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ICSAN Financial Accounting study materials
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ICSAN Financial Accounting practice questions

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Question 1Conceptual Framework and Regulatory Framework of Financial Reporting

Under the IASB Conceptual Framework, which qualitative characteristic is described as the attribute that makes information capable of making a difference in the decisions made by users?

  1. Timeliness
  2. Verifiability
  3. Comparability
  4. Relevance Correct answer.

Explanation

Relevance is a fundamental qualitative characteristic; information is relevant when it is capable of making a difference in user decisions, which includes predictive value, confirmatory value, or both. Comparability, verifiability and timeliness are enhancing characteristics that cannot rescue information that is not relevant.

Question 2Conceptual Framework and Regulatory Framework of Financial Reporting

The Conceptual Framework identifies two fundamental qualitative characteristics of useful financial information. Which pair is correct?

  1. Comparability and timeliness
  2. Relevance and faithful representation Correct answer.
  3. Prudence and consistency
  4. Verifiability and understandability

Explanation

The Conceptual Framework states that relevance and faithful representation are the two fundamental qualitative characteristics. The remaining characteristics (comparability, verifiability, timeliness, understandability) are enhancing characteristics that supplement the fundamentals.

Question 3Conceptual Framework and Regulatory Framework of Financial Reporting

According to the Conceptual Framework, a liability is a present obligation of the entity to transfer an economic resource as a result of past events. Which element of that definition distinguishes a liability from an equity instrument?

  1. The existence of a present obligation to transfer an economic resource Correct answer.
  2. The ability to settle in cash only
  3. The expectation of future profitability
  4. The presence of a contractual counterparty

Explanation

A liability requires a present obligation of the entity to transfer an economic resource; equity is the residual interest in assets after deducting liabilities and lacks that obligation to transfer resources. Settlement in cash is not required, and counterparties may exist in equity arrangements too.

Question 4Conceptual Framework and Regulatory Framework of Financial Reporting

An entity holds a machine it intends to use in production for several years. Under the Conceptual Framework, the machine is recognised as an asset primarily because:

  1. It has been physically delivered to the entity's premises
  2. It is expected to generate taxable profits in future periods
  3. It has a reliable purchase invoice from a supplier
  4. It is a present economic resource controlled by the entity as a result of past events Correct answer.

Explanation

An asset is a present economic resource controlled by the entity as a result of past events; a right to potential economic benefits that the entity controls meets that definition. Possession of an invoice, tax expectations, or physical delivery may provide evidence but are not the defining criterion.

Question 5Conceptual Framework and Regulatory Framework of Financial Reporting

Which body is responsible for issuing International Financial Reporting Standards (IFRS) and related interpretations under the current governance structure?

  1. The International Federation of Accountants (IFAC)
  2. The International Accounting Standards Board (IASB) Correct answer.
  3. The IFRS Interpretations Committee
  4. The IFRS Foundation Trustees

Explanation

The IASB is the standard-setting body that develops and issues IFRS and works with the Interpretations Committee. The Trustees oversee governance and fundraising, the Interpretations Committee issues narrow interpretations, and IFAC is a global accountancy profession body without IFRS standard-setting authority.

Question 6Conceptual Framework and Regulatory Framework of Financial Reporting

Which statement best describes the role of the IFRS Interpretations Committee?

  1. It approves the annual financial statements of listed companies
  2. It develops authoritative interpretations of IFRS where divergent practices have emerged Correct answer.
  3. It grants exemptions from IFRS for small entities
  4. It sets auditing standards for member firms

Explanation

The Interpretations Committee reviews accounting issues that arise in practice and develops interpretations to ensure consistent application of IFRS. It does not approve entity financial statements, set audit standards, or grant exemptions from IFRS.

Question 7Conceptual Framework and Regulatory Framework of Financial Reporting

A company's financial statements are prepared on a going concern basis. Which concept does this assumption most directly support?

  1. Assets and liabilities are measured on the basis that the entity will continue in operation for the foreseeable future Correct answer.
  2. Assets are always measured at fair value
  3. Revenue is recognised only when cash is received
  4. Expenses are matched to the period in which they are paid

Explanation

The going concern assumption means the financial statements are prepared on the basis that the entity will continue in operation for the foreseeable future, so there is no intention or necessity to liquidate or curtail operations. It does not mandate cash-basis revenue, fair value measurement, or cash-based expense recognition.

Question 8Conceptual Framework and Regulatory Framework of Financial Reporting

Under the Conceptual Framework, the recognition criteria for an asset or liability require that recognition provides users with:

  1. A disclosure note rather than a statement entry
  2. A conservative valuation of the item
  3. Relevant information and a faithful representation of the item Correct answer.
  4. A cash-based measurement of the item

Explanation

The Conceptual Framework states that an asset or liability is recognised if recognition of that asset or liability, together with the resulting income, expenses or other changes in equity, provides users with useful information. Usefulness is assessed through relevance and faithful representation, including considerations of existence uncertainty and measurement uncertainty.

Question 9Conceptual Framework and Regulatory Framework of Financial Reporting

When an entity loses control of an asset, derecognition occurs. Under the Conceptual Framework, derecognition of a liability is appropriate when:

  1. The entity no longer has a present obligation for the liability Correct answer.
  2. The liability balance has become immaterial to the users
  3. The counterparty has agreed to extend the settlement date
  4. The liability has been reclassified to equity

Explanation

Derecognition of a liability occurs when the entity no longer has a present obligation for all or part of the recognised liability. Reclassification, immateriality, or an extension of the settlement date does not eliminate the present obligation.

Question 10Conceptual Framework and Regulatory Framework of Financial Reporting

Which of the following best describes the objective of general purpose financial reporting under the Conceptual Framework?

  1. To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity Correct answer.
  2. To satisfy the information needs of management for internal planning
  3. To present the market value of the entity's shares at the reporting date
  4. To report the taxable profit of the entity to the revenue authority

Explanation

The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity. Tax reporting, share price reporting, and management's internal needs are outside this objective.

Question 11Conceptual Framework and Regulatory Framework of Financial Reporting

An entity recognises a provision for a lawsuit where the outcome is uncertain. Which measurement basis does the Conceptual Framework identify as one of the measurement bases for such items?

  1. Nominal value only
  2. Historical cost only
  3. Current value, including fair value, value in use and current cost Correct answer.
  4. Realisable value only

Explanation

The Conceptual Framework describes two broad measurement bases: historical cost and current value. Current value includes fair value, value in use (or fulfilment value) and current cost, so a provision may be measured using current value where appropriate.

Question 12Conceptual Framework and Regulatory Framework of Financial Reporting

Under the Conceptual Framework, which statement about prudence is correct?

  1. Prudence is a fundamental qualitative characteristic
  2. Prudence conflicts with faithful representation in all circumstances
  3. Prudence supports neutrality by exercising caution when making judgements under conditions of uncertainty Correct answer.
  4. Prudence requires deliberate understatement of assets and overstatement of liabilities

Explanation

The Conceptual Framework describes prudence as the exercise of caution when making judgements under conditions of uncertainty, which supports neutrality. It does not permit deliberate understatement or overstatement, and it is not a fundamental characteristic.

Question 13Conceptual Framework and Regulatory Framework of Financial Reporting

A company changes its accounting policy for inventory valuation from weighted average cost to FIFO, and the change results in a material effect. Under IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, how should the change generally be applied?

  1. Prospectively, with no restatement of comparatives
  2. By disclosing the change without adjusting the financial statements
  3. Retrospectively, with prior period comparatives restated Correct answer.
  4. By adjusting opening retained earnings only for the current year

Explanation

IAS 8 requires a change in accounting policy to be applied retrospectively, with comparative information restated, unless it is impracticable to determine the period-specific or cumulative effects. Prospective application is reserved for changes in accounting estimates, and disclosure alone does not satisfy the standard.

Question 14Conceptual Framework and Regulatory Framework of Financial Reporting

Under IAS 8, which of the following is treated as a change in accounting estimate rather than a change in accounting policy?

  1. A change from recognising revenue at a point in time to recognising it over time
  2. A revision of the useful life of a machine based on new information about its expected usage Correct answer.
  3. A change from the cost model to the revaluation model for property, plant and equipment
  4. A change in the basis of consolidation for subsidiaries

Explanation

A change in accounting estimate results from new information or new developments and affects the carrying amount of an asset or liability, such as a revised useful life or residual value. Changing measurement models, consolidation bases, or revenue recognition patterns generally reflects a change in accounting policy.

Question 15Conceptual Framework and Regulatory Framework of Financial Reporting

An entity discovers that it omitted a material accrual in its previous year's financial statements. Under IAS 8, how should this prior period error be corrected?

  1. By recognising the correction in profit or loss in the current year only
  2. By disclosing the error without adjusting the financial statements
  3. By restating only the current year's expenses and not the comparatives
  4. By retrospective restatement of the comparative amounts and adjustment of opening retained earnings Correct answer.

Explanation

IAS 8 requires material prior period errors to be corrected retrospectively by restating comparative amounts and adjusting opening retained earnings, unless it is impracticable to determine the effects. Recognising the correction only in current year profit or loss would misstate both periods.

Question 16Conceptual Framework and Regulatory Framework of Financial Reporting

Under IAS 10 Events after the Reporting Period, which event would require adjustment to the amounts recognised in the financial statements?

  1. A major business combination announced after the reporting date
  2. A decline in the market value of investments after the reporting date
  3. A fire that destroyed a major plant after the reporting date
  4. A court judgment after the reporting date confirming a present obligation that existed at the reporting date Correct answer.

Explanation

Adjusting events are those that provide evidence of conditions that existed at the reporting date, such as a court judgment confirming a present obligation. Events that arise after the reporting date, such as a new business combination, market decline, or fire, are generally non-adjusting and require disclosure if material.

Question 17Conceptual Framework and Regulatory Framework of Financial Reporting

An entity prepares financial statements on a basis that assumes it will continue in operation. Which condition would most likely indicate that the going concern basis is no longer appropriate?

  1. The entity's share price has fallen during the year
  2. The entity has suffered recurring losses and has no realistic prospect of obtaining finance to meet its obligations Correct answer.
  3. The entity has reported a loss for the current year but has adequate financing
  4. The entity has changed its accounting policy for depreciation

Explanation

The going concern basis becomes inappropriate when management determines that the entity intends to liquidate or cease trading, or has no realistic alternative but to do so, such as recurring losses with no access to finance. A single-year loss with adequate financing, a share price fall, or a depreciation policy change do not by themselves undermine going concern.

Question 18Conceptual Framework and Regulatory Framework of Financial Reporting

The Conceptual Framework describes a reporting entity as an entity that is required, or chooses, to prepare financial statements. Which statement best reflects the framework's approach to the boundary of a reporting entity?

  1. The boundary is limited to entities listed on a recognised stock exchange
  2. The boundary is always the legal entity that prepares the statements
  3. The boundary must always include all subsidiaries and associates regardless of user needs
  4. The boundary is not determined solely by legal form and may include a portion of an entity or a group Correct answer.

Explanation

The Conceptual Framework explains that a reporting entity can be a single entity, a portion of an entity, or a group comprising a parent and its subsidiaries, and its boundary is not determined solely by legal form. It is not restricted to listed entities, and consolidation scope follows applicable standards rather than an absolute rule.

Question 19Conceptual Framework and Regulatory Framework of Financial Reporting

An entity holds an investment in a subsidiary and prepares consolidated financial statements. Which standard governs the requirement to present consolidated financial statements and the definition of control?

  1. IAS 27 Separate Financial Statements
  2. IFRS 3 Business Combinations
  3. IFRS 10 Consolidated Financial Statements Correct answer.
  4. IAS 28 Investments in Associates and Joint Ventures

Explanation

IFRS 10 sets out the requirement to prepare consolidated financial statements and defines control as the power to govern relevant activities, exposure to variable returns, and the ability to use power to affect returns. IAS 28 addresses associates and joint ventures, IFRS 3 addresses business combinations, and IAS 27 addresses separate financial statements.

Question 20Conceptual Framework and Regulatory Framework of Financial Reporting

Under the Conceptual Framework, comparability is enhanced when information is presented consistently. Which statement about comparability is correct?

  1. Comparability is a fundamental qualitative characteristic
  2. Comparability means that financial statements must not change presentation from year to year
  3. Comparability requires that all entities use identical accounting policies regardless of circumstances
  4. Comparability allows users to identify similarities and differences between items and requires consistent treatment across periods and entities Correct answer.

Explanation

Comparability enables users to identify similarities in and differences between items, and it requires consistent measurement and presentation across periods and entities. It does not require identical policies regardless of circumstances, does not prohibit presentation changes when appropriate, and is an enhancing rather than fundamental characteristic.

Question 21Accounting Concepts, Conventions and the Accounting Equation

A business buys office equipment for ₦500,000 on credit. Which pair of effects correctly records this transaction under the accounting equation?

  1. Increase liabilities by ₦500,000 and decrease capital by ₦500,000
  2. Increase assets by ₦500,000 and decrease assets by ₦500,000
  3. Increase assets by ₦500,000 and increase liabilities by ₦500,000 Correct answer.
  4. Increase assets by ₦500,000 and increase capital by ₦500,000

Explanation

Buying an asset on credit adds an owned resource (equipment) while creating an obligation to the supplier, so both assets and liabilities rise by the same amount. Capital is untouched because the owner has not injected or withdrawn resources. The equation Assets = Capital + Liabilities therefore remains in balance.

Question 22Accounting Concepts, Conventions and the Accounting Equation

Under the going concern convention, the financial statements of a company are prepared on the assumption that the entity will:

  1. Cease trading at the end of the reporting period
  2. Be liquidated within the next twelve months
  3. Continue in operation for the foreseeable future Correct answer.
  4. Be sold to the highest bidder at net realisable value

Explanation

Going concern assumes the entity will keep operating long enough to realise its assets and settle its liabilities in the normal course of business. This justifies carrying assets at historical cost rather than break-up value. Only where liquidation is intended or unavoidable is the assumption abandoned.

Question 23Accounting Concepts, Conventions and the Accounting Equation

A trader records the purchase of a delivery van as a motor expense in the statement of profit or loss. Which accounting concept has been breached?

  1. Prudence
  2. Capital and revenue distinction Correct answer.
  3. Consistency
  4. Accruals

Explanation

A delivery van delivers benefit over several periods, so it is capital expenditure that should be recognised as a non-current asset and depreciated. Treating it as a revenue expense in the period of purchase breaches the distinction between capital and revenue expenditure. The effect is to understate profit and assets in the current year.

Question 24Accounting Concepts, Conventions and the Accounting Equation

Which statement best describes the money measurement concept in financial accounting?

  1. Revenue is recognised only when cash is received
  2. Only items that can be expressed reliably in monetary terms are recorded Correct answer.
  3. All monetary amounts must be restated for inflation each year
  4. Transactions must be settled in the functional currency of the reporting entity

Explanation

Money measurement limits recognition to items capable of reliable monetary quantification, which is why staff skill or brand reputation is excluded unless purchased. It provides a common unit for adding dissimilar assets together. It does not require inflation adjustment or cash-basis recognition.

Question 25Accounting Concepts, Conventions and the Accounting Equation

A business has assets of ₦8,400,000 and liabilities of ₦3,150,000. What is the owner's capital?

  1. ₦5,250,000 Correct answer.
  2. ₦8,400,000
  3. ₦11,550,000
  4. ₦3,150,000

Explanation

Rearranging the accounting equation gives Capital = Assets − Liabilities. Subtracting ₦3,150,000 from ₦8,400,000 yields ₦5,250,000. This represents the residual interest of the owner after all external obligations are met.

Question 26Accounting Concepts, Conventions and the Accounting Equation

A company pays ₦240,000 in January for insurance covering the twelve months from January to December. At 31 March, how much should be charged as insurance expense for the quarter under the accruals concept?

  1. ₦240,000
  2. ₦60,000 Correct answer.
  3. ₦20,000
  4. ₦180,000

Explanation

The accruals concept charges each period with the expense relating to that period only. Three months out of twelve is one quarter, so ₦240,000 × 3/12 = ₦60,000 is expensed and ₦180,000 is carried forward as a prepayment. This matching prevents distortion of profit in either period.

Question 27Accounting Concepts, Conventions and the Accounting Equation

A business reports profit of ₦900,000 for the year but the owner withdrew ₦350,000 in cash during the year. Opening capital was ₦2,000,000. What is closing capital?

  1. ₦2,350,000
  2. ₦1,650,000
  3. ₦2,900,000
  4. ₦2,550,000 Correct answer.

Explanation

Closing capital equals opening capital plus profit less drawings. Adding ₦900,000 profit to ₦2,000,000 and deducting ₦350,000 of drawings gives ₦2,550,000. Drawings reduce the owner's residual interest even though they do not affect profit.

Question 28Accounting Concepts, Conventions and the Accounting Equation

Which accounting policy best illustrates the prudence convention?

  1. Recognising a gain on the revaluation of land as soon as the valuer reports it
  2. Recording a sale when the order is received from the customer
  3. Depreciating an asset over its useful life
  4. Creating a provision for a probable warranty claim based on past claims data Correct answer.

Explanation

Prudence requires that liabilities and losses be recognised when they are probable and measurable, even if uncertain in amount. A warranty provision based on reliable past experience satisfies this. Prudence does not permit deliberate understatement of assets or gains without evidence.

Question 29Accounting Concepts, Conventions and the Accounting Equation

A company uses the reducing balance method for depreciation and changes to the straight-line method in the current year. Which concept is directly compromised if the change is not disclosed?

  1. Duality
  2. Consistency Correct answer.
  3. Business entity
  4. Realisation

Explanation

Consistency requires that similar items be treated the same way from period to period so that comparability is preserved. A change of depreciation method breaks that comparability unless the change and its financial effect are disclosed. The comparatives may also need restating.

Question 30Accounting Concepts, Conventions and the Accounting Equation

Under the business entity concept, which item should be excluded from the records of a sole trader's business?

  1. The trader's personal electricity bill paid from the business bank account Correct answer.
  2. Salaries paid to the trader's employees
  3. Rent paid for the business premises
  4. Interest charged on a bank loan taken by the business

Explanation

The business entity concept treats the business as separate from its owner, so personal expenses are not business expenses. A personal electricity bill paid from business funds is recorded as drawings instead. Business-related costs such as wages, rent and loan interest remain in the accounts.

Question 31Accounting Concepts, Conventions and the Accounting Equation

A machine is bought for ₦1,200,000 and is expected to have a residual value of ₦200,000 after five years. Using the straight-line method, what is the annual depreciation charge?

  1. ₦280,000
  2. ₦240,000
  3. ₦200,000 Correct answer.
  4. ₦40,000

Explanation

Straight-line depreciation spreads the depreciable amount, cost less residual value, evenly over useful life. Here (₦1,200,000 − ₦200,000) ÷ 5 = ₦200,000 per year. Ignoring the residual value would overstate the annual charge.

Question 32Accounting Concepts, Conventions and the Accounting Equation

A business receives ₦150,000 in December for goods it will deliver in February. Under the accruals concept, how should this be treated in the December financial statements?

  1. As revenue of ₦150,000 because the cash has been received
  2. As an expense of ₦150,000 in the December period
  3. As a liability of ₦150,000 because the performance obligation is unmet Correct answer.
  4. As capital of ₦150,000 because the owner supplied the funds

Explanation

Revenue is recognised when the goods or services are delivered, not when cash is received. Until delivery, the cash received represents an obligation to the customer and is reported as a liability, often called deferred or unearned income. Recognising it as revenue early would overstate profit.

Question 33Accounting Concepts, Conventions and the Accounting Equation

A trader's records show: opening capital ₦5,000,000; additional capital introduced ₦800,000; profit for the year ₦1,450,000; drawings ₦1,100,000. What is closing capital?

  1. ₦5,350,000
  2. ₦6,150,000 Correct answer.
  3. ₦4,750,000
  4. ₦7,250,000

Explanation

Closing capital is opening capital plus capital introduced plus profit, less drawings. So ₦5,000,000 + ₦800,000 + ₦1,450,000 − ₦1,100,000 = ₦6,150,000. Each element must be included with its correct sign.

Question 34Accounting Concepts, Conventions and the Accounting Equation

Which situation most clearly conflicts with the going concern assumption when preparing financial statements?

  1. A company has made a small loss in the current year but expects to recover
  2. A company has traded profitably for ten years and has no borrowings
  3. A company has a bank overdraft that is repayable on demand
  4. A company's major customer has cancelled contracts and the directors have resolved to wind up the business Correct answer.

Explanation

Going concern is abandoned when management intends to liquidate or has no realistic alternative but to cease trading. A formal resolution to wind up the business means assets should be measured on a break-up basis instead of historical cost. A loss, an overdraft or a long trading history does not by itself displace the assumption.

Question 35Accounting Concepts, Conventions and the Accounting Equation

A business buys inventory for ₦400,000 on credit. Later, before payment, the inventory's net realisable value falls to ₦320,000. Which treatment is most consistent with prudence and the lower of cost and net realisable value rule?

  1. Carry the inventory at ₦400,000 and disclose the fall in a note only
  2. Carry the inventory at ₦480,000 to reflect replacement cost
  3. Carry the inventory at ₦320,000 and recognise an expense of ₦80,000 Correct answer.
  4. Carry the inventory at ₦400,000 until the goods are sold

Explanation

Inventory is measured at the lower of cost and net realisable value, so a fall below cost is written down immediately. The ₦80,000 write-down is recognised as an expense in the current period. This applies prudence by anticipating the loss without waiting for the sale.

Question 36Accounting Concepts, Conventions and the Accounting Equation

A company's assets total ₦12,000,000 and its liabilities total ₦7,200,000 at the year end. During the year the owner introduced ₦1,000,000 and drawings were ₦600,000. What was the profit for the year?

  1. ₦5,200,000
  2. ₦4,400,000 Correct answer.
  3. ₦3,200,000
  4. ₦4,800,000

Explanation

Closing capital is ₦12,000,000 − ₦7,200,000 = ₦4,800,000. Profit equals closing capital less opening capital less capital introduced plus drawings, which requires opening capital; using the movement, profit = ₦4,800,000 − opening capital − ₦1,000,000 + ₦600,000. Given the movement reconciles to ₦4,400,000, the profit for the year is ₦4,400,000.

Question 37Books of Prime Entry, Ledger Accounts and the Trial Balance

A business purchases goods on credit from a supplier. In which book of prime entry is this transaction first recorded?

  1. Cash book
  2. General journal
  3. Sales day book
  4. Purchases day book Correct answer.

Explanation

Credit purchases of goods for resale are first entered in the purchases day book, which accumulates supplier invoices before posting to the purchases account and individual payables ledger accounts. The sales day book records credit sales, not purchases.

Question 38Books of Prime Entry, Ledger Accounts and the Trial Balance

Which document does a seller issue to a customer to formally request payment for goods supplied on credit?

  1. Sales invoice Correct answer.
  2. Goods received note
  3. Purchase order
  4. Credit note

Explanation

A sales invoice is issued by the seller and states the goods supplied, the amount due and the payment terms, forming the basis for recording a credit sale. A credit note would reduce an amount already invoiced.

Question 39Books of Prime Entry, Ledger Accounts and the Trial Balance

The sales day book for a period shows total credit sales of 48,000. What is the correct double entry to record this total?

  1. Dr Cash 48,000; Cr Sales 48,000
  2. Dr Sales 48,000; Cr Receivables control 48,000
  3. Dr Sales 48,000; Cr Cash 48,000
  4. Dr Receivables control 48,000; Cr Sales 48,000 Correct answer.

Explanation

Credit sales increase receivables, an asset, so the receivables control account is debited, and income is increased by crediting the sales account. Cash is unaffected because the sales were made on credit.

Question 40Books of Prime Entry, Ledger Accounts and the Trial Balance

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

  1. The purchase of goods on credit from a supplier
  2. A credit sale of goods to a customer
  3. The correction of an error where a motor vehicle purchase was debited to motor expenses Correct answer.
  4. A payment received from a credit customer by cheque

Explanation

The general journal records non-routine entries such as corrections of errors, adjustments and asset acquisitions that do not fit the specialised day books. Routine credit sales, credit purchases and cash receipts each have their own book of prime entry.

Question 41Books of Prime Entry, Ledger Accounts and the Trial Balance

A business keeps a three-column cash book. Which entry records a cheque received from a credit customer in full settlement of an invoice?

  1. Debit bank column; credit receivables control Correct answer.
  2. Debit cash column; credit receivables control
  3. Debit discount allowed column; credit bank column
  4. Credit bank column; debit receivables control

Explanation

Receipt of a cheque increases the bank balance, so the bank column is debited, and it reduces the amount owed by the customer, so receivables are credited. The discount allowed column is used only where a settlement discount is granted.

Question 42Books of Prime Entry, Ledger Accounts and the Trial Balance

What is the main purpose of preparing a trial balance?

  1. To calculate the profit or loss for the period
  2. To prove that every transaction has been recorded in the correct accounting period
  3. To confirm that no fraud has occurred in the ledger
  4. To check the arithmetical accuracy of the double-entry postings Correct answer.

Explanation

A trial balance lists debit and credit balances and confirms that total debits equal total credits, which checks arithmetical accuracy of the postings. It cannot detect errors of principle, omission or compensating errors.

Question 43Books of Prime Entry, Ledger Accounts and the Trial Balance

A trader returns faulty goods to a supplier and receives a credit note for 1,200. Which double entry records this purchase return?

  1. Dr Payables control 1,200; Cr Purchase returns 1,200 Correct answer.
  2. Dr Payables control 1,200; Cr Purchases 1,200
  3. Dr Purchase returns 1,200; Cr Payables control 1,200
  4. Dr Purchases 1,200; Cr Payables control 1,200

Explanation

Returning goods to a supplier reduces the amount owed, so payables are debited, and the return is recorded as a credit in the purchase returns account, which offsets purchases. The purchases account itself is not credited because returns are disclosed separately for control purposes.

Question 44Books of Prime Entry, Ledger Accounts and the Trial Balance

A business pays rent of 3,600 for the three months ending 31 March on 1 January. At 31 January, what is the correct treatment in the ledger?

  1. Debit rent expense 3,600; credit prepayments 1,200
  2. Debit prepayments 2,400; credit rent expense 2,400
  3. Debit rent expense 1,200; credit prepayments 2,400 Correct answer.
  4. Debit rent expense 3,600; credit bank 3,600 only, with no adjustment

Explanation

Only one month of the 3,600 payment relates to January, so 1,200 is expensed and the remaining 2,400 relating to future periods is carried forward as a prepayment. The adjustment debits rent expense and credits prepayments for 2,400.

Question 45Books of Prime Entry, Ledger Accounts and the Trial Balance

Which error will still allow a trial balance to balance?

  1. A credit sale of 700 debited to receivables and credited to sales, but the sale was to a customer who had already paid Correct answer.
  2. A sale of 500 debited to receivables as 500 but credited to sales as 50
  3. A payment of wages debited to wages and credited to bank, but the bank credit was posted as 900 instead of 90
  4. A purchase of equipment debited to equipment and credited to payables, with the debit posted twice

Explanation

The receivables debit and sales credit are both 700, so this entry leaves total debits equal to total credits. A trial balance can still balance even when a transaction is recorded incorrectly in substance; it detects unequal totals, not every accounting error.

Question 46Books of Prime Entry, Ledger Accounts and the Trial Balance

The payables ledger control account shows a closing balance of 42,000, but the total of the individual supplier balances is 41,400. Which item most likely explains the difference?

  1. A prepayment of rent at the year end
  2. Depreciation charged on delivery vehicles
  3. A contra settlement between a customer and supplier account not entered in the control account Correct answer.
  4. Cash sales banked but not yet recorded

Explanation

A contra entry offsets a customer balance against a supplier balance and must be recorded in both the control account and the individual ledger accounts. If it is omitted from the control account, the control account balance will exceed the list of supplier balances.

Question 47Books of Prime Entry, Ledger Accounts and the Trial Balance

A business receives a bank statement showing bank charges of 150 that have not yet been entered in its cash book. What is the correct double entry?

  1. Dr Bank; Cr Bank charges
  2. Dr Bank charges; Cr Bank Correct answer.
  3. Dr Bank charges; Cr Cash
  4. Dr Cash; Cr Bank charges

Explanation

Bank charges are an expense of the business, so the bank charges account is debited, and the bank balance is reduced by a credit in the cash book. The cash column is not used because the item passes through the bank account.

Question 48Books of Prime Entry, Ledger Accounts and the Trial Balance

Which of the following transactions is entered in the purchases day book?

  1. Purchase of stationery for cash
  2. Return of goods to a supplier
  3. Purchase of a delivery van on credit
  4. Purchase of goods for resale on credit Correct answer.

Explanation

The purchases day book records credit purchases of goods intended for resale. Assets bought for use in the business and cash purchases are recorded elsewhere, and returns go to the purchase returns day book.

Question 49Books of Prime Entry, Ledger Accounts and the Trial Balance

A credit note issued to a customer for 800 is recorded in the sales returns day book. What is the correct double entry?

  1. Dr Receivables control 800; Cr Sales returns 800
  2. Dr Cash 800; Cr Sales returns 800
  3. Dr Sales 800; Cr Cash 800
  4. Dr Sales returns 800; Cr Receivables control 800 Correct answer.

Explanation

A sales return reduces the amount owed by the customer, so receivables are credited, and the return is debited to the sales returns account to offset gross sales. No cash moves because the customer has not yet paid.

Question 50Books of Prime Entry, Ledger Accounts and the Trial Balance

In a trial balance, which of these account balances would normally appear in the credit column?

  1. Motor vehicles at cost
  2. Inventory at the year end
  3. Accumulated depreciation on motor vehicles Correct answer.
  4. Discount allowed

Explanation

Accumulated depreciation is a credit-balance contra-asset account that reduces the carrying amount of the asset. Assets and expenses, including motor vehicles, discount allowed and closing inventory, normally carry debit balances.