Accounting: Business Entities and the Accounting System — Practice Questions

These are original questions written for Marlbridge, in the style and at the standard of the examination. They are not reproduced past-paper questions — examination boards hold copyright in their own papers. Use these alongside the official past papers available free from your board.

Related: Business Entities and the Accounting System revision notes

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Section A

1. Name the books of prime entry and state what is recorded in each. [5]

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

Section B

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, preference shares and debentures, in terms of return, risk and voting rights. [9]

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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Section C

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, name 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 day book — credit sales [1]. Purchases day book — credit purchases [1]. Sales returns day book — goods returned by customers [1]. Purchases returns day book — goods returned to suppliers [1]. Cash book and journal — cash and bank transactions, and non-routine entries such as corrections 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 statutory provisions apply, including equal profit sharing and no salaries [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 after preference dividends [1]; they carry the highest risk, ranking last on a winding up [1]; they do carry voting rights, so holders control the company [1]. Preference shares — the return is a fixed percentage dividend, paid before ordinary dividends [1]; lower risk than ordinary shares, ranking above them on a winding up [1]; they normally carry no voting rights [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 lowest risk, since debenture holders are creditors and usually secured on the company’s assets, ranking first [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 preference shareholders always receive a dividend — profits must be available.
• 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.