AAT L3 Advanced Bookkeeping 4 — Questions and Answers
Question 1: The purchase ledger control account is used to:
- Record all individual supplier transactions in detail
- Provide a total of all amounts owed to suppliers, cross-checking the purchase ledger (Correct answer)
- Record only cash payments to suppliers
- Prepare the VAT return
Correct answer: Provide a total of all amounts owed to suppliers, cross-checking the purchase ledger
The purchase ledger control account (PLCA) provides a totals check: the closing balance should equal the sum of all individual supplier account balances in the purchase ledger.
Question 2: Which of the following is a capital expenditure?
- Repainting existing office walls
- Buying a new delivery vehicle (Correct answer)
- Paying the annual vehicle insurance premium
- Replacing a worn component on machinery
Correct answer: Buying a new delivery vehicle
Capital expenditure creates a new non-current asset or increases the capacity or economic benefits of an existing one. Buying a new vehicle is a capital item; routine maintenance and repainting are revenue expenses.
Question 3: If closing inventory is understated, the effect on profit for the year is:
- Profit is overstated
- Profit is understated (Correct answer)
- Profit is unaffected
- Cost of sales is understated
Correct answer: Profit is understated
Closing inventory appears in the cost of sales calculation: COGS = opening inventory + purchases − closing inventory. Understating closing inventory increases COGS and therefore understates profit.
Question 4: The accounting equation is:
- Assets = Capital + Liabilities (Correct answer)
- Assets = Liabilities − Capital
- Capital = Assets + Liabilities
- Liabilities = Assets + Capital
Correct answer: Assets = Capital + Liabilities
The fundamental accounting equation is Assets = Capital + Liabilities (or Assets = Equity + Liabilities). Every transaction maintains this balance.
Question 5: Which of the following is an example of a revenue expense?
- Purchase of a new computer
- Installation of a new air conditioning system
- Annual subscription for accounting software (Correct answer)
- Costs of extending the factory building
Correct answer: Annual subscription for accounting software
Revenue expenditure is incurred for the ongoing operation of the business and is charged to the income statement. An annual software subscription is a revenue expense consumed within a short period.
Question 6: Retained profit (retained earnings) appears on the balance sheet as:
- A current asset
- A non-current liability
- Part of equity (capital) (Correct answer)
- A current liability
Correct answer: Part of equity (capital)
Retained earnings are the cumulative profits kept in the business after dividends; they represent the owners' stake in the business and are classified as equity in the balance sheet.
AAT L3 Advanced Bookkeeping 4
The purchase ledger control account is used to: