Principles of Accounts Flashcards

Which of the following correctly states the accounting equation?

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.

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

Answer: Debit Purchases, Credit Creditors

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

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

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.

What does a trial balance verify?

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.

Which of the following accounts normally carries a credit balance?

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.

Carriage inwards is included in which financial statement section?

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.

A cash book serves as which type of accounting record?

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.

How is gross profit calculated in the Trading account?

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.

Where does accumulated depreciation appear in the financial statements?

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.

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

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.

Prepaid expenses are classified in the Balance Sheet as:

Answer: A current asset

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

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

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.

Accrued expenses are shown on the Balance Sheet as:

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.

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

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.

What is the purpose of preparing a bank reconciliation statement?

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.

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

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.

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

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.

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

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.

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

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.

In a manufacturing account, prime cost consists of:

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.