Chapter 5

Question 1

What is the trial balance?

Answer 1

It is a summary of the balances on all the ledger accounts making up the general ledger

Question 2

When is a trial balance prepared?

Answer 2

Before the final financial statements are produced

Question 3

What is the trial balance used for?

Answer 3

The trial balance is used to detect errors. Total debits should equal total credits.

If they don’t, an error, or errors have been made. The trial balance is also used to extract the financial statements, via the “extended trial balance”.

Question 4

Profits in the trial balance

Answer 4

Note there is no account for “profit” but that total debits = total credits. To prepare the financial statements you must be able to classify each balance as an asset, liability, income, capital or expense

Question 5

What are the main categories of booking errors

Answer 5

Ones that result in the trial balance being out of balance
Ones that DONT result in the trial balance being out of balance

Question 6

What are the 7 types of error

Answer 6

Omission
Principle
Commission
Transposition
Compensating
Original Entry
Casting Error

O’s both have two types

Question 7

What is Omission Error?

Answer 7

Two types
1 - a transaction is not recorded at all
e.g. sales invoice not recorded in the accounts
BALANCES

2- only one side of the entry is posted
e.g. cash received from customer debited to cash book but not credited to receivables
NOT BALANCE

Question 8

What is Principle Error?

Answer 8

An item is posted to the correct side of the wrong type of account
e,g, cash received from a customer debited to a cash book but not credited to receivables
BALANCES

Question 9

What is Commission error?

Answer 9

an item is entered to the correct side of the wrong account
e.g. Telephone expense debited to electricity expenses in N/L
BALANCES

Question 10

What is Transposition error?

Question 11

What is compensating error

Question 12

What is original entry error

Question 13

What is casting error

Question 14

What is a trial balance structured lik?

Answer 14

List of Accounts | Debit | Credit
only one line of debit or credit filled in?
total at bottom of each column
Debit SHOULD = Credit

Question 15

What adjustments have to be made once the trial balance has been drawn up

Answer 15

1) depreciation
2) accruals and prepayments
3) Irrecoverable (‘bad’) debts
4) Recording closing inventory
5) Correcting errors

All have to be recorded in the nominal ledger, via the journal

Question 16

What does the statement of profit or loss show?

Answer 16

The statement of profit or loss tells the results of the accounting period
i.e. it shows financial performance

Question 17

What is the structure of the statement of profit or loss

Answer 17

Revenue
Gross Profit
Profit before tax
Profit for the year

Question 18

What is the section of the statement of profit or loss before gross profit called?

Answer 18

Trading Account

Question 19

At the end of the period when books are closed, what happens with the statement of profit or loss?

Answer 19

All income and expense accounts are cleared to the statement of profit or loss

Question 20

What are other words for statement of profit or loss?

Answer 20

income statement
profit or loss account
income and expenditure account
profit or loss

Question 21

How is the statement of profit or loss treated in terms of the ledger account

Answer 21

The statement of profit or loss is a seperate ledger account in the nominal ledger and normal double entry rules apply

Question 22

How is the statement of profit or loss represented in terms of D and C

Answer 22

Dr Sales (to clear the sales accounts to zero)
Cr statement of profit or loss

Question 23

Is anything carried forward on the statement of profit or loss

Answer 23

we do not ‘carry forward’ balances on the statement of profit or loss
ALL income and expense accounts start the next period with nil balances

We want to show income and expesnse for a period - wrong to have last year’s sales or wages sitting in the ledger accounts for this year

Question 24

What is the final step of profit and loss statement?

Answer 24

Clear the balance on the statement of profit or loss, which will be the profit or loss for the year. This is added to the owners capital.
Drawings are deducted from the owners capital

Question 24

What are drawings?

Answer 24

drawings” refer to the amounts of money or other assets that the owner of a business withdraws from the business for personal use.
These withdrawals reduce the owner’s equity or capital in the business.

Drawings are not considered expenses of the business and do not appear on the statement of profit or loss.
Instead, they are deducted from the owner’s capital account in the equity section of the balance sheet.

Question 24

What is the Statement of Financial position sometimes called?

Answer 24

The balance sheet

Question 25

What is the statement of financial position

Answer 25

a snapshot of the business assets and liabilities at a particular date

Question 26

What are the two main sections of the Statement of FInancial position

Answer 26

Debits and Credits

Question 27

In the statement of financial position, what is in the debits section#/

Answer 27

Assets
MORE HERE
Total Assets

Question 28

In the statement of financial position, what is in the credits section?

Answer 28

Capital and Liabilities
MORE HERE - vid?
Total Capital and liabities

Question 29

What are the 6 accounting equations

Answer 29

Debits = Credits

Assets = Liabilities + Capital + Profits - Drawings

Assets - Liabilities (net assets) = Capital + Profits - Drawings

Net assets = Capital

Change in Net assets = Change in capital + Profit - Drawings

Profit = Increase in Net assets - Increase in Capital + Drawings

Question 30

What is the theory behind the accounting equation

Answer 30

always two equal and opposite entries for every transaction, the accounts should balance, that is the total of debit entries should be equal to the total of the credit entries
this equation can therefore be rearranged in many different forms