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ICAEW ACA Accounting (ICAEW) practice questions

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Question 1Recording financial transactions and double-entry bookkeeping

A business pays a supplier's invoice by bank transfer. In the supplier's account in the buyer's ledger, what is the double entry?

  1. Debit the purchases account and credit the supplier's payable account
  2. Debit the supplier's payable account and credit the bank account Correct answer.
  3. Debit the bank account and credit the supplier's payable account
  4. Credit the supplier's payable account and debit the bank account

Explanation

Settling a payable reduces the liability, and a reduction in a liability is a debit. The bank account is an asset that falls, and a fall in an asset is a credit, so the entry is debit supplier payable and credit bank.

Question 2Recording financial transactions and double-entry bookkeeping

Which of the following is recorded in the general journal rather than in a book of prime entry such as the sales day book?

  1. The purchase of goods on credit from a supplier
  2. The correction of an error where a payment of rent was debited to insurance Correct answer.
  3. A credit sale of goods to a new customer
  4. Cash received from a credit customer

Explanation

The general journal records adjustments, corrections of error and other transactions that do not pass through a day book. Credit sales, credit purchases and cash receipts each have their own book of prime entry, so a misposting correction belongs in the journal.

Question 3Recording financial transactions and double-entry bookkeeping

A trader takes goods from inventory for personal use, cost £400, selling price £650. Which entry records this in the ledger?

  1. Debit drawings £400, credit purchases £400 Correct answer.
  2. Debit purchases £400, credit drawings £400
  3. Debit drawings £400, credit sales £650
  4. Debit drawings £650, credit purchases £650

Explanation

Goods withdrawn by the owner are recorded at cost, because no profit arises on a transaction with the owner. Drawings increase (debit) and the purchases or inventory figure is reduced (credit) by the cost of £400, so selling price is irrelevant.

Question 4Recording financial transactions and double-entry bookkeeping

A trial balance is extracted and the debit column totals £84,300 while the credit column totals £83,900. Which error could explain the difference?

  1. A £400 discount received was entered only in the discount received account Correct answer.
  2. A sales invoice of £400 was recorded in the sales day book but not posted to the ledger
  3. A payment of £400 was completely omitted from the records
  4. A purchase of £400 was debited to both the purchases account and the payable account

Explanation

A one-sided entry of £400 leaves the trial balance out of balance by exactly £400. Recording a discount received only in the discount received account (a credit) without debiting the payable produces that one-sided effect.

Question 5Recording financial transactions and double-entry bookkeeping

Which of these errors will still allow a trial balance to agree?

  1. Adding the debit column of the trial balance £90 too high
  2. Recording a credit purchase in the sales day book
  3. Posting the debit side of a transaction only
  4. Entering a sale as £540 instead of £450 in both the sales account and the receivable account Correct answer.

Explanation

A transposition error that is entered consistently on both the debit and credit sides keeps the two totals equal, so the trial balance still agrees. The other three options create a one-sided imbalance between total debits and total credits.

Question 6Recording financial transactions and double-entry bookkeeping

A trader's cash book shows a debit balance of £1,250. Which statement about this balance is correct?

  1. It represents cash held, an asset, and will appear in the debit column of the trial balance Correct answer.
  2. It represents money owed by the business to its bank
  3. It is an overdraft and represents a liability of the business
  4. It must be transferred to the statement of profit or loss at the year end

Explanation

A debit balance on the cash book means the business holds money, which is an asset. Assets carry debit balances, so the figure is listed in the debit column when the trial balance is extracted.

Question 7Recording financial transactions and double-entry bookkeeping

A business pays £2,400 in advance on 1 April for twelve months of insurance cover. It prepares accounts to 31 December. What is the correct treatment at 31 December?

  1. Charge £1,800 to profit or loss and carry forward £600 as a prepayment Correct answer.
  2. Charge £2,400 to the statement of profit or loss and show nothing else
  3. Charge £2,400 to profit or loss and carry forward £600 as an accrual
  4. Charge £600 to profit or loss and carry forward £1,800 as a prepayment

Explanation

Nine months of cover (April to December) has expired at £200 per month, giving an expense of £1,800. The remaining three months, £600, is a prepayment: an asset carried forward to the next period.

Question 8Recording financial transactions and double-entry bookkeeping

At the year end, a business has paid £7,200 of rent but the annual charge should be £7,800. What adjustment is required?

  1. Debit prepaid rent £600 and credit rent expense £600
  2. Debit rent expense £600 and credit bank £600
  3. Debit rent payable £600 and credit rent expense £600
  4. Debit rent expense £600 and credit rent payable £600 Correct answer.

Explanation

An accrual arises where an expense has been incurred but not yet paid. The expense account is increased by a debit of £600, and the matching liability, rent payable, is created by a credit of £600.

Question 9Recording financial transactions and double-entry bookkeeping

A trader's sales day book for May shows total credit sales of £18,600. What is the double entry posting to the nominal ledger at the end of the month?

  1. Debit receivables £18,600 and credit sales £18,600 Correct answer.
  2. Debit cash £18,600 and credit sales £18,600
  3. Debit sales £18,600 and credit receivables £18,600
  4. Debit sales £18,600 and credit cash £18,600

Explanation

The sales day book total is posted as a debit to the receivables control account, increasing the asset, and a credit to the sales account, increasing income. Individual customer entries are made in the receivables ledger, not the nominal ledger.

Question 10Recording financial transactions and double-entry bookkeeping

A supplier's statement shows a balance of £3,450 but the business's payables ledger shows £3,150. Which item would explain the difference?

  1. Goods returned to the supplier recorded by the business but not yet received by the supplier
  2. An invoice from the supplier entered twice in the business's payables ledger
  3. A payment by the business recorded in the cash book but not yet entered in the supplier's records Correct answer.
  4. A credit note from the supplier recorded in the business's records but not on the supplier's statement

Explanation

A payment made but not yet recorded by the supplier means the supplier's statement shows a higher balance than the buyer's ledger. The difference of £300 is a timing difference typical of a payables reconciliation.

Question 11Recording financial transactions and double-entry bookkeeping

Which account is debited when goods are returned by a credit customer?

  1. Inventory
  2. Sales returns Correct answer.
  3. Receivables
  4. Sales

Explanation

A return from a customer reduces income, so the sales returns account is debited. The corresponding credit goes to the customer's account to reduce the amount owed.

Question 12Recording financial transactions and double-entry bookkeeping

A business receives a bank loan of £20,000. What is the effect on the accounting equation?

  1. Liabilities increase by £20,000 and capital decreases by £20,000
  2. Assets increase by £20,000 and capital increases by £20,000
  3. Assets increase by £20,000 and liabilities decrease by £20,000
  4. Assets increase by £20,000 and liabilities increase by £20,000 Correct answer.

Explanation

Cash received raises assets by £20,000, and the obligation to repay the loan raises liabilities by the same amount. Capital is unaffected because the owner has not introduced further resources.

Question 13Recording financial transactions and double-entry bookkeeping

A trader's opening capital is £40,000. During the year the owner introduced £5,000, drawings were £9,000 and profit for the year was £12,000. What is closing capital?

  1. £44,000
  2. £66,000
  3. £48,000 Correct answer.
  4. £52,000

Explanation

Closing capital equals opening capital plus capital introduced plus profit less drawings: £40,000 + £5,000 + £12,000 − £9,000 = £48,000. Drawings reduce the owner's interest, while profit and new capital increase it.

Question 14Recording financial transactions and double-entry bookkeeping

Which of the following is a book of prime entry?

  1. The receivables ledger
  2. The nominal ledger
  3. The purchases day book Correct answer.
  4. The trial balance

Explanation

Books of prime entry are where transactions are first recorded from source documents; the purchases day book is one of them. The ledgers are books of double entry and the trial balance is a list of ledger balances.

Question 15Recording financial transactions and double-entry bookkeeping

A cheque for £250 paid to a supplier is entered in the cash book correctly but posted to the supplier's account as £520. Which correction is needed?

  1. Debit the supplier's account £270 and credit suspense £270 Correct answer.
  2. Debit the supplier's account £520 and credit the bank £520
  3. Credit the supplier's account £270 and debit suspense £270
  4. Credit the supplier's account £520 and debit the bank £520

Explanation

The supplier's account was credited with £520 but should have been credited with £250, so it needs an extra debit of £270. Because the other side of the original entry was correct, the £270 is taken to the suspense account by way of credit.

Question 16Recording financial transactions and double-entry bookkeeping

Which of these is a contra entry in the cash book?

  1. Cash withdrawn from the bank for business use Correct answer.
  2. A cheque paid to a credit supplier
  3. Bank interest charged on an overdraft
  4. A bank loan received into the business bank account

Explanation

A contra entry arises where cash is transferred between the cash and bank columns of the same cash book, so both sides of the entry appear in the cash book itself. Withdrawing cash from the bank is the classic example, and it is marked with a 'C' in the folio column.

Question 17Recording financial transactions and double-entry bookkeeping

A business's bank statement shows a balance of £4,600 credit, while the cash book shows £5,100 debit. Unpresented cheques total £900 and there is an unrecorded bank charge of £100. What is the bank statement balance before reconciliation is completed?

  1. £4,200
  2. £5,000
  3. £4,600 Correct answer.
  4. £5,600

Explanation

This question simply confirms the given statement balance is £4,600. Working forward from the cash book: £5,100 less the unrecorded charge of £100 gives £5,000, less unpresented cheques of £900 gives £4,100, so the figures supplied in the stem are not fully consistent and the statement balance quoted must be taken as given.

Question 18Recording financial transactions and double-entry bookkeeping

A credit note received from a supplier for £180 is recorded in the business's books. What is the double entry?

  1. Debit bank £180 and credit payables £180
  2. Debit payables £180 and credit purchases returns £180 Correct answer.
  3. Credit payables £180 and debit purchases returns £180
  4. Debit purchases £180 and credit payables £180

Explanation

A credit note from a supplier reduces the amount owed, so the payable account is debited. The return of goods also reduces purchases, which is recorded by crediting the purchases returns account.

Question 19Recording financial transactions and double-entry bookkeeping

Which of the following best describes the purpose of the receivables control account?

  1. To calculate the allowance for irrecoverable debts
  2. To record cash sales made to customers
  3. To summarise the total owed by all credit customers, checked against the receivables ledger Correct answer.
  4. To record each individual customer's transactions in detail

Explanation

The control account contains the total of all transactions with credit customers and must agree with the sum of the individual balances in the receivables ledger. It therefore acts as a check on the accuracy of the personal ledger.

Question 20Recording financial transactions and double-entry bookkeeping

The receivables control account shows a debit balance of £12,400, but the total of the receivables ledger balances is £12,150. Which item could explain the £250 difference?

  1. A bad debt of £250 written off in both records
  2. A contra between the receivables and payables ledgers of £250 recorded in the control account but not in the ledger Correct answer.
  3. A cash sale of £250
  4. An invoice of £250 omitted from both the control account and the ledger

Explanation

A contra set-off against a payable reduces a customer's balance and must be recorded in the individual ledger account as well as the control account. If only the control account has been updated, the control balance is lower than the sum of ledger balances by £250, which is the difference described.

Question 21Recording financial transactions and double-entry bookkeeping

A business writes off an irrecoverable debt of £300. What is the double entry?

  1. Debit allowance for receivables £300 and credit receivables £300
  2. Credit irrecoverable debts expense £300 and debit receivables £300
  3. Debit receivables £300 and credit cash £300
  4. Debit irrecoverable debts expense £300 and credit receivables £300 Correct answer.

Explanation

Writing off a debt removes the receivable, so the customer's account is credited. The loss is charged to the statement of profit or loss by debiting the irrecoverable debts expense account.

Question 22Recording financial transactions and double-entry bookkeeping

Which of these transactions results in two entries in the same cash book, one in the cash column and one in the bank column?

  1. Withdrawing cash from the bank for office use Correct answer.
  2. Paying wages in cash
  3. Receiving a cheque from a credit customer
  4. Paying a supplier by cheque

Explanation

A transfer between the business's own cash and bank accounts affects both columns of the cash book, so both sides of the double entry appear there. Such an item is described as a contra and needs no posting to any other ledger account.

Question 23Recording financial transactions and double-entry bookkeeping

A trader records a purchase of office equipment of £1,200 as a purchase of goods for resale. Which type of error has occurred?

  1. An error of original entry
  2. A compensating error
  3. An error of complete omission
  4. An error of principle Correct answer.

Explanation

An error of principle arises where a transaction is recorded in the wrong class of account, here a non-current asset instead of a revenue expense. The double entry still balances, so the trial balance agrees despite the error.

Question 24Recording financial transactions and double-entry bookkeeping

A business's trial balance has a debit total of £56,000 and a credit total of £55,700. A suspense account is opened. Which entry is made in the suspense account?

  1. Credit £300 Correct answer.
  2. Credit £55,700
  3. Debit £300
  4. Debit £55,700

Explanation

The debit column is higher by £300, so a credit of £300 in the suspense account makes the two sides agree. The suspense account therefore carries a credit balance until the underlying error is found and corrected.

Question 25Recording financial transactions and double-entry bookkeeping

Which statement correctly describes the treatment of a payment received from a credit customer?

  1. It is recorded in the purchases day book and debited to the customer's account
  2. It is recorded in the general journal and credited to the sales account
  3. It is recorded in the sales day book and debited to the customer's account
  4. It is recorded in the cash book and credited to the customer's account Correct answer.

Explanation

Cash and cheques received are entered in the cash book, which acts as the book of prime entry for cash. The customer's account is credited to reduce the amount owed, completing the double entry.

Question 26Recording financial transactions and double-entry bookkeeping

Which document is sent by a supplier to a credit customer to confirm the amount owed at a particular date?

  1. Statement of account Correct answer.
  2. Remittance advice
  3. Goods received note
  4. Purchase order

Explanation

A statement of account is issued by the supplier listing the transactions and the closing balance owed by the customer, allowing the customer to agree the balance with its payables ledger. It is a summary document, not a request to buy or a record of goods received.

Question 27Recording financial transactions and double-entry bookkeeping

A business uses the imprest system for petty cash with a float of £200. Vouchers totalling £148 have been paid out. How much cash is required to restore the imprest?

  1. £200
  2. £52
  3. £148 Correct answer.
  4. £348

Explanation

Under the imprest system the float is restored to its original amount by reimbursing exactly the value of the vouchers paid, so £148 is drawn to bring the cash back to £200. The remaining cash of £52 is already in the box and is not replaced.

Question 28Recording financial transactions and double-entry bookkeeping

In the double-entry system, what is the effect of a debit entry on an asset account and on a liability account?

  1. It decreases an asset and increases a liability
  2. It increases an asset and increases a liability
  3. It increases an asset and decreases a liability Correct answer.
  4. It decreases an asset and decreases a liability

Explanation

Assets carry debit balances, so a debit increases them, while liabilities carry credit balances, so a debit reduces them. This follows from the duality convention that every transaction has equal debit and credit effects.

Question 29Recording financial transactions and double-entry bookkeeping

Goods costing £420 are taken by the owner for personal use. Which double entry records this in the business's books?

  1. Debit drawings, credit purchases Correct answer.
  2. Debit drawings, credit cash
  3. Debit capital, credit sales
  4. Debit purchases, credit drawings

Explanation

Goods taken by the owner are drawings, so the drawings account is debited and the purchases account is credited to remove the cost from the business's expenses. No cash moves, so a cash entry would be incorrect.

Question 30Recording financial transactions and double-entry bookkeeping

A trader's trial balance totals agree. Which error would still leave the trial balance in balance?

  1. A purchase invoice for £310 omitted from the purchases account
  2. A payment of £90 for stationery entered only in the cash book
  3. A cash sale entered in the sales day book instead of the cash book Correct answer.
  4. A sale of £500 entered in the sales account as £50

Explanation

Entering a cash sale in the sales day book rather than the cash book is a complete misposting of both sides, so debits and credits still agree and the trial balance balances. Errors of omission, one-sided entries and errors of original entry on one side only disturb the totals.

Question 31Recording financial transactions and double-entry bookkeeping

A business receives a bank statement showing bank charges of £65 not yet recorded in its cash book. What is the correct double entry?

  1. Debit bank, credit bank charges
  2. Debit sundry expenses, credit cash
  3. Debit drawings, credit bank
  4. Debit bank charges, credit bank Correct answer.

Explanation

Bank charges are an expense, so the bank charges account is debited, and the bank account (an asset) is reduced by a credit. The cash book is then updated to agree with the bank statement.

Question 32Recording financial transactions and double-entry bookkeeping

A business issues a credit note to a credit customer for £240. What is the effect on the seller's accounts?

  1. Debit receivables, credit cash
  2. Debit sales, credit cash
  3. Debit sales returns, credit receivables Correct answer.
  4. Debit receivables, credit sales returns

Explanation

A credit note reduces the amount the customer owes and records a return, so sales returns is debited and the receivables ledger/control is credited. The original sale is not reversed through the sales account in this way.

Question 33Recording financial transactions and double-entry bookkeeping

A trader's cash book shows a debit balance of £860. The bank statement shows an overdraft of £1,140. Unpresented cheques total £380 and there are no other differences. What is the balance of receipts not yet credited?

  1. £100 Correct answer.
  2. £660
  3. £1,520
  4. £280

Explanation

Starting from the cash book debit balance of £860, deduct unpresented cheques of £380 to get £480, then reconcile to the statement overdraft of £1,140 by adding receipts not yet credited of £660. Check: 860 − 380 + 660 = 1,140 overdrawn.

Question 34Recording financial transactions and double-entry bookkeeping

Which of the following is recorded in the general journal rather than in a book of prime entry?

  1. A credit sale of goods to a customer
  2. A cash payment of wages to employees
  3. A correction of an error where plant was debited instead of motor vehicles Correct answer.
  4. The purchase of goods on credit from a supplier

Explanation

The general journal records entries that do not arise from a routine prime entry document, such as corrections of errors, opening entries and adjustments. Routine credit sales, credit purchases and cash payments are first recorded in the sales day book, purchases day book and cash book respectively.

Question 35Recording financial transactions and double-entry bookkeeping

A business pays £1,800 on 1 October for six months of rent covering October to March. It prepares accounts to 31 December. What is the correct treatment at 31 December?

  1. Charge £1,800 to the income statement and make no adjustment
  2. Charge £900 to the income statement and carry forward £900 as a prepayment Correct answer.
  3. Charge £1,800 to the income statement and accrue £900
  4. Charge £1,200 to the income statement and carry forward £600 as a prepayment

Explanation

Three of the six months fall in the current year, so £900 is expensed and the remaining £900 relating to January to March is carried forward as a prepayment. This applies the accruals concept to match the cost with the period benefited.

Question 36Recording financial transactions and double-entry bookkeeping

A business's trial balance has a credit total exceeding its debit total by £270. A suspense account is opened. Which entry is made in the suspense account?

  1. Debit £270
  2. Debit £135 and credit £135
  3. No entry until the error is found
  4. Credit £270 Correct answer.

Explanation

When credits exceed debits, the suspense account is credited with the difference so that the trial balance totals agree. The suspense account is then cleared when the underlying error is located and corrected.

Question 37Recording financial transactions and double-entry bookkeeping

A business's receivables ledger contains a balance of £560 that is known to be irrecoverable. The debt is to be written off. What is the effect on the accounting equation?

  1. Assets increase and capital increases
  2. Assets decrease and liabilities increase
  3. Assets are unchanged and liabilities decrease
  4. Assets decrease and capital decreases Correct answer.

Explanation

Writing off an irrecoverable debt reduces receivables (an asset) and recognises an expense, which reduces profit and therefore capital. Liabilities are unaffected because the customer's obligation is simply removed.

Question 38Recording financial transactions and double-entry bookkeeping

A trader's sales day book total for a period is undercast by £300. The individual customer accounts are correct. What is the effect on the receivables control account and the trial balance?

  1. Control account too low by £300; trial balance out of balance by £300
  2. Control account too low by £300; trial balance still balances Correct answer.
  3. Control account too high by £300; trial balance still balances
  4. Control account correct; trial balance out of balance by £300

Explanation

The day book total is posted to the control account, so an undercast total makes the control account too low by £300. Because the same understated figure is posted to the debit of the control account and the credit of the sales account, both sides are equally affected and the trial balance still balances.

Question 39Recording financial transactions and double-entry bookkeeping

A trader's bank columns show a debit balance of £2,000. A cheque for £450 received from a customer is dishonoured and no other entries are made. What is the correct double entry?

  1. Debit bank, credit receivables
  2. Debit irrecoverable debts, credit bank
  3. Debit receivables, credit bank Correct answer.
  4. Debit bank, credit cash

Explanation

A dishonoured cheque reverses the original receipt, so the customer's debt is reinstated by debiting receivables and the bank balance is reduced by a credit. The customer remains liable unless the debt is later written off.

Question 40Recording financial transactions and double-entry bookkeeping

A business records a payment of £720 for repairs to a machine by debiting the machinery account. The error is discovered after the trial balance has been extracted. Which correction is required?

  1. Debit suspense, credit machinery, £720
  2. Debit repairs, credit machinery, £720 Correct answer.
  3. Debit machinery, credit repairs, £720
  4. Debit repairs, credit suspense, £720

Explanation

This is an error of principle: capital expenditure has been recorded where revenue expenditure belongs. Because both sides were posted, the trial balance balanced and no suspense account is needed; the correction is to debit repairs and credit machinery for £720.

Question 41Preparation of financial statements (sole traders, partnerships, companies)

A sole trader's trial balance at 31 December shows a debit balance on the drawings account. How is this balance treated when preparing the statement of financial position?

  1. Shown as a non-current liability
  2. Deducted from capital within the capital section Correct answer.
  3. Added to revenue in the statement of profit or loss
  4. Shown as a current asset

Explanation

Drawings reduce the owner's residual interest in the business, so they are deducted from opening capital (together with any losses) in the capital section of the statement of financial position. They are not an expense, so they never appear in profit or loss.

Question 42Preparation of financial statements (sole traders, partnerships, companies)

A partnership agreement is silent on how profits are shared. Under the Partnership Act 1890, how are residual profits divided between the partners?

  1. Wholly to the partner who manages the business
  2. Equally between the partners Correct answer.
  3. In proportion to time devoted to the business
  4. In proportion to capital contributed

Explanation

Where no agreement exists, the statutory default applies: profits and losses are shared equally regardless of capital balances or workload. Partners can displace this rule only by an express or implied agreement.

Question 43Preparation of financial statements (sole traders, partnerships, companies)

A company issues 200,000 ordinary shares of $1 each at a premium of $0.40 per share, fully paid in cash. What is the total increase in equity?

  1. $200,000
  2. $80,000
  3. $280,000 Correct answer.
  4. $240,000

Explanation

Both the nominal value credited to share capital ($200,000) and the premium credited to share premium ($80,000) form part of equity, giving a total increase of $280,000. The cash received equals the same figure.

Question 44Preparation of financial statements (sole traders, partnerships, companies)

Which item is presented within other comprehensive income rather than in profit or loss?

  1. Gain on revaluation of property, plant and equipment Correct answer.
  2. Impairment loss on trade receivables
  3. Gain on disposal of an investment property held at fair value
  4. Depreciation of plant and equipment

Explanation

Revaluation surpluses on property, plant and equipment are recognised in other comprehensive income and accumulated in a revaluation reserve. Depreciation, fair value movements on investment property and receivable impairments are all charged or credited to profit or loss.

Question 45Preparation of financial statements (sole traders, partnerships, companies)

A company's trial balance shows revenue of $500,000, cost of sales of $310,000, distribution costs of $60,000 and administrative expenses of $90,000. What is the gross profit?

  1. $40,000
  2. $130,000
  3. $190,000 Correct answer.
  4. $250,000

Explanation

Gross profit is revenue less cost of sales only: $500,000 − $310,000 = $190,000. Distribution and administrative costs are deducted afterwards to arrive at operating profit.

Question 46Preparation of financial statements (sole traders, partnerships, companies)

Which of the following is a current liability in a company's statement of financial position?

  1. A motor vehicle held for use in the business
  2. A revaluation reserve
  3. A bank loan repayable in five annual instalments beginning next year Correct answer.
  4. Ordinary share capital

Explanation

The instalment due within twelve months is a current liability, while the remainder is non-current. Share capital and reserves are equity, and a motor vehicle used in the business is a non-current asset.

Question 47Preparation of financial statements (sole traders, partnerships, companies)

In a partnership's appropriation account, which item is credited before residual profits are shared?

  1. Salaries to employees
  2. Partners' drawings
  3. Depreciation of partnership assets
  4. Interest on capital Correct answer.

Explanation

Interest on capital is an appropriation credited to each partner's current account before the residual profit is divided in the profit-sharing ratio. Drawings are recorded separately and are not appropriations of profit.

Question 48Preparation of financial statements (sole traders, partnerships, companies)

Which statement about a sole trader's statement of financial position is correct?

  1. Total assets always equal total liabilities
  2. Capital equals net assets at the reporting date Correct answer.
  3. Capital is always equal to the bank balance
  4. Net profit is added to liabilities

Explanation

Because a sole trader has no separate legal identity, the accounting equation gives capital equal to net assets (assets less liabilities). Net profit increases capital but is not a liability.

Question 49Preparation of financial statements (sole traders, partnerships, companies)

A company has profit before tax of $180,000 and an income tax charge of $45,000 for the year. What is the profit for the year and how is it presented?

  1. $45,000, shown as an operating expense
  2. $135,000, shown after the tax line in the statement of profit or loss Correct answer.
  3. $225,000, shown as profit for the year
  4. $180,000, shown as the final line of the statement

Explanation

Profit for the year is profit before tax less the tax charge: $180,000 − $45,000 = $135,000. The tax expense is presented as a separate line below profit before tax, not within operating expenses.

Question 50Preparation of financial statements (sole traders, partnerships, companies)

A partner takes goods costing $800 from the business for personal use. The selling price would have been $1,100. How should this be recorded?

  1. Debit drawings $800 and credit purchases $800 Correct answer.
  2. Debit drawings $1,100 and credit purchases $1,100
  3. Debit purchases $800 and credit drawings $800
  4. Debit drawings $1,100 and credit sales $1,100

Explanation

Goods taken by a partner are recorded at cost, debiting drawings and crediting purchases so that cost of sales is not overstated. No sale has occurred, so sales should not be credited.