PRINCIPLES OF ACCOUNTING

1 Which one of the following is an internal user of accounting information?

A. Bank
B. Creditor
C. Manager
D. Customer

2. Which of following is not an internal user of financial statements?

A. Board of Director
B. Managers
C. Employees
D. Creditor

3. Which one of the following is not an external user of accounting information?

A. the bank
B. investors
C. Goverment
D. managers

4. Which of the following is correct?

A. Capital = Liabilities + Assets
B. Liabilities = Assets + Capital
C. Assets = Liabilities + Capital
D. Assets = Capital - Sales

5. Which accounting equation is incorrect out of following?

A. Liabilities = Assets – Capital
B. Assets = Liabilities – Capital
C. Capital = Assets – Liabilities
D. Assets = Liabilities + Capital

6 Which of the following is correct?

Assets (£) Liabilities (£) Capital (£)
A. 875,000 125,000 750,000
B. 820,000 280,000 1,100,000
C. 955,000 115,000 820,000
D. 542,000 654,000 112,000

7. Which of following is capital ?

A. profit
1
 B. Cash
C. Car
D. expenses

8. The properties owned by business enterprises are classified as ……………

A. assets
B. liabilities
C. capital
D. Cash

9 The account used to record credit sales is ….….….….….

A. Accounts Payable
B. accounts receivable
C. amount receivable
D. discount receivable

10. The liability arising from the purchase of goods on credit is called ….….….….….
A. accounts payable
B. accounts receivable
C. loan
D. payable expenses

11 Items which are purchased and sold in the merchandise business is called ………..
A. machine
B. liability
C. goods
D. expense

12 A person who owes money to a firm against goods sold is called a/an ………….
A. creditor
B. debtor
C. shareholder
D. investor

13. A person to whom money is owed by a firm for the purchase of goods is called a/an ………….
A. creditor
B. debtor
C. investor
D. manager

14. Which account is used to record borrowings from the lenders?

A. Asset

2
 B. Liability
C. Expense
D. Revenue

15 Which financial statement contains assets, liabilities and capital of a business enterprise as of
a specific date?
A. Income Statement
B. Cash Flow Statement
C. Balance Sheet
D. Profit & Loss Statement

16 Which of the following are the three basic elements of the balance sheet?
A. Assets, liabilities and expense
B. Assets, expense and capital
C. Assets, liabilities and revenue
D. Assets, liabilities and capital

17. Which financial statement represents the accounting equation?

A. Income Statement
B. Cash Flow Statement
C. Balance Sheet
D. Profit & Loss Statement

18 The left side of the balance sheet should always be .......... to the total of the right side
A. Equal
B. Greater
C. Lower
D. All of A, B and C

19. Which statement is correct?

A. Financial accounting reports reflect past performance, while management accounting
reports are concerned with the future as well as the past
B. Financial accounting reports are prepared for internal users, while management accounting
reports are prepared for external users
C. Financial accounting reports focus on internal reporting
D. Financial accounting reports help managers plan and control what the business is doing

20. The liabilities of a firm are £5,000, the capital is £7,000. The total assets are:
A. £5,000
B. £7,000
C. £12,000

3
 D. £2,000

21. The assets can be converted into cash within a short period (one year or less) are known
as……………….
A. current assets
B. fixed assets
C. net asset
D. non-current assets

22. Bookkeeping is a systematic records of all …………. transactions.

A. personal
B. financial
C. non-financial
D. operating

23. Which of the following is not a business transaction?

A. Bought furniture of £100,000 for business
B. Paid for salaries of employees £20,000
C. Paid sons’ fees from her personal bank account £2,000
D. Paid sons’ fees from the business £2,000

24. What are the effects of the owner taking money out of the business bank account for private
use?
A. Asset increase, Capital decrease
B. Asset increase, Capital increase
C. Asset decrease, Capital increase
D. Asset decrease, Capital decrease

25. Which of the following transactions will reduce the total assets and liabilities of the
company?
A. Computer purchased in cash £20,000
B. Repaid the bank loan £20,000
C. Purchased of goods on credit £20,000
D. Loan received from the bank £20,000

26. Which of the following does not affect capital?

A. Profit of the business
B. Money lent to a business
C. Loss of the business
D. Money invested in a business by its owners

27. ABC Pizza bought equipment costing £11,000 on time. What is the effect of this transaction?

4
 A. Increase equipment by £11,000 and decrease capital by £11,000
B. Increase equipment by £11,000 and increase capital by £11,000
C. Increase equipment by £11,000 and increase accounts payable by £11,000
D. Increase equipment by £11,000 and decrease accounts payable by £11,000

28. If assets are £99,000 and liabilities are £32,000 then capital equals ………..
A. £32,000
B. £67,000
C. £99,000
D. £131,000

29. If a company receives the owner’s investment of £2,000 in cash, the effect on the accounting
equation would be:
A. Asset decrease by £12,000 and Capital decrease by £12,000
B. Asset increase by £12,000 and Liability decrease by £12,000
C. Asset increase by £12,000 and Liability increase by £12,000
D. Asset increase by £12,000 and Capital increase by £12,000

30. Edmund Limited has non-current assets of £101,356, current assets of £52,618, current
liabilities of £42,615 and non-current liabilities of £42,000. What is the amount of capital?
A. £49,353
B. £69,359
C. £153,359
D. £238,589

31. Marina is a sole trader. During her first year of trading to 31 December 20X9, she invested
£10,000 in the business, made a profit of £25,000 and withdrew £15,000 from the business. What
is the balance of the capital account at 31 December 20X9?
A. £10,000
B. £20,000
C. £35,000
D. £50,000

32. According to accrual concept of accounting, the economic transaction is recorded ……..
A. when cash is received or paid
B. when transaction occurs
C. when profit is computed
D. when the invoice is received

33. Which accounting concept states that the transactions of a business must be recorded
separately from its owners?
A. Materiality concept

5
 B. Time period concept
C. Matching principle
D. Business entity concept

34. Recording of all transactions at cost and not the market value is known as…………
A. materiality concept
B. conservatism concept
C. time interval concept
D. historical cost concept

35. Which of the following statements is true?

A. Economic life of an entity is divided into periodic intervals in accordance with the going
concern assumption
B. The assets are classified as current assets and fixed assets in accordance with accounting
period assumption
C. Revenue is generally recognized at the point of sale in accordance with the money
measurement concept
D. There are two aspects of accounting, one represented by the assets of the business and the
other by the claims against them in accordance with the dual aspect concept

36. Which of the following transactions will increase the total assets of the company by £15,000?
A. Purchased a car on credit £15,000
B. Purchased equipment in cash £15,000
C. Received payment from Paul £15,000
D. Paid bank loan of £15,000

37. Which of the following statements about an account is true?

A. The right side of an account is the debit or increase side.
B. An account is an individual accounting record of increases and decreases in specific assets,
liability, and capital items.
C. There are separate accounts for specific assets and liabilities but only one account for
capital items.
D. The left side of an account is the credit or decrease side.

38. A sole trader purchases a van for business use, paying by cheque. What is the double entry?
A. Credit van and debit bank
B. Debit van and credit cash
C. Debit purchases and credit bank
D. Debit van and credit bank

39. The double entry principle requires that ………………

A. the number of debit accounts must equal the number of credit accounts

6
 B. there must always be entries made on both sides of the accounting equation
C. the amount of the debits must equal the amount of the credits
D. there must only be two accounts affected by any transaction

40. What is the journal entry to record salaries paid by cash?

A. Debit capital, Credit cash
B. Debit salaries, Credit cash
C. Debit cash, Credit salaries
D. Debit salaries, Credit accounts payable

41. What is the double entry when the company performs a service but has not yet received
payment?
A. Debit service revenue and credits accounts receivable
B. Debit accounts receivable and credits service revenue
C. Debit service revenue and credits accounts payable
D. Make no entry until cash is received.

42. Which of the following requires credit entry?

A. An increase in accounts receivable
B. An increase in accounts payable
C. A decrease in capital
D. A decrease in loan

43. Which accounts are used when the business borrowed money from a bank?
A. Cash and bank
B. Capital and loan
C. Bank and loan
D. Bank and capital

44. Withdrawal of cash by the owner is …………...

A. debited to drawing
B. debited to cash
C. credited to drawing
D. credited to capital

45. Which of the following statement is correct?

A. Accounts receivable normally have credit balance
B. Machinery normally has debit balance
C. Accounts payable normally have debit balance
D. Expenses normally have credit balance

46. Recording transaction: Goods bought by cash

7
 A. Dr Cash; Cr Inventory
B. Dr Purchases; Cr Cash
C. Dr Inventory; Cr Bank
D. Dr Cash; Cr Sales

47. Recording transaction: Goods bought on time

A. Dr Accounts Payable; Cr Purchases
B. Dr Accounts Receivable; Cr Goods
C. Dr Purchases; Cr Accounts Payable
D. Dr Goods; Cr Accounts Receivable

48. Recording transaction: The business paid the amount owing to Timeless Ltd. by cash
A. Dr Business account; Cr Cash
B. Dr Accounts Payable; Cr Cash
C. Dr Accounts Receivable; Cr Cash
D. Dr Cash; Cr Accounts Payable

49. Which accounts are used when Tony paid the amount owed to the company by cheque?
A. Accounts payable and cash
B. Accounts receivable and cash
C. Accounts payable and bank
D. Accounts receivable and bank

50. On July 7, 20XX, ABC Corporation received cash £1,400 for services rendered. The entry to
record this transaction will include ………..
A. a debit to service revenue of £1,400
B. a credit to cash of £1,400
C. a debit to cash of £1,400
D. a credit to account payable of £1,400

51. What transaction is represented by the following entry?

Dr Account receivable
Cr Sale
A. The sale of goods on credit to a customer
B. Purchase inventory on cash
C. The sale of good on cash to a customer
D. Payment by cheque to a credit customer

52. What transaction is represented by the following entry?

Dr Account payable
Cr Cash
A. Payment by cheque to creditor

8
 B. Repaid part of loan from creditor in cash
C. A debtor, T. Smith paid us by cash
D. Bought van on time from creditor

53. Recording the transaction: Started a household machines business with £20,000 cash and
£100,000 in the bank
A. Dr Bank
Cr Capital
Cr Machine
B. Dr Cash
Dr Bank
Cr Capital
C. Dr Cash
Cr Bank
Cr Capital
D. Dr Capital
Cr Bank
Cr Cash

54. What transaction is represented by the following entry?

Dr Asset
Cr Liability
A. Bought a van on time
B. Sell a van in cash
C. The proprietor paid a creditor from his private funds
D. Return the computer to Timeless Ltd

55. On 1 January, the assets and liabilities of a business are: Assets: Fixtures £10,000; Inventory
£8,000; Cash at the bank £3,000; Liabilities: Accounts payable £3,000. During January, the
whole of the £8,000 inventory is sold for £11,000 cash. This results to
A. Profit of £3,000 and Capital of £21,000
B. Profit of £11,000 and Capital of £21,000
C. Profit of £3,000 and Capital of £29,000
D. Profit of £11,000 and Capital of £29,000

56. What transaction can be explained for double entry Dr Wages £200, Cr Bank £150, Cr
Wages Payable £50?
A. Paying wages of £200 by £150 by bank transfer and £50 by Cash
B. Paying wages of £200 by £150 by bank transfer
C. Receiving wages from bank transfer of £150 and being owed £50
D. Wages expense of £200 partly paid £150 by bank transfer and the rest of £50 paid later

9
57. What transaction can be explained for double entry Dr Bank £30, Dr Receivable £220, Cr
Sales £250
A. Goods sold for £250, receiving £200 in Cash and £30 from Bank transferred
B. Goods bought of £250, payment made of £30 from Bank transferred and the remaining
amount being paid later
C. Goods sold for £250, receiving £30 from Bank transferred and £220 being owed
D. Goods sold for £250, receiving £200 immediately and £30 from Bank transferred

58. What transaction can be explained for double entry Dr Purchases £100, Cr Payable £30, Cr
Cash £70?
A. Bought £100 of inventory, paying £70 in Cash and the remaining paying later
B. Bought goods of £100, paying £30 from Bank and £70 in Cash
C. Goods bought of £200, in which £100 of inventory and the remaining paying later
D. Goods sold for £70 Cash and £30 on time

59. What transaction can be explained for double entry Dr Receivable £50, Dr Cash £30, Cr
Equipment £80?
A. Bought equipment of £80, paying Cash of £30 and the remaining paying later
B. Equipment sold, receiving Cash of £30 and £50 being owed
C. Equipment sold for £80, owing to buyer £50 and receiving Cash of £30
D. Bought equipment, paying in Cash £30 and Bank transferred £50

60. What transaction can be explained for the following changes: Receivable increased by £30,
Capital increased by £10 and Inventory decreased by £20?
A. Inventory cost of £30 sold on time for £20
B. Owner taking £20 inventory out for private use, and putting back £30 inventory later
C. Sold inventory on time of £20, making loss of £10
D. Inventory cost of £20 sold on time for £30, making a profit of £10

61. What transaction can be explained for the following changes: Capital increased by £30 and
Receivable increased by £30?
A. Goods sold on time for £30
B. Owner investing £30 for the business, but paying later
C. Owner payback £30 that borrowing before
D. Goods sold for Cash of £30

62. Suppliers' personal accounts are found in the ……

A. nominal ledger
B. sales ledger
C. purchases ledger
D. general ledger

10
63. Which of the following transactions will not be included in the cashbook?
A. Cash receipt from Anil for £4,000
B. Cash purchases of £3,000
C. Credit sales of £2,000
D. Cash sales of £4,000

64.. As the total of the debit side exceeded the total of the credit side, the balance is said …
A. to be a “debit balance”
B. to be a “credit balance”
C. to be “closed off”
D. to be “balanced off”

65. What is the balance of the T account below?

Tandy
Sales £155 Bank £250
Sales £200 Cash £50

A. £55 on credit side

B. £55 sales
C. £55 on debit side
D. £55 Tandy

66. The T account Tom of ABC company has the following information:
Tom
Sales £100 Bank £200
Sales £200 Cash £50

This means:
A. Tom owes ABC nothing
B. ABC owes Tom £50
C. The account has credit balance of £50
D. Tom owes ABC £50

67 The T acount Lee of ABC company has the following information:

Lee
Sales £100 Bank £250
Sales £200 Cash £80
Sales £30

This means:
A. Lee owes ABC nothing
B. Lee owes ABC £30

11
 C. ABC owes Lee £30
D. Lee owes ABC £330

68. ABC company has the following transactions during May:

Sales on time to B. Flyn £800; Returns inwards from B. Flyn £120; B. Flyn paid ABC £440 by
cash. The balance of B. Flyn account is ……
A. £240 debit
B. £480 credit
C. £1,120 credit
D. £480 debit
69. XYZ company has the following transactions during June:
Purchases on time from J. Wilson £540; XYZ paid J. Wilson by cash £300; Returned goods to J.
Wilson £100. The balance of J. Wilson account is ……
A. £340 credit
B. £140 credit
C. £740 debit
D. £440 debit

70. XYZ company has the following transactions for the month of October:
Started in business with capital in cash of £3,600 and £8,400 in the bank; Paid rent by cash £800;
Bought goods on time from: A. Bell £1,200. The balance of cash account is ……
A. Debit balance of £2,800
B. Credit balance of £2,800
C. Credit balance of £2,400
D. Debit balance of £2,400

71. ABC company has the following transactions for the month of July:
Cash sales K. Park £510; Sold goods on time to K. Park £610; K. Park returned goods to ABC
£200. The balance of K. Park account is …….
A. Debit balance of £920
B. Credit balance of £1,320
C. Debit balance of £410
D. Credit balance of £920

72. During Jan 20X2, Blake has the following transaction:

Started in business with £10,000 cash and £5,000 at bank
Bough a car of £5,000. Paid immediately £2000 by bank transfer. The remaining paid in the next
month. Bought a machine of £1,000. Paid immediately £500 by cash and £500 by bank transfer.
The balance brought down of cash account is ……
A. £9,000 on debit side
B. £8,500 on credit side
C. £9,500 on debit side

12
 D. £15,000 on credit side

73. During Jan 20X2, Blake has the following transaction

Purchases on time from J. Parker £1,000; Sold goods on time to A. David £1,400; Returned
goods to J. Parker £200. The balance of Returns Outwards account is ……
A. Debit balance of £800
B. Debit balance of £1,200
C. Credit balance of £200
D. Credit balance of £800

74. During July 20X2, Helen has the following transaction:

Started in business with £15,000 at bank; Bought goods on time from J. Parker £2,000; Withdrew
£1,500 goods for personal use.
The balance of capital account is ……
A. Credit balance of £11,500
B. Credit balance of £13,500
C. Debit balance of £11,500
D. Debit balance of £13,500

75. During June 20X2, Tom has the following transaction:

Started in business with £4,000 at bank; Bought goods on time from J. Parker £2,500; Withdrew
£500 goods for personal use. The balance carried down of purchases account is ……
A. £2,000 on credit side
B. £2,000 on debit side
C. £1,500 on debit side
D. £1,500 on credit side

76. Accrued expense is ………..

A. expense account
B. asset account
C. liability account
D. capital account

77. Business ABC rent a building for £5,000 a year. The business pays £4,500 by cash in the
year. Which of the following entries is correct?
A. Dr Profit and Loss £4,500; Cr Rent £4,500
B. Dr Rent £5,000; Cr Profit and Loss £5,000
C. Dr Profit and Loss £5,000; Cr Rent £5,000
D. Dr Rent £4,500; Cr Profit and Loss £4,500

78. A debit balance brought down on Insurance account could be called

A. Accrued income

13
 B. Accrued expense
C. Prepaid income
D. Prepaid expense

79. Business ABC rent out a building for £5,000 a year, starting from 1 December 20X2. On 31
December 20X2, rent is received £5,500 by bank transferred. Which of the following statements is
correct?
A. £500 of prepaid income
B. £500 of prepayment
C. £500 of receivable
D. £500 of prepaid expense

80. At the end of the period, rent receivable account has the following information:
Rent receivable

Profit and Loss £2,000 Bank £1,800

The balance of the account is ………….

A. £200 of accrued income and placed on the credit side
B. £200 of accrued income and placed on the debit side
C. £200 of prepaid income and placed on the credit side
D. £200 of prepaid income and placed on the debit side

81. Business ABC rent a building for £5,000 a year. The business pays £4,500 by cash in the
year. Which of the following entries is correct?
A. Dr Rent expense £5,000; Cr Cash £4,500
B. Dr Rent expense £4,500; Cr Cash £4,500
C. Dr Rent expense £5,000; Cr Cash £4,500; Cr Rent receivable £500
D. Dr Rent expense £5,000; Cr Cash £4,500; Cr Rent payable £500

82. At the end of the period, Insurance account has the following information:
Insurance

Bank £1,700 Profit and Loss £2,000

The balance of the account is ………….

A. £300 of accrued expense and placed on the credit side
B. £300 of accrued expense and placed on the debit side
C. £300 of prepaid expense and placed on the credit side
D. £300 of prepaid expense and placed on the debit side

14
83. Where do items of prepaid income go in financial statement?
A. Current assets
B. Current liabilities
C. Revenue
D. Capital

84. Revenue received in advance could be recorded as ………….

A. revenue
B. accrued income
C. liabilities
D. receivables

85. Which of the following asset generally assumed not to depreciate?

A. Machinery
B. Building
C. Land
D. All of the above

86. If a machine cost £2,100 and was expected to be used for 3 years, it might be estimated at the
end of the first year that a third of its overall usefulness had been consumed. Depreciation is £700.
Profit would be …………..
A. reduced by £700
B. increased by £700
C. reduced by £1,400
D. increased by £1,400

87. If the estimated amount of depreciation on equipment for a period is £2,000, the adjusting
entry to record depreciation would be?
A. Debit depreciation expense, £2,000; Credit accumulated depreciation, £2,000
B. Debit depreciation expense, £2,000; Credit cash, £2,000
C. Debit equipment £2,000; Credit depreciation expense, £2,000
D. Debit accumulated depreciation, £2,000; Credit depreciation expense, £2,000

88. Gross profit is …………..

A. the excess of sales revenue over the total expenses
B. the excess of sales revenue over the cost of goods sold
C. the excess of purchases over the ending inventory
D. the excess of purchases over the cost of goods sold

89. XYZ Inc. had the following figures in its income statement:
Sales: 3,000,000; Expenses: 500,000; Purchases: 2,000,000; Closing inventory: 800,000; Rates:
20,000. Gross profit is ………….
A. 1,280,000
15
 B. 1,300,000
C. 200,000
D. 1,800,000

90. XYZ Inc. had the following figures in its income statement:
Sales: 3,000,000; Expenses: 500,000; Purchases: 2,000,000; Closing inventory: 800,000; Rates:
20,000. Net profit is ………….
A. 2,500,000
B. 1,280,000
C. 200,000
D. 1,800,000

91. XYZ Inc. had the following figures in its income statement:
Sales: 800,000; Cost of goods sold: 350,000; Salaries: 100,000; Rent received: 200,000; Other
expenses: 50,000
What is the amount of net profit?
A. 100,000
B. 450,000
C. 500,000
D. 300,000
92. At 31/12/20X9, Trading account has the following information:

Trading
Sales £12,000
Purchases £25,000
Closing inventory £3,000

Which of the following statements is correct?

A. Gross profit 10,000 and placed on credit side of trading account
B. Net profit 10,000 and placed on credit side of trading account
C. Net loss 10,000 and placed on debit side of trading account
D. Gross loss 10,000 and placed on credit side of trading account

93. At 31/12/20X9, Profit and Loss account has the following information:

Profit and Loss

Rent £2,500
Salaries £5,000 Gross profit £12,000
Other expenses £3,500

Which of the following statements is correct?

A. Net profit £1,000 and placed on debit side of Profit and Loss account
B. Net loss £1,000 and placed on debit side of Profit and Loss account

16
 C. Net profit £1,000 and placed on credit side of Profit and Loss account
D. Net loss £1,000 and placed on credit side of Profit and Loss account

94. Which statement is correct?

A. All the items in the trial balance have been used in the statement of profit or loss
B. Not all the items in the trial balance have been used in the statement of profit or loss. The
remaining balances are assets or liabilities or capital
C. Not all the items in the trial balance have been used in the statement of profit or loss. The
remaining balances are expenses or sales
D. All the items in the trial balance have been used in the statement of profit or loss; and have
zero balances at the end of the accounting period

95. Which statement is NOT correct?

A. Gross profit is calculated in trading account
B. Net profit is calculated in profit and loss account
C. Trading account and profit and loss account comprise of the statement of financial position
D. Both the trading account and the profit and loss account are part of the double entry system

96. XYZ Inc. had the following figures in its income statement:
Sales: £3,000,000; Expenses: £500,000; Gross profit: £2,000,000; Purchses: £1,800,000.
Ending inventory is ……………
A. £800,000
B. £2,800,000
C. £700,000
D. £1,500,000

97. At 31/12/20X9, Capital account has the following information:

Capital
Cash £12,000
Drawings £5,000
Net profit £7,000

Which of the following statements is correct?

A. Balance of capital account 14,000 and placed on debit side of capital account
B. Balance of capital account 14,000 and placed on credit side of capital account
C. Balance of capital account 2,000 and placed on debit side of capital account
D. Balance of capital account 14,000 and placed on credit side of capital account

98. XYZ Inc. had the following figures in its statement of financial position:
Cash: £5,000; Receivable: £12,000; Inventory: £6,000; Machinery: £20,000; Net assets: £15,000
The amount of liabilities is
A. £28,000
B. £58,000
17
 C. £8,000
D. £5,000

99. XYZ Inc. had the following figures in its statement of financial position:
Cash introduced: £20,000; Net loss for the year: £8,000; Drawings: £5,000
Total Capital is
A. £23,000
B. £33,000
C. £7,000
D. £13,000

100. XYZ Inc. had the following figures in its income statement:
Net profit: £800,000; Sales: £3,000,000; Purchses: £1,800,000; Closing inventory: £500,000
Total expenses are ……………
A. £1,900,000
B. £1,700,000
C. £2,200,000
D. £900,000

18