Chapter 5: Preparing basic financial statements

Question 1

Examples of non-current assets

Answer 1

Land

Question 2

Which types of account appear on the debit side of the initial trial balance?

Answer 2

Earnings, assets, drawings

Question 3

Which types of account appear on the credit side of the initial trial balance?

Answer 3

Liabilities, income, capital

Question 4

Define: Trial balance

Answer 4

A list of nominal ledger account balances shown in debit and credit columns at a point in time, usually the end of the accounting year. The trial balance is not part of the double entry system, it is extracted from the double entry system. It is the starting point to preparing financial statements.

Question 5

What are the five possible errors in a trial balance?

Answer 5

1. Transposition errors
2. Omission errors
3. Commission errors
4. Compensating errors
5. Errors of principle

Question 6

Define: Transposition error

Answer 6

Two digits in an amount are accidentally recorded the wrong way round

Question 7

Define: Omission error

Answer 7

A transaction is completely omitted, either in the nominal ledger, or in the trial balance itself, so neither a debit nor a credit is made

Question 8

Define: Commission error

Answer 8

A debit or credit is posted to the correct side of the nominal ledger, or the trial balance itself, so neither a debit nor a credit is made

Question 9

Define: Compensating error

Answer 9

One error is exactly cancelled by another error elsewhere

Question 10

Define: Errors of principle

Answer 10

An accounting entry being recorded in the wrong place