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Basic Accounting Multiple-Choice Questions (MCQs)

Accounting is the process of assessing, recording, and communicating financial transactions. Organizations and individuals do accounting to develop a detailed understanding of their financial situation. An accountant is a finance professional who facilitates this, for companies and clients, by tracking their profits, losses, expenses, and incomes.

Basic Accounting MCQs: This section contains multiple-choice questions and answers on Basic Accounting. It will help the students to prepare well for their exams.

List of Basic Accounting MCQs

1. The revenues and expenses of a company are displayed in which statement?

  1. Balance Sheet
  2. Cash Flow Statement
  3. Income Statement
  4. None of the above

Answer: C) Income Statement

Explanation:

The income statement displays all the revenues and expenses of a company.

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2. The main Purpose of Financial Accounting is?

  1. To Provide financial information to shareholders
  2. To maintain balance sheet
  3. To minimize taxes.
  4. To keep track of liabilities

Answer: A) To Provide financial information to shareholders

Explanation:

The purpose of financial accounting is to provide financial information to shareholders.

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3. The expanded accounting equation is used by which statement?

  1. Cash Flow Statement
  2. Balance Sheet
  3. Income Statement
  4. None of the above

Answer: B) Balance Sheet

Explanation:

The expanded accounting equation is used by the balance sheet.

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4. What type of balance do asset accounts have?

  1. Contra
  2. Credit
  3. Debit
  4. All of the above

Answer: C) Debit

Explanation:

Assets Account have a debit balance.

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5.The kind of debts which are needed to be repaid in a short term is known as?

  1. Fixed Liabilities
  2. Current Liabilities
  3. Depreciating Assets
  4. Intangible Assets

Answer: B) Current Liabilities

Explanation:

Current Liabilities are the debts that needed to be repaid in a short period.

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6. The account which increases equity is known as?

  1. Debit Account
  2. Credit Account
  3. Revenue
  4. Treasury Stock

Answer: C) Revenue

Explanation:

Revenue, Owner Investments and retained earnings increase the equity of a company.

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7. What are the long-term assets which do not have any physical existence?

  1. Intangible Assets
  2. Tangible Assets
  3. Current Liabilities
  4. Current Assets

Answer: A) Intangible Assets

Explanation:

Intangible Assets have no physical existence. For Example, Goodwill, Brand Recognition, Patents etc. are known as Intangible Assets.

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8. What is the supporting evidence in a business transaction called?

  1. Journal
  2. Ledger
  3. Voucher
  4. Contra Voucher

Answer: C) Voucher

Explanation:

Vouchers are proof that a business transaction has taken place.

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9. The Expenses, Profit & Loss of an organisation are recorded in which account?

  1. Current Account
  2. Personal Account
  3. Nominal Account
  4. None of the above

Answer: C) Nominal Account

Explanation:

The nominal account records all the transactions of a business for one fiscal year.

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10. Which person owes an amount to a business organisation for buying goods and services on a credit basis?

  1. Creditors
  2. Debtors
  3. Owner
  4. None of the above

Answer: B) Debtors

Explanation:

Debtors are the persons who owe an amount to a business organisation for buying goods and services on a credit basis.

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11. When are balance sheets prepared?

  1. Quarterly
  2. Yearly
  3. Monthly
  4. None of the above

Answer: B) Yearly

Explanation:

Balance Sheets are prepared yearly as it displays the liabilities and assets of a company.

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12. What is Activity Ratio?

  1. Financial Ratios that measure a firm's ability to convert different accounts into a balance sheet.
  2. Ratios that measure a company's ability to pay debt obligations and its margin of safety.
  3. Financial measurements that assess the ability of a company to meet its financial obligations
  4. The ratio that evaluates the company's ability to generate income as compared to its expenses.

Answer: A) Financial Ratios that measure a firm's ability to convert different accounts into a balance sheet

Explanation:

Activity Ratios are a category of financial ratios that measure a firm's ability to convert different accounts within its balance sheets into cash or sales.

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13. What is Current Liability?

  1. Assets of a company that are expected to be sold or used as a result of standard business operations over the next year.
  2. A potential liability that may occur in the future.
  3. Company's short-term financial obligations that are due within one year or within a normal operating cycle.
  4. Obligations listed on the balance sheet not due for more than a year.

Answer: C) Company's short-term financial obligations that are due within one year or within a normal operating cycle

Explanation:

Current liabilities are a company's short-term financial obligations that are due within one year or within a normal operating cycle.

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14. What is an operating cycle?

  1. A metric that expresses the time (measured in days) it takes for a company to convert its investments in inventory and other resources into cash flows from sales.
  2. The time it takes a company to buy goods, sell them and receive cash from the sale of said goods.
  3. The process of hiring personnel to conduct the daily operations of the business.
  4. collective process of identifying, analysing, and recording the accounting events of a company.

Answer: B) The time it takes a company to buy goods, sell them and receive cash from the sale of said goods

Explanation:

An operating cycle refers to the time it takes a company to buy goods, sell them and receive cash from the sale of said goods. In other words, it's how long it takes a company to turn its inventories into cash. The length of an operating cycle is dependent upon the industry.

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15. What are Outstanding Expenses?

  1. Expenses which are not paid off in the current balance sheet.
  2. The necessary purchases that keep a business going from day-to-day.
  3. Type of expense that is due but has not been paid.
  4. None of the above.

Answer: C) Type of expense that is due but has not been paid

Explanation:

An Outstanding Expense is a type of expense that is due but has not been paid. This expense becomes outstanding to the company when, this has taken the benefit, but the related payment has not been made simultaneously. For Example: Rent due but not yet paid.

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16. What is Bank Overdraft?

  1. A document used by a company's accounts payable department containing the supporting documents for an invoice.
  2. A negotiable instrument where payment is guaranteed by the issuing bank.
  3. A negotiable instrument similar to a bill of exchange.
  4. A line of credit that covers your transactions if your bank account balance drops below zero.

Answer: D) A line of credit that covers your transactions if your bank account balance drops below zero

Explanation:

An overdraft facility linked to your everyday transaction account is an unsecured line of credit designed to cover short-term cash flow shortfalls.

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17. Which Ratio protects the Creditors?

  1. Lower Debt Equity Ratio
  2. Liquidity Assets
  3. Higher Inventory Ratio
  4. Return on Investment Ratio

Answer: A) Lower Debt Equity Ratio

Explanation:

Lower the Debt Equity ratio higher is the protection to creditors. Creditors usually like a low debt to equity ratio because a low ratio (less than 1) is the indication of greater protection to their money.

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18. Return on Investment =?

  1. Net Sales x 100
  2. Fixed Assets x 100
  3. Total Assets x 100
  4. None of the above

Answer: C) Total Assets x 100

Explanation:

Return on Investment Ratio (ROI) = (Net profit / Total assets) x 100.

Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments.

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19. What does improper utilization of resources and over investment in assets indicate?

  1. Low Return on Investment
  2. Low Sales
  3. High Sales
  4. Depreciation of Assets

Answer: A) Low Return on Investment

Explanation:

Improper Utilization of resources and over investment in assets indicate a Low Return on Investment.

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20. Which budget is prepared for Advertising, Salary, and Market Analysis?

  1. Operating Budget
  2. Sales Expenditure Budget
  3. Static Budget
  4. Labor Budget

Answer: B) Sales Expenditure Budget

Explanation:

The selling expense budget is usually based on the sales budget and the prior expense budgets in prior years.

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21. What does a master budget include?

  1. Material Budget
  2. Production Budget
  3. Sales Budget
  4. All of the above

Answer: D) All of the above

Explanation:

A Master Budget consists of Sales budget, Production budget and Material budget.

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22. Transaction is referred as which event in accounting?

  1. Political Event
  2. Economic Event
  3. Dividend
  4. Cash Transaction

Answer: B) Economic Event

Explanation:

In accounting, an economic event is referred to as Transaction.

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23. Recording financial transaction is part of?

  1. Accounting
  2. Book Keeping
  3. Data Entry
  4. Journal

Answer: B) Book Keeping

Explanation:

Bookkeeping refers mainly to the record-keeping aspects of financial accounting, and involves preparing source documents for all transactions, operations, and other events of a business.

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24. Examining of financial information refers to?

  1. Analysis
  2. Auditing
  3. Recording
  4. Balance Sheet

Answer: B) Auditing

Explanation:

Auditing is defined as the on-site verification activity, such as inspection or examination, of a process or quality system, to ensure compliance to requirements.

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25. Who is an external user of financial statements?

  1. Shareholders
  2. CEO
  3. Manager
  4. Creditor

Answer: D) Creditor

Explanation:

Creditor of the business is the external user of financial statements.

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26. Identifying an economic transaction is which phase of accounting cycle?

  1. First
  2. Second
  3. Third
  4. Last

Answer: A) First

Explanation:

Identifying an economic transaction is the first phase of an accounting cycle.

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27. What is a Company?

  1. Legal entity organized and operated for a collective, public or social benefit, in contrast with an entity that operates as a business aiming to generate a profit for its owners.
  2. Business organization which is owned and carried on jointly by the members of the Hindu Undivided Family.
  3. Unincorporated business with only one owner who pays personal income tax on profits earned.
  4. A legal entity formed by a group of individuals to engage in and operate a business.

Answer: D) A legal entity formed by a group of individuals to engage in and operate a business

Explanation:

A company is a legal entity formed by a group of individuals to engage in and operate a business, commercial or industrial enterprise. A company may be organized in various ways for tax and financial liability purposes depending on the corporate law of its jurisdiction.

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28. What are Liabilities?

  1. Resources of a Company
  2. Expenses of a Company
  3. Obligations of a Company
  4. None of the above

Answer: C) Obligations of a Company

Explanation:

Liabilities are defined as a company's legal financial debts or obligations that arise during the course of business operations.

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29. What is an Income?

  1. A resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit.
  2. Obligation between one party and another not yet completed or paid for.
  3. Earning from investments and other sources unrelated to employment.
  4. The revenue a business earns from selling its goods and services.

Answer: D) The revenue a business earns from selling its goods and services

Explanation:

Income is the revenue a business earns by selling its goods or by providing services.

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30. An Asset possessed by the business should be shown in which part of balance sheet?

  1. Liabilities
  2. Assets
  3. Revenues
  4. Fixed Assets

Answer: B) Assets

Explanation:

An Asset possessed by the business should be shown in Asset part of balance sheet.

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31. What is the common characteristic of all the assets owned by a company?

  1. Intangible
  2. Long Life
  3. Future Economic Benefits
  4. None of the above

Answer: C) Future Economic Benefits

Explanation:

Future economic benefits are the most important characteristic that all assets of a business have.

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32. Capital + Liabilities = ?

  1. Revenue
  2. Assets
  3. Unearned Income
  4. Voucher

Answer: B) Assets

Explanation:

This is the fundamental accounting equation, also called the balance sheet equation, represents the relationship between the assets, liabilities, and owner's equity of a person or business.

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33. Owner's claim on total assets is?

  1. Liability
  2. Assets
  3. Equity
  4. Cash

Answer: C) Equity

Explanation:

Owner's claim on total assets is called equity.

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34. What are Drawings?

  1. Accounting method used to allocate the cost of a tangible or physical asset over its useful life or life expectancy.
  2. The amount of cash that a business disburses.
  3. An increase in the value of an asset over time.
  4. Money that is taken from the business account for personal use.

Answer: D) Money that is taken from the business account for personal use

Explanation:

Drawing in accounts is the record kept by a business owner or accountant that shows how much money has been withdrawn by business owners.

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35. What occurs when expenses are greater than income?

  1. Net Loss
  2. Net Profit
  3. Debts
  4. Decrease in Assets

Answer: A) Net Loss

Explanation:

Net loss occurs when Expenses are greater than income. A net loss, sometimes referred to as a net operating loss (NOL), occurs when expenses exceed the income or total revenue produced for a given period of time.

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36. What is a nominal account?

  1. An interest-bearing deposit account held at a bank or other financial institution.
  2. The account that represents a country's imports and exports of goods and services.
  3. The account in which accounting transactions are stored for one fiscal year.
  4. None of the above

Answer: C) The account in which accounting transactions are stored for one fiscal year

Explanation:

Nominal accounts are used to collect accounting transaction information for revenue, expense, gain, and loss transactions, all of which appear in the income statement.

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37. What is a Real Account?

  1. An interest-bearing deposit account held at a bank or other financial institution.
  2. The account that represents a country's imports and exports of goods and services.
  3. The account in which accounting transactions are stored for one fiscal year.
  4. An account that retains and rolls forward its ending balance at the end of the year.

Answer: D) An account that retains and rolls forward its ending balance at the end of the year

Explanation:

A real account is an account that retains and rolls forward its ending balance at the end of the year. These amounts then become the beginning balances in the next period.

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38. When does the capital of a company increases?

  1. Drawings Decrease
  2. Liabilities Decrease
  3. Revenue Increases
  4. Interest on capital increases

Answer: C) Revenue Increases

Explanation:

The capital of a company increases when its revenue increases.

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39. Revenue - Expenses =?

  1. Net Income
  2. Net Loss
  3. Depreciation
  4. None of the above

Answer: A) Net Income

Explanation:

Revenue minus Expenses is the net income of the company.

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40. What causes the decrease in Assets?

  1. Cash Purchases
  2. Liabilities
  3. Payment of Expenses
  4. Retained Earnings

Answer: C) Payment of Expenses

Explanation:

When an expense is recorded at the same time it is paid for with cash, the cash (asset) account declines, while the amount of the expense reduces the retained earnings account.

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41. Assets - Liabilities = ?

  1. Income
  2. Gains
  3. Earnings
  4. Capital

Answer: D) Capital

Explanation:

Assets - Liabilities = Capital is correct.

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42. What increases the Assets & Equity?

  1. Fresh Capital
  2. Debts paid off
  3. Revenues
  4. None of the above

Answer: A) Fresh Capital

Explanation:

The Assets & Equity of a company increases when fresh capital is introduced.

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43. What is the book of original entries?

  1. Voucher Book
  2. General Journal
  3. Day Book
  4. Account Statement

Answer: B) General Journal

Explanation:

General Journal is the first place where a transaction is entered into the books.

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44. How many accounts are affected by a business transaction?

  1. One
  2. Two
  3. Three
  4. Several

Answer: B) Two

Explanation:

Two accounts are affected whenever a transaction takes place in a business organization.

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45. Day book is also known as?

  1. Journal
  2. Voucher
  3. Ledger
  4. Book Keeping

Answer: A) Journal

Explanation:

Day Book is the other name of Journal.

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46. What is a compound entry?

  1. An entry involving more than two accounts.
  2. Accounting entry in which just one account is debited and one is credited.
  3. An accounting entry in which there is more than one debit, more than one credit, or more than one of both debits and credits.
  4. Entry that is used to record a business transaction in the accounting records of a business.

Answer: C) An accounting entry in which there is more than one debit, more than one credit, or more than one of both debits and credits.

Explanation:

A compound journal entry is an accounting entry in which there is more than one debit, more than one credit, or more than one of both debits and credits.

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47. Purchases are Debited when?

  1. Goods are purchased on cash
  2. Goods are sold at a discount
  3. Goods are purchased on credit
  4. Goods are lost

Answer: C) Goods are purchased on credit

Explanation:

Purchases are debited when an organisation purchases goods on credit.

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48. When are Drawing Debited?

  1. Cash withdrawn for personal use
  2. Cash withdrawn for payment of goods
  3. Cash withdrawn for salary
  4. Octroi

Answer: A) Cash withdrawn for personal use

Explanation:

Drawings Account is debited when cash is withdrawn for personal use.

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49. In what order data is entered into Journal?

  1. Chronological Order
  2. Numeric Order
  3. Alphabetically
  4. Bullets

Answer: A) Chronological Order

Explanation:

Journal entries are typically entered in chronological order.

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50. Cash Account is credited when?

  1. Debts paid off
  2. Building bought in cash
  3. Asset sold for cash
  4. None of the above

Answer: B) Building bought in cash

Explanation:

Cash Account is credited when a building is purchases by the organization for cash.

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