QUESTION BANK

1. State why it is useful for a business to maintain a sales journal.

To reduce number of entries/detail in sales account Allows work to be shared between several
people Provides list of credit sales

2. State what is meant by the accounting objective of understand ability.

A financial report must be capable of being understood by the users of that report. (1)

3. Name two interested parties who might wish to look at the financial statements of a business.
Give a reason in each case.

4. ) State the meaning of each of the following terms.

(i) Income statement

A statement in which the profit or loss for the year is calculated

(ii) Statement of financial position

A statement showing the assets and liabilities of a business on a certain date

(iii) Non-current assets

Assets which are purchased for use not for resale Assets whose values do not fluctuate frequently
Assets which will be kept by the business for more than 12 months Assets which are acquired to aid
the business earn revenue Any two statements (1) each

(iv) Non-current liabilities

Liabilities which are not due for repayment within 12 months

(v) Capital

Either The amount the business owes the owner of that business Or Any resources provided for a
business by the owner of that business
(b) Give one example of an intangible asset.

Goodwill/patents/trademarks/other suitable example

5. State how each of the following may be regarded as a limitation of financial statements.

(i) Historical cost

Transactions are recorded at actual cost (1) It is difficult to compare transactions taking place at
different times (1)

(ii) Non-financial factors

Only information which was be expressed in monetary terms is recorded (1) Many important factors
which affect the business are not recorded (1)

6. Suggest one reason why the loose tools are revalued at the end of each financial year rather
than by using the straight line (equal instalment) or reducing (diminishing) balance method of
depreciation.

Low value items which are not easy to depreciate separately/Not practical to keep detailed records
of such assets/other suitable comment.

7. State the accounting equation.

capital = assets – liabilities (1), or assets = capital + liabilities (1), or liabilities = assets – capital (1)

8. State what is meant by the following terms.

Asset: something a business owns or which is owed to the business (1) (need all)

Liability – something which a business owes to a third party (1)

Inventory – goods bought for resale not yet sold (1)

9. Name the accounting principle applied when using the double entry system of book-keeping.

duality (1)

10. State the meaning of owner’s equity.

The amount owed by the business to the owner. The funds put into the business/contributed by the
owner (plus profits net of drawings). Any one for (1) mark

11. State two differences between a bank overdraft and a bank loan.

A loan is of fixed amount but an overdraft is of varying amount. A loan is for a fixed term but an
overdraft may be paid back at any time. A loan may require security but an overdraft may be
unsecured. A loan may have a fixed rate of interest but an overdraft will have a variable rate. Any
two for (1) each
12. Name one method of depreciation, other than the straight line (equal instalment) method, and
explain how it is calculated.

Name of method Reducing (diminishing) balance method (1) Annual percentage rate (1) is applied to
the net book value (1) of the asset. OR Revaluation method (1) The difference between the opening
and closing valuations is taken (1) and adjusted for any purchases or disposals (1)

13. State one purpose of accounting.

To monitor progress To prepare financial statements For decision making Any one reason for (1)
mark

14. State one difference between an income statement and a statement of financial position.

An income statement deals with revenues and costs, (1) whilst a statement of financial position
deals with assets and liabilities. (1) OR An income statement covers a period of time, (1) whilst a
statement of financial position is for a specified date. (1)

15. State one reason why a trader maintains books of prime entry.

To reduce the number of entries in the ledger To allow book-keeping duties to be shared As an aid
for posting to the ledger To summarise accounting information To help in the preparation of control
accounts To group together similar types of transactions To make it easier to check for errors Accept
other valid answers. Any one for (1) mark

16. State what is meant by the term ‘trial balance’.

A list of account balances (1) at a specific date. (1)

17. Name and explain two errors which would not affect the balancing of the trial balance.

Omission (1) transaction totally omitted from the books. (1) Commission (1) transaction posted to
wrong account of right class. (1) Principle (1) transaction posted to account of wrong class. (1)
Original entry (1) transaction incorrectly recorded in book of prime entry. (1) Reversal (1) debit entry
posted on credit side and vice versa. (1) Compensating (1) errors cancel one another out. (1)

18. State the purpose of a debit note.

Issued by the customer to request a reduction in an invoice.

19. State what is meant by a ‘dishonoured cheque’. Suggest two possible reasons why a cheque
might be dishonoured
20. Explain the meaning of the ‘imprest system’.

At any time the amount paid out from the float (represented by vouchers/receipts) plus remaining
cash (1) must equal the fixed amount of the float (1)

21. State two purposes of a trial balance.

Useful as a basis for preparing financial statements 1 Check arithmetical accuracy of the double
entry

22. ) Explain how providing for depreciation of non-current assets is an application of the principle
of prudence.

Ensures that the profit for the year is not overstated in the income statement (1) Ensures that the
non-current assets are not overstated in the statement of financial position(1)

23. State one advantage of being a partner rather than a sole trader.

Share losses Share responsibilities Share risks Share decision-making Additional finance available
Additional skills and experience available Accept other valid points. Any 1 advantage (1)

24. State one disadvantage of being a partner rather than a sole trader.

Share profits Decisions must be recognised by all partners Decisions may take longer to implement
One partner’s actions can bind other partners Disagreements can occur All partners are responsible
for the debts of the business Accept other valid points. Any 1 disadvantage (1)

25. Name three interested parties (other than the business owner) who may wish to look at the
financial statements of a business. For each interested party state a reason for their interest.

26. State two causes of depreciation.

Physical deterioration Economic reasons Passage of time Obsolescence Depletion Any 2 (1) each
27. Complete the following table by writing either True or False against each statement about
depreciation.

28. Name one accounting objective

Comparability Relevance Reliability Understandability Any 1 objective (1)

29. Name the accounting principle described by each of the following statements.

30. State one reason for using a petty cash book.

Reduces the number of entries in the main cash book Removes the small cash payments from the
main cash book Reduces the number of entries in the ledger Allows the chief cashier to delegate
some of the work Provides training for junior staff members Accept other valid points. Any 1 reason
(1)

31. State one advantage of the imprest system of petty cash.

Control/limit petty cash expenditure The cash remaining and the vouchers received should equal the
imprest Can help to reduce fraud Accept other valid points. Any 1 advantage (1)

32. State two reasons why it was necessary to open a suspense account.

To balance the trial balance Because there are errors on the trial balance To allow draft financial
statements to be prepared Accept other valid points. Any 2 reasons (1) each
33. State two reasons why to use books of prime (original) entry.

Reduces the number of entries in the ledger Acts as an aid for posting to the ledger Helps to gather
and summarise accounting information e.g. total credit purchases Helps in the preparation of control
accounts Groups together similar types of transactions Allows work to be divided between several
people/train junior accountants To see as a list of transactions/reference purposes Accept other
valid points. Any 2 reasons – 1 mark each

34. State the meaning of each of the following terms.

A bad debt is an amount owing to a business which will not be paid by the credit customer

Bad debt recovered-A bad debt recovered is when a credit customer pays some, or all of a debt
previously written off as a bad debt

35. State the meaning of each of the following terms and give an example of each.

36. State the purpose of a narrative in a journal entry

Useful because it may be necessary to recall the reasons/it can involve non-regular transactions/can
contain a reference to any prime documents. (1 mark for any acceptable purpose)
37. State two uses of the general journal in addition to the recording of opening entries of a
business.

Purchase/sale of non-current assets on credit Non-regular transactions not recorded in any other
book of prime entry Correction of errors Year end transfers (1 mark per use – maximum 2)

38. State the meaning of

Assets: What the business owns and what is owed to the business

Lability: What the business owes 1

Capital:Resources provided by the owner of the business/what the business owes to the owner of
the business 1

39. Explain what is meant by a ‘statement of financial position’.

Statement of the assets, liabilities, capital (1) of the business on a certain date (1)

40. State what is meant by a ‘book of prime (original) entry’.

A book in which transactions are recorded before being entered in the ledger. Or books used to
record information from source documents

41. State two benefits of maintaining a sales ledger control account.

Helps to prove the arithmetical accuracy of sales ledger Helps to reduce fraud Can (assist in) locating
errors, allow help, identify errors Easy access to total receivables figure Quicker production of
financial statements Provides a summary of transactions relating to trade receivables (1 mark per
benefit, maximum 2)

42. State what is meant by the objective of ‘reliability’.

Financial information is reliable only if it can be depended on to represent actual events if it is free
from error if it free from bias Any 2 comments (1) each

43. Name three other objectives which should be considered when selecting accounting policies

Comparability (1) Relevance (1) Understandability (1)

44. Name three items which may appear in the income statement of a trading business but which
would not appear in income statement.

Revenue Purchases Inventory (opening/closing) Returns (sales/purchases) Carriage inwards Carriage

outwards Or other suitable item Any 3 items (1) each

45. Suggest two reasons why the bank manager would be interested in her financial statements.

Assess prospects of any requested loan/overdraft being repaid when due Assess prospects of any
interest on loan/overdraft being paid when due Assess security available to cover any loan/overdraft
Or other acceptable reason Any 2 reasons (1) each
46. Name two other interested parties who may wish to see financial statements.

Competitors Employees Government Lenders/potential lenders Manager Potential buyers of the

business/investors Potential partners Trade receivables/clients/customers Trade payables/suppliers
Owner/Sadia Or other acceptable interested party Any two interested parties (1) each

47. Suggest two reasons why it was necessary to open a suspense account.

To ensure that the trial balance totals agree To allow draft financial statements to be prepared To
assist in the correction of errors To assist in ensuring errors are discovered Any 2 reasons (1) each

48. State the meaning of the term ‘bad debt recovered’

Money received from a credit customer in payment/part payment of a debt after it has been written
off as a bad debt. (1)

49. Name two accounting principles applied by maintaining a provision for doubtful debts.

Prudence Accruals (matching) Consistency Any 2 principles (1) each

50. Suggest two reasons why suppliers would be interested in his financial statements.

Assessment of liquidity position/check whether he can meet his debts on time Identify how long it
takes him to pay credit suppliers Identify future prospects of the business Establish a credit limit
Accept other valid reasons. Any 2 reasons (1) each

51. Krishna is considering purchasing business premises costing $80000. She could invest a further
$40000 as capital. The remaining $40000 would have to come from a 6% bank loan repayable after
5 years.

REQUIRED (c) Explain three factors Krishna should consider when making a decision about
purchasing these business premises.