Chapter 2 - ALC defs, p/l other expenses

Question 1

The accounting equation is correctly expressed as:
A Assets + profits – drawings – liabilities = closing capital
B Assets – liabilities – drawings = opening capital + profit
C Assets – liabilities – opening capital + drawings = profit
D Opening capital + profit – drawings – liabilities = assets

Answer 1

C Assets – liabilities – opening capital + drawings = profit
The accounting equation is most commonly expressed as assets = capital + liabilities. Capital can be
expanded to opening capital + profit - drawings. This can then be rearranged as: Assets – liabilities –
opening capital + drawings = profit.

Question 2

2 The capital of a sole trader would change as a result of:
A a credit customer paying by bank transfer
B raw materials being purchased on credit
C non-current assets being purchased on credit
D personal petrol being paid for out of the business’s petty cash

Answer 2

Correct answer(s):
D personal petrol being paid for out of the business’s petty cash
Personal petrol is a drawing rather than an expense of the business. The petrol costs being paid in
petty cash means assets decrease and drawings increase, which decreases capital. Option A is a
transaction that involves assets only, while options B and C increase assets and increase liabilities.

Question 3

8 A sole trader sells goods for cash for £500 which had cost £300.
Requirement
Which element(s) of the accounting equation will change due to this transaction?
A Assets and liabilities
B Assets and capital
C Capital and liabilities
D Assets only

Answer 3

8 Correct answer(s):
B Assets and capital
Assets will increase as there is an increase in cash of £500 and a decrease in inventory of only £300,
and capital will increase due to the profit of £200.

Question 4

10 Which three of the following are elements of financial statements as identified by the IASB’s C
onceptual Framework ?
A Income
B Expenses
C Profits
D Losses
E Obligations
F Resources
G Equity

Answer 4

10 Correct answer(s):
A Income
B Expenses
G Equity
According to the IASB’s Conceptual Framework , income, expenses and equity are elements of
financial statements. The IASB’s Conceptual Framework also identifies assets and liabilities as
elements of financial statements.

Question 5

A sole trader received £4,000 from a credit customer for goods which had been sold on credit. The sole trader has an overdraft with his bank of £10,000. Which elements of the accounting equation will change due to this transaction?

Answer 5

assets and liabilities - assets because the cash increases and liability because the overdraft will decrease. If the business wasn’t in the overdraft then it wouldn’t affect liabilities.

Question 6

Nozam maintains an imprest amount of £250 in petty cash. At the end of the month, he has vouchers totalling £112, a receipt for a refund of £9 and a note to say that an employee took £10 to buy stationery for which a voucher has not been prepared. How much does Nozam need to withdraw from the business bank account to reinstate his imprest balance at the end of the month?

Answer 6

Nozam has to reinstate the amount of vouchers, plus the amount taken for which no voucher was prepared, less the refund.

£112 + £10 – £9 = £113

The correct answer is: £113