Past Papers

Answer 1

Purposes of Trial Balance

The trial balance serves the following purposes:
1. Checks Mathematical Accuracy – Ensures that total debits equal total credits.
2. Detects Errors – Helps identify mistakes in recording transactions.
3. Financial Statement Preparation – Acts as a basis for preparing financial statements like the income statement and balance sheet.
4. Summarizes Ledger Accounts – Provides a quick summary of all ledger balances.
5. Facilitates Adjustments – Helps in making necessary adjustments before finalizing accounts.

Concept of Separate Business Entity

The separate business entity concept states that a business is a separate legal and financial entity from its owner(s). This means:
• The business’s finances are kept separate from the personal finances of the owner.
• The owner’s personal assets and liabilities are not mixed with business records.
• The business can own property, enter contracts, and take loans in its own name.

Example: If a business takes a loan, it is the business’s liability, not the owner’s personal debt.

Comparison of Journal and Ledger

Feature Journal Ledger
Definition A book where transactions are recorded first in chronological order. A book where transactions are grouped and classified under different accounts.
Purpose Initial recording of transactions. Helps track balances of individual accounts.
Format Follows a debit-credit format with narration. Has separate accounts for each item (e.g., Cash A/C, Sales A/C).
Posting Transactions are recorded here before being posted to the ledger. Entries are transferred from the journal to the respective ledger accounts.

Accounting Equation

The accounting equation is:

This equation shows that:
• The business owns assets (e.g., cash, buildings).
• These assets are funded by either liabilities (e.g., loans) or owner’s equity (the owner’s investment).
• The equation always stays balanced because every transaction affects two or more accounts.

Example:
• If an owner invests $10,000, assets (cash) increase and so does owner’s equity.

Distinction Between Pass Book and Cash Book

Feature Pass Book Cash Book
Definition A record maintained by the bank showing the customer’s transactions. A record maintained by the business to track cash transactions.
Maintained By The bank. The business.
Shows Bank’s view of the customer’s account. Business’s view of its cash and bank transactions.
Balance Type Credit balance means deposit, debit balance means overdraft. Debit balance means cash available, credit balance means overdraft.

Capital Expenditure

Capital expenditure refers to spending on assets that will provide benefits for a long time. These expenses:
• Help in business expansion.
• Are not charged as expenses in the income statement.
• Are recorded as assets in the balance sheet.

Examples:
1. Buying machinery.
2. Constructing a building.
3. Purchasing land.

Error of Omission

An error of omission occurs when a transaction is completely left out from the books of accounts.

Example:
• If a business sells goods for $500 but forgets to record it in the sales journal, it is an error of omission.
• This can cause the trial balance to disagree or affect the accuracy of financial statements.

Outstanding Expenses

Outstanding expenses are expenses that a business has incurred but not yet paid at the end of an accounting period.

Examples:
1. Unpaid salaries – If employees worked in December but were paid in January.
2. Unpaid electricity bill – If the business used electricity but hasn’t paid for it yet.

Bank Reconciliation Statement (BRS)

A Bank Reconciliation Statement is a report that compares the bank statement balance with the business’s cash book balance to identify differences.

Reasons for differences:
• Cheques issued but not yet cleared.
• Deposits made but not reflected in the bank account.
• Bank charges or interest not recorded in the cash book.

BRS helps ensure that both balances match and errors are identified.

Parties Involved in a Bill of Exchange

A bill of exchange involves three parties:
1. Drawer – The person who writes (issues) the bill and is owed money.
2. Drawee – The person who accepts the bill and has to pay.
3. Payee – The person who receives the payment (can be the drawer or someone else).

Example:
If A sells goods to B on credit and issues a bill for payment after 3 months:
• A is the drawer, B is the drawee, and A (or another person) is the payee.

Debit Note and Credit Note
• Debit Note – Issued by a buyer to a seller when returning goods or requesting a reduction in price.
• Credit Note – Issued by a seller to a buyer to acknowledge a return or reduction in amount owed.

Example:
• A shop buys 10 shirts but returns 2 due to defects. The shop sends a debit note to the supplier, and the supplier issues a credit note to adjust the amount.

Examples of Administrative Expenses

Administrative expenses are costs related to the general operation of a business.

Three Examples:
1. Salaries of office staff – Payment to employees not directly involved in production.
2. Office rent – Cost of maintaining office space.
3. Utilities (electricity, water, internet) – Expenses for office operations.

These expenses do not directly contribute to manufacturing or sales but are necessary for business operations.