N-Level Principles of Accounts — Questions and Answers
Question 1: What is the accounting equation?
- Assets = Liabilities - Capital
- Assets = Liabilities + Capital (Owner's Equity) (Correct answer)
- Assets + Liabilities = Capital
- Capital = Assets + Liabilities
Correct answer: Assets = Liabilities + Capital (Owner's Equity)
The fundamental accounting equation states that Assets = Liabilities + Capital (Owner's Equity). This means everything a business owns (assets) is funded either by borrowing (liabilities) or the owner's investment (capital).
Question 2: What is the difference between a 'debit' and a 'credit' in double-entry bookkeeping?
- Debits are always bad; credits are always good
- Debits record increases in assets and expenses (left side); credits record increases in liabilities, capital, and revenue (right side) (Correct answer)
- They mean the same thing
- Debits are only for cash transactions
Correct answer: Debits record increases in assets and expenses (left side); credits record increases in liabilities, capital, and revenue (right side)
In double-entry bookkeeping, debits (left side) increase assets and expenses while decreasing liabilities and capital. Credits (right side) increase liabilities, capital, and revenue while decreasing assets.
Question 3: What is a 'trial balance' in accounting?
- A bank statement
- A list of all ledger account balances to check that total debits equal total credits (Correct answer)
- A balance sheet for new businesses
- A type of profit calculation
Correct answer: A list of all ledger account balances to check that total debits equal total credits
A trial balance lists all debit and credit balances from the ledger. If total debits equal total credits, the books are arithmetically correct (though some errors may still exist).
Question 4: What is the purpose of a 'balance sheet' (statement of financial position)?
- To show profit for the year
- To show the financial position of a business at a specific point in time, listing assets, liabilities, and capital (Correct answer)
- To show cash received and paid
- To show sales revenue only
Correct answer: To show the financial position of a business at a specific point in time, listing assets, liabilities, and capital
The balance sheet provides a snapshot of what the business owns (assets), what it owes (liabilities), and the owner's stake (capital) at a specific date, following the accounting equation.
Question 5: What is 'depreciation' in accounting?
- An increase in asset value
- The systematic allocation of the cost of a non-current asset over its useful life to reflect its declining value (Correct answer)
- A type of income
- The amount paid for an asset
Correct answer: The systematic allocation of the cost of a non-current asset over its useful life to reflect its declining value
Depreciation spreads the cost of a non-current asset (e.g., machinery, vehicles) over the years it is expected to be used. It reflects wear and tear, reducing the asset's book value each year.
Question 6: What is the difference between 'revenue expenditure' and 'capital expenditure'?
- There is no difference
- Revenue expenditure is day-to-day spending (e.g., rent, wages); capital expenditure is spending on long-term assets (e.g., equipment, vehicles) (Correct answer)
- Capital expenditure is smaller
- Revenue expenditure only involves cash
Correct answer: Revenue expenditure is day-to-day spending (e.g., rent, wages); capital expenditure is spending on long-term assets (e.g., equipment, vehicles)
Revenue expenditure (operational costs) benefits the current period and is charged to the income statement. Capital expenditure (asset purchases) benefits multiple periods and is recorded on the balance sheet.
N-Level Principles of Accounts
What is the accounting equation?