Question

State whether the following statement are true or false.

1. Final Accounts are prepared on the basis of Trial Balance.
2. Trading Account is a part of Profit & Loss Account.
3. Profit Loss Account is prepared to find out Gross Profit or Gross Loss.
4. Gross Profit or Gross Loss is transferred to Balance Sheet.
5. An amount of net profit is added to the capital.
6. All indirect expenses are debited to trading account.
7. Balance Sheet is a statement and not an account.
8. Capital account is a personal account.
9. Amount of prepaid expenses appears on assets side.
10. Bank Overdraft is a liability of business concern.

Answer 1

(1) True

Explanation:
Trial Balance is a statement that shows the summary of debit and credit balances of all the ledger accounts. It helps in the preparation of financial statements, as from these ledger balances, final accounts such as, Trading and Profit & Loss Account and Balance Sheet, are prepared. Thus, final accounts are prepared on the basis of a Trial Balance.

(2) True

Explanation:
A Trading Account is a part of the Profit & Loss Account, as both these accounts are prepared together and divided into two parts. The first part is known as a Trading Account where all the direct expenses and incomes are recorded and the second part is known as a Profit & Loss Account where all the indirect expenses and incomes are recorded. The Trading Account reveals the gross profit earned or gross loss incurred during the accounting period, whereas the Profit and Loss Account reveals the net profit earned or net loss incurred.

(3) False

Explanation:
The Profit & Loss Account is prepared to calculate the net profit or net loss during an accounting period, whereas the Trading Account is prepared to ascertain the gross profit or gross loss. Gross profit or gross loss means the profit or loss arising from the buying and selling of goods.

(4) False

Explanation:
The gross profit or gross loss is transferred to the Profit & Loss Account in order to ascertain the overall profit and loss of the business. The Profit & Loss Account is prepared to ascertain the net profit or loss of the business. Net profit or loss ascertained from the Profit & Loss Account is transferred to the Balance Sheet where net profit is added and net loss is deducted from the capital of the business.

(5) True

Explanation:
The net profit is ascertained from the Profit & Loss Account and is added to the capital because this profit will increase the owner’s equity and the funds available with the business. Thus, net profit is added to the capital on the Liabilities side of the Balance Sheet.

(6) False

Explanation:
A Trading Account is prepared to know the profit or loss resulting from buying and selling goods. Thus, it records all the direct expenses and incomes of a business that are related to the production of goods. On the other hand, all the indirect expenses, i.e. the expenses not related to the production of goods and services, are recorded in the Profit & Loss Account. Thus, all indirect expenses are debited to the Profit & Loss Account.

(7) True

Explanation:
A Balance Sheet is prepared at a particular date and not for a particular period. It is a statement prepared at a particular date showing the owner’s equity and liabilities on the left-hand side and all the assets on the right-hand side. It is a statement showing the balances of real and personal accounts.

(8) True

Explanation:
The accounts that are related to individuals, firms, companies or institutions are classified as personal accounts. The Capital Account represents the account of the proprietor who has made investments in the business and, thus, is classified as a personal account.

(9) True

Explanation:
Prepaid expenses are the expenses that have been paid in advance for the next accounting year in the current year. These expenses become the current assets of a business, as the benefit from these expenses will accrue in future. It is a Representative Personal Account because it represents those persons to whom the payment has been made in advance. Thus, the amount of prepaid expenses is shown on the Assets side of the Balance Sheet.

(10) True

Explanation:
Bank overdraft is a facility provided by banks to the current account holders to withdraw amounts greater than the available amount in their accounts, up to a specified limit. Hence, it is a liability of a trader and is shown under the head of Current Liabilities on the Liabilities side of the Balance Sheet.