: It shows profit or loss.
Source: UPSC EPFO Practice Set – Edutap

9. Which of the following is not a direct objective of accounting?

A) Determining financial position
B) Assessing tax liability
C) Recording business transactions
D) Political analysis
Explanation: Political use is not an accounting function.
Source: SSC CHSL 2021

10. Balance sheet is prepared — A)

Daily
B) Monthly
C) Annually or periodically
D) For every transaction
Explanation: Usually prepared at year-end.
Source: CA Foundation 2020

11. Which of the following best describes the dual aspect concept?
A) Every transaction affects at least two accounts
B) Transactions are recorded once
C) Only assets are recorded
D) Revenue must be recognized when received Explanation: Basis of double-entry system.
Source: UPSC EPFO Mock 2022

12. Accounting is often called the — A)

Science of management
B) Language of business
C) Tool for HR
D) Means of marketing
Explanation: It communicates financial performance.
Source: CA Inter 2021

13. Which of the following users is least interested in financial accounting?

A) Investors
B) Creditors
C) Customers
D) Bankers
Explanation: Customers may not directly use reports.
Source: SSC CGL 2021

14. Which of the following is not shown in Profit & Loss Account?
A) Rent paid
B) Commission received
C) Sales
D) Capital invested
Explanation: Capital is part of balance sheet.
Source: CA CPT 2021

15. Financial accounting focuses primarily on — A)

Product costing
B) Internal controls
C) External reporting
D) Sales forecasting
Explanation: For stakeholders like investors, govt.
Source: CA Foundation 2020

16. Recording and classifying business transactions is done in — A)

Budgeting
B) Planning
C) Accounting
D) Auditing
Explanation: Core function of accounting.
Source: SSC CHSL 2022
17. Tax authorities use accounting information to — A)
Estimate population
B) Set interest rates
C) Determine tax liabilities
D) Calculate inflation
Explanation: Income, sales, and other tax calculations.
Source: UPSC EPFO 2021 Test Series

18. The main focus of financial accounting is — A)

Forecasting profit
B) Reporting past performance
C) Managing teams
D) Reducing tax
Explanation: It reports what already occurred.
Source: CA Inter 2021

19. An important objective of accounting is to ensure — A)

Increase in business
B) Political transparency
C) Accountability of funds
D) Tax evasion
Explanation: Tracks use of resources.
Source: SSC CGL 2020

20. Accounting helps in — A)

Guessing profit
B) Measuring wealth in qualitative terms
C) Decision-making
D) Influencing politics
Explanation: Accounting reports aid decisions.
Source: CA Foundation 2021

21. Managerial accounting is used primarily for — A)

External stakeholders
B) Filing income tax
C) Internal decision-making
D) Government policies
Explanation: Tailored for internal use.
Source: SSC CHSL 2022

22. The following is not a purpose of accounting: — A)

Measuring profits
B) Tracking donations
C) Speculating prices
D) Budgeting
Explanation: Price speculation isn’t a role of accounting.
Source: CA CPT 2022

23. One of the objectives of financial reporting is to — A)

Promote goods
B) Reduce competition
C) Communicate performance to stakeholders
D) Train employees
Explanation: Investors, creditors rely on reports.
Source: UPSC EPFO Test Series – Byju’s

24. Net result of a business is shown in — A)

Cash book
B) Trading account
C) Profit & Loss Account
D) Trial Balance
Explanation: Profit/loss is derived here.
Source: SSC CGL 2020

25. Which is not a stakeholder in accounting info?

A) Manager
B) Government
C) Competitor
D) Investor
Explanation: Competitors do not receive business’s internal reports. Source:
CA Inter 2021

MCQs 26–50: Objective of Accounting

26. Accounting records only those transactions which are — A)

Legal
B) Related to sales
C) Measurable in monetary terms
D) Government-approved
Explanation: Based on the money measurement concept.
Source: CA Foundation 2022

27. Which one of the following is not a user of financial statements?

A) Employees
B) Customers
C) Investors
D) Government
Explanation: Customers rarely access detailed financial records.
Source: SSC CGL 2020

28. One objective of accounting is to measure — A)

Employee satisfaction
B) Market reputation
C) Business performance
D) GDP
Explanation: Through profit/loss and financial reports.
Source: CA CPT 2021

29. The objective of cost accounting is mainly to — A)

File taxes
B) Ascertain cost of products/services
C) Satisfy shareholders
D) Reduce selling price
Explanation: Cost accounting focuses on costing efficiency.
Source: CA Inter 2020

30. Financial accounting provides information for — A)

Internal management
B) Government and external users
C) Product development
D) Advertising
Explanation: Financial accounting is mostly for external reporting.
Source: UPSC EPFO Test Series – Edutap

31. What is the primary output of accounting?

A) Ledger
B) Audit report
C) Financial statements
D) Budget
Explanation: Accounting culminates in preparation of statements.
Source: CA Foundation 2022
32. Bookkeeping is concerned primarily with — A)
Interpretation
B) Recording of data
C) Tax filing
D) Asset management
Explanation: Bookkeeping handles the initial data entry.
Source: SSC CHSL 2021

33. Accounting does not provide information on — A)

Liquidity
B) Profitability
C) Brand image
D) Solvency
Explanation: Brand image is qualitative and not quantifiable.
Source: CA CPT 2020

34. Double-entry system of accounting ensures — A)

Accuracy of tax
B) Cross-verification of accounts
C) Increase in profit
D) No need for auditing
Explanation: Each entry affects two accounts—helps self-balancing. Source:
SSC CGL 2021

35. A business's financial position on a particular date is shown in — A)

Journal
B) Profit & Loss account
C) Balance Sheet
D) Cash book
Explanation: Balance sheet = snapshot of financial position.
Source: CA Foundation 2021

36. Which of the following shows financial performance over time?

A) Balance Sheet
B) Trial Balance
C) Ledger
D) Profit & Loss Account
Explanation: It shows income and expenses over a period.
Source: UPSC EPFO Mock Test

37. Which of these can be considered a limitation of accounting?

A) It helps track profits
B) It ignores non-monetary factors
C) It maintains records
D) It provides audit data
Explanation: Only monetary items are recorded.
Source: SSC CHSL 2022

38. Which statement is true about the objective of accounting?

A) It helps forecast future sales
B) It only benefits large companies
C) It provides a true and fair view of the business
D) It avoids taxation
Explanation: This is the primary intent of accounting reports.
Source: CA Inter 2021

39. Accounting ensures proper control over — A)

Customers
B) Assets
C) Markets
D) Competitors
Explanation: Through asset tracking and depreciation.
Source: CA Foundation 2020

40. Which one of the following best explains why accounting is done?
A) To keep the business legal
B) To satisfy investors and managers
C) To avoid audits
D) To show goodwill
Explanation: Stakeholders require accountability and transparency.
Source: UPSC EPFO Test Series
41. Accounting is helpful in — A)
Tax evasion
B) Investment decisions
C) Manipulating prices
D) Public policy
Explanation: It helps assess profitability and risk.
Source: SSC CGL 2020

42. Which of these is an objective of accounting in the government sector?

A) Show ROI
B) Manage human resources
C) Ensure public accountability
D) Generate advertisements
Explanation: Public money must be used transparently.
Source: CA Inter 2022

43. Who is responsible for preparing accounting records in an organization?

A) HR manager
B) Sales team
C) Accountant
D) CEO
Explanation: Bookkeeping and accounting staff handle it.
Source: SSC CHSL 2021

44. In accounting, the term "financial year" refers to — A)

Calendar year
B) Tax exemption period
C) 12-month reporting period
D) Budget cycle
Explanation: Typically Apr 1 – Mar 31 in India.
Source: CA Foundation 2021

45. Net profit =

A) Total revenue – total cash
B) Assets – liabilities
C) Income – expenses
D) Revenue – capital
Explanation: This is the basic formula used in P&L.
Source: SSC CGL 2021

46. A creditor is interested in accounting information to — A)

Know firm’s solvency
B) Plan marketing
C) File taxes
D) Avoid legal compliance
Explanation: Creditors check financial health before lending.
Source: UPSC EPFO AO/EO Mock Test

47. Which of the following is a qualitative characteristic of accounting information? A)

Objectivity
B) Verifiability
C) Timeliness
D) Relevance
Explanation: Relevance ensures usefulness in decisions.
Source: CA Inter 2022

48. The term 'true and fair view' is associated with — A)

Marketing
B) Accounting
C) Legal Affairs
D) HR
Explanation: Audit reports and financial statements use this term.
Source: CA Foundation 2021

49. Accounting data helps in comparison by providing — A)

Political records
B) Standardized formats
C) Market projections
D) Personal views
Explanation: Standards like GAAP or IND AS allow comparison.
Source: UPSC EPFO Test Series – InsightsIAS

50. One of the key goals of accounting is to ensure — A)

Security
B) Uniformity
C) Tax refund
D) Sales growth
Explanation: Uniform records ensure transparency and comparison.
Source: SSC CGL 2020

Theory Base of Accounting

(For UPSC EPFO/APFC – Concise Notes + Updated Terminology)

1. What is the "Theory Base" of Accounting?

It refers to the fundamental concepts, principles, assumptions, and conventions that guide the
preparation and presentation of financial statements.
These are standardized norms that ensure consistency, comparability, and reliability in accounting
practices.

2. Components of Theory Base

A. Accounting Assumptions (Also called Concepts)
Assumption Meaning

Going Concern The business will continue to operate indefinitely.

Revenue and expenses are recorded when they occur, not when cash is received
Accrual Concept
or paid.

Business Entity Business and owner are separate entities.

Money Only transactions measurable in money are recorded.

Assumption Meaning

Measurement

Accounting Period Financial statements are prepared for a specific period (e.g., annually).

Dual Aspect Every transaction has two aspects: debit and credit (A = L + C).

B. Accounting Principles
Principle Meaning

Cost Principle Assets are recorded at their historical cost.

Revenue Recognition Revenue is recognized when it is earned, regardless of cash received.

Matching Principle Expenses should be matched with the revenue they generate.

Full Disclosure All material information must be disclosed.

Conservatism (Prudence) Anticipate no profit, but provide for all potential losses.
Consistency Same accounting methods must be used over time.

Materiality Only significant items are recorded; trivial ones may be ignored.

C. Accounting Standards (AS) & IND AS

• Issued by Institute of Chartered Accountants of India (ICAI)

• Ensure uniformity in reporting
• IND AS aligns Indian accounting with IFRS (International Financial Reporting
Standards)

D. International Framework

• Issued by IASB (International Accounting Standards Board)

• Emphasizes reliability, relevance, comparability, and understandability

3. Purpose of Theory Base in Accounting

• Provides uniform rules across industries
• Ensures transparency and credibility of financial information
• Helps in legal compliance and audit readiness
• Assists users in comparative analysis

MCQs 1–25: Theory Base of Accounting

1. The assumption that a business will continue indefinitely is — A)

Accrual Concept
B) Going Concern Assumption
C) Cost Principle
D) Dual Aspect
Explanation: Going concern assumes the business will not shut down soon. Source:
CA Foundation 2022
2. The business entity concept states that — A)
Business and owner are the same
B) Business and owner are separate
C) Transactions are based on profit
D) Only real accounts are recorded
Explanation: Personal and business finances must be kept separate.
Source: SSC CGL 2021

3. Accounting is based on which of the following systems?

A) Single-entry
B) Trial-based
C) Double-entry
D) Tax-based
Explanation: Every transaction affects two accounts.
Source: UPSC EPFO Test Series – Byju’s

4. The principle of "revenue recognition" refers to — A)

Revenue only when cash is received
B) Revenue when invoice is sent
C) Revenue when it is earned
D) Revenue after final payment
Explanation: Part of the accrual system.
Source: CA CPT 2021

5. The cost concept implies —

A) Recording assets at current value
B) Recording assets at original price
C) Recording at market price
D) Recording estimated value
Explanation: Also called historical cost principle.
Source: SSC CHSL 2020

6. Under which concept are owner’s transactions kept out of the business books?
A) Cost Concept
B) Business Entity Concept
C) Matching Principle
D) Accrual Concept
Explanation: Business and owner are treated as separate entities.
Source: CA Foundation 2022

7. "Debit what comes in, credit what goes out" applies to — A)

Nominal Account
B) Personal Account
C) Real Account
D) Impersonal Account
Explanation: Real accounts relate to assets.
Source: SSC CGL 2022

8. The dual aspect concept results in — A)

Matching of incomes and expenses
B) Maintaining balance sheet
C) Debit equals credit
D) Preparing cash flow statement
Explanation: Every transaction has two effects.
Source: CA CPT 2020

9. Which principle follows “anticipate no profit but provide for all losses”?
A) Consistency
B) Prudence (Conservatism)
C) Materiality
D) Full Disclosure
Explanation: This avoids overstating profits.
Source: CA Foundation 2021

10. The concept that ensures comparison of financial statements over time is — A)
Matching
B) Relevance
C) Consistency
D) Accrual
Explanation: Same methods used year after year.
Source: UPSC EPFO AO/EO Mock Test
11. Financial transactions are recorded only if measurable in money. This is — A) Cost
Concept
B) Money Measurement Concept
C) Matching Principle
D) Periodicity Concept
Explanation: Non-monetary items like goodwill are excluded unless valued. Source:
SSC CHSL 2021

12. Accounting period concept means — A)

Lifetime of business
B) Calendar year
C) Pre-defined period for preparing reports
D) Tax filing year
Explanation: Usually one financial year.
Source: CA Inter 2021

13. Income should be recognized in the period in which it is earned — A)

Going Concern
B) Accrual Concept
C) Cost Concept
D) Realisation Concept
Explanation: Core of modern accounting.
Source: SSC CGL 2020

14. Which principle advises not to overstate income or assets?

A) Full Disclosure
B) Consistency
C) Conservatism
D) Accrual
Explanation: Protects users from misleading data.
Source: CA CPT 2022

15. Financial statements are prepared at regular intervals because of — A)

Accrual Concept
B) Matching Principle
C) Accounting Period Concept
D) Conservatism
Explanation: Enables comparison and timely reporting.
Source: SSC CHSL 2022

16. Which concept requires disclosure of all relevant facts?

A) Cost Concept
B) Materiality
C) Full Disclosure Principle
D) Consistency
Explanation: Ensures transparency.
Source: CA Foundation 2020

17. When small items like a calculator are fully expensed instead of capitalized, which
concept applies? A) Prudence
B) Conservatism
C) Materiality
D) Going Concern
Explanation: Trivial items may be treated as expenses.
Source: SSC CGL 2021

18. Which of the following is not an accounting assumption?

A) Going Concern
B) Matching Principle
C) Business Entity
D) Accounting Period
Explanation: Matching is a principle, not an assumption.
Source: CA CPT 2021

19. Which principle ensures expenses are recognized in the same period as related revenues?
A) Cost Principle
B) Matching Principle
C) Realisation Principle
D) Materiality
Explanation: Key for accurate P&L calculation.
Source: CA Inter 2020

20. Depreciation is recorded based on which concept?

A) Matching Concept
B) Business Entity
C) Dual Aspect
D) Periodicity
Explanation: Expense is matched with revenue generation.
Source: SSC CHSL 2022

21. Which of the following is a qualitative characteristic of financial information? A)

Verifiability
B) Objectivity
C) Relevance
D) Ledger balancing
Explanation: Relevant info must influence decisions.
Source: CA Foundation 2021

22. The concept that expenses should be recognized when incurred is — A)

Matching
B) Revenue Recognition
C) Accrual
D) Realisation
Explanation: Accrual concept allows this.
Source: UPSC EPFO Model Questions

23. According to consistency principle, a firm should — A)

Change methods yearly
B) Maintain the same method over time
C) Use multiple methods together
D) Ignore errors
Explanation: Enables comparability.
Source: CA CPT 2022
24. Goods given away as charity should be — A)
Ignored
B) Recorded as sales
C) Shown as expenses
D) Recorded as drawings
Explanation: Treated as business expense.
Source: SSC CHSL 2020

25. Dual Aspect Concept is the basis for — A)

Bookkeeping
B) Journal Entries
C) Double-entry System
D) Single-entry System
Explanation: Fundamental to modern accounting.
Source: CA Foundation 2021
Topic 1: Accounting Principles and Conventions

Essential for conceptual clarity + frequently asked in MCQs.

A. Accounting Principles
Accounting principles are fundamental rules and guidelines that govern the accounting process.
These principles provide a framework for preparing and presenting financial statements.

1. Cost Principle (Historical Cost Principle)

• Assets are recorded at their original purchase cost.
• No adjustment is made for market price fluctuations.
• Example: If a building is purchased for ₹10 lakhs, it remains recorded as ₹10 lakhs, even
if its market value increases.

2. Revenue Recognition Principle (Realization Principle)

• Revenue is recognized when it is earned, not when cash is received.
• Applicable in accrual accounting.
• Example: A sale is made on credit in March; revenue is recorded in March, not when
payment is received in April.

3. Matching Principle
• Expenses should be recorded in the same period in which related revenues are recognized.
• Ensures correct calculation of profit/loss for a period.
• Example: Salary expense for March should be recorded in March even if paid in April.

4. Full Disclosure Principle

• All material facts must be disclosed in financial statements.
• Includes contingent liabilities, lawsuits, pending litigations, etc.
• Aims to maintain transparency for stakeholders.

5. Consistency Principle
• The same accounting methods and practices should be applied consistently over time.
• Facilitates comparability across financial periods.
• If a change is made, it must be disclosed with a reason.

6. Conservatism (Prudence) Principle

• Accountants should anticipate losses but not unrealized gains.
• “Record all possible losses but no profits unless realized.”
• Example: Stock is valued at cost or market price, whichever is lower.

7. Materiality Principle
• Only transactions that are significant (material) should be recorded with full detail.
• Insignificant items can be treated as expenses.
• Example: A calculator worth ₹100 is expensed, not capitalized.

B. Accounting Conventions
Accounting conventions are common practices derived from usage and traditions over time.
They provide flexibility and practicality in financial reporting.

1. Convention of Disclosure
• All material and relevant facts must be disclosed in financial statements.
• E.g., depreciation method used, details of contingent liabilities.
2. Convention of Consistency
• Once an accounting method is adopted, it should be followed consistently.
• Helps in trend analysis and comparing financial performance year-to-year.

3. Convention of Conservatism
• Recognize anticipated losses, but do not account for anticipated gains.
• Prevents overstatement of financial position.

4. Convention of Materiality
• Focus only on significant facts and items.
• Immaterial items can be skipped or simplified in reporting.

Topic 2: Accounting Terminology

Here is a detailed glossary of key accounting terms, crucial for MCQs:

A. Basic Terms

Term Definition

Assets Resources owned by a business (e.g., cash, land, machinery).

Liabilities Obligations to outsiders (e.g., loans, creditors).

Capital Owner's equity or investment in the business.

Revenue Income earned from core business activities (sales, rent received).

Expense Costs incurred to earn revenue (salaries, rent paid).

Profit Excess of revenue over expenses.

Loss Excess of expenses over revenue.

Drawings Withdrawals made by owner for personal use.

B. Business Relations

Term Definition

Debtor A person or firm who owes money to the business.

Creditor A person or firm to whom the business owes money.

Bills Receivable Bills received from customers for future payment.

Bills Payable Bills issued by the business promising future payment.

C. Accounting Books & Statements

Term Description

Journal Book of original entry, where transactions are recorded first.

Ledger Principal book where transactions are grouped into accounts.

Term Description

Trial Balance List of all ledger accounts to check arithmetic accuracy (Debit = Credit).

Cash Book Record of all cash and bank transactions.

Profit & Loss

Statement showing net profit or loss for a period.
Account

Statement showing financial position at a specific date (Assets = Liabilities

Balance Sheet + Capital).
D. Others

Term Meaning

Voucher Documentary proof of a transaction (e.g., invoice, receipt).

Depreciation Reduction in the value of an asset over time.

Provision Estimated amount set aside for future liabilities (e.g., provision for doubtful debts).

Contingent Liability A potential obligation that depends on a future event (e.g., lawsuit).

MCQs 1–25: Accounting Principles, Conventions &

Terminology

1. Under which principle are assets recorded at their original cost?

A) Realization Principle
B) Matching Principle
C) Cost Principle
D) Conservatism
Explanation: Cost principle follows historical cost.
Source: CA Foundation 2022

2. Which principle states that expenses should be matched with revenues?

A) Full Disclosure
B) Matching Principle
C) Accrual Principle
D) Consistency
Explanation: Ensures accurate profit/loss calculation.
Source: SSC CGL 2021
3. The term 'assets' in accounting refers to — A)
Profits of business
B) Liabilities to outsiders
C) Resources owned by the business
D) Owner’s equity
Explanation: Assets = economic resources.
Source: UPSC EPFO 2020 Practice Set – Edutap

4. Revenue is recognized when — A)

Cash is received
B) Order is placed
C) Revenue is earned
D) Payment is made
Explanation: As per accrual and realization principle.
Source: CA CPT 2021

5. Which term represents the amount invested by the owner in the business? A)
Liability
B) Asset
C) Capital
D) Expense
Explanation: Owner’s contribution = capital.
Source: SSC CHSL 2021

6. The practice of recording only important items is based on — A)

Conservatism
B) Materiality
C) Consistency
D) Matching
Explanation: Trivial items may be treated differently.
Source: CA Inter 2022

7. The term used for a person who owes money to the business is — A)
Creditor
B) Debtor
C) Lender
D) Investor
Explanation: Debtors are customers who haven't paid yet.
Source: SSC CGL 2020

8. Which convention advises to record only anticipated losses and not anticipated profits? A)
Consistency
B) Materiality
C) Conservatism
D) Full Disclosure
Explanation: Prevents overstatement of income.
Source: UPSC EPFO Test Series – InsightsIAS

9. “Journal” in accounting is a — A)
Book of final entry
B) Book of adjustments
C) Book of original entry
D) Audit report
Explanation: Transactions are first recorded here.
Source: CA Foundation 2021

10. Which statement shows the financial position of a business at a specific date? A)
Trial Balance
B) Ledger
C) Profit & Loss Account
D) Balance Sheet