Practice questions

1 Which of the following is NOT an advantage of being a partnership instead of a sole trader?

a) There is more than one source of capital.

b) The ability of partners to provide expertise in different aspects of the business.
c) The partners have limited liability.
d) The workload can be shared between the partners.

2 Which of the following is not an example of capital expenditure?

a) Legal fees incurred when buying a factory.

b) The cost of building a warehouse as an extension to the factory.
c) Insurance on the factory and the warehouse.
d) The transport cost of delivering the materials to build the warehouse.

3. Which of the following is NOT a current asset?

a) Trade receivables b) Inventory

c) Cash in hand d) Trade payables

4. Which of the following is NOT a non-current asset?

a) Fixtures and fittings b) Plant and equipment

c) Long Term loan d) Vehicles

5. Which of the following is NOT a current liability?

a) Trade payables b) Bank loan repayable over two years

c) Accrual d) Bank overdraft

6. Provision for doubtful debts at the start of the year = $ 320

Provision for doubtful debts at the end of the year = $ 410
The effects of the provision for doubtful debts on the financial statements will:

a) Increase profit for the year by $ 90 Increase trade receivables by $ 410

b) Increase profit for the year by $ 90 Decrease trade receivables by $ 410
c) Decrease profit for the year by $ 90 Increase trade receivables by $ 410
d) Decrease profit for the year by $ 90 Decrease trade receivables by $ 410
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 7. A trade receivable who had previously been written off as an irrecoverable debt unexpectedly
sends a cheque to pay the amount owing. The double entry is:

a) Debit ‘Trade receivables’ Credit ‘Irrecoverable debt recovered’

b) Debit ‘Bank’ Credit ‘Irrecoverable debt recovered’
c) Debit ‘Irrecoverable debt recovered’ Credit ‘Trade receivables’
d) Debit ‘Irrecoverable debt recovered’ Credit ‘Bank’

8. Which pair of statements is correct?

a) Income due is a current asset Income received in advance is a current asset

b) Income due is a current asset Income received in advance is a current liability
c) Income due is a current liability Income received in advance is a current asset
d) Income due is a current liability Income received in advance is a current liability

9. Name the accounting concept that matches revenue and expenditure to the period when they
arise.

a) Business entity b) Accruals

c) Money measurement d) Consistency

10. Name the accounting concept that includes credit sales and credit purchases in the income
statement, even if they have not been paid for yet.

a) Realisation b) Going concern

c) Prudence d) Money measurement

11. Name the accounting concept that requires financial statements, where in doubt, to include a
figure that will cause profit or the value of assets to be lower rather than higher.

a) Materiality b) Consistency
c) Prudence d) Cost

12. What is the accounting equation?

a) Assets + Liabilities = Owner’s equity

b) Assets + Owner’s equity = Liabilities
c) Assets – Liabilities = Owner’s equity
d) Assets = Liabilities – Owner’s equity
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 13. Which definition is not correct?

a) A liability is what a business owns.

b) An asset is a resource that a business owns.
c) Owner’s equity is what the business owes the owner.
d) The accounting equation is reflected in the statement of financial position.

14. A business had the following assets and liabilities on 6 June 2016:

Motor vehicle $5 900; bank loan $6 000; cash at bank $49 000; trade payables $800;
inventory $2 100; premises $30 000.

What was the value of owner’s equity?

a) $80 200 b) $81 200 c) $81 800 d) $92 200

15. Which statement is correct?

a) Resources owned by the business = Resources supplied to the business

b) Resources owned by the business = Resources owed to the business
c) Resources owned by the business = Resources supplied by the business
d) What the business supplies = What the business owes

16. A customer, Neil, pays the business by cheque for goods previously bought by him on credit.
Which entries record the payment in the business’ ledgers?

Account to be debited Account to be credited.

a) Trade payables Bank

b) Bank Trade payables
c) Bank Trade receivables
d) Trade receivables Bank

17. Kaye returned damaged goods to her supplier, Mungo. Which entries are made in Mungo’s
books?

Account to be debited Account to be credited.

a) Sales returns Kaye

b) Purchases returns Kaye
c) Kaye Purchases returns
d) Kaye Sales returns
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 18. Machinery was purchased on credit. Which entries are made to record this?

Account to be debited Account to be credited.

a) Machinery expenses Trade payables

b) Trade payables Machinery expenses
c) Machinery Trade payables
d) Machinery Cash

19. Which balance will be recorded as an asset in a statement of financial position?

a) A credit balance on the bank account

b) A credit balance on a supplier’s account
c) A debit balance on the drawings account
d) A debit balance on a customer’s account

20. Which source document issued by a business is used to prepare the sales return account?

a) Credit note b) Debit note c) Sales invoice d) Statement of account

21. Roxy ordered 200 computer components from Pooja. Each component was priced at $20.95.
Pooja allowed a trade discount of 5 per cent. What was the total of the invoice that Roxy received?

a) $3 580.90 b) $3 890.50 c) $3 950.80 d) $3 980.50

22. Regina sold goods to Kareena at a list price of $5 000. Regina has allowed Kareena a trade
discount of 5 per cent and a cash discount of 2 per cent. What was the amount of the invoice sent
to Kareena by Regina?

a) $4 566 b) $4 570 c) $4 655 d) $4 750

23. In which book of prime entry is the purchase of a non-current asset on credit recorded?

a) Cash book b) General journal

c) Purchases journal d) Purchases returns journal

24. Which item is a capital receipt?

a) Commission received b) Money received from sale of machinery

c) Rent received d) Sales revenue
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 25. Transportation costs of machinery purchased for the factory was entered in the carriage
inwards account. How did this error affect the financial statements of the business?

Income statement Statement of financial position

a) Profit overstated non-current assets understated

b) Profit understated non-current assets overstated
c) Profit overstated non-current assets overstated
d) Profit understated non-current assets understated

26. $470 was paid to repaint the factory building. Which account should be debited?

a) Improvement to buildings account

b) Land and buildings account
c) Loose paint account
d) Repairs and maintenance account

27. A business provides the following information regarding its expenditure for the year ended 31
March 2018: $

Machinery 56 000
Employees’ salaries 39 000
Purchases 37 000
Office rent 30 000
Motor vehicle 25 000
Petrol 600

What was the value of the capital expenditure?

a) $81 000 b) $95 000 c) $106 600 d) $131 600

28. Which item is not classified as capital expenditure?

a) Cost of installing a new non-current asset

b) Cost of repairing a non-current asset
c) Legal fees in connection with purchase of non-current asset
d) Purchase of a non-current asset

29. Rotunda Ltd. purchased machinery for $30 000 on 1 January. Two years later the machinery has
a book value of $24 000. Depreciation was calculated using the straight-line method. What is the
annual rate of depreciation?

a) 10 per cent b) 20 per cent

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c) 25 per cent d) 30 per cent

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 30. Why does a business provide for depreciation of its non-current assets?

a) To charge the cost of the non-current asset against the profits in the year it is purchased
b) To ensure that cost of the asset is spread over the years of the economic life of the asset
c) To ensure that the assets are shown in the statement of financial position at cost
d) To fund the replacement of the asset

31. Sweta, a sole trader, has not allowed for depreciation of her non-current assets in her financial
statements. How will her financial statements be affected?

Non-current assets Profit for the year

a) Understated Overstated
b) Overstated Overstated
c) Understated Understated
d) Overstated Understated

32. Which of the following assets should best be depreciated using the revaluation method?

a) Loose tools b) Machinery c) Motor vehicle d) Office furniture

33. Office equipment bought for $20 000 is depreciated using the reducing balance method. The
rate of depreciation applied is ten per cent. What is the net book value of the equipment at the end
of two years?

a) $16 000 b) $16 200 c) $17 000 d) $18 000

34. On 23 December 2018, Royston receives a cheque from a tenant. This is rent due to the
business for the period 1 January to 31 July 2019. How is this treated in Royston’s financial
statements for the year ended 31 December 2018?

a) Accrued expense b) Accrued income

c) Prepaid expense d) Prepaid income

35. Desdemona, a sole trader, incorrectly entered an accrued expense of $550 as a prepayment in
the income statement. What is the effect on her profit for the year?

a) Overstated by $550 b) Understated by $550

c) Overstated by $1 100 d) Understated by $1 100
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 36. Bessy’s financial year ends on 30 September. On 1 September 2018 cash of $1 200 was paid for
insurance for six months. Which item was recorded in Bessy’s statement of financial position at 30
September 2019?

a) A prepayment of $200 b) An accrual of $200

c) A prepayment of $1 000 d) An accrual of $1 000

37. Sandra lets part of her business premises at a monthly rent of $400. On 1 January, the tenant
owed two months’ rent. During the year ended 31 December 2018, the tenant paid rent of $4 000.
Which value for rent receivable was credited in Sandra’s income statement for the year ended 31
December 2018?

a) $3 200 b) $4 000 c) $4 800 d) $5 200

38. Novac and daughters have not adjusted their financial statements for internet charges accrued
at the end of the financial year. Which effects will this have?

Profit for the year Current liabilities.

a) understated understated
b) overstated understated
c) overstated overstated
d) understated overstated

39. Kusum gives you the following information:

2018 $
1 May Trade receivables 1 600
Credit sales during May 4 600
31 May Trade receivables 700

How much did Kusum receive during May?

a) $2 300 b) $3 900 c) $5 050 d) $5 500

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 40. Su Jin provided the following information: $

Provision for doubtful debts 31 March 2018 2 000

Trade receivables at 31 March 2019 50 000

The provision for doubtful debts is maintained at five per cent of trade receivables at the end of
each year. What was the change in the provision for doubtful debts account in the year ended 31
March 2019?
a) Decrease by $500 b) Increase by $500
c) Increase by $2 500 d) Remain at $2 000

41. Neil is a sole trader who makes a provision for doubtful debts at ten per cent of trade receivables
on 31 December. He provides the following information:

Trade receivables at 31 December 2018: $30 000

Trade receivables at 31 December 2019: $40 000

What was recorded for doubtful debts in Neil’s income statement for the year ended 31 December
2019?
a) Credited with $1 000 b) Debited with $1 000
c) Credited with $4 000 d) Debited with $4 000

42. Which of the following is correct?

Increases profits Decreases current assets.

a) Irrecoverable debts Irrecoverable debts recovered

b) Increase in provision for doubtful debts Decrease in provision for doubtful debts
c) Decrease in provision for doubtful debts Increase in provision for doubtful debts
d) Irrecoverable debts recovered Irrecoverable debts recovered

43. Garry is a sole trader who makes a provision for doubtful debts as a year-end adjustment. On 31
December 2017, his provision for doubtful debts was $800. He provided the following information:

Year ended 31 December Trade receivables.

2018 $50 000 Increase in provision $200

2019 $36 000 Decrease in provision $280

Which of the following is correct?

Trade receivables at 31 December 2017 Percentage used to calculate provision.

a) $20 000 2 per cent

b) $20 000 4 per cent
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c) $40 000 4 per cent

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d) $40 000 2 per cent

 44. Which of the following will work out to net realisable value?

a) Selling price
b) Selling price less administration costs
c) Selling price less cost of making goods saleable
d) Selling price less estimated profit

45. Gigi Retailers value their inventory of items M and N on 31 December 2019. The following
information is provided.

Item Cost price per unit Net realisable value per unit

M 200 units $5 $7
N 700 units $10 $8

What is the total of the inventory?

a) $6 600 b) $7 000 c) $8 000 d) $8 400

46. Francis has the following information for the year ended 31 December 2018:

Cost per unit of inventory purchased during the year 20

Selling price of inventory sold during the year 40

At 31 December 2018, Francis counted his inventory and discovered that he had 2 000 units left.
However, 150 units had a net realisable value of only $10 each. What was the total value of Francis’
inventory at 31 December 2018?

a) $38 500 b) $40 000 c) $80 000 d) $81 500

47. How should inventory be valued?

a) At the higher of net realisable value and cost

b) At the higher of net realisable value and selling price
c) At the lower of net realisable value and cost
d) At the lower of net realisable value and selling price

48. Errol, a sole trader, finds that he has 1 000 units of inventory at 30 November 2018. He had
purchased 2 500 units of this product at a price of $10. During the year he had sold 1 500 units at
$25 each. Out of the remaining, he discovered that 100 units had a net realisable value of only $15.
What was the value of his inventory at 30 November 2018?
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a) $10 000 b) $10 500 c) $15 000 d) $24 000

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 49. Wellington Traders have the following assets and liabilities on 1 January 2018:

Land and buildings 500 000

Cash and cash equivalents 4 000
Trade receivables 7 000
Bank overdraft 3 000
Trade payables 4 900

During the year ended 31 December 2018 the business made a profit of $12 000, and the owner
made drawings of $10 000. What was the value of capital at 31 December 2018?

a) $501 100 b) $505 100 c) $507 100 d) $511 100

50. Which item appears in both the income statement and the statement of financial position?

a) Capital b) Drawings c) Gross profit d) Profit for the year

51. Which item is calculated in the trading account section of the income statement?

a) Capital b) Gross profit c) Profit for the year d) Sales

52. Which of the following is an intangible asset?

a) Furniture and fixtures b) Office equipment

c) Patents d) Property

53. Which of the following records, maintained by a business, provides information for the
preparation of an income statement?

a) Bank statement b) Cash book

c) Nominal (general) ledger d) Petty cash book

54. In which accounts are salaries to staff and salaries to partners recorded in?

Staff salaries Partners’ salaries

a) Profit and loss appropriation Profit and loss appropriation account

b) Profit and loss account Profit and loss appropriation account
c) Profit and loss appropriation account Profit and loss account
d) Profit and loss account Profit and loss account
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 55. The profit for the year before appropriation in a partnership was $50 000. Shagun, one of the
partners, receives a salary of $4 000 and interest at ten per cent per annum on her capital of $100
000. Amir, the other partner, receives interest on capital at the same rate as Shagun. Amir’s capital
was $89 000. They share profits and losses equally.

What was the total share of profits credited to Amir’s current account?

a) $13 550 b) $15 350 c) $22 450 d) $24 250

56. Aimee and Bella are partners sharing profits and losses equally. They made a loss for the year
before appropriation of $6 000. Aimee is given a salary of $1 200 for the extra work she puts in.
Which value is debited to Aimee’s current account as her share of the loss?

a) $3 000 b) $3 600 c) $4 800 d) $4 000

57. In which section of the statement of financial position would a debit balance on a partner’s
current account be recorded?

a) Capital b) Current assets

c) Current liabilities d) non-current liabilities

58. Which document would a supplier issue to a credit customer if the credit customer had
returned goods or had been overcharged?

a) cheque b) credit note c) debit note d) invoice`

59. Andy was a regular customer of Khalid. He bought goods with a list price of $1000 and later paid
$760 in full settlement after receiving a discount for prompt payment of 5%. How much trade
discount did Andy receive?

a) $40 b) $190 c) $200 d) $278

60. The totals of a trial balance agree. What does this mean?

a) All the arithmetic in the ledger is correct

b) All transactions have been entered in the correct ledger accounts.
c) All transactions have been entered on the correct sides of the ledger.
d) Total debit balances equal total credit balances in the ledger.
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 ANSWER THE FOLLOWING:

1. Identify the source document for each of the following transactions.

a) Rent paid by direct debit.

b) Goods bought on credit.

c) A customer pays for goods by credit transfer.

d) Goods sold and paid for immediately.

e) Goods bought on credit that are returned to a supplier.

f) A cheque received from a credit customer.

g) Goods sold on credit.

h) Goods sold on credit that are returned by a customer.

i) Stationery bought and paid for immediately.

j) A credit supplier is paid by cheque.

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 3. Complete the following table to show the source document and effect of each transaction on the
different accounts.

Transaction Source Book of Account Account

document prime entry debited credited
The business owner transfers,
$ 10 000 into the business
bank account.

The business pays rent by

standing order.

The business buys goods on

credit from ‘Supplier’.

The business returns some of

the goods that it had bought
on credit.

The business sells goods on

credit to ‘Customer’.

The business receives a

cheque in payment for the
goods sold on credit.

The business pays its credit

supplier by cheque.

The business pays its

electricity bill by direct debit.
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 4. The balances on Christos’ books at 31 July 2021 were as follows:

Capital ?
Drawings 8 000
Office furniture 5 000
Provision for depreciation on office furniture 3 200
Inventory 4 150
Bank overdraft 250
Trade payables 2 950
Sundry expenses 10 600
Purchases 32 400
Provision for doubtful debts 350
Revenue (sales) 53 750
Trade receivables 6 250

Prepare the trial balance for Christos at 31 July 2021, including the balance on the capital account.
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 5. Sanath Jaffer is a trader. His financial year ends on 31 January. He provided the following
information on 31 January 2023. $

Capital 53000
Drawings 6 100
Revenue 6 6000
Purchases 43 350
Purchases returns 1 150
Inventory 1 February 2022 3 700
Inventory 31 January 2023 4 100
Bank overdraft 3 050
Trade receivables 5 320
Trade payables 3 450
General expenses 17 850
non-current assets 50 400

Complete a trial balance for Sanath Jaffer at 31 January 2023. Show any difference you find as a
balance on an appropriate account.

Trial balance as at 31 January 2023.

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 6. Write up Mahabeer' s THREE column cash book from the transactions below and balance the
cash book appropriately.

April 2020

1 Balances brought forward; cash $350: bank overdraft $5 000.

2 Singh who had an account balance of $8 000 paid in full by cheque, after deducting
5% cash discount.

3 Paid rent by cheque $700.

7 Paid Townsend $970 by cheque, having deducted 3% cash discount.
10 Received a cheque of $3 000 from a friend as a loan.
15 Paid wages in cash $300.
16 Transferred $1700 from bank to cash.
25 Cash sales $450.
27 Cash withdrawn for personal use $150.
28 Paid in full, McBean's outstanding balance of $700, less 5% cash discount.
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 a. Explain what is meant by the imprest system of petty cash book.

b. State ONE advantage of using imprest system of petty cash.

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 8. Martha started a business trading in Wooden Toys on 1 July 2015. At the end of first year of trading
she valued her inventory at the lowest of cost and net realisable value.

a. Explain the meaning of the term “cost”.

b. Explain the meaning of the term “net realisable value”.

c. Explain how Martha is applying the accounting principle of prudence by valuing her inventory at
the lowest of cost and net realisable value.
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The cost per unit of LS15 does not include carriage inwards of $ 2 per unit.
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 d. Calculate the value of each type of inventory. Show your calculations.

e. Explain the basis for your valuation in each case.

Wages Account
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 Insurance Account

10. On 1 April 2021 Lynne purchased two motor vehicles for business use on credit from Villa
Motors Limited. The vehicles cost $12 000 each. Depreciation is charged on the motor vehicles at
20 per cent per annum by the reducing balance method. A full year’s depreciation is charged in the
year of purchase, but no depreciation is charged in the year of sale. On 23 January 2023 one of the
motor vehicles was sold for $6 500.

a Prepare the journal entry to record the purchase of the motor vehicles on 1 April 2021. Dates and
narratives are not required.

b Prepare the provision for depreciation account for the years ended on 31 March 2022 and 2023.
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 c Prepare the disposal account.

d State two other methods of depreciation.

11. Mary started business on 1 January 2022, renting premises at $12 000 per annum, paid by
instalments on the first day of January, April, July and October.

On 1 August 2022 Mary let part of the premises to another business for $5 400 per annum, to be
paid by instalments on the first day of August, November, February and May.

Mary paid the rent on 1 January, 1 April and 1 July 2022.

The tenant paid rent to Mary on 1 August and 1 November 2022.

a Prepare the rent payable account for the year ended 31 December 2022. Balance the account
and bring the balance down on 1 January 2023.
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 b Explain the meaning of the balance on 1 January 2023.

c Prepare the rent received account for the year ended 31 December 2022. Balance the account
and bring the balance down on 1 January 2023.

d Explain the meaning of the balance on 1 January 2023.

12. On 1 January 2018, Pat’s business had trade receivables of $9 400 and the provision for doubtful
debts was five per cent of the trade receivables. At 31 December 2018, irrecoverable debts of $640
were written off and $140 was received in respect of irrecoverable debts previously written off. On
the same day, trade receivables totalled $11 000, and it was decided to increase the provision for
doubtful debts to eight per cent of trade receivables, based on the growth of irrecoverable debts.

Prepare:
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 provision for doubtful debts account for the year ended 31 December 2018

The entry for irrecoverable debts and provision for doubtful debts in the income statement for the
year ended 31 December 2018

The general journal entry for irrecoverable debts recovered.

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 13. Ravi is a retailer of garden furniture. Ravi provided the following information about inventory held
at the end of his financial year.

Product Units held Cost per unit Selling and distribution Selling price
costs per unit per unit.

$ $ $

A 600 15 2.00 21
B 100 12 1.50 13
C 50 18 2.00 17

a Calculate the total value of each type of product.

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 14. Thein has a retail business. The following balances were extracted from his books at the end of
his financial year on 31 March 2022.

Leasehold property – 25 years (cost) 50 000

Equipment (cost) 54 000
Provisions for depreciation:
Leasehold property 10 000
Equipment 17 000

6% bank loan repayable 31 December 2025 25 000

Bank 5 150 (dr)
Trade receivables 6 750
Trade payables 4 010
Provision for doubtful debts 700
Revenue 78 580
Purchases 18 240
Purchases returns 1 600
Inventory at 1 April 2021 4 690
Equipment repairs 850
Equipment running expenses 2 650
General expenses 8 400
Wages 15 300
Insurance 3 640
Power and water 2 300
Advertising 5 100
Discount allowed 1 650
Discount received 330
Capital at 1 April 2021 50 000
Drawings 8 500

Additional information at 31 March 2022:

• Inventory was valued at $3 870.

• Thein took inventory valued at $450 for his own use.
• Equipment running expenses, $750, were accrued, and insurance, $1 350, was prepaid.
• The 6 per cent bank loan was received on 1 December 2021.
• An appropriate amount is to be written off the lease.
• The purchase of additional equipment, $10 000, had been omitted from the books.
• Payment was $5 000 by cheque with the remainder on credit.
• Equipment is to be depreciated at the rate of 20 per cent per annum using the
diminishing(reducing) balance method.
• Provision for doubtful debts is to be maintained at 8 per cent of trade receivables.
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 Prepare the income statement for the year ended 31 March 2022.
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 Prepare the statement of financial position at 31 March 2022.
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 15. Chris and Dorcas are in partnership. Their capital and current accounts as at January I, 2023, are
as follows:

Capital $ Current $ Drawings $

Chris 40000 5 000 (Credit) 17 000

Dorcas 60 000 3 000 (Credit) 12 000

The partnership agreement provides for the following:

1. Profits and losses are shared between Chris and Dorcas in the same ratio as their capital.
2. Chris is to be credited with a salary of $6 000 per annum.
3. Interest on capital at 8 per cent per annum is allowed.
4. Interest on drawings is charged at 10 per cent per annum.

The profit for the year is $95 950.

(a) Prepare the partnership profit and loss appropriation account for the year ended 31st Dec 2023.

(b) Prepare the partnership capital and current accounts as at 31st Dec 2023.
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 (c) Explain the meaning of a debit balance on a partner's current account.
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