Section 1 Practice Questions:
1. Which task is not performed by an accountant?
A) monitoring the progress of the business
B) preparing a statement of financial position
C) reporting on the trading results
D) writing up a three-column cash book
2. What is the accounting equation?
A) assets = capital – liabilities
B) capital = assets + liabilities
C) capital = assets – liabilities
D) liabilities = assets + capital
3. The following account appeared in Anna’s ledger:
Which statement is correct?
A) On 5 January Jodie sold goods, $500, to Anna.
B) On 7 January Anna returned goods, $20, to Jodie.
C) On 29 January Anna paid Jodie $300.
D) On 31 January Jodie owed Anna $180.
4. What is the purpose of a trial balance?
A) to calculate the capital of the business
B) to prove the arithmetical accuracy of the double entry
C) to summarise the assets and liabilities
D) to locate and correct errors in the ledger accounts
5. What transaction will be entered in both the purchases ledger and the nominal (general) ledger?
A) cash paid for goods for resale
B) purchase of office furniture by cheque
C) returns of goods by a credit customer
D) returns of goods to a credit supplier
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6. Waseem had the following assets, liabilities and capital on 1 April 20–6:
$
Premises 100 000
Machinery 48 000
Fixtures 8 800
Cash 590
Cash at bank 3 320
Trade receivables 4 130
Inventory 5 140
Trade payables 4 980
Capital 165 000
(a) Explain the meaning of each of the terms ‘assets’, ‘liabilities’ and ‘capital’.
Assets are things owned by or owed to the business.
Liabilities are amounts owed by the business.
Capital is the amount owed by the business to the owner
(b) State why the assets are always equal to the total of the liabilities and capital.
The assets represent how the resources of a business are being used and the liabilities and
capital represent where these resources have come from
(c) Complete the following table to state the effect of each transaction which took place on 2 April 20–
6. The first one has been completed as an example. If the transaction does not affect the assets or
liabilities write ‘no effect’.
Effect on
Transaction Effect on Assets $ $
Liabilities
Obtained a loan, $10,000, from AB Finance Bank +10 000 Loan +10 000
Inventory +500
Bought goods for resale, $500, for cash No effect No effect
Cash -500
Paid a credit supplier $2,100 by cheque Bank -2100 Trade payables -2100
Bought machinery, $4,000, and paid by cheque Machinery +4000 No effect No effect
Bank -4000
Sold out of date goods at cost price, $190, on credit Inventory -190 No effect No effect
Trade receivables +190
Explanation:
1. Obtained a loan: Increases assets (bank) and liabilities (loan).
2. Bought goods for resale: Increases inventory but decreases cash (not separate in this format).
3. Paid a credit supplier: Decreases cash and trade payables.
4. Bought machinery: Increases machinery and decreases cash.
5. Sold goods on credit: Increases trade receivables with no effect on liabilities.
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(d) Prepare the statement of financial position on 2 April 20–6 after these transactions have taken
place.
7. The following balances appeared in the books of Fabice on 30 June 20–7:
$
Machinery and equipment 108 000
Motor vehicles 31 000
Trade payables 7 800
Balance at bank 3 830
Trade receivables 11 500
Carriage inwards 380
Carriage outwards 440
Sales 131 000
Purchases 101 900
Rent receivable 3 600
Rent payable 8 400
Inventory 13 200
Commission receivable 1 950
Administration expenses 9 600
Capital ?
(a) State two reasons why a trial balance is prepared.
i) To Check the arithmetical accuracy of the double entries.
ii) Useful for preparing financial statements
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(b) Prepare a trial balance for Fabice on 30 June 20–7, inserting a figure for the capital account.
(c) Name and explain three errors which will not be revealed by a trial balance.
Three from –
i. Error of commission A transaction is entered using the correct amount and on the correct side abut the
wrong account of the same class
ii. Error of complete reversal The correct amount is entered in the correct accounts but the entry has been
made on the wrong side of each account
iii. Error of omission A transaction is completely omitted from the accounting records
iv. Error of original entry An incorrect figures is used when the transaction is first entered in the
accounting records so the double entry used the incorrect figure
v. Error of principle A transaction is entered using the correct amount and on the correct side but in the
wrong class of account
vi. Compensating errors These occur when two or more errors cancel each other out
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8. Mahendra started a business on 1 November 20–7. He provided the following information for his
first month of trading:
Date Details
Introduced $160,000 capital into the business, of which $158,500 was transferred
Nov-01 into a business bank account and the rest was placed in the business cash box.
2 Purchased premises, $95,000, paying by credit transfer
5 Bought goods for resale, $2,600, on credit from Duleep
10 Returned goods, $150, to Duleep
14 Paid general expenses in cash, $275
19 Paid rates in cash, $395
21 Sold goods on credit to Anila, $124
Paid carriage on goods sold, $95, in cash
24 Paid Duleep $1,000 by cheque on account
28 Took goods costing $250 for personal use
30 Rented out part of the premises and received $260 rent by cheque
(a) Enter these transactions in the cash book and ledgers. Balance the cash book and Duleep’s
account. Bring down the balances on 1 December 20–7.
Ans:
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(b) Prepare a trial balance on 30 November 20–7.
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Mahendra is considering allowing credit customers a cash discount for prompt payment.
(c) Explain the effect that this suggestion may have on Mahendra’s cash flow.
May receive cash quicker than if no cash discount, but will receive less than if no discount
was allowed.
PS- Cash flow is the money moving in and out of a business
(d) State how this discount would be recorded if Mahendra decided to proceed with this suggestion.
When the customer pays, the discount allowed is noted in the discount allowed column in
the cash book and a credit entry is made in the account of the customer in the sales ledger.
At the end of the month the discount allowed column is totalled and debited to the discount
allowed account in the nominal ledger.
9. Rachel is as trader. Her cash book for March 20–3 is shown below.
Explain each entry in the cash book. State where the double entry for each transaction would be made.
Date Transaction and Double Entry
Mar-01 Capital introduced by Rachel of which 200 was placed in the cash box and the remainder
deposited in the business bank account.
Double entry: credit capital account
Mar-04 Paid rent by cheque.
Double entry: debit rent payable account
Mar-06 Bought office furniture and paid by cheque.
Double entry: debit office furniture account
Mar-10 Bought goods for resale and paid by cheque.
Double entry: debit purchases account
Mar-19 Paid office expenses by cheque.
Double entry: debit office expenses account
Mar-21 Received a loan which was paid into the bank.
Double entry: credit loan account
Mar-30 Sold goods for cash.
Double entry: credit sales account
Mar-31 Paid wages in cash.
Double entry: debit wages account
Mar-31 Paid cash into the business bank account which is a contra entry.
Double entry: appears on both sides of cash book (debit bank and credit cash)
Mar-31 Balances remaining in the cash box and the bank at the end of the month.
Double entry: debit side of cash book at start of next month
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10. Habib maintains a three-column cash book and also a petty cash book.
The petty cash imprest is $80. All payments under $30 are made from petty cash.
The petty cash book has analysis columns for travel, stationery and ledger accounts.
The balances on 1 February 20–9 was:
$
Petty cash 44
Cash 200
Bank overdraft 2968
The following transactions took place in February 20–9:
Date Details
Feb-01 Petty cash restored from business bank account
Feb-04 Paid for taxi fares, $18
Feb-14 Received a cheque from Nadira in settlement of her account of $440, less 2½% cash discount ($427)
Feb-19 Bought copy paper, $12
Feb-24 Paid Uzma $343 by credit transfer after deducting 2% cash discount ($336.14)
Feb-26 Paid Bashir, a credit supplier, $25
Feb-27 Cash sales, $1,962
Feb-28 Paid all office cash into the bank except $150
Write up the petty cash book and the cash book for February 20-9. Balance the books on 28 February
and bring down the balances on 1 March 20-9.
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