O-Level Principles of Accounts — Questions and Answers

Question 1: Which of the following correctly states the accounting equation?

Assets = Liabilities + Capital (Correct answer)
Assets = Liabilities - Capital
Assets + Capital = Liabilities
Liabilities = Assets + Capital

Correct answer: Assets = Liabilities + Capital

The fundamental accounting equation is Assets = Liabilities + Capital, showing that all assets are funded by either external obligations or the owner's equity.

Question 2: When a business purchases goods on credit from a supplier, which double entry is recorded?

Debit Purchases, Credit Bank
Debit Purchases, Credit Creditors (Correct answer)
Debit Creditors, Credit Purchases
Debit Bank, Credit Purchases

Correct answer: Debit Purchases, Credit Creditors

Purchasing goods on credit increases the Purchases account (debit) and creates a liability to the creditor (credit).

Question 3: Which source document is issued by a seller to a buyer for a credit sale?

Purchase order
Goods received note
Sales invoice (Correct answer)
Debit note

Correct answer: Sales invoice

A sales invoice is issued by the seller to the buyer as the source document for recording a credit sale in the books.

Question 4: What does a trial balance verify?

That all transactions have been recorded correctly
That total debits equal total credits in the ledger (Correct answer)
That assets equal liabilities plus capital
That the business has made a profit

Correct answer: That total debits equal total credits in the ledger

A trial balance verifies that the total of all debit balances equals the total of all credit balances, confirming arithmetical accuracy in the ledger.

Question 5: Which of the following accounts normally carries a credit balance?

Asset account
Expense account
Drawings account
Capital account (Correct answer)

Correct answer: Capital account

A capital account has a normal credit balance because it represents the owner's equity — an amount the business owes to its owner.

Question 6: Carriage inwards is included in which financial statement section?

Profit and Loss account
Trading account (Correct answer)
Balance Sheet under current assets
Sales account

Correct answer: Trading account

Carriage inwards is the cost of transporting purchased goods to the business and is included in the Trading account as it forms part of the cost of goods sold.

Question 7: A cash book serves as which type of accounting record?

Only a ledger account
Only a book of original entry
Both a book of original entry and a ledger account (Correct answer)
Neither a ledger nor a book of original entry

Correct answer: Both a book of original entry and a ledger account

The cash book is unique in that it functions simultaneously as a book of original entry (like a journal) and as a ledger account for cash and bank.

Question 8: How is gross profit calculated in the Trading account?

Sales minus all expenses
Sales minus cost of goods sold (Correct answer)
Net sales plus cost of goods sold
Sales minus opening stock only

Correct answer: Sales minus cost of goods sold

Gross profit = Sales − Cost of Goods Sold; it reflects the profit from trading activities before deducting operating expenses.

Question 9: Where does accumulated depreciation appear in the financial statements?

Profit and Loss account as an income
Balance Sheet as a deduction from the fixed asset's cost (Correct answer)
Trading account as an expense
Balance Sheet under current liabilities

Correct answer: Balance Sheet as a deduction from the fixed asset's cost

Accumulated depreciation is deducted from the cost of the fixed asset on the Balance Sheet to show its net book value.

Question 10: When a debtor is unable to pay and the debt is written off, where is this loss recorded?

As an expense in the Balance Sheet
As a bad debt in the Profit and Loss account (Correct answer)
As a deduction directly from capital
As a credit entry in the Sales account

Correct answer: As a bad debt in the Profit and Loss account

Bad debts are written off as an expense in the Profit and Loss account, reducing the net profit for the accounting period.

Question 11: Prepaid expenses are classified in the Balance Sheet as:

A current liability
A non-current asset
A current asset (Correct answer)
Part of capital

Correct answer: A current asset

Prepaid expenses represent amounts paid in advance for future benefits and are classified as current assets on the Balance Sheet.

Question 12: Which depreciation method allocates an equal charge to each year of an asset's useful life?

Reducing balance method
Straight-line method (Correct answer)
Units of production method
Sum-of-years-digits method

Correct answer: Straight-line method

The straight-line method calculates depreciation as a fixed amount each year, keeping the annual charge constant throughout the asset's useful life.

Question 13: Accrued expenses are shown on the Balance Sheet as:

Current assets
Non-current assets
Current liabilities (Correct answer)
Non-current liabilities

Correct answer: Current liabilities

Accrued expenses are costs incurred but not yet paid, making them current liabilities because they represent short-term obligations of the business.

Question 14: The formula 'Opening Stock + Purchases − Closing Stock' gives which figure?

Gross profit
Cost of goods sold (Correct answer)
Net profit
Sales revenue

Correct answer: Cost of goods sold

Opening Stock + Purchases − Closing Stock = Cost of Goods Sold, representing the total cost of the goods that were actually sold during the period.

Question 15: What is the purpose of preparing a bank reconciliation statement?

To verify the cash in hand balance only
To reconcile differences between the cash book balance and the bank statement balance (Correct answer)
To check arithmetical accuracy of the trial balance
To confirm the net profit earned by the business

Correct answer: To reconcile differences between the cash book balance and the bank statement balance

A bank reconciliation statement is prepared to explain and reconcile any differences between the balance in the cash book and the balance shown on the bank statement.

Question 16: In partnership accounts, which account records partners' salaries, interest on capital, and drawings?

Fixed capital account
Current account (Correct answer)
Loan account
Goodwill account

Correct answer: Current account

Partners' current accounts record variable items including salaries, interest on capital, share of profits or losses, and drawings made by each partner.

Question 17: A debit balance in a suspense account after extracting a trial balance indicates:

Total credits exceeded total debits in the trial balance
Total debits exceeded total credits in the trial balance (Correct answer)
All errors in the accounts have been corrected
The business holds more assets than liabilities

Correct answer: Total debits exceeded total credits in the trial balance

A debit balance in the suspense account means total debits exceeded total credits in the trial balance, so the suspense account was credited to make both sides agree.

Question 18: In the accounts of a club or society, the Receipts and Payments account records:

Only revenue income and expenditure for the period
Outstanding subscriptions receivable
All actual cash and bank receipts and payments during the period (Correct answer)
The accumulated fund at the start of the year

Correct answer: All actual cash and bank receipts and payments during the period

A Receipts and Payments account is a summary of all actual cash and bank transactions — both capital and revenue — received and paid during the accounting period.

Question 19: What is the primary purpose of a sales ledger control account?

To replace all individual debtor accounts in the ledger
To provide an overall check on the accuracy of the individual debtor accounts (Correct answer)
To record all credit sales made during the period
To calculate the gross profit from credit sales

Correct answer: To provide an overall check on the accuracy of the individual debtor accounts

A sales ledger control account summarises all postings to the debtors ledger and acts as a checking mechanism to verify the accuracy of the individual debtor accounts.

Question 20: In a manufacturing account, prime cost consists of:

Factory overhead costs only
Direct materials and direct labour costs (Correct answer)
All costs of production including factory overheads
Administrative, selling, and distribution expenses

Correct answer: Direct materials and direct labour costs

Prime cost = Direct Materials + Direct Labour; these are the costs directly traceable to the manufactured product before any overhead is added.

Question 21: Which ratio measures a business's ability to meet short-term liabilities using its most liquid assets, excluding inventory?

Current ratio
Gross profit ratio
Acid test (quick) ratio (Correct answer)
Return on capital employed

Correct answer: Acid test (quick) ratio

The acid test ratio = (Current Assets − Inventory) ÷ Current Liabilities, measuring short-term liquidity without relying on the sale of stock.

O-Level Principles of Accounts

Which of the following correctly states the accounting equation?

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