Double Entry Book-Keeping, Ledgers and the Trial Balance

Question 1

Which of the following best describes the purpose of a trial balance?
A. To calculate the total annual profit or loss of a business
B. To summarise the inventory levels held in stock
C. To provide a forecast for future financial performance
D. To check that total debits equal total credits at a specific point in time

Answer 1

D. To check that total debits equal total credits at a specific point in time
Explanation: A trial balance lists all ledger balances and ensures the double-entry system is functioning correctly by confirming debits equal credits.

Question 2

A business pays £1,200 for office rent. How should this transaction be recorded?
A. Debit Cash, Credit Rent Expense
B. Debit Rent Expense, Credit Cash
C. Debit Capital, Credit Rent Expense
D. Debit Rent Expense, Credit Income

Answer 2

B. Debit Rent Expense, Credit Cash
Explanation: Expenses are increased with a debit entry. Cash is decreased with a credit entry, as money is leaving the business.

Question 3

Which of the following is an example of a liability account?
A. Trade creditors
B. Debtors
C. Equipment
D. Drawings

Answer 3

A. Trade creditors
Explanation: Trade creditors represent money the business owes and are therefore liabilities. Debtors are assets, equipment is an asset, and drawings reduce capital.

Question 4

Ali runs a small coffee shop. He buys a new espresso machine for £3,000 using business savings. Which accounts are affected?
A. Asset (equipment) and Asset (bank)
B. Capital and Asset (equipment)
C. Asset (equipment) and Liability (loan)
D. Asset (equipment) and Expense (purchases)

Answer 4

A. Asset (equipment) and Asset (bank)
Explanation: Buying the machine increases fixed assets (equipment) and decreases another asset (bank balance). Both are asset accounts.

Question 5

A business pays £4,800 rent on 1 October to cover the next 12 months. Its financial year ends on 31 December. What is the correct year-end adjustment?
A. £4,800 expense in this year’s profit and loss
B. £1,200 deferred income, £3,600 expense
C. £3,600 expense, £1,200 prepayment
D. £1,200 expense, £3,600 prepayment

Answer 5

D. £1,200 expense, £3,600 prepayment
Explanation: Only three months’ rent (£1,200) applies to the current year. The remainder (£3,600) is a prepayment for the next year.

Question 6

A trial balance shows total debits of £105,000 and total credits of £102,000. What does this indicate?
A. The business has made a loss
B. The business has more assets than liabilities
C. An error has been made in recording transactions
D. The accounts are correctly balanced

Answer 6

C. An error has been made in recording transactions
Explanation: In a double-entry system, total debits and credits must match. A mismatch means an entry has likely been missed or duplicated.

Question 7

Which of the following is classified as an income account?
A. Inventory
B. Rent paid
C. Trade sales
D. Bank loan

Answer 7

C. Trade sales
Explanation: Income accounts record money earned by the business, such as revenue from trade. Inventory is an asset, rent is an expense, and loans are liabilities.

Question 8

Tom, a sole trader, invests £10,000 of his personal funds into his business. How should this be recorded?
A. Debit Cash, Credit Drawings
B. Debit Capital, Credit Bank
C. Debit Bank, Credit Capital
D. Debit Drawings, Credit Bank

Answer 8

C. Debit Bank, Credit Capital
Explanation: The business gains cash (debit bank), and the same value is credited to the capital account to reflect the owner’s investment.