Edexcel IGCSE Accounting: Application of accounting concepts (4AC1) – 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 from your board or school.

These questions cover section 5.1, Application of accounting concepts, in Topic 5 of the Pearson Edexcel International GCSE in Accounting (4AC1) specification, Issue 1, October 2016. The six concepts are consistency, prudence, accruals, materiality, money measurement and business entity. Amounts are in dollars, written without a currency sign.

Links: 4AC1 Accounting course hub, printable 4AC1 checklist, free 10-minute diagnostics. Teaching is in the study guide and the revision notes.

Questions

1. For each situation, state the accounting concept that applies. Choose from consistency, prudence, accruals, materiality, money measurement and business entity.

(a) A business uses the straight line method for all its vehicles every year. [1] (b) The owner’s gym membership is settled out of the firm’s bank balance and treated as drawings. [1] (c) The skill of a long-serving workforce does not appear on the statement of financial position. [1] (d) December electricity is included in the year’s expenses although the bill arrives in January. [1] (e) Closing inventory is shown at cost or at net realisable value, whichever is smaller. [1] (f) A box of pens costing 12 is treated as an expense, not as a non-current asset. [1]

2. Harbourside Frames counts three lines of inventory at the year end.

Line	Cost	Net realisable value
Oak frames	2,850	3,400
Glass sheets	1,960	1,420
Mounting card	740	700

(a) Calculate the value of closing inventory that should be used. [3] (b) State how much lower profit is than if the lines were valued at cost. [1] (c) Name the concept that supports your answer to (a). [1]

3. Quarry Hill Gardens has a year end of 30 September. On 1 July it paid 5,400 for twelve months’ rent. Telephone payments in the year total 1,260, and the bill for September, 140, arrives in October.

(a) Calculate the rent expense for the year and the other receivable at the year end. [3] (b) Calculate the telephone expense for the year and the other payable at the year end. [3]

4. Quarry Hill Gardens has profit of 29,000. During the year it buys a calculator for 22 and a ride-on mower for 4,800. Express each as a percentage of profit to 1 decimal place and explain how materiality affects the way each is recorded. [4]

5. The draft profit of Alder Mews Books is 31,250. The following private items were charged as business costs: the owner’s dentist bill of 480 (sundry expenses), books taken home that cost 150 (cost of sales), and the owner’s home broadband of 360 (telephone).

(a) Calculate the corrected profit. [3] (b) Calculate the total added to drawings. [1] (c) Explain which concept requires these corrections. [2]

6. Sable Court Laundry bought machines for 30,000 at the start of Year 1. They have a five-year life and no residual value. Profit before depreciation was 24,000 in Year 1 and 25,200 in Year 2. The business uses straight line.

(a) Calculate the Year 1 depreciation under straight line and the Year 2 charge if it changes to 30% reducing balance. [2] (b) Calculate Year 2 profit if straight line is kept and if the change is made. [2] (c) Explain why the change harms the usefulness of the statements. [2]

7. Explain two limitations of the money measurement concept, with an example of each. [4]

8. Harbourside Frames has trade receivables of 14,600 after writing off a debt known to be bad. It decides to make a first-year provision of 3% of trade receivables.

(a) Calculate the provision and the amount at which trade receivables are shown. [2] (b) Say whether profit goes up or down, and by how much. [1] (c) Explain why prudence supports making the provision. [2]

9. Sable Court Laundry has a draft profit of 22,400. The owner is about to ask the bank for a loan and wants to leave out electricity of 700 owed at the year end, and to make no provision on trade receivables of 16,000, where the usual rate of 5% would apply.

(a) Calculate the profit if both items are dealt with properly. [3] (b) Identify the two concepts the owner’s plan ignores and explain each. [4] (c) Advise the owner. [1]

10. The draft profit of Brackley Ropes is 36,000. These items have not yet been adjusted.

1. Wages of 900 are owed at the year end.
2. Insurance of 450 for next year was paid before the year end.
3. Inventory is recorded at its cost of 8,200; net realisable value is 7,350.
4. A private bill of 520 paid by the business was charged to expenses.
5. A first-year provision of 4% is needed on trade receivables of 12,500.

For each item, name the concept and state the effect on profit. Then calculate adjusted profit. [12]

11. A sole trader owns a delivery van used only for the business and a house where the family lives. Explain how the business entity concept and the money measurement concept affect what is shown on the business’s statement of financial position. [6]

Answers

1. (a) Consistency [1]. (b) Business entity [1]. (c) Money measurement [1]. (d) Accruals [1]. (e) Prudence [1]. (f) Materiality [1]. [6] Examiner insight: A single concept name is what these ask for, so commit to the best fit for each.

2. (a) Oak frames: cost 2,850 is lower than net realisable value, so use 2,850 [1]. Glass sheets: net realisable value 1,420 is lower, so use 1,420 [1]. Mounting card: 700 is lower. Total 2,850 + 1,420 + 700 = 4,970 [1]. (b) Cost total is 2,850 + 1,960 + 740 = 5,550, so profit is 580 lower [1]. (c) Prudence [1]. [5] Examiner insight: Compare each line separately. Comparing only totals hides the oak frames gain.

3. (a) Three of twelve months used, so expense = 5,400 × 3/12 [1] = 1,350 [1]. Other receivable = 5,400 − 1,350 = 4,050 [1]. (b) Expense = 1,260 + 140 [1] = 1,400 [1]. Other payable = 140 [1]. [6] Examiner insight: Show the fraction of the year before the figure, so a slip can still be seen to have the right method.

4. Calculator: 22 / 29,000 × 100 = 0.1% [1]. Mower: 4,800 / 29,000 × 100 = 16.6% [1]. The calculator is not material, so it can be charged as an expense with no non-current asset record or depreciation [1]. The mower is large relative to profit, so it is capitalised as a non-current asset and depreciated [1]. [4] Examiner insight: Link the percentage to the treatment. Quoting percentages with no conclusion about how the item is recorded leaves the concept unapplied.

5. (a) Private items = 480 + 150 + 360 = 990 [1]. These were deducted from profit wrongly [1]. Corrected profit = 31,250 + 990 = 32,240 [1]. (b) 990 [1]. (c) Business entity [1]: the owner is separate from the business, so private payments and goods taken for private use are drawings, not expenses [1]. [6] Examiner insight: State the direction as well as the figure. Profit rises and drawings rise by the same amount; showing only one half is a common way to lose credit.

6. (a) Straight line: 30,000 / 5 = 6,000 [1]. Reducing balance after Year 1: carrying value 24,000, so 24,000 × 30% = 7,200 [1]. (b) Straight line kept: 25,200 − 6,000 = 19,200 [1]. After change: 25,200 − 7,200 = 18,000 [1]. (c) Consistency is broken [1]. Profit looks flat at 18,000 in both years, hiding the genuine rise of 1,200, so users cannot compare years fairly [1]. [6] Examiner insight: A good answer says what a reader would wrongly conclude. Stating only that “consistency was not followed” repeats the question.

7. Limitation 1: items with no money value are not recorded [1], such as staff skill or reputation, so the statement of financial position does not show the full worth of the business [1]. Limitation 2: money changes in value over time [1], so land bought long ago at cost is added to recent purchases at current prices, and the total mixes values [1]. [4] Examiner insight: Give each limitation its own example, not one shared example.

8. (a) Provision = 14,600 × 3% = 438 [1]. Shown at 14,600 − 438 = 14,162 [1]. (b) Profit is reduced by 438 [1]. (c) Some customers may not pay [1], and prudence says assets and profit should not be overstated, so the possible loss is recognised now [1]. [5] Examiner insight: Give the effect on both profit and the asset. Many answers mention one only.

9. (a) Electricity owed 700 reduces profit [1]. Provision = 16,000 × 5% = 800 [1]. Profit = 22,400 − 700 − 800 = 20,900 [1]. (b) Accruals [1]: December electricity is a cost of this year even though it is unpaid, so omitting it overstates profit [1]. Prudence [1]: some receivables may not pay, so omitting the provision overstates assets and profit [1]. (c) Advise the owner to record both, because the bank would be relying on profit overstated by 1,500 [1]. [8] Examiner insight: Match each concept to its own item; naming two concepts without that link does not show application.

10. Item 1: accruals [1]; expense increases, profit falls by 900 [1]. Item 2: accruals [1]; the cost belongs to next year, profit rises by 450 [1]. Item 3: prudence [1]; value used is 7,350, so profit falls by 8,200 − 7,350 = 850 [1]. Item 4: business entity [1]; treat as drawings, profit rises by 520 [1]. Item 5: prudence [1]; provision = 12,500 × 4% = 500, profit falls by 500 [1]. Adjusted profit = 36,000 − 900 + 450 − 850 + 520 − 500 [1] = 34,720 [1]. [12] Examiner insight: List the adjustments with plus and minus signs, so correct steps stay visible if one number is wrong.

11. The van is a business asset used in trading, so it is recorded as a non-current asset [1]. The house is private, so under business entity it is not an asset of the business and does not appear [1]. Any private use or loan relating to the house stays out of the business’s records [1]. Money measurement: the van is recorded at its cost in money terms [1], and the figure then falls through depreciation [1]. Things without a money value, such as the owner’s skill, do not appear, so the statement does not show everything that makes the business valuable [1]. [6] Examiner insight: Keep the two concepts in separate points so it is clear both are applied.

Where marks are usually lost

• Naming the concept but not giving the effect on profit, an asset or a liability.
• Adding accrued expenses to profit instead of deducting them.
• Treating a prepaid amount as an expense of the current year.
• Putting the owner’s private spending in expenses rather than drawings.
• Describing prudence as “always record the lowest profit” instead of avoiding overstatement.
• Quoting a percentage for materiality without saying how the item is then recorded.
• Calling money measurement “valuing at market price” rather than recording what can be stated in money.
• Comparing totals of inventory instead of comparing cost with net realisable value line by line.

Next steps

• Revisit the study guide for any concept you missed.
• Condense your learning with the revision notes.
• Browse the 4AC1 Accounting course hub and the printable checklist.
• Take one of the free 10-minute diagnostics.
• Book a free trial class.

Frequently asked questions

How do you get full marks when applying an accounting concept? Name the concept that fits the situation, state what the business should record and give the effect on profit, an asset or a liability, with figures where possible. Naming the concept without its effect is a common way to lose marks in Edexcel IGCSE Accounting (4AC1).

Does an accrued expense increase or reduce profit? An accrued expense is an expense owed at the year end, so adding it to the year’s charge reduces profit. A prepaid expense is removed from the year’s charge, which adds back to profit.

Should inventory be compared with net realisable value in total or line by line? Compare cost with net realisable value for each line of inventory separately and take the lower figure for each. Comparing totals can hide a loss on one line behind a gain on another.

What does the money measurement concept mean? Money measurement means the books record only facts that can be stated in money, usually at the amount paid. It does not mean assets are valued at current market prices, and items such as staff skill or reputation are not recorded.

Official syllabus

Pearson Edexcel International GCSE in Accounting (4AC1) specification, Issue 1, October 2016, published by Pearson Education Limited – Topic 5 Accounting for end of period adjustments, section 5.1 Application of accounting concepts.