Business Accounts - Double-entry Bookkeeping, Ledgers and Trial Balance

Question 1

What are the 2 key financial statements prepared for each accounting period?

Answer 1

1. Profit and loss account
2. Balance sheet

Question 2

What is the basic principle of double entry book-keeping?

Answer 2

Every financial transaction affects the business in 2 ways - 1 entry is recorded as a debit and the other as a credit

Question 3

Why must every debit entry have a corresponding credit entry?

Answer 3

Because the total debits must always equal total credits in the system, ensuring that the accounts remain in balance

Question 4

What is a trial balance?

Answer 4

A list of all the balances from a business’s ledgers/accounts at the end of an accounting period, with debits in one column and credits in another. The totals should match

Question 5

What is capital in a sole trader business?

Answer 5

Money invested by the owner, including retained profits, representing the owner’s interest in the business

Question 6

What is a fixed (non-current) asset?

Answer 6

A long-term asset (tangible or intangible) held by the business for more than 1 year, such as premises or machinery

Question 7

Examples of intangible fixed assets?

Answer 7

• Trade marks
• Patents
• Goodwill

Question 8

What is a current asset

Answer 8

An asset expected to be converted into cash within 1 year, such as stock, debtors or bank balances

Question 9

What is a current liability?

Answer 9

A debt that is due within 1 year, such as trade creditor or an overdraft

Question 10

What is a long-term (non-current) liaility?

Answer 10

A debt due after 1 year, such as a term loan or mortgage