JAMB Financial Accounting 1994 Past Questions & Explanations

An accounting period is the time span covered by financial statements, typically one year. Option A incorrectly links it to tax payment timing. Option B confuses the accounting period with the budget period—while they may overlap, the accounting period is specifically the period covered by financial statements. Option D incorrectly defines it by debtor settlement expectations. The correct answer emphasizes that the accounting period is the standard timeframe (usually 12 months) for which financial statements are prepared and reported.

The matching concept is the accounting principle that requires matching revenues and related expenses in the same accounting period. This ensures that expenses incurred to generate specific revenues are recorded in the period those revenues are recognized, not when cash is paid or received. Option A (passing of entries) is a mechanical recording process, not a principle. Option B (consistency convention) relates to using the same accounting methods over time. Option D (adjusting for revenue) is vague and not a recognized accounting convention. The matching concept is fundamental to accrual accounting.

Conservatism (also called prudence) is the accounting convention that requires a cautious approach: profits are not recognized until they are realized (certain), while losses are provided for as soon as they are anticipated or probable. This principle protects against overstatement of assets and profits. Option A (materiality) concerns significance of information. Option B (objectivity) requires unbiased, verifiable information. Option C (consistency) addresses uniform application of methods over time. Conservatism directly addresses the asymmetric treatment of potential gains (recognized only when realized) versus potential losses (provided for early).

Investors and creditors analyze accounting information primarily to assess future cash flows, which determine the company's ability to pay dividends (for investors) and service debt (for creditors). Future cash flow prediction is the fundamental use of financial statements for decision-making. Option B (tax payments) is a secondary concern and not the primary use. Option C (merger candidates) is not a direct prediction based on accounting information. Option D (staff remuneration) is determined by management policy, not predicted from financial statements. The primary economic interest of investors and creditors centers on future cash-generating ability.

Generators are fixed assets for an electronics company, not inventory for resale. Under the double-entry system, when acquiring a fixed asset with cash, the asset account (Generator Account) is debited to increase the asset, and the Cash Account is credited to decrease cash. Option B incorrectly treats generators as purchases (inventory items), which would be appropriate if they were goods for resale. Option C reverses the entries incorrectly—debiting cash when we are paying cash out. Option D also reverses entries, crediting the asset account when it should be debited. The correct approach recognizes generators as fixed assets, not current inventory.

Labour costs incurred to install a fixed asset are capitalized—added to the cost of the asset itself—because they are directly necessary to bring the asset into a usable condition. These costs increase the asset's value and should be depreciated over the asset's useful life. Option B incorrectly treats installation labour as a period expense (wages and salaries). Option C, while seemingly correct, is less precise than Option A; "installation cost" is typically part of the asset's acquisition cost. Option D (business cost) would incorrectly expense the cost in the period incurred rather than capitalizing it. The principle is that all necessary costs to acquire and prepare an asset for use are capitalized as part of the asset's cost.

The cardinal rule of double-entry bookkeeping is: "Debit the receiving account and credit the giving account." This fundamental principle applies universally to all transactions. For example, when receiving cash, debit Cash (receiving account) and credit the source (giving account). Option A is incomplete—it doesn't describe a universal rule applicable to all account types. Option C is too specific to asset/liability transactions. Option D is incorrect; revenue should be credited (not debited) when recognized. Option B captures the essence of why every transaction has a dual nature: something is received by one account and given by another, maintaining the accounting equation (Assets = Liabilities + Equity).

This is an error of principle—the freezer (a fixed asset) should have been debited to an Asset Account (such as Fixed Asset Account or Equipment Account), not to an expense account (Office Expenses). Although the double-entry mechanics appear correct (a debit and a credit), the principle of proper account classification is violated. Option A (error of commission) refers to posting the correct account type but to the wrong account of that type. Option B (error of reversal) involves debiting when you should credit and vice versa. Option D (compensating error) involves two errors that cancel each other's effect on the trial balance. This error violates the principle that fixed assets should be capitalized, not expensed.

The folio column (also called the reference column or folio reference) in the ledger is used for cross-referencing and tracing transactions back to their source document or the journal page from which they were posted. This enables auditors and accountants to verify entries and maintain an audit trail. Option B (particulars) refers to the description column of the transaction. Option C (account titles) refers to the account name at the top of the ledger page. Option D (only credit items) is incorrect—folio references are used for all entries regardless of debit or credit nature. The folio serves a referencing and control function in the accounting system.

A suspense account is a temporary account created when the trial balance does not balance and the error causing the imbalance cannot be immediately located. The suspense account holds the difference amount, allowing the trial balance to agree temporarily. Once the error is found and corrected, the suspense account is eliminated. Option A is incorrect—significance of amount is not the criterion for using a suspense account. Option B is incorrect; immateriality is not the determining factor. Option C is misleading; it's not that the item is unknown, but rather that the error itself has not yet been identified. Option D correctly states that suspense accounts are used specifically when errors prevent trial balance agreement—they provide a temporary solution until the actual error is found and corrected.

Discount columns in a three-column cash book (which typically includes Cash, Bank, and Discount columns) are not balanced like regular cash columns because discounts do not form part of the double-entry system's primary mechanics—they are not assets, liabilities, or main cash flows. Instead, discounts are periodically transferred to the Discount Received Account (for cash discounts on purchases) or Discount Allowed Account (for cash discounts on sales), where they enter the main double-entry records and ultimately affect the Profit and Loss Account. Option A is incorrect—discounts are important. Option B is incorrect—discounts relate to credit terms, not just cash items. Option D is incorrect—discounts are not used in bank reconciliation. The key principle is that discount columns accumulate data for later transfer to the proper nominal accounts that form part of the double-entry system.

A petty cash account is debited when the fund is initially established (increasing the asset) and again each time the fund is replenished (restoring it to its original balance). Under the imprest system, individual petty cash expenses are recorded separately in an expense account, not by debiting the petty cash account each time. The petty cash account itself is only debited when creating or restoring the fund. Option A is incorrect—individual spending is not debited to petty cash; expenses are recorded separately. Option C is incorrect—decreasing the float would not generate separate debit entries. Option D is incorrect—drawing money reduces cash temporarily, but under the imprest system, the petty cash account balance is restored only by replenishment. The petty cash account tracks the fixed float amount, which is debited only when the fund is established or topped up to its original level.

When reconciling the bank statement balance to the cash book balance, unpresented cheques (cheques written and recorded in the company's books but not yet cleared by the bank) are deducted from the bank statement balance because they reduce the bank's records but have not yet reduced the company's balance. Option A (bank charges) appears on the bank statement but not in the company's books, so they are added to the cash book balance or deducted from the company's recorded balance, not from the bank statement balance. Option B (uncleared cheques) is another term for unpresented cheques. Option C (returned cheques) are cheques that have bounced and are already reflected in the bank statement; they would be deducted from the cash book, not the bank statement. Unpresented cheques represent legitimate deductions from the bank statement when reconciling to the company's book balance.

The Balance Sheet (also called the Statement of Financial Position) presents the financial position of an organization at a specific point in time by showing all assets, liabilities, and equity. It answers the question: "What does the company own and owe at this moment?" Option A (Statement of Sources and Application of Funds) shows how funds were obtained and used during a period—a flow statement, not a position statement. Option B (Statement of Retained Earnings) shows changes in retained earnings over a period. Option D (Profit and Loss Account) shows financial performance during a period, not position at a point in time. Only the Balance Sheet directly presents the financial position (assets, liabilities, equity) as of a specific date.

Cost of Goods Sold (COGS) is calculated as: Opening Stock + Purchases + Carriage Inwards - Closing Stock. Carriage Outwards is a distribution expense, not part of COGS. Calculation: ₦10,000 (opening) + ₦20,000 (purchases) + ₦5,000 (carriage inwards) - ₦5,000 (closing) = ₦30,000. Carriage Inwards (₦5,000) is added to purchases because it is the cost of transporting goods inward to the business. Carriage Outwards (₦5,000) is excluded because it is the cost of delivering goods to customers—an expense, not part of the cost of acquiring goods. Sales (₦40,000) is not used in COGS calculation.

Net profit is determined by taking the gross profit, deducting all operating expenses (administrative, selling, distribution, financial expenses), and adding any other income (commissions, interest received, rental income, etc.). Option A only produces gross profit, not net profit—it ignores operating expenses and other income. Option B incorrectly adds administrative expenses instead of subtracting them. Option C only addresses one source of other income and neglects systematic treatment of all expenses. Option D correctly describes the process: eliminating (deducting) all expenses from gross profit and adding (including) any other income sources. This comprehensive approach produces net profit, the bottom-line profit after all items affecting profitability have been considered.

When a bad debt that was previously written off is subsequently recovered, the amount is recorded as income in the Profit and Loss Account (specifically, as a recovery of bad debts or similar line item). This reverses the previous bad debt expense and improves the current period's profit. Option B is incorrect—income is recorded in the Profit and Loss Account, not the Balance Sheet (the Balance Sheet shows the resulting cash asset). Option C is awkwardly phrased; while the cash does increase, the proper characterization is as income, not "additional cash." Option D is incorrect—this is income (a favorable item), not an expense. The recovery of a previously written-off debt is treated as an income item in the Profit and Loss Account of the period in which it is collected.

Using the accounts receivable analysis formula: Beginning A/R + Sales on Account - Collections = Ending A/R. Rearranging: Sales on Account = Collections + Ending A/R - Beginning A/R = ₦36,000 + ₦15,000 - ₦8,000 = ₦43,000. This formula tracks the movement of receivables: the beginning balance plus new sales minus collections should equal the ending balance. The increase in receivables (from ₦8,000 to ₦15,000, a ₦7,000 increase) indicates that sales on account exceeded collections by ₦7,000. Therefore, sales must be collections (₦36,000) plus the net increase in receivables (₦7,000), totaling ₦43,000. Option A, B, and C do not properly account for both the increase in receivables and the collections made.

A creditors' control account (Accounts Payable control) is posted from the Purchases Journal, which records all purchases on credit from suppliers. The Purchases Journal is the primary source of entries that increase the creditors' control account. Option A (Suppliers' invoices) are the source documents for entries, but entries are posted from the Purchases Journal, not directly from invoices. Option B (Cash Disbursements Journal) records payments to creditors, which decrease the control account. Option C (Subsidiary Debtors' Ledger) records customer receivables, not supplier payables. The Purchases Journal is the journal that captures all credit purchases, making it the main source for posting to the creditors' control account. The control account summarizes information that is detailed in the subsidiary Creditors' Ledger.

Direct labour costs are wages and salaries of workers directly involved in the production of goods. Factory workers' salaries are direct labour because these workers' time and effort are directly traceable to the manufacturing process and are essential to producing the product. Option A (Accountant's salary) is indirect labour—an administrative cost. Option C (Managing Director's salary) is indirect labour—an executive/administrative cost. Option D (Cashier's salary) is indirect labour—a financial administration cost. Direct labour must be identifiable with and traceable to specific products or batches. Factory workers on the production line clearly satisfy this criterion, making their salaries classifiable as direct labour costs.