Y10 TERM 2

Question 1

Error of commission

Answer 1

Where a debit or credit entry is made in the wrong account (of the same class)

Question 2

Error of omission

Answer 2

Where a transaction is overlooked so that no debit and credit entry is made in the accounts

Question 3

Error of principle

Answer 3

Where a debit or credit entry is made for the correct amount but in the wrong class of account

Question 4

Error of original entry

Answer 4

When a mistake is made transferring an amount from a source document to a subsidiary book so both the debit entries and credit entries are incorrect

Question 5

Compensating error

Answer 5

Where two or more errors of the same amount cancel each other out

Question 6

Error of complete reversal

Answer 6

When the account that should be debited is credited in error, and the account that should be credited is debited in error

When an entry is made on the wrong side of each account

Question 7

Suspense account

Answer 7

A temporary account used to make the totals of a trial balance agree

Question 8

Bad debt

Answer 8

An amount owing to the business which the trade receivable is unable to pay

Question 9

Provision for doubtful debts

Answer 9

An estimate of the amount which a business will lose in a financial year because of bad debts

Question 10

State 2 reasons why a business maintains a provision for doubtful debts.

Answer 10

1. To ensure that the profits are not overstated
2. To ensure that trade receivables are not overstated
   (application of prudence principle)

Question 11

State 2 effects on the final accounts of applying the principle of prudence.

Answer 11

1. To ensure that profits are not overstated and liabilities are not understated
2. To ensure that accounting records present a realistic picture of the business’ performance and a more realistic figure of trade receivables

Question 12

Prepaid expenses

Answer 12

Those to be used in the following period but have been paid in advance

Question 13

Accrued expenses

Answer 13

Those which have been used in the current year but have not been paid

Question 14

Prepaid income

Answer 14

Those to be earned in the following period but have been received in advance

Question 15

Accrued income

Answer 15

Those which have been earned in the current year but have not been received

Question 16

Depreciation

Answer 16

An estimate of the loss in value of a non-current asset over its expected working life

Question 17

Cause of depreciation - Physical deterioration

Answer 17

This is the result of ‘wear and tear’ due to the normal usage of the non-current asset. It can also be because the asset falls into a poor physical state due to rust, decay and so on.

Question 18

Cause of depreciation - Depletion

Answer 18

This arises in connection with non-current assets such as wells and mines. The worth of the asset reduces as the value is taken from the asset.

Question 19

Cause of depreciation - Technology factor

Answer 19

Equipment (eg. computers) can rapidly cease being up to date and therefore become unable to meet the needs of the business that owns them.

Question 20

Cause of depreciation - Time factor

Answer 20

The life of some assets has a legal limit. For example, some business premises are held on a lease where there is an agreement to pay rent for a period of years. The lease is likely to have no value when the expiry date is reached.

Question 21

Explain why it is necessary to open a suspense account when the totals of a trial balance fail to agree.

Answer 21

1. To ensure the totals of the trial balance agree

2. To allow draft financial statements to be prepared

Question 22

Accruals (matching) principle

Answer 22

In order to calculate a true and fair profit, income for a financial year is matched exactly with expenses that relate to that accounting year whether paid or not

Question 23

Prudence principle

Answer 23

An accounting principle that requires where there is doubt, asset and profit values are understated rather than overstated, and that losses and liabilities are overstated rather than understated

Question 24

Rule for valuing inventories

Answer 24

Inventories should be valued at the lower of cost and net realisable value

Question 25

Consistency principle

Answer 25

Accounting policies should be carried out in the same way year on year

Question 26

Depreciation - application of accruals (matching) principle

Answer 26

Depreciation spreads the cost of the non-current asset over the years which benefit from the use of the asset / over its useful life.

Question 27

Depreciation - application of prudence principle

Answer 27

Depreciation will reduce the net profit to a more realistic figure. If depreciation is not taken into account, the net profit will be overstated. This concept is also applied in the statement of financial position when the fixed assets are recorded at a more realistic figure.

Question 28

Depreciation - application of consistency principle

Answer 28

The depreciation method selected should be applied consistently to provide comparability of the results of the operations of the business from period to period.

Question 29

Bad debt recovered

Answer 29

Money received from a credit customer in payment/part payment of a debt after it has been written off as a bad debt

Question 30

Profit

Answer 30

The difference between a business' income (sales) and expenditure (purchases and expenses)

Question 31

Capital expenditure

Answer 31

Money spent on non-current assets that is intended to be of benefit in future financial years // Money spent on acquiring, improving and installing non-current assets

Question 32

Revenue expenditure

Answer 32

Money spent on running costs that benefits only the current financial year // Money spent on the running of a business on a day-to-day basis eg. salaries, rent, repairs on old building

Question 33

Capital receipts

Answer 33

Money received that is of long-term (more than one year) benefit to the business // Amounts received which do not form part of the day-to-day trading activities - from selling non-current assets

Question 34

Revenue receipts

Answer 34

Money received that is of short-term (less than one year) benefit to the business // Amounts received in the day-to-day trading activities and other items of income - from normal business activities (eg. rent received)

Question 35

Carriage inwards

Answer 35

The cost of transporting goods, paid by a business on its own purchases

Question 36

Carriage outwards

Answer 36

The cost of transporting goods, paid by a business on its sales to customers

Question 37

Ways to reduce the possibility of bad debts

Answer 37

1. Obtain credit references before allowing credits 2. Invoices and month-end statements should be issued promptly 3. No further goods should be supplied until the amount due is paid 4. Charge interest on overdue accounts

Question 38

Cost

Answer 38

The actual purchase price plus any additional cost incurred in bringing the inventory to its present condition

Question 39

Net realisable value

Answer 39

The estimated receipts from the sales of the inventory less any cost of completing the goods or cost of selling the goods

Question 40

Income statement

Answer 40

A statement comprised of revenues and expenses for a specific period