Chapter 5

Question 1

9 The following are balances on the accounts of Luigi, a sole trader, as at the end of the current
financial year and after all entries have been processed and the profit for the year has been
calculated.
Requirement
What is the balance on Luigi’s capital account?
A £59,000
B £66,000
C £62,000
D £64,000
LO 3c
£
Non-current assets 85,000
Trade receivables 7,000
Trade payables 3,000
Bank loan 15,000
Accumulated depreciation, non-current assets 15,000
Inventory 4,000
Accruals 1,000
Prepayments 2,000
Bank overdraft

Answer 1

Correct answer(s):
C £62,000
£98,000 – £36,000 = £62,000 (the capital account is the balancing figure for the trial balance)

Add all the assets and liabilities up and then the difference is the capital.

Question 2

1 Anchor Ltd is preparing its financial statements. After transferring the balances on all the income and
expense ledger accounts to the profit and loss ledger account, the total credits in the profit and loss
ledger account exceed the total debits by £4,000.
Requirement
Which two of the following statements about Anchor Ltd are correct?
A Anchor Ltd has made a loss for the year of £4,000.
B Anchor Ltd has made a profit for the year of £4,000.
C To begin to calculate the closing capital account balance, Anchor Ltd should credit the capital
account and debit the profit and loss ledger account with £4,000.
D The opening balance on the profit and loss ledger account for the next reporting period is
£4,000 credit.
E The closing balance on the profit and loss ledger account of £4,000 should be deducted from
the capital account to give the profit for the year.

Answer 2

Correct answer(s):
B Anchor Ltd has made a profit for the year of £4,000.
C To begin to calculate the closing capital account balance, Anchor Ltd should credit the capital
account and debit the profit and loss ledger account with £4,000.
Total credits exceed total debits, which means there is a credit balance in the account – this
represents a profit for the period. The correct entry to transfer the profit for the year to the capital
account is debit profit and loss ledger account, credit capital account. This step is required in order
to start to calculate the closing balance on the capital account which is included in the statement of
financial position. Option D is incorrect as the balance on the profit and loss ledger account is
cleared to the capital account, it is not brought down to the next period. Option E is incorrect, the
closing balance on the profit and loss ledger account is the profit for the year.

Question 3

4 Which of the following statements concerning the preparation of financial statements is true?
A The balances on income and expense accounts are brought down at the end of the accounting
period to be carried forward to the next accounting period.
B The balances on asset and liability accounts are summarised in an additional ledger account
known as the statement of financial position ledger account.
C The statement of profit or loss ledger account is a list of all the balances extracted from the
business’s accounts.
D Loss for the year is a credit entry in the statement of profit or loss ledger account.

Answer 3

4. D Loss for the year is a credit entry in the statement of profit or loss ledger account.
   A loss decreases capital and is therefore debited to the capital account in the statement of financial
   position. The other side of the entry is to credit it to the statement of profit or loss ledger account.