Examkin

Question

Difficulty: MediumBalance Sheet Classification of Assets and Liabilities

Match each financial item extracted from a sole trader's trial balance to its correct Statement of Financial Position (Balance Sheet) classification.

  • GoodwillNon-current Asset
  • Bank OverdraftCurrent Liability
  • Prepaid RentCurrent Asset
  • 5-Year Mortgage LoanNon-current Liability

Answer

Goodwill matches with Non-current Asset; Bank Overdraft matches with Current Liability; Prepaid Rent matches with Current Asset; 5-Year Mortgage Loan matches with Non-current Liability.
Each item is correctly matched according to standard balance sheet classification: Goodwill is a long-term intangible resource (Non-current Asset), Bank Overdraft is a short-term debt obligation (Current Liability), Prepaid Rent is an advance payment yielding near-term benefits (Current Asset), and a 5-Year Mortgage Loan is a long-term borrowing (Non-current Liability).

Step-by-Step Solution

1
Analyze each accounting item to determine whether it is a resource owned (asset) or an obligation owed (liability).
Goodwill and Prepaid Rent are assets; Bank Overdraft and 5-Year Mortgage Loan are liabilities.
Assets represent economic resources controlled by the business, whereas liabilities represent financial obligations.
2
Determine the time horizon/liquidity profile for each item.
Goodwill (long-term intangible) and 5-Year Mortgage Loan (long-term debt) are non-current; Bank Overdraft (short-term bank debt) and Prepaid Rent (short-term advance payment) are current.
Items expected to be realized, consumed, or settled within twelve months are current, while those extending beyond one year are non-current.
3
Pair each item with its designated Statement of Financial Position heading.
Goodwill → Non-current Asset; Bank Overdraft → Current Liability; Prepaid Rent → Current Asset; 5-Year Mortgage Loan → Non-current Liability.
Matching criteria align with standard financial reporting and accounting rules for sole traders.

Key Concept

Classification of assets and liabilities into current and non-current categories based on liquidity, settlement period, and nature of the balance.
Rate this question

Topics

Balance Sheet Classification of Assets and Liabilities