What does double-entry bookkeeping require?

Every transaction recorded as a debit in one account and a credit in another

Two people to approve each payment

Accounts to be kept in two currencies

A duplicate ledger kept for safety

What does depreciation do in a set of accounts?

Spreads the cost of a long-lived asset across the years it is used

Records a fall in the company's share price

Reduces the wages bill over time

Adjusts historic figures for inflation

What are accounts receivable?

Money owed to the business by its customers

Money the business owes to suppliers

Shares issued but not yet paid for

Gross profit differs from net profit in that gross profit does what?

Deducts only the direct cost of the goods sold

Excludes all sales made on credit

Counts only cash actually received in the year

Why can a profitable business still run out of cash?

Because a sale is recorded when it is made, not when it is paid for

Because tax is charged before any profit is earned

Because profit ignores the cost of goods sold

Because banks are not permitted to lend against profit

What is a fixed cost?

One that does not change with the quantity produced

One set in a contract that cannot be renegotiated

One that stays the same from one year to the next

A business reaches break-even at the point where what happens?

Total revenue exactly covers total costs

Its first loan is repaid in full

Cash in the bank matches the year's expenses

What is the purpose of an external audit?

To give an independent opinion on whether the accounts are fairly stated

To calculate the tax the company owes

To value the business ahead of a sale

To check that staff are following internal procedures

What does goodwill represent on a balance sheet?

The amount paid for a business above the value of its identifiable assets

A provision set aside for customer refunds

Charitable donations made during the year

The value of training given to staff

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Business & Enterprise Hard ⚡ 10 Questions ⏱️ ~8 Mins +100 XP

Reading the Accounts

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Accounts are not arithmetic so much as a set of conventions. Once you know the conventions, they are readable.

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~8m

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About this topic

Company accounts look like arithmetic and are really a set of agreed conventions about when something counts. A sale is recorded when it is made, not when the customer pays, which is why a profitable business can run out of cash. A van bought once is charged against several years of profit rather than one. Neither treatment is a fact about the world; both are decisions, taken so that different companies can be compared. The underlying method is very old. Luca Pacioli described double-entry bookkeeping in print in 1494, though Venetian and Genoese merchants had been using it for generations before that. Its virtue is that every transaction is recorded twice, in opposite directions, so the books only balance if the entries are consistent. Everything a modern audit does rests on that one piece of self-checking arithmetic.

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Reading the Accounts: all 10 questions and answers

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1The balance sheet equation states that assets are equal to what?
- A Cash plus stock
- B Liabilities plus equity Correct
- C Revenue minus costs
- D Equity minus liabilities
Answer: B. Liabilities plus equity

Why: It balances because everything the business owns was funded either by borrowing or by its owners. The statement describes a position on one particular date rather than a period of trading.
2What does double-entry bookkeeping require?
- A Every transaction recorded as a debit in one account and a credit in another Correct
- B Two people to approve each payment
- C Accounts to be kept in two currencies
- D A duplicate ledger kept for safety
Answer: A. Every transaction recorded as a debit in one account and a credit in another

Why: Luca Pacioli described the method in print in 1494, though Italian merchants had used it for generations already. The self-checking arithmetic is what makes an error visible at all.
3What does depreciation do in a set of accounts?
- A Records a fall in the company's share price
- B Reduces the wages bill over time
- C Adjusts historic figures for inflation
- D Spreads the cost of a long-lived asset across the years it is used Correct
Answer: D. Spreads the cost of a long-lived asset across the years it is used

Why: A delivery van bought once appears as a cost in each year that it serves. It lowers reported profit without any cash leaving the business in that year.
4What are accounts receivable?
- A Cash held in the bank
- B Shares issued but not yet paid for
- C Money owed to the business by its customers Correct
- D Money the business owes to suppliers
Answer: C. Money owed to the business by its customers

Why: They appear as an asset because the business expects to collect them. How long collection is taking is one of the earliest signals that something is going wrong.
5Gross profit differs from net profit in that gross profit does what?
- A Counts only cash actually received in the year
- B Deducts only the direct cost of the goods sold Correct
- C Includes tax already paid
- D Excludes all sales made on credit
Answer: B. Deducts only the direct cost of the goods sold

Why: Net profit also takes off overheads, interest and tax. A business can post a healthy gross figure and still lose money once everything else is deducted.
6Why can a profitable business still run out of cash?
- A Because a sale is recorded when it is made, not when it is paid for Correct
- B Because tax is charged before any profit is earned
- C Because profit ignores the cost of goods sold
- D Because banks are not permitted to lend against profit
Answer: A. Because a sale is recorded when it is made, not when it is paid for

Why: Stock on the shelves and unpaid invoices tie up money the profit figure has already counted. It is the reason a cash flow statement is prepared separately from the profit and loss account.
7What is a fixed cost?
- A One set in a contract that cannot be renegotiated
- B One paid as a single lump sum
- C One that stays the same from one year to the next
- D One that does not change with the quantity produced Correct
Answer: D. One that does not change with the quantity produced

Why: Rent, insurance and salaried staff are the usual examples. Spreading them across more units is most of the reason higher volume lowers the cost per item.
8A business reaches break-even at the point where what happens?
- A Gross profit equals net profit
- B Cash in the bank matches the year's expenses
- C Total revenue exactly covers total costs Correct
- D Its first loan is repaid in full
Answer: C. Total revenue exactly covers total costs

Why: Above that point each extra sale only has to cover its own variable cost. Below it the fixed costs carry on running whether anything sells or not.
9What is the purpose of an external audit?
- A To check that staff are following internal procedures
- B To give an independent opinion on whether the accounts are fairly stated Correct
- C To calculate the tax the company owes
- D To value the business ahead of a sale
Answer: B. To give an independent opinion on whether the accounts are fairly stated

Why: Auditors sample evidence rather than re-examine every transaction. Their opinion concerns fair presentation, and is not a guarantee that no fraud has occurred.
10What does goodwill represent on a balance sheet?
- A The amount paid for a business above the value of its identifiable assets Correct
- B A provision set aside for customer refunds
- C Charitable donations made during the year
- D The value of training given to staff
Answer: A. The amount paid for a business above the value of its identifiable assets

Why: It stands in for reputation, customer relationships and similar things that were bought but cannot be listed separately. If the acquisition turns out to be worth less than was paid, it has to be written down.

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