Accounting: Business Entities and the Accounting System — Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs — examination boards hold copyright in their own papers. Use these alongside the official past papers available free from your board. Cambridge 9706 question papers are not divided into lettered sections, so the questions below are grouped by topic only.

Related: Business Entities and the Accounting System revision notes

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The accounting system and financial statements

1. Identify the books of prime entry and state what is recorded in each. [6]

2. State three differences between the financial statements of a sole trader and those of a limited company. [3]

Partnerships and limited companies

3. A and B are partners sharing profits 3 : 2. Profit for the year is $60 000. A is entitled to a salary of $10 000 and interest on capital of $4000; B’s interest on capital is $3000.

(a) Calculate the residual profit to be shared. [3] (b) Calculate each partner’s total share of profit. [4]

4. Explain the purpose of a partnership agreement and state three items it should cover. [5]

5. Explain the difference between ordinary shares and debentures, in terms of return, risk and voting rights. [6]

6. Explain the role of the following in a limited company’s accounts: retained earnings, share premium, and a general reserve. [6]

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Sources of finance, concepts and computerised systems

7. A sole trader wants to buy a delivery van costing $18 000.

(a) State two sources of finance she could use, other than a bank loan, and explain each. [4]

(b) State the accounting equation and explain how an $18 000 bank loan used to buy the van affects it. [3]

8. For each scenario, identify the accounting concept being applied.

(a) A machine bought for $50 000 five years ago is still recorded at $50 000, despite now being worth $30 000. [2]

(b) A business owner’s personal car is not included in the business’s non-current assets. [2]

(c) A company continues to depreciate its assets on the assumption that it will keep trading next year. [2]

9. A business is setting up a computerised accounting system.

(a) State which book of prime entry records the correction of an error, and explain why it does not fit in any of the other specialised books. [2]

(b) State two measures the business can take to secure its data. [2]

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Answers

1. Sales journal — credit sales [1]. Purchases journal — credit purchases [1]. Sales returns journal — goods returned by customers [1]. Purchases returns journal — goods returned to suppliers [1]. Cash book — cash and bank transactions [1]. General journal — non-routine entries such as corrections of errors and year-end adjustments [1].

2. A company’s statement of financial position shows share capital and reserves instead of a single capital account [1]; a company’s income statement includes taxation and directors’ remuneration as expenses [1]; a company’s statements must be prepared in a prescribed format and, above a threshold, audited and filed publicly [1].

3. (a) Total appropriations = 10 000 + 4000 + 3000 = 17 000 [1]; residual = 60 000 − 17 000 [1] = $43 000 [1]. (b) A’s share of residual = 43 000 × 3/5 = $25 800 [1]; B’s = 43 000 × 2/5 = $17 200 [1]. A’s total = 10 000 + 4000 + 25 800 = $39 800 [1]; B’s total = 3000 + 17 200 = $20 200 [1].

4. A partnership agreement sets out how the partners will share profits and run the business, preventing disputes [1]; without one, the default provisions of the Partnership Act 1890 apply, including equal profit sharing, no salaries and interest allowed on partners’ loans [1]. It should cover: the profit- and loss-sharing ratio [1]; salaries and interest on capital and on drawings [1]; the capital each partner contributes and the procedure for admitting or retiring a partner [1].

5. Ordinary shares — the return is a variable dividend, paid only if profits allow and the directors declare one [1]; they carry the higher risk, ranking after all creditors, including debenture holders, on a winding up [1]; they do carry voting rights, so holders control the company [1]. Debentures — the return is interest, which is a charge against profit and must be paid whether or not the company is profitable [1]; the lower risk, since debenture holders are creditors and usually secured on the company’s assets, ranking ahead of shareholders [1]; they carry no voting rights, as holders are lenders, not owners [1].

6. Retained earnings — the accumulated profits not distributed as dividends [1], available for reinvestment or future distribution [1]. Share premium — the amount received for shares in excess of their nominal value [1]; it is a capital reserve and cannot be distributed as a dividend [1]. General reserve — profit transferred out of retained earnings by the directors to strengthen the company’s financial position [1]; it signals an intention not to distribute those profits, though it remains a revenue reserve [1].

7. (a) Leasing — using the van without buying it outright, avoiding a large upfront cost [2]. Payment by instalments — spreading the cost of the purchase over time while still owning the van from the outset [2].

(b) Assets = liabilities + capital [1]. Taking the loan increases assets (cash, then the van) by $18 000 and increases liabilities (the loan) by $18 000 [1], so both sides of the equation rise equally and remain in balance [1].

8. (a) Historic cost — assets are recorded at their original purchase cost, not their current market value [2].

(b) Business entity concept — the business is accounted for separately from its owner, so personal assets are excluded [2].

(c) Going concern — accounts assume the business will continue operating, which is what justifies spreading depreciation over an asset’s useful life rather than writing it off immediately [2].

9. (a) The general journal [1] — it records transactions not covered by the other specialised books, such as correcting errors or recording non-current asset purchases made on credit [1].

(b) Any two: passwords; access levels restricting what different users can view or change; regular backups [2].

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Where marks are usually lost

• Sharing the whole profit in the ratio before deducting salaries and interest.
• Saying ordinary shareholders are entitled to a dividend — one is paid only if profits allow and the directors declare it.
• Treating debenture interest as an appropriation rather than an expense.
• Describing share premium as distributable.
• Confusing historic cost (original purchase price) with current market value.
• Naming a computerised system’s advantages without also acknowledging the security and reliability risks the syllabus expects.