Preparing for the Income Tax Inspector ITI Departmental Examination requires not only a sound understanding of the Income Tax Act but also a strong command of Book Keeping and Accounting Principles. Paper II of the Departmental Examination tests candidates on practical accounting concepts such as journal entries, ledger posting, trial balance, bills of exchange, bank reconciliation, depreciation, consignment accounting, company accounts, financial statements, adjusting entries, accounting standards, and other fundamental principles of financial accounting.
This article presents Part 1 (Questions 1–50) of the ITI Departmental Examination 2025 – Paper II (Book Keeping) with correct answers and concise explanations. Every question has been carefully reviewed based on the official question paper to help aspirants understand not only the correct option but also the underlying accounting concept.
Whether you are appearing for the Departmental Examination for the first time or revising before the examination, these solved questions will serve as an excellent revision resource. Instead of merely memorising answers, candidates are encouraged to understand the accounting principles involved, as the examination increasingly emphasizes conceptual clarity and practical application.
This is Part 1 of a two-part series. Part 2 will cover Questions 51–100, thereby completing the entire Paper II with answers and explanations.
Question 1. In case the drawer of the bill requires urgent funds and cannot wait till the due date and presents it to the bank, it is called:
a) Retirement of bill | b) Dishonouring of bill | c) Discounting of bill | d) Endorsement of bill
Correct Answer: (c) Discounting of bill
Explanation: Discounting means receiving immediate cash from the bank before the bill’s maturity after deducting discount.
Question 2. When an entry is made simultaneously on both the debit and credit side of the cash book, it is called:
a) Double Entry | b) Compound Entry | c) Contra Entry | d) None of the above
Correct Answer: (c) Contra Entry
Explanation: A contra entry records transfers between cash and bank accounts within the cash book.
Question 3. The Bank Pass Book shows a debit balance of Rs. 25,000. A debtor directly deposits Rs. 4,000 into the bank account. The balance as per Cash Book will be:
a) Debit balance Rs.29,000 | b) Credit balance Rs.29,000 | c) Credit balance Rs.21,000 | d) Debit balance Rs.21,000
Correct Answer: (b) Credit balance of Rs.29,000
Explanation: The direct deposit is not yet recorded in the cash book, resulting in a credit balance of Rs.29,000.
Question 4. Mr. A draws a bill for Rs.2,50,000 for three months. On maturity, Rs.1,50,000 is paid and a fresh bill carrying 12% interest for two months is drawn. The Bills Receivable will be:
a) Rs.1,02,000 | b) Rs.1,00,000 | c) Rs.98,000 | d) None
Correct Answer: (a) Rs.1,02,000
Explanation: New bill = Balance Rs.1,00,000 + Interest Rs.2,000 = Rs.1,02,000.
Question 5. A three-column cash book contains which columns?
a) Cash, Bank & Ledger Folio | b) Cash, Bank & Contra | c) Cash, Bank & Discount | d) None
Correct Answer: (c) Cash, Bank & Discount
Explanation: A three-column cash book contains Cash, Bank and Discount columns.
Question 6. Which of the following will not require adjustment in the Pass Book?
a) Cash received from debtors | b) Cash paid to creditors | c) Cash discount allowed | d) All of the above
Correct Answer: (d) All of the above
Explanation: These transactions are recorded in the cash book and do not require separate pass book adjustments.
Question 7. Cheque received from customers but not deposited into the bank on the same day is entered in the Cash Book on:
a) Debit side of Cash column | b) Credit side of Cash column | c) Both debit and credit side of Cash column | d) Debit side of Bank column
Correct Answer: (c) Both debit and credit side of Cash column
Explanation: Such cheques are treated as cash until deposited, requiring a contra-type entry in the cash column.
Question 8. Which of the following is a key feature of Financial Accounting?
a) Cost analysis for internal decisions | b) Recording transactions as per GAAP | c) Only tax calculation | d) Ignores external reporting
Correct Answer: (b)
Explanation: Financial accounting records transactions in accordance with Generally Accepted Accounting Principles (GAAP).
Question 9. A bill of Rs.2,50,000 was discounted for Rs.2,45,000. On dishonour, noting charges of Rs.5,000 were paid. How much will be debited by the bank?
a) Rs.2,40,000 | b) Rs.2,45,000 | c) Rs.2,50,000 | d) Rs.2,55,000
Correct Answer: (d) Rs.2,55,000
Explanation: Bank recovers the full bill amount plus noting charges.
Question 10. What does ‘Retiring a Bill under Rebate’ mean?
a) Payment before due date | b) Dishonour | c) Payment after due date | d) All
Correct Answer: (a)
Explanation: Retirement under rebate means paying the bill before maturity and receiving a rebate.
Question 11. Endorsement of a Bill means:
a) Transfer from drawee to creditor | b) Creditor to drawee | c) Creditor to drawer | d) Drawer to creditor
Correct Answer: (d)
Explanation: Endorsement transfers the rights in a bill from the holder (drawer) to another person.
Question 12. On dishonour of an accepted bill, the acceptor records:
a) Bills Payable A/c Dr. To Cash A/c | b) Bills Receivable A/c Dr. To Debtor A/c | c) Creditor A/c Dr. To Bills Payable A/c | d) Creditor A/c Dr. To Bank A/c
Correct Answer: (a)
Explanation: On dishonour, the liability under Bills Payable is reversed against Cash.
Question 13. A bill of Rs.30,000 is discounted after 30 days at 10% p.a. What is the discount?
a) Rs.250 | b) Rs.500 | c) Rs.1,000 | d) Rs.1,500
Correct Answer: (a) Rs.250
Explanation: Discount = Rs.30,000 × 10% × 30/360 = Rs.250.
Question 14. How is a post-dated cheque recorded?
a) Liability | b) Asset | c) Expense | d) Not recorded until the date mentioned on the cheque
Correct Answer: (d)
Explanation: A post-dated cheque is recorded only on the date appearing on the cheque.
Question 15. When the bank debits interest on overdraft, the entry is:
a) Interest Expense Dr. To Bank A/c | b) Bank A/c Dr. To Interest Income | c) Overdraft A/c Dr. To Interest Expense | d) Interest Payable Dr. To Bank
Correct Answer: (a)
Explanation: Interest on overdraft is an expense and reduces the bank balance.
Question 16. Which transaction requires an adjusting entry?
a) Issue of shares | b) Purchase of equipment | c) Services on account | d) Accrued salaries at month-end
Correct Answer: (d)
Explanation: Outstanding salaries require adjustment at the end of the accounting period.
Question 17. If accrued revenue is omitted, the effect will be:
a) Assets understated | b) Liabilities overstated | c) Expenses understated | d) Equity overstated
Correct Answer: (a)
Explanation: Failure to record accrued revenue understates assets and income.
Question 18. Which transaction requires a compound journal entry?
a) Cash purchase | b) Advance rent | c) Sale partly in cash and partly on credit | d) Cash sale with profit
Correct Answer: (c)
Explanation: More than two accounts are affected in a compound journal entry.
Question 19. Which statement is correct regarding Subsidiary Ledgers?
a) Summarised data | b) Include details supporting control accounts | c) Replace General Ledger | d) Track only capital expenditure
Correct Answer: (b)
Explanation: Subsidiary ledgers provide detailed records supporting control accounts.
Question 20. Which of the following are errors of principle?
(i) Land debited to Purchases A/c
(ii) Sale of furniture credited to Sales A/c
(iii) Construction of restroom debited to Repairs A/c
(iv) Purchase from Raj posted to Ram’s account
a) Only (i) & (ii) | b) Only (i), (ii) & (iii) | c) All | d) Only (i)
Correct Answer: (b)
Explanation: Errors of principle involve incorrect accounting treatment, whereas posting to the wrong personal account is an error of commission.
Q.21 Stock worth Rs. 50,000 was destroyed by fire. The claim was fully accepted by the insurance company. The journal entry is:
a) Insurance Claim A/c Dr. 50,000 To Inventory A/c 50,000
b) Cash A/c Dr. 50,000 To Insurance Claim A/c 50,000
c) Purchases A/c Dr. 50,000 To Insurance Claim A/c 50,000
d) Insurance Claim A/c Dr. 50,000 To Purchases A/c 50,000
Correct Answer: (d)
Explanation: Insurance claim is recognised by debiting Insurance Claim Account and crediting Purchases Account.
Q.22 If goods are sent on sale or return basis, how will it be treated?
a) Ordinary sale and not recorded
b) Ordinary sale and recorded as normal sale
c) No entry until goods are approved and sold
d) Recorded as sale without debtor until actual sale
Correct Answer: (b)
Explanation: The paper treats goods sent on sale or return as normal sales.
Q.23 What is the purpose of journalising adjusting entries?
a) Record transactions chronologically
b) Classify and summarise transactions
c) Prepare financial statements
d) Ensure accuracy and completeness of financial records
Correct Answer: (d)
Explanation: Adjusting entries ensure financial statements present accurate and complete information.
Q.24 Vijay & Company Pvt. Ltd. issues 10,000 debentures of Rs.100 each at 10% premium. The journal entry is:
a) Bank A/c Dr. Rs.10,00,000 To Debenture A/c Rs.10,00,000
b) Bank A/c Dr. Rs.11,00,000 To Debenture A/c Rs.11,00,000
c) Bank A/c Dr. Rs.11,00,000 To Debenture A/c Rs.10,00,000 To Securities Premium A/c Rs.1,00,000
d) Bank A/c Dr. Rs.10,00,000 Securities Premium A/c Dr. Rs.1,00,000 To Debenture A/c Rs.11,00,000
Correct Answer: (c)
Explanation: Premium received on issue of debentures is credited to Securities Premium Account.
Q.25 Which is the correct order of steps in the accounting cycle?
a) Journal → Ledger → Adjustments → Trial Balance → Analysis → Financial Statements
b) Ledger → Adjustments → Closing Entries → Financial Statements → Trial Balance
c) Adjustments → Trial Balance → Journal → Closing Entries → Financial Statements
d) Journal → Ledger → Adjustments → Trial Balance → Financial Statements
Correct Answer: (d)
Explanation: The accounting cycle ends with the preparation of financial statements after the trial balance.
Q.26 The Accounting Cycle refers to the process through which organisations:
a) Identify and summarise transactions
b) Classify and summarise transactions
c) Identify, record, classify and summarise financial transactions over an accounting period
d) None of the above
Correct Answer: (c)
Explanation: The accounting cycle covers the complete process from identification to summarisation of transactions.
Q.27 What are the objectives of preparing the Trial Balance?
(i) Ascertain arithmetical accuracy
(ii) Help locate errors
(iii) Assist in preparation of financial statements
(iv) Check accuracy of cash flow statement
a) (i), (iii) & (iv)
b) (i), (ii) & (iii)
c) (ii), (iii) & (iv)
d) (iv) only
Correct Answer: (b)
Explanation: Trial Balance helps verify arithmetic accuracy, locate errors and prepare financial statements.
Q.28 Bad debt provisions are created so that the ________ does not show ________ above their realisable value.
a) Profit & Loss Account, Bad Debts
b) Trading Account, Bad Debts
c) Balance Sheet, Sundry Debtors
d) None
Correct Answer: (c)
Explanation: Provision ensures Sundry Debtors are shown at their estimated realisable value.
Q.29 When the Trial Balance agrees, it is assumed that transactions have been correctly posted to the ________ from the ________.
a) Journal, Trial Balance
b) Balance Sheet, Ledger
c) Ledger, Journal
d) Ledger, Trial Balance
Correct Answer: (c)
Explanation: Transactions are posted from the Journal to the Ledger.
Q.30 What is the closing stock if Opening Stock = Rs.5,000, Purchases = Rs.25,000 and Cost of Goods Sold = Rs.20,000?
a) Rs.10,000
b) Rs.15,000
c) Rs.5,000
d) Rs.20,000
Correct Answer: (a)
Explanation: Closing Stock = Opening Stock + Purchases − Cost of Goods Sold = Rs.10,000.
Q.31 Machinery costing Rs.1,00,000 is depreciated @10% on WDV method. Book value after 2 years will be:
a) Rs.81,000
b) Rs.80,000
c) Rs.90,000
d) Rs.79,000
Correct Answer: (a)
Explanation: Book value = Rs.1,00,000 × 90% × 90% = Rs.81,000.
Q.32 Bad debts of Rs.12,000 are written off and provision is to be maintained @5% on debtors of Rs.1,00,000. Required adjustment is:
a) Provision A/c Dr. Rs.5,000 To Bad Debts A/c
b) Bad Debts A/c Dr. Rs.12,000 To Debtors A/c
c) Profit & Loss A/c Dr. Rs.5,000 To Provision for Doubtful Debts A/c
d) Provision for Doubtful Debts A/c Dr. Rs.5,000 To Profit & Loss A/c
Correct Answer: (c)
Explanation: A fresh provision of Rs.5,000 is created by debiting Profit & Loss Account.
Q.33 Salary paid during the year is Rs.30,000; outstanding salary at beginning Rs.2,000; outstanding salary at end Rs.3,000; salary paid in advance Rs.2,600. Amount debited to Income & Expenditure Account is:
a) Rs.33,600
b) Rs.26,400
c) Rs.31,600
d) Rs.28,400
Correct Answer: (d)
Explanation: Salary Expense = Rs.30,000 + Rs.3,000 − Rs.2,000 − Rs.2,600 = Rs.28,400.
Q.34 Del Credere Commission is allowed to:
- Cover bad debt risk
- Encourage sale at specified price
- Cover transit loss
- Cover damage in consignee’s custody
a) Only (1)
b) (1) & (2)
c) (3) & (4)
d) Only (2)
Correct Answer: (a)
Explanation: Del Credere Commission compensates the consignee for bearing bad debt risk.
Q.35 Which statement is NOT true about Carriage Inward?
a) Transportation cost of purchases
b) Expense incurred on receiving incoming goods
c) It is an indirect expense incurred to prepare goods for sale
d) Paid on purchases from manufacturers and traders
Correct Answer: (c)
Explanation: Carriage inward is a direct expense, not an indirect expense.
36. A proprietor withdraws Rs.1,00,000 for personal use, pays Keyman Insurance premium of Rs.30,000 and purchases a motor car of Rs.15,00,000 for business. Which transaction is correctly recorded?
Options: (a) Debit P&L A/c with Rs.30,000 (b) Debit Cash A/c with Rs.1,00,000 (c) Credit Motor Car A/c with Rs.15,00,000 (d) None of the above
Answer: (a)
Explanation: Keyman Insurance premium is a business expenditure allowable in Profit & Loss Account.
37. Which of the following is correct?
Options: (a) COGS − Opening Stock + Purchases = Closing Stock (b) Purchases + COGS − Opening Stock = Closing Stock (c) COGS + Closing Stock − Opening Stock = Purchases (d) Opening Stock + Closing Stock − Purchases = COGS
Answer: (c)
Explanation: Rearranging the COGS formula gives Purchases = COGS + Closing Stock − Opening Stock.
38. Mr. A starts a business with Rs.80,000 and purchases goods on credit worth Rs.50,000. What is the accounting equation?
Options: (a) 1,30,000 = 80,000 + 50,000 (b) 30,000 = 80,000 − 50,000 (c) 80,000 = 50,000 + 30,000 (d) 50,000 = 80,000 − 30,000
Answer: (a)
Explanation: Assets = Capital + Liabilities = Rs.1,30,000 = Rs.80,000 + Rs.50,000.
39. Expenditure incurred in formation of a new company is a ________.
Options: (a) Capital Expenditure (b) Revenue Expenditure (c) Capital Asset (d) Deferred Revenue Expenditure
Answer: (d)
Explanation: Preliminary expenses are treated as deferred revenue expenditure (traditional accounting approach).
40. Wages paid Rs.12,51,000; outstanding wages at beginning Rs.27,500 and at end Rs.12,500. Amount to be shown in Income & Expenditure Account?
Options: (a) Rs.12,66,000 (b) Rs.12,23,500 (c) Rs.12,36,000 (d) Rs.12,38,500
Answer: (d)
Explanation: Expense = Paid + Closing Outstanding − Opening Outstanding = Rs.12,38,500.
41. The most suitable depreciation method for mines, oil wells and quarries is:
Options: (a) Depletion Method (b) Annuity Method (c) Straight Line Method (d) Sinking Fund Method
Answer: (a)
Explanation: Natural resources are depreciated using the depletion method.
42. Goods sold but lying in the godown at the buyer’s risk should be treated as part of:
Options: (a) Closing Inventory (b) Sales (c) Goods-in-transit (d) Purchases
Answer: (b)
Explanation: Ownership has passed to the buyer; therefore, it remains a sale.
43. Which accounting concept requires expenses to be recorded in the same period as related revenue?
Options: (a) Accrual (b) Matching (c) Conservatism (d) Cost
Answer: (b)
Explanation: Matching concept matches expenses with corresponding revenues.
44. Conservatism applied to the balance sheet results in:
Options: (a) Understatement of Assets (b) Overstatement of Assets (c) Understatement of Capital (d) Overstatement of Capital
Answer: (a)
Explanation: Conservatism avoids overstatement of assets and income.
45. Wages of Rs.5,000 paid for installation of new machinery should be:
Options: (a) Debit Wages A/c (b) Debit Installation Expenses A/c (c) Debit Machinery A/c (d) Debit Repairs & Maintenance A/c
Answer: (c)
Explanation: Installation cost is capitalized as part of machinery cost.
46. Which of the following are not capital expenditure?
Options: (a) (i) & (ii) (b) (ii) & (iii) (c) (iv) & (v) (d) (iii) & (iv)
Answer: (d)
Explanation: Depreciation and purchase of trading stock are not capital expenditure.
47. A company receives Rs.1,00,000 in advance for a two-year service contract. Correct accounting treatment?
Options: (a) Recognise full revenue immediately (b) Record unearned revenue and recognise Rs.50,000 each year (c) Record as asset (d) Recognise revenue only at contract end
Answer: (b)
Explanation: Advance receipts are recognised as unearned revenue and recognised over the service period.
48. Which principle records income and expenses in the period to which they relate?
Options: (a) Consistency (b) Prudence (c) Accrual (d) Dual Aspect
Answer: (c)
Explanation: Accrual principle records transactions irrespective of cash flow.
49. Sundry Debtors Rs.76,000; Provision for Doubtful Debts @5%. Which statement is correct?
Options: (a) Income in P&L and deduct from debtors (b) Expense in P&L and deduct from debtors (c) Expense in P&L and add to debtors (d) Income in P&L and add to debtors
Answer: (b)
Explanation: Provision for doubtful debts is an expense and is deducted from debtors.
50. Which statement regarding depreciation methods is true?
Options: (a) Diminishing balance gives equal depreciation every year (b) Units of production gives equal depreciation every year (c) Straight-line gives equal depreciation every year (d) None of these
Answer: (c)
Explanation: Straight-line method provides the same depreciation amount each year.
Conclusion
This completes Part 1 (Questions 1–50) of the ITI Departmental Examination 2025 – Paper II (Book Keeping). These questions cover important accounting concepts including accounting principles, journal entries, trial balance, depreciation, financial statements, bills of exchange, accounting errors, and capital & revenue expenditure.
Continue with Part 2 (Questions 51–100) to complete the entire Paper II and strengthen your preparation for the Income Tax Inspector Departmental Examination. Keep practicing previous year question papers to improve both conceptual understanding and exam confidence.
Always refer Official Income Tax Act from its official site.
Relevant Article on Simple Income Tax
✅ Part 1: Questions 1–50 – Solved with Answers & Explanations
✅ Part 2: Questions 51–100 – Solved with Answers & Explanations
✅ Part 3: Questions 101–150 – Solved with Answers & Explanations
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