Edexcel IGCSE Accounting: Types of business organisation and 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 sections 1.1 (Types of business organisation) and 1.2 (Accounting concepts) of Topic 1 in the Pearson Edexcel International GCSE in Accounting (4AC1) specification, Issue 1, October 2016. All businesses and people are invented and amounts are in dollars ($). The specification does not list business-type characteristics or stakeholder groups, so those questions use standard accounting knowledge.

Links: Edexcel IGCSE Accounting hub, printable checklist, all free 10-minute diagnostics, study guide, revision notes.

Questions

1. State two characteristics of a sole trader. [2]

2. Explain two characteristics of public sector organisations. [4]

3. Calum Skerritt and Raoul Pemberley plan to open a tile shop together as a partnership.

(a) Explain two advantages to them of forming a partnership rather than each trading as a sole trader. [4] (b) Explain one disadvantage of a partnership. [2]

4. Mosscroft Bakery is a sole trader business. State one item in its financial statements that each stakeholder might use, and why.

(a) The bank manager, considering an overdraft request. [2] (b) A baker employed by the business. [2] (c) The supplier of flour, who sells on credit. [2] (d) The tax authority. [2]

5. Name the accounting concept shown in each situation.

(a) Tideswell Textiles has a highly skilled workforce, but no value for it appears in the statement of financial position. [1] (b) An owner’s family holiday is paid from the business bank account and recorded as drawings. [1] (c) December’s electricity is charged to December although the bill is paid in January. [1] (d) A box of paper clips costing 8 is treated as an expense. [1] (e) Closing inventory is valued at the lower of cost and net realisable value. [1] (f) The same method of calculating depreciation is used as last year. [1]

6. Tideswell Textiles holds 80 rolls of cloth that cost 25 each. A fall in market prices means each roll now has a net realisable value of 21.

(a) Calculate the total cost and total net realisable value of the rolls. [2] (b) State the value at which the rolls should appear and the effect on profit. [2] (c) Explain which accounting concept supports this treatment. [1]

7. Mosscroft Bakery pays 4,800 on 1 April for 12 months’ rent. Its year ends on 30 June.

(a) Calculate the rent expense for the year. [2] (b) Calculate the amount that is a prepayment at 30 June. [1] (c) Explain the accruals concept. [2]

8. Calum Skerritt is a sole trader. His opening capital is 38,000 and his profit for the year is 19,500. During the year he took 9,800 in cash, goods that cost 1,500 and paid a 1,100 personal phone bill from the business account.

(a) Calculate his total drawings. [3] (b) Calculate his closing capital. [2] (c) Explain why the personal items are not recorded as business expenses. [2]

9. Fostergate Joinery has annual revenue of 250,000. During the year it buys a pencil sharpener for 15 and a delivery van for 18,500.

(a) Calculate the cost of each item as a percentage of revenue. [2] (b) State how each item is likely to be treated, using the concept of materiality. [2] (c) Explain why the same item might be treated differently by a much smaller business. [2]

10. Raoul Pemberley bought a machine for 36,000. In year 1 he charged depreciation of 10% of cost each year. In year 2 he changed to reducing balance at 20% a year.

(a) Calculate the year 1 charge and the net book value at the end of year 1. [2] (b) Calculate the year 2 charge under reducing balance and the difference from the year 1 method. [2] (c) Explain which concept the change affects and why it matters to users. [2]

11. A newsletter states that a business’s statement of financial position shows the full worth of the firm. Explain two reasons, based on the money measurement concept, why this claim may be wrong. [4]

12. Calum Skerritt trades alone as Skerritt Tiling with capital of 18,000 and profit last year of 31,200. He needs 40,000 to buy a workshop. Raoul Pemberley offers to join him as a partner and put in 22,000, with profit shared equally. Evaluate whether Calum should accept. [8]

Answers

1. Any two of: owned by one person [1]; the owner keeps all the profit [1]; the owner has unlimited liability, so is personally responsible for the debts; simple to set up. [2] Examiner insight: “State” asks for short points, so two clear characteristics are enough. Writing “small business” is vague and may not be enough on its own.

2. Owned and controlled by the government [1], so decisions follow public policy, not the wishes of private owners [1]. Main aim is to provide a service to the public, for example health care [1], not to make a profit for owners [1]. Funded mainly by taxes is another valid characteristic. [4] Examiner insight: “Explain” calls for a point plus a reason or consequence. A list of examples, such as “hospitals and schools”, does not explain a characteristic.

3. (a) More capital because both contribute [1], which can pay for a larger shop or stock [1]. Different skills, for example one in tiling and one in selling [1], so the business is better run [1]. Shared workload or ideas would also be sensible points. [4] (b) Profit must be shared [1], so each receives less than a sole trader would from the same profit [1]. Disagreements, or partners being personally responsible for the debts, are other sound disadvantages. [2] Examiner insight: Each advantage needs the point and its effect on the business. “More money” alone is thinner than “more capital, so a bigger shop”.

4. (a) Profit for the year or assets [1], to judge whether the bakery could repay an overdraft [1]. (b) Profit for the year [1], to judge whether the job is secure or a pay rise is affordable [1]. (c) Trade payables compared with cash and receivables [1], to judge whether the bakery can pay for flour on time [1]. (d) Profit for the year [1], as the basis for calculating the tax due [1]. [8] Examiner insight: Each part asks for an item and a reason. Naming the stakeholder’s interest without a figure from the statements leaves half the answer missing.

5. (a) Money measurement [1] (b) Business entity [1] (c) Accruals [1] (d) Materiality [1] (e) Prudence [1] (f) Consistency [1] [6] Examiner insight: A single concept name is the whole answer here. Naming two concepts for one situation risks losing the credit.

6. (a) Cost = 80 × 25 = 2,000 [1]; net realisable value = 80 × 21 = 1,680 [1]. (b) The rolls appear at the lower figure, 1,680 [1], so profit falls by 2,000 − 1,680 = 320 [1]. (c) Prudence: a likely loss is recognised as soon as it is foreseen. [1] [5] Examiner insight: State both the value and the profit effect separately. Giving only the 320 does not say which value is used.

7. (a) Monthly rent = 4,800 ÷ 12 = 400 [1]; April to June is 3 months, so the expense is 1,200 [1]. (b) The other 9 months, 9 × 400 = 3,600, is a prepayment. [1] (c) Income and expenses are recorded in the period in which they are earned or incurred [1], not in the period in which cash is received or paid [1]. [5] Examiner insight: Show the monthly figure before the final answer. A correct number from a wrong period shows up as a different expense, so the working is worth setting out.

8. (a) Total drawings = cash + goods + personal bill [1] = 9,800 + 1,500 + 1,100 [1] = 12,400 [1]. (b) Closing capital = 38,000 + 19,500 − 12,400 [1] = 45,100 [1]. (c) The business is a separate entity from its owner [1], so private spending is not a cost of the business and is not deducted in working out profit. [1] [7] Examiner insight: A common slip is subtracting drawings from profit before showing profit. Keep profit at 19,500 and deduct drawings from capital.

9. (a) Sharpener: 15 ÷ 250,000 × 100 = 0.006% [1]; van: 18,500 ÷ 250,000 × 100 = 7.4% [1]. (b) The sharpener is immaterial and is likely to be charged as an expense [1]; the van is material and is likely to be recorded as a non-current asset [1]. (c) Materiality depends on the size of the business [1], so an amount that is trivial here could affect the decisions of users of a much smaller business’s statements. [1] [6] Examiner insight: “Material” needs a comparison with something, usually revenue or profit. A statement that an item is “small” with no comparison is weaker.

10. (a) Year 1 charge = 36,000 × 10% = 3,600 [1]; net book value = 36,000 − 3,600 = 32,400 [1]. (b) Year 2 charge = 32,400 × 20% = 6,480 [1]; difference = 6,480 − 3,600 = 2,880 higher [1]. (c) Consistency [1]: the method has changed, so profit for the two years is not comparable and users cannot tell whether performance or the method caused the change. [1] [6] Examiner insight: Link the answer to comparability. Saying only “the method should always stay the same” overlooks that a change can be justified.

11. Only items that can be measured in money are recorded, so things such as a skilled workforce or a good reputation are not in the statement [1], although they add to the firm’s worth [1]. Money changes in value over time, so assets bought at different dates are recorded at figures that are not like for like [1], and may not show current worth [1]. [4] Examiner insight: Two separate reasons are asked for. Two examples of the same reason, such as staff skills and staff loyalty, count as one idea.

12. Advantages: capital would be 18,000 + 22,000 = 40,000 [1], exactly the amount needed [1]; Raoul may bring extra skills and share the workload [1]. Disadvantages: if profit stays at 31,200, each partner’s share would be 31,200 ÷ 2 = 15,600 [1], so Calum’s income falls by 15,600 [1]; he loses sole control of decisions [1]; partners are personally responsible for the debts, which could include debts arising from Raoul’s decisions [1]. Judgement: accepting is reasonable only if the workshop is likely to raise profit by more than the share given away, or if no other finance is available, and a partnership agreement should set out how decisions are made [1]. [8] Examiner insight: Evaluation answers tend to gain more when the figures are used and a supported decision is reached. A list of advantages and disadvantages with no conclusion stops short of evaluating.

Where marks are usually lost

• Writing “limited liability” for a sole trader or an ordinary partnership.
• Describing a stakeholder’s interest without naming an item in the financial statements.
• Naming a concept without linking it to the facts in the question.
• Treating prudence as always choosing the lowest number.
• Counting the whole payment as this year’s expense and forgetting the prepayment.
• Deducting drawings from profit, not from capital.
• Calling an item material or immaterial without any comparison.
• Stating a conclusion in an evaluate question with no figures to support it.

Next steps

• Revise with the revision notes and read the study guide.
• Check the course hub and the checklist.
• Try all free 10-minute diagnostics.
• Book a free trial class at /trial/.

Frequently asked questions

How do you describe a stakeholder’s interest in the financial statements? Name an item in the financial statements that the stakeholder would look at and say what decision it helps with. Describing an interest without naming a figure is a common way to lose marks.

How do you calculate an expense when a payment covers more than this year? Divide the payment by the number of months it covers and charge only the months that belong to this year; the rest is a prepayment. Counting the whole payment as this year’s expense is a common error.

Where are drawings deducted? Drawings are deducted from capital, not from profit, because they are not a business expense. Closing capital is opening capital plus profit minus drawings.

How do you support an evaluate answer on accounting concepts? Use figures from the question, such as an item’s size as a percentage of revenue for materiality, and finish with a conclusion. A conclusion with no supporting figures earns little credit in Edexcel IGCSE Accounting (4AC1).

Official syllabus

Pearson Edexcel International GCSE in Accounting (4AC1) specification, Issue 1, October 2016, published by Pearson Education Limited – Topic 1 The accounting environment, sections 1.1 Types of business organisation and 1.2 Accounting concepts.