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Seventeenth Edition : June 2026
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CHAPTER
DESCRIPTIVE QUESTION
Q.1 Discuss the limitations which must be kept in mind while evaluating the Financial Statements. [Nov. 2018, 4 Marks]; [MTP Jan. 2026]; [RTP Jan. 2026]
Ans. Limitations of Financial Statements
1.Historical Cost
2.Perpetual Continuity & Periodical Account
3.Strengths & Weaknesses
SHORT NOTES
Q.1 Trading account
Ans. Trading account
Q.2 Profit and loss account
Ans. Profit and loss account:
Q.3 Balance sheet
Ans. Balance sheet:
Q.4 Manufacturing A/c
Ans. Manufacturing account:
Q.5 Trial balance
Ans. Trial balance:
DIFFERENCES
Q.1 Provision & Reserve
Ans. Provision and Reserve:
Q.2 Capital reserve & Revenue reserve
Ans. Capital reserve and Revenue reserve:
TRUE OR FALSE
Q.1 Profit and loss account shows the financial position of the concern.
Ans. False:
Q.2 Profit and loss account is a point statement whereas a balance sheet is a period statement.
Ans. False:
Q.3 The provision for discount on debtors is calculated before deducting the provision for doubtful debts from debtors. [RTP Sep. 2025]
Ans. False:
Q.4 The gain from sale of capital assets need not be added to revenue to ascertain the net operating profit of a business.
Ans. True:
Q.5 Under the ‘liquidity approach’ assets which are most liquid are presented at the bottom of the balance sheet.
Ans. False:
Q.6 The proprietor of a shop feels that he has made a loss due to closing stock being zero.
Ans. False:
Q.7 Closing stock will never appear in the trial balance. Ans. False:
Q.8 If Closing Stock appears in the Trial Balance: [Nov. 2018, 2 Marks; June 2024, 2 Marks]; [MTP Jan. 2025] The closing inventory is then not entered in Trading Account. It is shown only in the balance sheet.
Ans. True:
Q.9 The provision for bad debts is debited to sundry debtors account. [Dec. 2021, 2 Marks]; [RTP May 2026]; [RTP Jan. 2026]
Ans. False:
Q.10 Overhead is defined as the total cost of direct material, direct wages and direct expenses. [June 2023, 2 Marks]
Ans. False:
Q.11 The gain from sale of capital assets is added to revenue to ascertain the net profit of the business. [Dec. 2023, 2 Marks]
Ans. True:
Q.12 Outstanding salaries for the previous year shall be shown as liability in the current year balance sheet. [RTP Jan. 2025] Ans. False:
Q.13 The results and position disclosed by final accounts are not exact. [RTP Jan. 2025]
Ans. True: -
Additional information
a.There was a further bad debt of ` 1,000.
b.During the year sales of ` 8,000 omitted to be recorded.
c.Make a Provision for bad debts @ 5% on debtors.
d.Make a Provision for discount @ 2%.
Show the extract of Profit & Loss Account & Balance Sheet for the above adjustments.
Solution:
Profit and Loss Account (Extract)
Q.2 Below is the trial balance of Shah as on December 31, 2015:
Additional information:
1. Rates have been prepaid to the extent of ` 175.
2. Bad debts ` 500 have to written off. A provision for doubtful debts @ 5% on debtors is necessary.
3. Building has to be depreciated at 2% and Furniture @ 10%.
4. The manager is entitled to a commission of 5% of net profits before charging such commission.
Solution:
Trading and Profit and Loss Account of Shah for the Year ended on December 31, 2015
Particulars ` Particulars ` Less: `
