Introduction to accounting

1 Which one of the following should be accounted for as capital expenditure?

A The cost of redecorating the business's head office
B The cost of replacing some roof tiles on a building
C The cost of a computer purchased for resale by a computer sales business
D The cost of delivery paid when purchasing a new manufacturing machine

2 Which of the following items should be treated as a capital item in the financial statements of a large
shop?
(1) Purchase of fixed shelving units
(2) Payment of wages
(3) Repairs to fixed shelving units

A (1) only
B (1) and (2) only
C (2) and (3) only
D (1), (2) and (3)

3 Which of the following items should be treated as revenue items in an entity's financial statements?
(1) Payment of local property tax
(2) Purchase of premises
(3) Alteration of premises to configure them to be ready for use in the business
(4) External audit fee

A (1) and (2) only

B (2) and (3) only
C (3) and (4) only
D (1) and (4) only

4 Which of the following should be classified as capital expenditure?

A Repairs to motor vans
B Depreciation of machinery
C Extension to premises
D Purchase of motor vans for resale
5 Which of the following is a consideration in the application of the Code of Ethics?
A Whether or not the activity is remunerated
B That the client or employer is an affiliate or member firm
C If an action brings discredit to the profession
D Whether or not the activity is an accounting or assurance engagement

6 Ned is considering two issues in the course of preparing his financial statements:
Issue 1: Non-current assets are carried at cost less depreciation.
Issue 2: Expenses incurred, but for which invoices have not yet been received, are included in the
financial statements.
Which accounting characteristic or principle is relevant to each of these issues?
A Issue 1: Verifiability; Issue 2 Accruals
B Issue 1: Accruals; Issue 2 Verifiability
C Both issues: Verifiability
D Both issues: Accruals

7 The auditor of James plc is insistent that great care is taken in estimating the amounts of accruals and
prepayments each year.
Which accounting concept is primarily being applied?
A Going concern
B Maturity
C Consistency
D Matching

8 Mr Bliss owns a business and often uses his own personal bank account to pay some business
expenses. Mr Bliss wishes to include all expenses shown in his personal bank account as business
expenses, but his accountant has explained that only some of the amounts may be included.
Which of the following is the main reason why not all of Mr Bliss' expenses can be included?
A Mr Bliss has not recorded the full details of some of the expenditure and, because of this
uncertainty, it is more prudent not to include them in the financial statements.
B There are a large number of immaterial payments which would take a long time to examine.
C The personal expenses of the owner are separate from those of the business and are not relevant
to the statement of profit or loss.
D To be consistent with last year's financial statements only payments above £500 are included in
the statement of profit or loss.
 The accounting equation
1 The capital of a sole trader would change as a result of:
A a trade payable being paid by a transfer from the business bank account
B raw materials being paid for from petty cash
C non-current assets being purchased for cash
D the owner taking goods from the inventory of the business

2 What is the purpose of a statement of financial position?

A To estimate of what a business is really worth
B To show the amount the business could be sold for as a going concern
C To show the amount the business could be sold for in a liquidation
D To show the assets of the business and the related liabilities

3 A sole trader received £2,500 from a credit customer for goods which had been sold on credit. The
sole trader has an overdraft with his bank of £5,000.
Which element(s) of the accounting equation will change due to this transaction?
A Assets only
B Liabilities only
C Capital only
D Assets and liabilities only

4 A sole trader purchases goods on credit for £400.

Which element(s) of the accounting equation will change due to this transaction?
A Assets and liabilities only
B Assets and capital only
C Capital and liabilities only
D Assets only
5 A sole trader takes out a loan of £5,000 from the bank.
Which element(s) of the accounting equation will change due to this transaction?
A Assets and liabilities only
B Assets and capital only
C Capital and liabilities only
D Assets only

6 A sole trader sold goods for cash for £1,000 which had cost £700.
Which element(s) of the accounting equation will change due to this transaction?
A Assets and liabilities only
B Assets and capital only
C Capital and liabilities only
D Assets only

7 A sole trader has paid for his own personal car to be repaired out of the business bank account. The
amount of the repairs has been added by the bookkeeper to the owner's drawings balance.
Of which generally accepted accounting concept is this an example?
A Prudence
B Business entity
C Substance over form
D Duality

8 Which of the following items should be treated as capital expenditure in the accounts of a sole trader?
A £1,000 drawings made by the proprietor to buy himself a new kitchen at home
B £1,000 spent on purchasing a new computer for his secretary in order to deal with business
administration
C £1,000 on purchasing a motorbike for resale
D £1,000 paid to a painter for redecorating his office
9 The statements of financial position of Gazhal's business at 31 December 20X2 and 20X1 showed the
following.
31 December 31 December
20X2 20X1
£ £
Non-current assets 32,500 45,000
Current assets 17,500 30,000
Current liabilities 12,500 12,500
Gazhal introduced new capital of £5,000 during the year, and drew out £10,000 from the business.
What was the profit or loss of Gazhal's business for the year?
A Profit of £20,000
B Profit of £30,000
C Loss of £20,000
D Loss of £30,000
 Recording financial transactions
1 A business paid out £23,550 in net wages to its employees. In respect of these wages, the following
amounts were shown in the statement of financial position.
£
PAYE payable 4,620
National Insurance payable – employees' 2,830
– employer's 2,640
What were the employees' gross wages before deductions?
A £28,170
B £30,810
C £31,000
D £33,640

2 Which of the following is a source document that would be entered into the accounting system?
A Debit note
B Delivery note
C Purchase order
D Sales invoice

3 Which of the following best explains the imprest system of petty cash control?
A The system ensures that there is always sufficient petty cash available
B The amount of petty cash in total must never fall below the imprest amount
C Each month an equal amount of cash is transferred into petty cash
D At any time petty cash in the box plus petty cash vouchers equals the imprest amount

4 Nozam maintains an imprest amount of £250 in petty cash. At the end of the month, he has vouchers
totalling £112, a receipt for a refund of £9 and a note to say that an employee took £10 to buy
stationery for which a voucher has not been prepared.
How much does Nozam need to withdraw from the business bank account to reinstate his imprest
balance at the end of the month?
A £113
B £93
C £137
D £127

5 The following data has been extracted from the payroll records of a business for the month of May
20X7.
 £
Net amount paid to employees 114,000
PAYE 38,000
Employer's NIC 15,600
Employees' NIC 13,400
What is the wage expense for May 20X7?:
A £181,000
B £152,000
C £143,000
D £114,000

6 Fred sells goods on credit to Keira for £2,400. £50 of these goods are defective and Keira returns them
to Fred.
What document would Keira issue to Fred?
A Invoice
B A request for a credit note
C Credit note
D A request for an invoice

7 The following data has been extracted from the payroll records of Scan Ltd for the month of March.
£
PAYE 18,400
Employer's NIC 12,100
Employees' NIC 10,400
Net amount paid to employees 109,000
What is Scan Ltd's wages expense for the month of March?
A £149,900
B £137,800
C £92,300
D £80,200

8 When a purchase invoice is received from a supplier, which of the following documents might the
invoice be checked against?
A Sales order
B Debit note
C Goods received note
D Credit note
9 Meghan downloads a transaction report showing her bank transactions for the day. The report shows
a payment of £860, which the computerised accounting system has not been able to match to a
transaction.
Which of the following transactions is most likely to have resulted in the payment of £860?
A A bank transfer received from a credit customer to settle an invoice
B An amount paid to purchase new office furniture
C An amount withdrawn to restore the petty cash to its imprest amount of £100
D A bank transfer paid to an electricity supplier in respect of the monthly invoice received

10 Cooks Ltd has a petty cash float with an imprest amount of £250. At the end of March, vouchers in the
petty cash box totalled £144 and the amount of cash remaining in the box was £86.
Which of the following explains the difference?
A A petty cash voucher for £20 is missing.
B An employee was given £20 too little when making a petty cash claim.
C An employee reimbursed petty cash with £20 in respect of postage stamps used, but no voucher
was prepared.
D A voucher for £20 was put in the box but no payment was made to the employee.
 Ledger accounting and double entry
1 All Peter's sales attract VAT at the standard rate of 20%. Peter sells goods to a customer on credit for
£2,400 exclusive of VAT. The double entry to record this transaction is:
A Dr Trade receivables £2,880; Cr Sales £2,400; Cr VAT £480
B Dr Sales £2,400; Dr VAT £480; Cr Trade receivables £2,880
C Dr Trade receivables £2,400; Dr VAT £480; Cr Sales £2,880
D Dr Sales £2,880; Cr Trade receivables £2,400; Cr VAT £480

2 What transaction is represented by the entries: debit non-current assets account, credit trade
payables?
A The receipt of money from sale of a non-current asset
B The issue of an invoice for the sale of a non-current asset
C Receipt of an invoice for the purchase of a non-current asset
D Payment for a non-current asset

3 In double-entry bookkeeping, which of the following statements is true?

A Credit entries decrease expenses and increase assets
B Debit entries decrease expenses and increase assets
C Credit entries decrease liabilities and increase income
D Debit entries decrease income and increase assets

4 Identify whether the following statements are true or false.

Statement 1: A credit balance of £100 brought down on George's receivables ledger in Guy's
accounting records means that George owes money to Guy.
Statement 2: A debit balance of £500 on Guy's drawings account means that Guy has withdrawn
£500 in the period.
A Statement 1 is true and Statement 2 is false
B Statement 1 is false and Statement 2 is true
C Both statements are true
D Both statements are false
5 Reece has opening trade receivables of £42,100 and closing trade receivables of £38,600. Sales for the
period totalled £186,190 (£13,400 of which were cash sales).
What is the total of receipts recorded in trade receivables for the period?
A £169,290
B £176,290
C £182,690
D £189,690

6 Kirsty purchased goods on credit from her supplier for £1,500 inclusive of VAT at the standard rate of
20%.
What is the double entry to record this transaction?
A Dr Trade payables £1,500; Cr Purchases £1,200; Cr VAT £300
B Dr Purchases £1,200; Dr VAT £300; Cr Trade payables £1,500
C Dr Trade payables £1,500; Cr Purchases £1,250; Cr VAT £250
D Dr Purchases £1,250; Dr VAT £250; Cr Trade payables £1,500

7 Destiny plc offers a 5% early settlement discount to any customers who pay within 10 days of receiving
an invoice. It sold goods totalling £1,240 on credit to a customer which is expected to take advantage
of the early settlement discount. You should ignore the effects of VAT.
What is the correct double entry to record the sale?
A Dr Trade receivables £1,240; Cr Revenue £1,240
B Dr Trade receivables £1,178; Cr Revenue £1,178
C Dr Revenue £1,240; Cr Trade receivables £1,240
D Dr Revenue £1,178; Cr Trade receivables £1,178

8 Which of the following could be a credit entry in trade receivables?

A Credit sales
B Cash sales
C Cash received from credit customers
D Early settlement discounts received from suppliers that were not expected to be taken at the
date of purchase

9 Millwood purchased goods on credit from Horwich. At the point of recording the invoice from Horwich,
Millwood did not intend to take the early settlement discount offered, however, Millwood later decided
that it would take the discount and so paid within the required timeframe.
What is the correct double entry to record the payment to Horwich in Millwood's accounts?
A Dr Cash at bank; Cr Purchases; Cr Trade payables
 B Dr Purchases; Dr Trade payables; Cr Cash at bank
C Dr Trade payables; Cr Purchases; Cr Cash at bank
D Dr Cash at bank; Dr Purchases; Cr Trade payables

10 A business received the following invoice from one of its suppliers:

Invoice: 4015
Date: 15 May 20X9
£
Goods 200 @ £20 4,000
Less Trade discount (1,000)
3,000

What entries will be made in the nominal ledger to record this invoice? (Ignore VAT)
A Dr Purchases £4,000; Cr Trade payables £4,000
B Dr Purchases £3,000; Cr Trade payables £3,000
C Dr Trade payables £3,000; Cr Purchases £3,000
D Dr Trade payables £4,000; Cr Purchases £4,000

11 Apricot plc makes sales of £37,800 excluding VAT and purchases of £37,800 including VAT. All sales
and purchases are on credit and are liable to VAT at 20%.
What amount is recorded in Apricot plc's sales account?
A £7,560
B £31,500
C £37,800
D £45,360

12 Apricot plc makes sales of £37,800 excluding VAT and purchases of £37,800 including VAT. All sales
and purchases are on credit and are liable to VAT at 20%.
What amount is recorded in Apricot plc's purchases account?
A £7,560
B £31,500
C £37,800
D £45,360

13 Apricot plc makes sales of £37,800 excluding VAT and purchases of £37,800 including VAT. All sales
and purchases are on credit and are liable to VAT at 20%.
What amount is recorded in Apricot plc's trade receivables?
A £7,560
B £31,500
 C £37,800
D £45,360

14 Apricot plc makes sales of £37,800 excluding VAT and purchases of £37,800 including VAT. All sales
and purchases are on credit and are liable to VAT at 20%.
What amount is recorded in Apricot plc's trade payables?
A £7,560
B £31,500
C £37,800
D £45,360

15 Milo is a trader and is registered for VAT. During the quarter to 30 June 20X8 he entered into the
following transactions.
£
Purchase of inventory 25,200
Purchase of new car for use in the business 14,400
Payments to HMRC 9,420
Sales 100,800
All the above purchases and sales are inclusive of VAT at 20%.
At 1 April 20X8 Milo owed HMRC £2,000.
What was Milo's liability at 30 June 20X8 in respect of VAT?
A £2,780
B £4,820
C £5,180
D £7,700

16 Anthony pays his one assistant a monthly gross salary of £1,500. He has calculated for the month of
March that £300 should be deducted as PAYE and that National Insurance amounts to £150 for
employees' NIC and £160 for employer's NIC.
What accounting entry should Anthony make in the salaries expense account?
A Credit £1,050
B Debit £1,500
C Debit £1,660
D Credit £610

17 Anthony pays his one assistant a monthly gross salary of £1,500. He has calculated for the month of
March that £300 should be deducted as PAYE and that National Insurance amounts to £150 for
employees' NIC and £160 for employer's NIC.
What accounting entry should Anthony make to the HMRC payable account?
A Credit £1,050
 B Debit £1,500
C Debit £1,660
D Credit £610

18 Which of the following statements is correct?

A A debit entry increases a liability; A debit entry decreases an asset
B A debit entry increases a liability; A credit entry decreases an asset
C A credit entry increases a liability; A debit entry decreases an asset
D A credit entry increases a liability; A credit entry decreases an asset

19 Which of the following statements is correct?

A A debit entry increases an asset; A debit entry decreases capital
B A debit entry increases an asset; A credit entry decreases capital
C A credit entry increases an asset; A debit entry decreases capital
D A credit entry increases an asset; A credit entry decreases capital
 Preparing basic financial statements
1 Identify whether the following statements are true or false.
(1) The balances on asset and liability accounts at the end of the period are brought forward to the
next reporting period.
(2) The balances on income and expense accounts are summarised in an additional ledger account
known as the profit and loss ledger account.

A Statement (1) is true and Statement (2) is false

B Statement (1) is false and Statement (2) is true
C Both statements are true
D Both statements are false

2 Max had trade payables of £16,400 at 1 June and during June made credit purchases of £35,500. Max
paid £33,000 to his credit suppliers, after taking advantage of an early settlement discount totalling
£700 that was expected to be taken at the date of purchase.
What was the balance of trade payables at the end of June?
A £20,300
B £18,900
C £13,900
D £12,500

3 Which three of the following nominal ledger accounts would normally have a credit balance on a trial
balance?
A Asset
B Liability
C Income
D Expense
E Capital
F Delivery outwards
4 The following tasks form parts of an entity's accounting process.
(1) Extract an initial trial balance
(2) Close off nominal ledger accounts
(3) Account for closing inventory, accruals and prepayments
(4) Calculate profit for the year
In which order are these tasks carried out?
A (1), (3), (2), (4)
B (1), (2), (3), (4)
C (2), (1), (3), (4)
D (2), (3), (4), (1)

5 The total of the profit or loss items in Mike's final trial balance are £35,640 for the debit balances and
£27,560 for the credit balances.
What entry does Mike need to make in the profit and loss ledger account to transfer his profit or loss
for the period to retained earnings?
A Cr £8,080 profit for the period
B Cr £8,080 loss for the period
C Dr £8,080 profit for the period
D Dr £8,080 loss for the period

6 Hilary has trade receivables of £31,200 at 1 July and during July made credit sales of £52,500 and cash
sales of £9,600. She received cash from credit customers of £60,100 in the period and made payments
to credit suppliers of £48,800.
What was the balance on trade receivables at the end of July?
A £33,200
B £23,600
C £34,600
D £44,500

7 Which three of the following accounts would normally have a debit balance in a trial balance?
A Trade payables
B Revenue
C Trade receivables
D Purchases
E Capital
F Inventory
8 Which of the following would be classified as a non-current liability?
A Accruals
B Prepayments
C Expenses
D Trade receivables

9 Pinot plc is a VAT registered retailer. All transactions attract VAT at the rate of 20%. For the month of
31 December 20X7, Pinot plc sold goods on credit for £31,300 exclusive of VAT and goods for cash of
£1,260 inclusive of VAT. Pinot plc also purchased goods for resale on credit for £28,800 inclusive of
VAT. It did not have any balance on its VAT account at 1 December 20X7.
What is the balance on Pinot plc's VAT account at 31 December 20X7?
A £1,460 credit
B £291 debit
C £1,670 credit
D £543 debit