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NCEA Level 2 Accounting study materials
NCEA Level 2 Accounting study resources

NCEA Level 2 Accounting practice questions

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Question 1Accounting achievement standards (Level 2 standards)

A business receives an invoice from its electricity supplier for power used in the current month. Under accrual accounting, how should this be recorded?

  1. Debit Cash, credit Electricity Expense
  2. Debit Electricity Expense, credit Cash
  3. Debit Accounts Payable, credit Electricity Expense
  4. Debit Electricity Expense, credit Accounts Payable Correct answer.

Explanation

Accrual accounting records expenses when incurred, not when paid. The power has been used, so the expense is recognised now with a matching liability to the supplier. Cash is untouched until payment is made.

Question 2Accounting achievement standards (Level 2 standards)

Which item would be classified as a current asset on a statement of financial position?

  1. A long-term investment in another company
  2. A delivery van used for five years
  3. Inventory expected to be sold within three months Correct answer.
  4. A mortgage repayable in ten years

Explanation

Current assets are resources expected to be converted to cash or used within the normal operating cycle, typically twelve months. Inventory held for resale meets this definition. Vehicles, long-term investments and long-term loans are non-current.

Question 3Accounting achievement standards (Level 2 standards)

A business has assets of $85,000 and equity of $32,000. What are its liabilities?

  1. $32,000
  2. $53,000 Correct answer.
  3. $117,000
  4. $85,000

Explanation

The accounting equation states Assets = Liabilities + Equity, so Liabilities = Assets − Equity. Subtracting $32,000 from $85,000 gives $53,000.

Question 4Accounting achievement standards (Level 2 standards)

Which document is sent by a seller to a buyer to correct an overcharge on a previous invoice?

  1. A receipt
  2. A statement of account
  3. A purchase order
  4. A credit note Correct answer.

Explanation

A credit note reduces the amount owed by the buyer and records a reduction in the seller's receivable. It documents returns or corrections to an earlier invoice. A statement of account merely summarises transactions.

Question 5Accounting achievement standards (Level 2 standards)

When a business pays a supplier by internet banking, which journal entry is correct?

  1. Debit Accounts Payable, credit Bank Correct answer.
  2. Debit Accounts Payable, credit Cash
  3. Debit Purchases, credit Bank
  4. Debit Bank, credit Accounts Payable

Explanation

Paying a supplier reduces the liability, so Accounts Payable is debited. The bank balance falls, so Bank is credited. No new purchase is being made, so Purchases is unaffected.

Question 6Accounting achievement standards (Level 2 standards)

Which of these is an example of revenue earned by a service business?

  1. Interest received from a bank deposit
  2. Fees charged to clients for consultations Correct answer.
  3. Proceeds from selling a used vehicle at book value
  4. A loan received from a bank

Explanation

Revenue arises from the ordinary operating activities of the business. For a service firm, fees charged for services are the main revenue. Loan receipts create liabilities and asset sales are not ordinary trading income.

Question 7Accounting achievement standards (Level 2 standards)

A business owner withdraws cash for personal use. What is the effect on the accounting equation?

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

Explanation

Drawings reduce the cash asset and reduce the owner's equity, because the owner has taken value out of the business. The two sides of the equation stay balanced. Liabilities are not involved.

Question 8Accounting achievement standards (Level 2 standards)

Which statement best describes the purpose of a trial balance?

  1. To prove that no transactions have been omitted
  2. To calculate the profit for the period
  3. To show the market value of the business
  4. To check that total debits equal total credits Correct answer.

Explanation

A trial balance lists ledger balances and confirms that total debits equal total credits. It is an arithmetic check only; it cannot detect errors such as omitted transactions or compensating errors. It does not measure profit or value.

Question 9Accounting achievement standards (Level 2 standards)

A firm uses the straight-line method to depreciate equipment costing $24,000 with an estimated residual value of $4,000 and a useful life of five years. What is the annual depreciation charge?

  1. $4,800
  2. $5,600
  3. $4,400
  4. $4,000 Correct answer.

Explanation

Straight-line depreciation is (cost − residual value) ÷ useful life. Here ($24,000 − $4,000) ÷ 5 = $4,000 per year. The residual value is excluded because it will be recovered at the end of the asset's life.

Question 10Accounting achievement standards (Level 2 standards)

Which of these errors would still allow a trial balance to balance?

  1. Recording only the debit entry for a cash purchase
  2. Adding the debit column $100 too high
  3. Recording a sale of $500 as a debit to Bank of $500 and a credit to Sales of $50 Correct answer.
  4. Recording a cash sale with both entries on the debit side

Explanation

When the same wrong amount is entered on both sides, debits and credits still agree, so the trial balance balances. The error is one of amount rather than of one-sided posting. The other options create unequal totals.

Question 11Accounting achievement standards (Level 2 standards)

A business has opening inventory of $12,000, purchases of $68,000 and closing inventory of $15,000. What is the cost of goods sold?

  1. $65,000 Correct answer.
  2. $95,000
  3. $71,000
  4. $68,000

Explanation

Cost of goods sold = opening inventory + purchases − closing inventory. That is $12,000 + $68,000 − $15,000 = $65,000. Closing inventory is deducted because it was not sold during the period.

Question 12Accounting achievement standards (Level 2 standards)

Which of the following would be classified as an operating expense rather than a cost of goods sold?

  1. Freight paid to bring purchased goods into the warehouse
  2. Packaging used to prepare goods for sale
  3. Customs duty on imported inventory
  4. Insurance on the office building Correct answer.

Explanation

Operating expenses relate to running the business rather than acquiring or preparing goods for sale. Office insurance falls into this category. Freight inwards, import duties and packaging for sale are typically part of inventory cost.

Question 13Accounting achievement standards (Level 2 standards)

A business receives $600 from a debtor whose account had previously been written off as a bad debt. Using the allowance method, which entry records the recovery?

  1. Debit Bad Debts Recovered $600, credit Bank $600
  2. Debit Accounts Receivable $600, credit Bad Debts Recovered $600
  3. Debit Bank $600, credit Accounts Receivable $600
  4. Debit Bank $600, credit Bad Debts Recovered $600 Correct answer.

Explanation

The cash received increases the bank asset, while the recovery is recognised as income, so Bad Debts Recovered is credited. The debt was already removed from Accounts Receivable when written off, so that account is not affected again.

Question 14Accounting achievement standards (Level 2 standards)

Under the perpetual inventory system, goods costing $900 are sold on credit for $1,500. Which pair of entries is required?

  1. Debit Accounts Receivable $1,500, credit Sales $1,500; and debit Cost of Goods Sold $900, credit Inventory $900 Correct answer.
  2. Debit Cost of Goods Sold $1,500, credit Inventory $1,500 only
  3. Debit Accounts Receivable $1,500, credit Sales $1,500 only
  4. Debit Sales $1,500, credit Accounts Receivable $1,500; and debit Inventory $900, credit Cost of Goods Sold $900

Explanation

A perpetual system records both the sale at selling price and the movement of inventory at cost. The receivable and sales entries capture the selling price, while the second entry transfers the cost of goods sold out of inventory.

Question 15Accounting achievement standards (Level 2 standards)

A business's bank statement shows a balance of $4,200, but its cash book shows $3,650. Outstanding cheques total $800 and there are no deposits in transit. What is the adjusted bank balance?

  1. $4,450
  2. $3,400 Correct answer.
  3. $5,000
  4. $3,650

Explanation

Outstanding cheques have been recorded in the cash book but not yet cleared the bank, so they are deducted from the bank statement balance. $4,200 − $800 = $3,400, which should then agree with the cash book after any cash book adjustments.

Question 16Accounting achievement standards (Level 2 standards)

Which of the following best explains why a business prepares a bank reconciliation?

  1. To confirm the profit reported in the income statement
  2. To identify differences between the cash book and the bank statement and update the cash book Correct answer.
  3. To calculate the interest earned on the bank account
  4. To determine the amount owed to trade creditors

Explanation

A bank reconciliation explains timing differences such as unpresented cheques and deposits in transit, and identifies items the business has not yet recorded, such as bank fees. Those items are then entered in the cash book. It does not measure profit or creditor balances.

Question 17Accounting achievement standards (Level 2 standards)

An income statement shows sales of $120,000, cost of goods sold of $72,000 and operating expenses of $31,000. What is the gross profit percentage?

  1. 26%
  2. 40% Correct answer.
  3. 60%
  4. 14%

Explanation

Gross profit is sales minus cost of goods sold: $120,000 − $72,000 = $48,000. Dividing by sales gives $48,000 ÷ $120,000 = 40%. Operating expenses affect net profit, not the gross profit percentage.

Question 18Accounting achievement standards (Level 2 standards)

Which user of financial statements is most likely to focus on the business's ability to pay interest and repay principal?

  1. A customer buying a single item
  2. A competitor reviewing pricing
  3. An employee choosing a uniform size
  4. A lender considering a loan application Correct answer.

Explanation

Lenders are concerned with credit risk, so they examine liquidity, cash flow and gearing to judge whether interest and principal will be paid. Other users have different priorities such as price, service or job security.

Question 19Accounting achievement standards (Level 2 standards)

A business has current assets of $60,000 and current liabilities of $40,000. It then uses $10,000 cash to pay off a current liability. What is the new current ratio?

  1. 1.25:1
  2. 1.67:1 Correct answer.
  3. 1.5:1
  4. 2:1

Explanation

Paying the liability reduces cash to $50,000 and current liabilities to $30,000. The new current ratio is $50,000 ÷ $30,000 = 1.67:1. The ratio rises because the reduction in liabilities is proportionally larger than the fall in assets.

Question 20Accounting achievement standards (Level 2 standards)

A business records a sale on credit but the customer later returns faulty goods. Which entry records the return under a perpetual system?

  1. Debit Sales Returns, credit Accounts Receivable only
  2. Debit Sales Returns, credit Accounts Receivable; and debit Inventory, credit Cost of Goods Sold Correct answer.
  3. Debit Inventory, credit Accounts Receivable; and debit Cost of Goods Sold, credit Sales Returns
  4. Debit Accounts Receivable, credit Sales Returns only

Explanation

A sales return reduces the amount owed by the customer, so Sales Returns is debited and Accounts Receivable credited. Because the goods come back into stock, Inventory is debited and Cost of Goods Sold credited at cost.

Question 21Accounting achievement standards (Level 2 standards)

An owner contributes a vehicle to the business. Which entry correctly records this transaction?

  1. Debit Capital, credit Vehicle
  2. Debit Drawings, credit Vehicle
  3. Debit Vehicle, credit Capital Correct answer.
  4. Debit Vehicle, credit Cash

Explanation

The business gains an asset, so Vehicle is debited. The owner's equity increases because the contribution is capital, so Capital is credited. Cash is not involved and drawings record withdrawals, not contributions.

Question 22Accounting achievement standards (Level 2 standards)

A firm has an allowance for doubtful debts of $1,200. It decides to increase the allowance to $1,500. What is the effect on the income statement?

  1. Income of $300 is recognised
  2. No effect, because the allowance is a balance sheet item
  3. An expense of $300 is recognised Correct answer.
  4. An expense of $1,500 is recognised

Explanation

Only the increase in the allowance is charged as an expense in the current period. The increase is $1,500 − $1,200 = $300. The existing $1,200 was already expensed in earlier periods.

Question 23Accounting achievement standards (Level 2 standards)

A business depreciates equipment using the reducing balance method at 20% per year. The equipment cost $30,000 and has been held for two full years. What is the depreciation charge for the second year?

  1. $6,000
  2. $12,000
  3. $4,800 Correct answer.
  4. $5,400

Explanation

Year one depreciation is 20% of $30,000 = $6,000, leaving a carrying amount of $24,000. Year two depreciation is 20% of $24,000 = $4,800. The reducing balance method applies the rate to the carrying amount, not the original cost.

Question 24Accounting achievement standards (Level 2 standards)

A business reports a gross profit ratio that has fallen from 35% to 28% while sales volume is unchanged. Which explanation is most consistent with this change?

  1. The business has increased its selling prices
  2. The business has reduced its advertising spending
  3. The cost of goods sold per unit has risen Correct answer.
  4. Operating expenses have increased sharply

Explanation

The gross profit ratio compares gross profit with sales, so a fall means cost of goods sold has taken a larger share of sales. Rising purchase or production costs per unit would produce this. Operating and advertising expenses affect net profit, not gross profit.

Question 25Accounting achievement standards (Level 2 standards)

A business has equity of $90,000 and total assets of $150,000. It then borrows $30,000 from a bank, which is deposited into its account. What is the debt-to-equity ratio after the borrowing?

  1. 1:1 Correct answer.
  2. 1.33:1
  3. 0.67:1
  4. 0.5:1

Explanation

Before borrowing, liabilities were $150,000 − $90,000 = $60,000. The new loan raises liabilities to $90,000 while equity stays at $90,000. The debt-to-equity ratio is therefore $90,000 ÷ $90,000 = 1:1.

Question 26Accounting achievement standards (Level 2 standards)

A business pays $1,800 cash for a one-year insurance policy covering the next 12 months. Under accrual accounting, how should this be treated at the date of payment?

  1. Recorded as a prepayment (current asset) and expensed over the 12 months Correct answer.
  2. Recorded as a liability until the cover is used
  3. Recorded as a reduction in owner's equity with no asset recognised
  4. Recorded immediately as an operating expense in full

Explanation

Under accrual accounting, expenses are matched to the periods that benefit from them. Because the policy covers future periods, the unused portion is a prepayment, a current asset, and only the expired portion becomes an expense each month.

Question 27Accounting achievement standards (Level 2 standards)

Which item would appear in the equity section of a sole trader's balance sheet?

  1. GST owed to Inland Revenue
  2. Drawings taken by the owner during the year Correct answer.
  3. Wages payable to staff at balance date
  4. Bank overdraft

Explanation

Equity for a sole trader consists of capital contributed, plus profits, less drawings and losses. Drawings reduce the owner's claim on the business and are shown as a deduction within equity.

Question 28Accounting achievement standards (Level 2 standards)

A business purchases office stationery for $250 cash. What is the correct double entry?

  1. Debit purchases $250; credit bank $250
  2. Debit stationery expense $250; credit accounts payable $250
  3. Debit stationery expense $250; credit bank $250 Correct answer.
  4. Debit bank $250; credit stationery expense $250

Explanation

Stationery is a consumable operating expense, so it is debited to the expense account. Cash leaves the business, so the bank account is credited.

Question 29Accounting achievement standards (Level 2 standards)

Which document would a business issue to a credit customer to reduce the amount owed after goods were returned?

  1. Purchase order
  2. Statement of account
  3. Invoice
  4. Credit note Correct answer.

Explanation

A credit note confirms that a customer's account has been reduced, for example because of returned goods or an overcharge. It is the standard source document for a sales return.

Question 30Accounting achievement standards (Level 2 standards)

A business has a bank loan of $40,000 repayable in five annual instalments, with the first instalment due in nine months. How should the loan be classified at balance date?

  1. $40,000 as a current liability
  2. $8,000 as a non-current liability and $32,000 as a current liability
  3. $8,000 as a current liability and $32,000 as a non-current liability Correct answer.
  4. $40,000 as a non-current liability

Explanation

The portion of a loan due within the next 12 months is a current liability, while the remainder is non-current. The first instalment falls due within a year, so only that amount is current.

Question 31Accounting achievement standards (Level 2 standards)

Which of these is a capital expenditure rather than revenue expenditure?

  1. Replacing the engine of a delivery van, extending its useful life by four years Correct answer.
  2. Repainting the office walls each year
  3. Buying fuel for the delivery van
  4. Paying monthly electricity accounts

Explanation

Capital expenditure improves an asset's earning capacity or extends its useful life and is recorded as an asset. The new engine extends the van's life, so its cost is capitalised.

Question 32Accounting achievement standards (Level 2 standards)

What does the accounting entity concept require of a business owner?

  1. Assets must be recorded at their market value at balance date
  2. Revenue must only be recognised when cash is received
  3. Financial statements must be prepared using the same methods each year
  4. Transactions of the business must be kept separate from the owner's personal affairs Correct answer.

Explanation

The accounting entity concept treats the business as separate from its owner for accounting purposes. Personal transactions are therefore excluded from the business records.

Question 33Accounting achievement standards (Level 2 standards)

A business receives an invoice from a supplier for goods bought on credit. Which accounts are affected?

  1. Increase purchases (or inventory) and increase accounts payable Correct answer.
  2. Decrease purchases and decrease accounts payable
  3. Increase purchases and increase bank
  4. Increase accounts payable and increase capital

Explanation

Buying goods on credit increases the cost of goods acquired and creates an obligation to the supplier. The debit goes to purchases or inventory and the credit to accounts payable.

Question 34Accounting achievement standards (Level 2 standards)

A business has opening inventory of $9,000, purchases of $52,000, purchase returns of $2,000 and closing inventory of $11,000. What is the cost of goods sold?

  1. $48,000 Correct answer.
  2. $46,000
  3. $50,000
  4. $52,000

Explanation

Cost of goods sold equals opening inventory plus net purchases minus closing inventory. Net purchases are $52,000 less $2,000 returns, giving $50,000; adding $9,000 and subtracting $11,000 gives $48,000.

Question 35Accounting achievement standards (Level 2 standards)

A trial balance has total debits of $84,300 and total credits of $84,300, yet the rent expense account has been understated by $500 with the corresponding bank credit also understated by $500. What type of error is this?

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

Explanation

When two errors of equal amount occur on opposite sides, they cancel out and the trial balance still balances. This is a compensating error, because the debit and credit totals remain equal despite both accounts being wrong.

Question 36Accounting achievement standards (Level 2 standards)

A business's cash book shows a debit balance of $2,400. The bank statement shows a credit balance of $3,100. Unpresented cheques total $900 and there is an unpresented deposit of $200. What is the adjusted cash book balance?

  1. $2,400 Correct answer.
  2. $3,100
  3. $2,200
  4. $2,600

Explanation

Unpresented cheques and deposits in transit are timing differences that affect the bank statement, not the cash book. The cash book balance of $2,400 is already correct unless the reconciliation reveals errors or omitted items.

Question 37Accounting achievement standards (Level 2 standards)

A business uses the allowance method for doubtful debts. It writes off a $700 debt as irrecoverable. What is the effect on the income statement and balance sheet?

  1. Profit decreases by $700; accounts receivable decreases by $700
  2. Profit increases by $700; the allowance increases by $700
  3. No effect on the balance sheet; profit decreases by $700
  4. No effect on profit; the allowance and accounts receivable both decrease Correct answer.

Explanation

Under the allowance method, the estimated bad debt expense was already recognised when the allowance was created. Writing off a specific debt reduces both accounts receivable and the allowance, so there is no further effect on profit.

Question 38Accounting achievement standards (Level 2 standards)

A business's income statement shows a gross profit of $48,000 and a net profit of $19,000. Operating expenses are $29,000. What is the gross profit ratio if sales were $160,000?

  1. 12%
  2. 18%
  3. 30% Correct answer.
  4. 40%

Explanation

The gross profit ratio is gross profit divided by sales, expressed as a percentage. $48,000 divided by $160,000 equals 0.30, or 30%.

Question 39Accounting achievement standards (Level 2 standards)

A business has current assets of $45,000 (including inventory of $18,000) and current liabilities of $30,000. What is the quick ratio?

  1. 0.6 : 1
  2. 1.0 : 1
  3. 0.9 : 1 Correct answer.
  4. 1.5 : 1

Explanation

The quick ratio excludes inventory from current assets because inventory may be slow to convert to cash. ($45,000 minus $18,000) divided by $30,000 equals 0.9.

Question 40Accounting achievement standards (Level 2 standards)

A business's gross profit ratio has increased from 30% to 38% while sales remain constant. Which explanation is most consistent with this change?

  1. The business increased advertising spending
  2. The business increased selling prices without a matching rise in the cost of goods sold Correct answer.
  3. The business reduced its selling prices to gain market share
  4. The business paid higher wages to sales staff

Explanation

The gross profit ratio measures gross profit as a percentage of sales. Raising selling prices while holding cost of goods sold steady increases the margin earned on each sale, lifting the ratio.

Question 41Accounting achievement standards (Level 2 standards)

A business owner takes goods from inventory for personal use, costing $400. Which entry records this?

  1. Debit drawings $400; credit purchases (or inventory) $400 Correct answer.
  2. Debit drawings $400; credit bank $400
  3. Debit purchases $400; credit drawings $400
  4. Debit inventory $400; credit drawings $400

Explanation

Goods withdrawn by the owner are treated as drawings, which reduce equity. The goods leave the business, so purchases or inventory is credited to remove their cost.

Question 42Accounting achievement standards (Level 2 standards)

A business's depreciation policy changes from 10% straight-line to 20% reducing balance. Which concept is most directly affected?

  1. Prudence
  2. Monetary measurement
  3. Going concern
  4. Consistency Correct answer.

Explanation

The consistency concept requires a business to apply the same accounting methods from period to period so results are comparable. Changing the depreciation method affects consistency and should be disclosed.

Question 43Accounting achievement standards (Level 2 standards)

A business has equity of $120,000 and total liabilities of $80,000. What are its total assets?

  1. $120,000
  2. $40,000
  3. $200,000 Correct answer.
  4. $80,000

Explanation

The accounting equation states that assets equal equity plus liabilities. Adding equity of $120,000 to liabilities of $80,000 gives total assets of $200,000.

Question 44Accounting achievement standards (Level 2 standards)

A business sells goods on credit for $2,000 (cost $1,200) under the perpetual inventory system. Which entries are required?

  1. Debit sales $2,000; credit accounts receivable $2,000; debit inventory $1,200; credit cost of goods sold $1,200
  2. Debit bank $2,000; credit sales $2,000; debit purchases $1,200; credit inventory $1,200
  3. Debit accounts receivable $2,000; credit sales $2,000; debit cost of goods sold $1,200; credit inventory $1,200 Correct answer.
  4. Debit accounts receivable $2,000; credit sales $2,000 only

Explanation

Under the perpetual system, two entries are made for each sale: one records the revenue and the receivable, and the other transfers the cost of the goods sold out of inventory. This keeps the inventory account continuously updated.

Question 45Accounting achievement standards (Level 2 standards)

A business has a gross profit ratio of 25% and a net profit ratio of 8%. Which statement best interprets these figures?

  1. Cost of goods sold is 8% of sales
  2. The business has a high net margin relative to its gross margin
  3. The business earns 25c of net profit on every sales dollar
  4. Operating expenses consume 17% of sales, leaving a lower net margin Correct answer.

Explanation

The difference between the gross profit ratio and the net profit ratio represents operating expenses as a percentage of sales. Here 25% minus 8% equals 17%, showing that operating costs absorb a substantial share of gross profit.

Question 46Accounting achievement standards (Level 2 standards)

A business has a bank overdraft of $5,000 and an allowance for doubtful debts of $1,200. How should each be presented in the balance sheet?

  1. Overdraft as a non-current liability; allowance as a deduction from equity
  2. Overdraft as equity; allowance as an operating expense
  3. Overdraft as a current liability; allowance as a deduction from accounts receivable Correct answer.
  4. Overdraft as a current asset; allowance as a current liability

Explanation

A bank overdraft is repayable on demand and is a current liability. The allowance for doubtful debts is a contra-asset that reduces the carrying amount of accounts receivable.

Question 47Accounting achievement standards (Level 2 standards)

A business's inventory turnover has fallen from 8 times per year to 5 times per year. What is the most likely implication?

  1. Gross profit has increased because inventory is cheaper
  2. Inventory is being held for longer, increasing storage and obsolescence risk Correct answer.
  3. The business is selling its inventory more quickly
  4. The business has reduced its closing inventory

Explanation

Inventory turnover measures how many times inventory is sold and replaced in a period. A fall from 8 to 5 means stock is sitting on the shelf longer, which raises holding costs and the risk of obsolete stock.

Question 48Accounting achievement standards (Level 2 standards)

A business has a debt-to-equity ratio of 1.5 : 1. It takes out a further loan and uses the funds to buy equipment. What is the likely effect on risk?

  1. The ratio is unaffected because assets and liabilities both rise
  2. Financial risk increases because the business must service more debt Correct answer.
  3. Risk is unchanged because no cash was involved
  4. Financial risk decreases because equipment is an asset

Explanation

Borrowing to buy a non-cash asset increases liabilities without a matching increase in equity. The higher gearing means greater fixed interest and repayment obligations, which raises financial risk to lenders and owners.

Question 49Accounting achievement standards (Level 2 standards)

A business's income statement shows a net loss of $6,000 for the year. The owner had contributed $10,000 of capital during the year and made drawings of $4,000. What is the movement in equity?

  1. An increase of $10,000
  2. No change, because capital of $10,000 less drawings of $4,000 equals the $6,000 loss Correct answer.
  3. An increase of $6,000
  4. A decrease of $6,000

Explanation

Equity changes by capital contributed plus profit (or minus loss) minus drawings. Here $10,000 capital less $4,000 drawings less $6,000 loss equals zero, so equity is unchanged overall.

Question 50Accounting achievement standards (Level 2 standards)

A business discovers that a $3,000 credit sale from last year was never recorded. The current year's financial statements are being prepared. What is the correct treatment?

  1. Record the sale as a reduction in drawings
  2. Ignore it because the period has closed
  3. Record the sale as revenue in the current year
  4. Correct the opening equity with a prior-period adjustment and record the receivable Correct answer.

Explanation

A material error from a prior period should be corrected by adjusting opening equity rather than inflating current-year revenue. The receivable is recognised and the prior-period effect is reflected in retained earnings or capital.