Basic Accounting Terms — Practice Quiz

It should be treated as a Contingent Liability

Step 1: Contingent Liabilities are those which may or may not arise depending on a future uncertain event. Step 2: Giving a guarantee means: IF the supplier (borrower) fails to repay the loan, THEN the business becomes liable to pay. Step 3: Since the event (default) has NOT happened yet, it is NOT an actual liability — it is a Contingent Liability. Step 4: It cannot be a Current or Long-term Liability because those are definite obligations. Step 5: Other examples of contingent liabilities include: liability for bills discounted (if bill is dishonoured) and disputed lawsuits (if decided agains

Revenue is total sales receipts; Income is the surplus of Revenue over Expenses

Step 1: Revenue refers to all amounts earned from regular business operations — sales of goods, interest earned, commission, rent received. It is the gross earning. Step 2: Income = Total Revenue - Total Expenses. It represents the net surplus or profit. Step 3: Example: Sales = ₹10 lakh (Revenue), Cost of Goods Sold = ₹8 lakh (Expense), Income = ₹2 lakh. Step 4: Capital contributions and loans are NOT revenue because they are not earned from business operations. Step 5: Common mistake — students confuse Revenue with Income. Revenue is the 'before expenses' figure; Income is the 'after expense

An Expense, because it is the cost of using the asset to generate revenue

Step 1: Expense is defined as the cost incurred in producing and selling goods/services to generate revenue. Step 2: Depreciation is the decrease in value of an asset due to its use in the business — it is a cost of using the asset to earn revenue. Step 3: According to Finney and Miller, 'expense is the cost of the use of things or services for the purpose of generating revenue.' Depreciation fits this definition perfectly. Step 4: A Loss, on the other hand, does NOT generate any revenue — e.g., loss by fire, theft, or flood. Step 5: Key distinction: Depreciation = Expense (planned, revenue-ge

Trade Debtor converted to Bills Receivable

Step 1: When goods are sold on credit, the buyer (Shyam) becomes a Trade Debtor in the seller's (Ram's) books. Step 2: When Ram draws a Bill of Exchange on Shyam and Shyam accepts it, the trade debt is converted into a Bill of Exchange. Step 3: In Ram's books (seller/creditor), this bill is called Bills Receivable — Ram will receive money on the due date. Step 4: In Shyam's books (buyer/debtor), the same bill is called Bills Payable — Shyam must pay on the due date. Step 5: 'Trade Receivables' = Trade Debtors + Bills Receivable. 'Trade Payables' = Trade Creditors + Bills Payable. Shyam remains