BA3: Recording transactions

Answer: D. Credit sales are first listed in the sales day book (sales journal) before being posted to the ledgers. The cash book records receipts and payments of cash, the purchases day book records credit purchases, and the journal records adjustments and items that do not fit the other books. Each category of transaction has its own book of prime entry as the first point of recording.

Answer: A. Buying goods on credit increases purchases, which is debited, and increases the amount owed to suppliers (payables, a liability), which is credited. Crediting cash would apply to a cash purchase, not a credit one, and reversing the entry would be wrong. Double entry always reflects the dual effect of a transaction — here, more goods acquired and more owed to suppliers.

Answer: B. A trial balance lists all the ledger balances to confirm that total debits equal total credits, providing a check on the arithmetical accuracy of the double entry. It does not by itself calculate profit, value inventory or prepare the cash flow statement, which all require further work. Importantly, a balanced trial balance does not prove there are no errors, because some errors affect both sides equally.

Answer: C. An error of principle occurs when a transaction is recorded in a fundamentally wrong type of account — here, treating capital expenditure (the van) as revenue expenditure (an expense). An error of omission leaves a transaction out entirely, an error of commission posts to the wrong account of the same type, and an error of original entry uses the wrong amount. This error would not be revealed by the trial balance, which would still balance.

Answer: D. A suspense account is a temporary account used to make the trial balance balance when there is an unexplained difference, pending investigation and correction of the underlying errors. Non-payment by a customer, a loss on disposal and damaged inventory are all ordinary events recorded in their own accounts, not reasons to open a suspense account. The suspense balance is cleared once the errors causing the imbalance are found.

Answer: A. Straight-line depreciation = (cost − residual value) ÷ useful life = (£50,000 − £5,000) ÷ 5 = £9,000 per year. The £10,000 figure ignores the residual value (£50,000 ÷ 5). The £45,000 figure is the total depreciable amount over the whole life, not the annual charge. The straight-line method spreads the depreciable amount evenly across the asset's useful life. £11,000 adds the residual value instead of deducting it ((£50,000 + £5,000) ÷ 5).

Answer: B. Year 1 depreciation = £20,000 × 25% = £5,000, leaving a carrying amount of £15,000. Year 2 depreciation = £15,000 × 25% = £3,750. The £5,000 figure is the year 1 charge, not year 2. Under the reducing balance method the percentage is applied to the falling carrying amount each year, so the charge decreases over time, unlike the constant straight-line charge.

Answer: C. The carrying amount at disposal = cost − accumulated depreciation = £12,000 − £8,000 = £4,000. Profit on disposal = proceeds − carrying amount = £5,000 − £4,000 = £1,000 profit, because the asset sold for more than its carrying amount. Comparing the proceeds with the original cost would wrongly suggest a large loss; disposal profits and losses are always measured against the carrying amount, not the original cost. A £7,000 loss compares the proceeds with the original cost (£12,000 − £5,000), which ignores the depreciation already charged.

Answer: D. A purchased patent may be recognised as an intangible asset because it was acquired in a transaction at a measurable cost and is expected to bring future economic benefits. IAS 38 prohibits recognising internally generated goodwill, internally generated brands and staff training expenditure as assets, because their cost cannot be measured reliably and separately from the business as a whole. Purchased intangibles meet the recognition criteria; most internally generated ones do not.

Answer: A. Unpresented cheques have reduced the cash book but not yet the bank statement, so the statement is higher by £500; outstanding lodgements have increased the cash book but not yet the statement, so the statement is lower by £300. Bank statement balance = £2,000 + £500 − £300 = £2,200. The reconciliation explains the timing differences between the company's records and the bank's, which arise because items reach the two records at different times. £1,800 reverses both adjustments (£2,000 − £500 + £300), £2,800 adds both items, and £2,000 assumes the two records agree.

Answer: B. Closing receivables = opening balance + credit sales − cash received − discounts allowed = £10,000 + £50,000 − £45,000 − £1,000 = £14,000. Credit sales increase the amount owed by customers, while cash received and discounts allowed reduce it. £15,000 omits the discounts allowed, and £16,000 adds them instead of deducting them. £6,000 reverses every entry. The control account summarises the total of all the individual customer balances in the sales ledger.

Answer: C. Sales tax on a net amount = net value × tax rate = £200 × 20% = £40, giving a gross invoice total of £240. The £33.33 figure would extract tax from a gross amount (£200 × 20/120), but here £200 is the net figure, so the tax is added rather than extracted. The £240 figure is the gross total, not the tax itself. Tax is calculated on the net value when that is the starting point.

Answer: D. Receiving cash from a credit customer increases cash (debit) and reduces the amount owed by the customer (credit receivables). Crediting sales would double-count the income, which was already recorded when the credit sale was made. The receipt simply settles an existing receivable, so the entry converts the asset 'receivable' into the asset 'cash' without affecting profit.

Answer: A. A one-sided entry — a debit with no matching credit — breaks the equality of debits and credits, so the trial balance will not balance. Errors of complete omission, principle and commission, and compensating errors, all leave total debits equal to total credits, so the trial balance still balances despite the error. This is why a balanced trial balance does not prove the records are free from error.

Answer: B. An error of commission occurs when an entry is posted to the wrong account but of the same type or class — here, the correct type of account (a receivable) but the wrong individual customer. An error of omission leaves the transaction out entirely, an error of principle uses the wrong class of account, and an error of original entry records the wrong amount. None of these affects the trial balance totals.

Answer: C. Under IAS 16, the cost of an asset includes its purchase price plus any costs directly attributable to bringing it to its location and working condition — such as delivery and installation. Ongoing maintenance, staff training and subsequent repairs are revenue expenses charged to profit or loss as incurred, not part of the asset's cost. Only directly attributable costs of getting the asset ready for use are capitalised.

Answer: D. The revaluation surplus = revalued amount − carrying amount = £55,000 − £40,000 = £15,000. Under IAS 16, this surplus is credited to a revaluation reserve within equity and reported as other comprehensive income, not as profit, because it is an unrealised gain. The £55,000 and £40,000 figures are the new and old carrying amounts themselves; the surplus is the increase between them. £95,000 adds the two amounts instead of taking the difference.

Answer: A. After revaluation, depreciation is based on the new carrying amount over the remaining useful life: £60,000 ÷ 10 years = £6,000 per year. The revalued amount, not the original cost, becomes the basis for future depreciation. The £60,000 figure is the full carrying amount, and £600 misplaces the decimal. Revaluation increases both the asset's value and its subsequent depreciation charge. £5,500 does not follow from a £60,000 amount spread over 10 years.

Answer: B. Carrying amount = cost − accumulated depreciation = £30,000 − £18,000 = £12,000. This is the value at which the asset appears in the statement of financial position. The £48,000 figure adds the two amounts instead of subtracting, and £30,000 and £18,000 are the cost and accumulated depreciation themselves. The carrying amount represents the unexpired cost of the asset still to be charged as depreciation.

Answer: C. Closing payables = opening balance + credit purchases − payments − discounts received = £8,000 + £40,000 − £35,000 − £500 = £12,500. Credit purchases increase the amount owed to suppliers, while payments and discounts received reduce it. The £13,000 figure omits the discounts received. The control account summarises the total of the individual supplier balances in the purchase ledger. £3,500 reverses every entry, and £12,000 deducts the discount twice.

Answer: D. Under the imprest system, the float is topped back up to the imprest amount by reimbursing exactly what was spent: £170. This restores the float from the £30 cash remaining back to £200. The £30 figure is the cash left, not the reimbursement, and £200 is the imprest amount itself. The reimbursement always equals the total of the vouchers for expenditure during the period. £370 adds the amount spent to the imprest amount.

Answer: A. Bank charges that the bank has deducted but the company has not yet recorded must be entered in the cash book, because they are genuine transactions the company had not accounted for. Unpresented cheques, outstanding lodgements and cheques in transit are timing differences that are dealt with on the reconciliation statement, not by adjusting the cash book. Items the company is unaware of (charges, direct debits, interest) update the cash book.

Answer: B. Net pay = gross pay − employee deductions = £2,000 − £300 (income tax) − £150 (employee's national insurance) = £1,550. Net pay is the amount actually paid to the employee. The £1,700 and £1,850 figures deduct only one of the two amounts. Employer's national insurance is an additional cost to the employer but is not deducted from the employee's gross pay, so it does not affect net pay.

Answer: C. The share premium is the excess of the issue price over the nominal value: 10,000 shares × (£1.50 − £1.00) = £5,000. The nominal value of £10,000 (10,000 × £1) is credited to share capital, and the premium of £5,000 to the share premium account, giving total proceeds of £15,000. The £15,000 figure is the total cash received, not the premium alone. £1,500 is a tenth of the total proceeds and does not follow from the figures.

Answer: D. Introducing capital increases the business's bank balance (debit bank) and increases the owner's capital — the amount the business owes back to the owner (credit capital). Treating it as drawings would be the opposite of an injection, and crediting sales would wrongly record it as income. Under the business entity concept, money the owner puts in is capital, recorded separately from the owner's personal affairs.

Answer: A. A sales return reverses part of a credit sale: it increases sales returns (a debit, reducing net sales) and reduces the amount owed by the customer (credit receivables). A cash entry would be wrong, because the original sale was on credit and no cash has changed hands. Sales returns are recorded in a separate account so that the level of returns can be monitored rather than netted invisibly against sales.

Answer: B. An error of omission occurs when a transaction is entirely left out of the books, so neither the debit nor the credit is recorded. Because both sides are missing, the trial balance still balances. An error of commission posts to the wrong account of the same type, an error of principle uses the wrong class of account, and an error of original entry records the wrong figure. Complete omission means the transaction is simply absent.

Answer: C. Annual depreciation = £24,000 ÷ 8 = £3,000. After 3 years, accumulated depreciation = 3 × £3,000 = £9,000. The £3,000 figure is the single-year charge, and £15,000 is the carrying amount remaining (£24,000 − £9,000), not the accumulated depreciation. Accumulated depreciation builds up year by year and is deducted from cost to give the carrying amount.

Answer: D. Annual depreciation = £24,000 ÷ 8 = £3,000, so accumulated depreciation after 3 years = £9,000. Carrying amount = cost − accumulated depreciation = £24,000 − £9,000 = £15,000. The £9,000 figure is the accumulated depreciation itself, not the carrying amount. The carrying amount is the part of the asset's cost that has not yet been charged as depreciation. £21,000 deducts only one year's depreciation.

Answer: A. Carrying amount at disposal = cost − accumulated depreciation = £10,000 − £6,000 = £4,000. Loss on disposal = carrying amount − proceeds = £4,000 − £2,500 = £1,500 loss, because the asset sold for less than its carrying amount. The £4,000 figure is the carrying amount itself, not the loss. Disposal gains and losses are always measured against the carrying amount, not the original cost.

Answer: B. Amortisation spreads the cost of a finite-life intangible over its useful life: £20,000 ÷ 5 = £4,000 per year. Amortisation is the intangible-asset equivalent of depreciation for tangible assets. The £20,000 figure is the full cost, and £5,000 would imply a 4-year life. A purchased patent with a finite useful life is amortised systematically over that life under IAS 38. £2,000 would imply a 10-year life.

Answer: C. Amount spent = imprest amount − cash remaining = £150 − £42 = £108, which equals the total of the expense vouchers held in the float. The £42 figure is the cash left, and £150 is the imprest amount. Under the imprest system the float will then be reimbursed by £108 to restore it to £150, so the reimbursement equals the amount spent. £192 adds the cash remaining to the imprest amount instead of deducting it.

Answer: D. A direct debit the company has not yet recorded is a genuine payment that must be entered in the cash book — credited, because it reduces the cash balance. It is not adjusted on the bank statement, which is the bank's own record, and it certainly cannot be ignored. Items the company is unaware of until it sees the bank statement (direct debits, standing orders, charges, interest) are corrected by updating the cash book.

Answer: A. When tax is included in a gross figure, it is extracted using the tax fraction: £1,200 × 20/120 = £200 (leaving a net amount of £1,000). The £240 figure wrongly applies 20% to the gross total, which would overstate the tax, because the £1,200 already includes the tax. Extracting tax from a gross amount uses 20/120, whereas adding tax to a net amount uses 20/100.

Answer: B. A bonus issue gives existing shareholders additional shares at no cost, capitalising reserves (such as the share premium or retained earnings) into share capital. No cash is received by the company. It is not a sale for cash, a loan, or a return of capital. A bonus issue changes the makeup of equity — increasing share capital and reducing reserves — without altering the total equity or bringing in new funds.

Answer: C. A rights issue offers existing shareholders the right to buy new shares in proportion to their current holding, normally at a price below the current market price to encourage take-up. Unlike a bonus issue, it raises cash for the company. It is not a free issue, not confined to employees, and not a compulsory buy-back. Rights issues let a company raise equity finance from its existing owners.

Answer: D. Closing capital = opening capital + profit − drawings = £30,000 + £12,000 − £8,000 = £34,000. Profit increases the owner's capital, while drawings (amounts withdrawn for personal use) reduce it. The £50,000 figure adds the drawings instead of subtracting, and £38,000 ignores the drawings entirely. The capital account reflects the owner's investment increased by profits retained in the business. £26,000 reverses both adjustments, deducting the profit and adding the drawings.

Answer: C. A discount allowed to a customer is an expense to the business: it is debited to discount allowed and credited to receivables, reducing the amount the customer still owes. Discount received relates to discounts from suppliers, which is a different transaction. The discount reduces the receivable because the customer pays less than the full invoiced amount in return for prompt settlement.

Answer: D. Carriage inwards is the cost of bringing purchased goods into the business and is added to the cost of purchases, forming part of the cost of sales. Carriage outwards (delivering goods to customers) is the item treated as a distribution expense. Carriage inwards is not an asset or a reduction of sales. Including it in purchases reflects the full cost of acquiring the goods for resale.

Answer: A. Goods taken by the owner reduce the purchases (or inventory) available to the business and increase drawings: debit drawings, credit purchases. The goods are not sold, so no sales or profit arise — recording it as a sale would overstate revenue. Drawings represent the owner's withdrawal of resources from the business, and crediting purchases removes the cost of those goods from the trading account.

Answer: B. The receivables account is debited with the opening balance (£5,000) and credit sales (£30,000), and credited with cash received (£28,000). Closing balance = £5,000 + £30,000 − £28,000 = £7,000 debit. The £3,000 figure mishandles the opening balance. Balancing an account involves totalling each side and carrying down the difference, which here is the amount still owed by customers at the period end. £63,000 adds the cash received instead of deducting it, and £33,000 omits the credit sales and adds the cash received.

Answer: C. Only the credit side of the sale was recorded, leaving total debits £500 short — which is why a £500 debit was placed in the suspense account to make the trial balance balance. The correction supplies the missing debit to receivables and removes the suspense balance by crediting it. Once the omitted debit is entered, the suspense account is cleared and the records are complete.

Answer: D. The full annual straight-line charge is £24,000 ÷ 5 = £4,800. As the asset was owned for only 6 months in the first year (1 July to 31 December), the charge is £4,800 × 6/12 = £2,400. The £4,800 figure is the full-year charge, ignoring that the asset was held for only part of the year. Charging depreciation from the date of acquisition matches the cost to the period the asset was used. £2,000 charges only 5 months (£4,800 × 5/12), but the asset was held for 6.

Answer: A. A non-current asset register lists each asset with details such as cost, depreciation and location, and is reconciled to the nominal ledger to provide a control check and help safeguard the assets. It is not a tax computation, an inventory valuation, or a record of sales. Differences between the register and the ledger can reveal errors, omissions or even missing assets, supporting good internal control over non-current assets.

Answer: B. The part-exchange allowance is effectively the proceeds for the old asset, so profit on disposal = allowance − carrying amount = £4,000 − £3,000 = £1,000 profit. The £4,000 figure is the allowance itself, not the profit. Disposal profit or loss is always the difference between the proceeds (here the part-exchange value) and the carrying amount, regardless of the form the proceeds take. £7,000 adds the carrying amount to the allowance instead of deducting it.

Answer: C. Under IAS 38, research expenditure must be written off as an expense as it is incurred, because at the research stage an entity cannot demonstrate that future economic benefits are probable. Development expenditure may be capitalised, but only once strict criteria are met. Research costs are not added to inventory, nor can they be ignored. The distinction between research (expensed) and development (potentially capitalised) is central to IAS 38.

Answer: D. The cash book must be updated for items the company had not recorded: add interest received (£100) and deduct bank charges (£40). Adjusted balance = £1,500 + £100 − £40 = £1,560. The £1,440 figure reverses the two adjustments. This adjusted cash book balance is the figure that then reconciles to the bank statement after allowing for timing differences such as unpresented cheques and outstanding lodgements. £1,360 deducts both items, and £1,640 adds both.

Answer: A. The invoice was omitted from a customer's individual account, so the list of balances is £200 too low. Correcting it: £14,800 + £200 = £15,000, which then agrees with the control account. The error lay in the memorandum sales ledger, not the control account, so it is the list of balances that is adjusted. Reconciling the control account to the list of balances helps detect errors in either record. £14,600 deducts the omitted invoice instead of adding it, and £15,200 adds £200 to the control account total, which was already correct.

Answer: B. The amount payable = output tax − input tax = £8,000 − £5,000 = £3,000. Output tax collected on sales is owed to the tax authority, while input tax paid on purchases is recoverable, so only the net amount is paid over. The £13,000 figure adds the two instead of netting them. If input tax exceeded output tax, the business would instead be due a refund.

Answer: C. The total cost to the employer = gross wages + employer's national insurance = £50,000 + £6,000 = £56,000. Employer's national insurance is an additional cost on top of gross pay, not a deduction from it. The £50,000 figure is the gross wages alone. Employee deductions (such as income tax and the employee's own national insurance) come out of the gross pay and so do not add to the employer's total cost. £44,000 deducts the employer's national insurance instead of adding it, and £62,000 adds it twice.

Answer: A. A discount received reduces the amount owed to the supplier and is income to the business: debit payables (reducing the liability) and credit discount received. Discount allowed is the opposite item, relating to discounts given to customers. The business settles the payable for less than the invoiced amount, and the saving is recognised as discount received, a form of other income.

Answer: B. A contra (set-off) entry is made when the same party is both a customer and a supplier of the business, allowing the receivable and the payable to be offset against each other so that only the net amount is settled. It is not triggered by a cash payment, a write-off, or a return of goods. The contra reduces both the sales ledger and purchase ledger balances by the offset amount.

Answer: C. The journal records transactions and adjustments that do not belong in the specialised books of prime entry — such as the correction of errors, year-end adjustments, depreciation and opening entries. Cash receipts go in the cash book, credit sales in the sales day book, and credit purchases in the purchases day book. The journal handles the non-routine entries, providing a clear record and explanation of each.

Answer: D. The repairs expense was wrongly capitalised in machinery, so the correction removes it from machinery (credit £600) and records it correctly as an expense (debit repairs £600). No suspense account is needed, because this error of principle did not unbalance the trial balance — both a debit and a credit had been recorded, just in the wrong account. The correction reclassifies the amount from an asset to an expense.

Answer: A. A revision to an asset's useful life is a change in accounting estimate, applied prospectively: the current carrying amount is depreciated over the remaining revised life. Annual charge = £18,000 ÷ 3 = £6,000. Prior periods are not restated. The £3,000 figure would imply a 6-year remaining life. The new estimate spreads the remaining carrying amount over the years the asset is now expected to be used. £4,500 spreads the carrying amount over 4 years instead of the revised 3.

Answer: B. A revaluation decrease is charged as an expense in profit or loss to the extent it exceeds any existing surplus on the same asset. With no previous surplus, the whole decrease is expensed. A decrease is not credited to the revaluation reserve (that is for increases), not added to cost, and not deferred to disposal. The asymmetry — gains to reserve, losses to profit unless reversing a prior gain — reflects prudence.

Answer: C. Year 1 depreciation = £16,000 × 20% = £3,200, leaving £12,800. Year 2 depreciation = £12,800 × 20% = £2,560, leaving a carrying amount of £12,800 − £2,560 = £10,240. The £12,800 figure is the carrying amount after only one year. Under reducing balance, the charge is calculated on the falling carrying amount each year, so the carrying amount declines by progressively smaller amounts. £9,600 uses the straight-line method (two charges of £3,200), and £6,400 is that straight-line accumulated depreciation.

Answer: D. Working from the bank statement to the cash book: outstanding lodgements have already increased the cash book (so add £500), and unpresented cheques have already reduced the cash book (so deduct £800). Cash book balance = £3,000 + £500 − £800 = £2,700. The reconciliation reverses the timing differences in the opposite direction to a cash-book-to-statement reconciliation. Both records will agree once all items have cleared. £3,300 reverses both adjustments, and £2,300 and £3,700 do not follow from the figures.

Answer: A. The payment was omitted from the control account, so the control balance is £500 too high. Correcting it: £20,500 − £500 = £20,000, which then agrees with the list of supplier balances. The error was in the control account, not the individual ledger accounts, so it is the control account that is adjusted. Reconciling the two figures pinpoints where the error lies. £21,000 adds the omitted payment instead of deducting it, and £19,500 adjusts the list of balances, which was already correct.

Answer: B. On a credit sale with sales tax, the customer owes the full (gross) amount, so receivables are debited with the gross figure; revenue is recorded net of tax (credit sales), and the tax collected on behalf of the authority is credited to the sales tax control account. The business is merely a collector of the tax, so the tax is not income. The gross receivable splits into net sales plus the sales tax liability.

Answer: C. Debenture interest is a finance cost — the cost of borrowing — and is charged as an expense in the statement of profit or loss, reducing profit. Unlike a dividend, which is a distribution of profit to owners, interest is a contractual cost of debt that must be paid regardless of profitability. It is not part of share capital. This distinction reflects that debt holders are creditors, not owners.

Answer: D. Expenditure that enhances an asset beyond its original standard — here, significantly extending its useful life — is capital expenditure and is added to the asset's carrying amount. Routine servicing that merely maintains the asset would be revenue expenditure. The work is not a reduction of value or a prepayment. The test is whether the spending improves the asset's future benefits (capitalise) or simply keeps it running (expense).

Answer: A. Returning goods to a supplier reduces the amount owed (debit payables) and reduces purchases via a purchases returns account (credit purchases returns). A cash entry would be wrong because the original purchase was on credit and no cash is involved in the return. Purchases returns are recorded separately so the level of returns can be monitored, and they reduce the net cost of purchases in the trading account.

Answer: B. Spending petty cash on stationery increases the stationery expense (debit) and reduces the petty cash float (credit). Crediting petty cash reflects the cash leaving the float. A payables entry would be wrong because the item is paid immediately in cash, not on credit. Petty cash vouchers are analysed by expense type and posted to the relevant expense accounts when the float is reimbursed.

Answer: C. Undercasting the discount allowed account means its debit total is £50 too low, so the trial balance debits fell short and a suspense balance arose. The correction adds the missing £50 to the expense (debit discount allowed) and clears the suspense (credit suspense). No cash entry is involved, because the error was purely one of adding up the account, not a missing transaction. The suspense is removed once the casting error is fixed.

Answer: D. With a full year's charge in the year of acquisition, the straight-line depreciation = £36,000 ÷ 6 = £6,000, regardless of the date within the year on which the asset was bought. The £3,000 figure would be a half-year charge, which this policy does not use. A consistent depreciation policy (such as full year in the year of purchase, none in the year of sale) is applied to avoid the need to apportion by exact dates.

Answer: A. A revaluation increase is recognised in profit or loss to the extent that it reverses a decrease on the same asset previously charged there; only any excess above that goes to the revaluation reserve in equity. This mirrors the treatment of decreases and ensures gains and losses are matched against each other before any unrealised surplus is taken to equity. The increase is neither ignored nor a reduction of cost.

Answer: B. Carrying amount = cost − accumulated depreciation = £20,000 − £14,000 = £6,000. A loss on disposal means proceeds were below carrying amount: proceeds = carrying amount − loss = £6,000 − £1,500 = £4,500. The £6,000 figure is the carrying amount itself. Working back from a known profit or loss to the proceeds is a common requirement, using the relationship between proceeds, carrying amount and the gain or loss. £7,500 adds the loss to the carrying amount instead of deducting it, and £5,000 does not follow from the figures.

Answer: C. IAS 38 permits capitalising development expenditure only when specific criteria are all met — including technical feasibility, the intention and ability to complete and use or sell the asset, and the probability of future economic benefits that can be measured reliably. It is not optional once the criteria are met (capitalisation is then required), nor automatic simply because cost was incurred. Staff training can never be capitalised. Research, as distinct from development, is always expensed.

Answer: D. An outstanding lodgement is a timing difference: the company has recorded the receipt, but the bank has not yet credited it. It will clear once the bank processes the deposit, so no adjustment to the cash book is needed — it is reflected on the reconciliation statement. It is not an error, a bank charge, or evidence of fraud. Timing differences such as this and unpresented cheques explain the gap between the two balances.

Answer: A. The sales ledger control account normally has a debit balance (amounts owed by customers), so a credit balance usually means a customer has overpaid or paid in advance, leaving the business owing them. It does not represent amounts owed to suppliers (that is the purchase ledger), cash at the bank, or inventory. Such credit balances are sometimes reclassified and shown within payables in the statement of financial position.

Answer: B. Output sales tax on a net amount = net sales × tax rate = £30,000 × 20% = £6,000. This is the tax charged to customers and owed to the tax authority. The £5,000 figure would extract tax from a gross amount (30,000 × 20/120), but £30,000 is the net figure, so the tax is added. The £36,000 figure is the gross total. Output tax is calculated on net sales when the net amount is the starting point. £600 misplaces the decimal point.

Answer: C. An ordinary dividend is a distribution of profit to the company's owners, not an expense, so it does not appear in the statement of profit or loss; instead it reduces retained earnings and is shown in the statement of changes in equity. Interest on debt is a finance cost (an expense), but dividends to shareholders are a return on their investment. A dividend is not added to share capital, which records the amount subscribed for shares.

Answer: D. Omitting an expense leaves costs too low, so profit is overstated. Recording an expense twice would understate profit, omitting income would understate profit, and understating closing inventory would raise cost of sales and so understate profit. Understanding how each error affects profit — through revenue, expenses, or inventory — is essential for assessing the impact of errors before they are corrected.

Answer: A. The total carrying amount = £5,000 + £8,000 + £12,000 = £25,000, and the register is reconciled to the carrying amount of non-current assets in the nominal ledger as a control check. It is not reconciled to the sales ledger, cash book or bank statement, which relate to receivables and cash. A difference between the register total and the ledger would signal an error or a missing or unrecorded asset.