O-Level Principles of Accounts 2 — Questions and Answers
Question 1: 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 2: 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 3: 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 4: 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 5: 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 6: 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 7: 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.
O-Level Principles of Accounts 2
How is gross profit calculated in the Trading account?