The Fundamentals of Accounting: 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: The Fundamentals of Accounting revision notes

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Section A

1. State the accounting equation and define each element. [3]

2. State whether each is an asset, a liability or capital: bank overdraft, motor vehicle, trade payables, owner’s investment, inventory. [5]

Section B

3. For each transaction, state the account debited and the account credited:

(a) Owner pays $10 000 into the business bank account. [2] (b) Goods bought on credit from Ali, $2400. [2] (c) Cash sales of $850. [2] (d) Rent paid by cheque, $600. [2] (e) Ali is paid $2400 by cheque. [2]

4. Explain the purpose of a trial balance and give three errors it will not reveal. [5]

5. Explain the difference between capital expenditure and revenue expenditure, giving an example of each, and state the effect of wrongly treating capital expenditure as revenue expenditure. [6]

6. Explain the following accounting concepts: prudence, matching (accruals), going concern, consistency. [8]

7. Explain the difference between book-keeping and accounting. [3]

8. A business has assets of $45 000 and liabilities of $12 000.

(a) Calculate the owner’s capital. [1] (b) The business then takes out a $6 000 bank loan, received in cash. State the new value of assets, liabilities and capital. [3]

9. Explain why capital is grouped with liabilities in the accounting equation rather than treated as a separate category of its own. [2]

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Answers

1. Assets = Capital + Liabilities [1]. Assets are resources owned by the business [1]; capital is the owner’s investment — what the business owes the owner; liabilities are amounts owed to outside parties [1].

2. Bank overdraft — liability [1]. Motor vehicle — asset [1]. Trade payables — liability [1]. Owner’s investment — capital [1]. Inventory — asset [1].

3. (a) Debit Bank, credit Capital [1] [1]. (b) Debit Purchases, credit Ali (trade payable) [1] [1]. (c) Debit Cash, credit Sales [1] [1]. (d) Debit Rent, credit Bank [1] [1]. (e) Debit Ali, credit Bank [1] [1].

4. A trial balance lists all ledger balances to check that total debits equal total credits, providing arithmetical proof of the double entry and a starting point for the financial statements [1] [1]. Errors it will not reveal: error of omission — the transaction is left out entirely [1]; error of commission — the correct amount is posted to the wrong account of the same type [1]; error of principle — posted to a wholly wrong class of account, e.g. a vehicle to motor expenses [1]; also compensating errors, errors of original entry and complete reversal of entries.

5. Capital expenditure is spending on acquiring or improving a non-current asset that will benefit the business for more than one period, e.g. buying a delivery van [1] [1]. Revenue expenditure is spending on the day-to-day running of the business, consumed within the period, e.g. fuel for the van [1] [1]. If capital expenditure is wrongly treated as revenue expenditure, expenses are overstated so profit is understated [1], and the non-current assets and therefore the capital shown in the statement of financial position are understated [1].

6. Prudence — do not overstate assets or profit and do not understate liabilities or losses; recognise losses as soon as they are foreseen but gains only when realised [1] [1]. Matching (accruals) — revenues and the costs incurred in earning them are recorded in the same period, regardless of when cash moves [1] [1]. Going concern — assume the business will continue trading for the foreseeable future, so assets are valued at cost rather than break-up value [1] [1]. Consistency — apply the same accounting treatment from one period to the next, so results are comparable over time [1] [1].

7. Book-keeping is the routine, day-to-day recording of transactions [1]; accounting is the broader, analytical activity of using those records to interpret performance, monitor progress and inform decisions [1]. Accounting is not simply the mechanical act of writing entries down — examiners specifically test this distinction [1].

8. (a) Capital = Assets − Liabilities = 45 000 − 12 000 = $33 000 [1]. (b) Assets rise by $6 000 to $51 000 [1]; liabilities rise by $6 000 to $18 000 [1]; capital is unchanged at $33 000, since 51 000 = 33 000 + 18 000 confirms the equation still balances [1].

9. From the business’s own point of view, capital is an amount effectively owed back to the owner — conceptually the same as a loan owed to an outside lender [1]. So assets = capital + liabilities balances the same way whether the claim on those assets comes from the owner or from an external party [1]. Capital itself is not fixed across a trading period: it rises through profit earned and further investment, and falls through losses and drawings taken by the owner.

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Where marks are usually lost

• Reversing the debit and credit for capital introduced.
• Saying a trial balance proves the accounts are correct.
• Confusing the direction of the profit effect when expenditure is misclassified.
• Defining prudence as “being cautious” without reference to assets, liabilities and profit.
• Treating book-keeping and accounting as interchangeable terms, rather than the routine-recording vs analytical-interpretation distinction examiners expect.
• Forgetting that a transaction affecting only assets and liabilities leaves capital completely unchanged.