JAMB Financial Accounting 2015 Past Questions & Explanations

A trial balance is a list of all the general ledger account balances (both debit and credit) at a specific point in time. It is used to verify that total debits equal total credits, ensuring the ledger is in balance. Option A is incorrect because a trial balance is not an account itself but a statement. Option C is incorrect because a trial balance does not reveal financial position—that is the purpose of a balance sheet. Option D is incorrect because a trial balance lists only the balances, not all individual entries.

Key features of accounting information include timeliness (provided when needed), accuracy (free from material errors), and completeness (includes all necessary information). Affordability is not a recognized feature of accounting information in standard accounting theory. While cost-effectiveness is desirable, affordability is not listed as a fundamental characteristic that accounting information must possess.

The correct formula for calculating net profit or loss is: Net Profit/Loss = Closing Capital + Drawings - Opening Capital. This is rearranged from the fundamental capital equation: Opening Capital + Net Profit - Drawings = Closing Capital. Therefore, solving for Net Profit gives us Closing Capital + Drawings - Opening Capital. Option A reverses the logic incorrectly. Option B subtracts closing capital instead of adding it. Option C incorrectly adds both opening and closing capital together.

A purchase invoice is a source document received from suppliers for goods bought on credit. It is first entered in the Purchases Journal (also called the Purchases Day Book), which is a book of original entry for recording all credit purchases. From the Purchases Journal, the entries are later posted to the ledger. Option A is incorrect because the Purchases Account is in the ledger, not a book of original entry. Option B is incorrect because the Cash Book records cash transactions. Option C is incorrect because the Sales Journal records sales, not purchases.

When assets are acquired, the fundamental double-entry rule is to debit the Asset Account (to increase the asset) and credit the Cash Account (to decrease cash/increase liability or reduce resources). This follows the basic accounting principle: Debit what comes in, Credit what goes out. Option B reverses this incorrectly. Options C and D involve specific business purchase accounts which are not the standard treatment for ordinary asset acquisitions.

When goods are returned to a supplier, this is a purchase return (outward return). The Returns Outwards Account should be credited to reduce the cost of purchases. Option A is incorrect because returns outwards should be credited, not debited. Options C and D refer to Returns Inwards, which is for goods returned by customers to the business. The correct entry is to credit the Returns Outwards Account, making Option B correct.

Real accounts are accounts that have a permanent nature and represent physical assets, liabilities, or equity that continue to exist beyond an accounting period. Plant Account (asset), Creditors Account (liability), and even Salaries Account can relate to real items. However, the Trading Account is a nominal account (temporary account) used to calculate gross profit. It is closed at the end of each period. Trading Account is not a real account because it does not represent a permanent balance sheet item; it is prepared for analytical purposes only.

When goods are sold on credit, the double-entry is: Debit Debtors Account (customer owes money, so asset increases) and Credit Sales Account (revenue is earned). Debtors (customers who owe money) are assets and increase on the debit side. Sales revenue increases on the credit side. Option B incorrectly uses Creditors (suppliers) instead of Debtors. Options C and D have the accounts reversed—Sales should be credited, not debited, when goods are sold.

Books of original entry (books of prime entry) are where transactions are first recorded before posting to the ledger. These include Sales Journal, Cash Book, Purchases Journal, and Returns Journals. The Purchases Account, however, is an account in the General Ledger, not a book of original entry. Purchases transactions are first entered in the Purchases Journal, then posted to the Purchases Account. Option B correctly identifies that Purchases Account is a ledger account, not a book of original entry.

When plant and machinery is sold on credit to a customer (Wilson), the entries are: Debit Wilson's Account (customer now owes money—increase in debtor) and Credit Plant and Machinery Account (asset is reduced/disposed). Option A is incorrect because cash is not involved in a credit sale. Option C is incorrect because Sales Account should be involved when selling inventory goods, not when selling a fixed asset like plant and machinery. Option D is incorrect because plant and machinery is credited (decreased) but the debit should go to the customer (Wilson), not to cash.

Accounts are classified into three main categories: Real, Personal, and Nominal. Real accounts are for assets and liabilities. Personal accounts are for people, organizations, or entities. Nominal accounts are for expenses, income, gains, and losses. Discount received is income/gain earned by the business when suppliers offer discounts on credit purchases, so it is a Nominal account. It appears on the credit side of the Profit and Loss Account.

In accounting, different accounts naturally carry debit or credit balances. Capital is a liability/equity account representing the owner's investment in the business, and it carries a credit balance by nature. Cash and Premises are asset accounts with debit balances. Drawings is a contra-capital account with a debit balance. Therefore, Capital is the only account among the options with a credit balance.

An overcast (overstatement) in the sales day book means the total sales recorded is higher than the actual amount. To correct this error, the Sales account must be debited (to reduce the inflated sales figure) and the Suspense account must be credited. This reverses the excess amount that was incorrectly recorded. The Suspense account is used as a temporary clearing account for correction entries until the error source is identified and fully corrected.

The fundamental accounting equation is Assets = Liabilities + Capital. Rearranging this: Assets - Liabilities = Capital. This expresses the residual interest of the owner in the business. Option A is incorrect (wrong arrangement), Option C incorrectly equates asset categories, and Option D is a non-standard formulation. Option B correctly states the accounting equation in its rearranged form.

When an invoice (sales document) is overcast, the amount charged to the customer is higher than it should be. To correct this error and reduce the customer's liability, the supplier sends a Credit Note. A credit note is a document that reduces the amount owed by the customer. A Debit Note is used when the supplier owes the customer additional money. A Cheque and Payment voucher are payment-related documents and are not appropriate for correcting an overcast invoice.

Unpresented cheques are cheques that have been recorded in the company's cash book (as the company has written them) but have not yet been presented to or cleared by the bank. These cheques are outstanding—they exist in the company's records but are not yet reflected in the bank's records. During bank reconciliation, unpresented cheques must be deducted from the bank statement balance to reconcile it with the cash book balance. The other options describe different types of cheque situations but not unpresented cheques.

The accounting period is from July 1, 2011 to June 30, 2012. Advertising was paid covering 12 months ending March 31, 2012, which means it covers April 2011 to March 2012. For the period July 1, 2011 to June 30, 2012, the relevant advertising expense is from July 1, 2011 to March 31, 2012 (9 months paid). Advertising owing would be for April 1, 2012 to June 30, 2012 (3 months). Assuming the annual advertising expense is GH¢12,000, the monthly amount is GH¢1,000. Therefore, advertising owing for 3 months is 3 × GH¢1,000 = GH¢3,000.

The cost of putting goods into a saleable condition includes costs such as freight inward, customs duties, import levies, and other costs incurred to bring goods to a state ready for sale. These are part of the cost of goods purchased and must be included in the cost of sales calculation. The Trading account is where these costs are recorded along with purchases and opening stock to determine the Gross Profit. The Profit and Loss account appears incorrect as it comes after the Trading account. Balance sheet and Trial balance are not statements where such operational costs are charged; they are summary statements of accounts.

Depreciation methods are systematic ways to allocate the cost of fixed assets over their useful life. The three main depreciation methods are: (1) Straight Line - depreciates assets by equal amounts each year, (2) Diminishing Balance - depreciates by a fixed percentage on the declining balance, and (3) Revaluation - adjusts asset value to current market price. Obsolescence refers to the process of an asset becoming outdated or no longer useful, which is a CAUSE of depreciation rather than a METHOD of calculating it. Therefore, obsolescence is not a depreciation method.

A provision for doubtful debts is created as an expense to account for debts that may not be collected. When the provision decreases (is reduced), it means less money needs to be set aside, which results in a release of the previously made provision. This release is treated as INCOME in the profit and loss account because it represents a recovery or reduction in expected losses. It is not an expense (which would increase), not a liability or asset (it affects income statement accounts, not balance sheet), so income is the correct classification.