N-Level Principles of Accounts 2 — Questions and Answers
Question 1: What is an 'income statement' (profit and loss account)?
- A list of all bank transactions
- A financial statement showing a business's revenue, expenses, and resulting profit or loss over a specific period (Correct answer)
- A record of cash only
- A list of assets and liabilities
Correct answer: A financial statement showing a business's revenue, expenses, and resulting profit or loss over a specific period
The income statement summarises all revenue earned and expenses incurred over a period (usually one year). The difference between total revenue and total expenses gives the net profit or loss.
Question 2: What is a 'trade receivable' (debtor)?
- Money the business owes to suppliers
- Money owed to the business by customers who purchased goods or services on credit (Correct answer)
- Cash in the business's bank account
- The owner's investment in the business
Correct answer: Money owed to the business by customers who purchased goods or services on credit
Trade receivables are amounts owed by customers who have purchased goods or services on credit terms. They are current assets on the balance sheet as they are expected to be collected within a year.
Question 3: What is the purpose of a 'bank reconciliation statement'?
- To calculate bank interest
- To explain the difference between the cash book balance and the bank statement balance, identifying items like unpresented cheques and uncredited deposits (Correct answer)
- To open a new bank account
- To calculate the bank's profit
Correct answer: To explain the difference between the cash book balance and the bank statement balance, identifying items like unpresented cheques and uncredited deposits
A bank reconciliation identifies why the cash book and bank statement show different balances. Common differences include timing (unpresented cheques, uncredited deposits), bank charges, and direct payments.
Question 4: What is 'accrued expense' in accounting?
- An expense paid in advance
- An expense that has been incurred in the current period but not yet paid (Correct answer)
- An expense that has been cancelled
- An expense from the previous year
Correct answer: An expense that has been incurred in the current period but not yet paid
Accrued expenses are costs incurred in the current accounting period but not yet paid. For example, electricity used in December but billed in January. They are recorded as current liabilities.
Question 5: What is the 'prudence concept' in accounting?
- Always record the highest possible profit
- Exercise caution: anticipate and record losses as soon as they are probable, but only record gains when they are realised (Correct answer)
- Ignore potential losses
- Record all transactions at market value
Correct answer: Exercise caution: anticipate and record losses as soon as they are probable, but only record gains when they are realised
The prudence concept requires accountants to be cautious: record potential losses and liabilities as soon as they are anticipated, but only recognise revenue and gains when they are certain.
Question 6: What is a 'cash flow statement'?
- The same as an income statement
- A financial statement showing all cash inflows and outflows classified into operating, investing, and financing activities (Correct answer)
- A list of all credit transactions
- A forecast of future sales
Correct answer: A financial statement showing all cash inflows and outflows classified into operating, investing, and financing activities
The cash flow statement tracks actual cash movements in and out of the business, categorised into operating activities (daily operations), investing activities (buying/selling assets), and financing activities (loans, capital).
N-Level Principles of Accounts 2
What is an 'income statement' (profit and loss account)?