GCE Financial Accounting
Past Questions

AI Explanation

The prudence convention (also called conservatism) requires that accountants should not anticipate profits but should provide for all possible losses. This means assets and income should not be overstated, while liabilities and expenses should not be understated. It ensures a cautious approach to financial reporting.

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The historical cost concept requires that assets be recorded and reported at their original purchase price (cost) rather than their current market value. Therefore, the land remains in the books at ₦5,000,000 despite the increase in market value. This concept provides objectivity and verifiability in financial reporting, though it may not reflect current economic reality.

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The consistency concept requires that once an accounting method is adopted, it should be applied uniformly from one period to another to allow meaningful comparison of financial statements. Switching from FIFO to AVCO without disclosure violates this principle. Any change in method must be disclosed and the effect stated.

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The materiality convention allows items of insignificant value to be treated as expenses rather than capitalised, since the cost of providing precise information would outweigh the benefit. A stapler costing ₦3,500 is immaterial relative to the size of the business and is therefore written off as an expense. This avoids unnecessary complexity in the financial statements.

AI Explanation

The business entity concept treats the business as separate from its owner, so capital contributed by the owner is regarded as a liability of the business to the owner and is shown separately from external liabilities. This separation ensures that the financial statements reflect only the business's own financial position. The dual aspect concept also applies, but the specific reason capital is separated from liabilities is the business entity concept.

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The business entity concept holds that a business is a distinct legal and accounting unit separate from its owner(s). This means the personal transactions of the owner are kept separate from the business transactions. It forms the basis for preparing financial statements that reflect only the affairs of the business.

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Annual depreciation = ₦2,400,000 ÷ 4 = ₦600,000. After two years, accumulated depreciation = 2 × ₦600,000 = ₦1,200,000. Net book value = ₦2,400,000 − ₦1,200,000 = ₦1,200,000. This question tests the prudence and going concern concepts applied through depreciation.

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The going concern concept assumes the business will continue to operate indefinitely, allowing assets to be valued at cost less depreciation. If this concept no longer applies (i.e., the business is to be wound up), assets must be valued at their net realisable (break-up) values, which are often lower than book values. This change in basis significantly affects the financial position of the business as presented in the balance sheet.

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The accrual concept (also called the matching concept) states that revenues should be recognised when they are earned and expenses when they are incurred, not necessarily when cash changes hands. This ensures that income and expenditure are matched to the correct accounting period. It is the basis for recording prepayments, accruals, debtors, and creditors.

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The Sales Account is credited with credit sales of ₦95,000, and debited with sales returns of ₦12,000 (Returns Inwards). The net balance on the Sales Account is ₦95,000 − ₦12,000 = ₦83,000. Purchases and purchases returns are posted to separate accounts and do not affect the Sales Account.

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When a business is started, assets introduced (Cash and Equipment) are debited because they increase, while Capital is credited to represent the owner's total investment of ₦700,000. Option B incorrectly debits Capital and credits assets, which reverses the correct treatment.

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Credit purchases increase the Purchases Account (debit) and create a liability to the supplier Bola, so Bola's Account in the Creditors ledger is credited. Debiting Bola's account would wrongly reduce the liability instead of creating it.

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A cash sale means the business receives cash (an asset increasing), so the Cash Account is debited. The corresponding credit goes to the Sales Account, which records the revenue earned. Debiting Sales and crediting Cash would incorrectly reverse the entry.

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The Purchases ledger (also called the Creditors ledger) contains individual accounts for trade suppliers from whom goods are bought on credit. The Sales ledger holds customer accounts, the General ledger holds nominal and real accounts, and the Private ledger holds confidential accounts such as Capital.

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Opening balance ₦45,000 plus credit sales ₦130,000 gives ₦175,000 on the debit side. Cash received ₦110,000 and discount allowed ₦5,000 total ₦115,000 on the credit side. Closing balance = ₦175,000 − ₦115,000 = ₦60,000. Discount allowed reduces the amount owed and must be credited to the Debtors Account.

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Rent is an expense, so the Rent Account is debited to record the increase in expenses. Payment by cheque reduces the bank balance, so the Bank Account is credited. Option B is wrong because the payment was by cheque, not cash, making Bank the correct credit account.

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The Debtors ledger (also called the Sales ledger) contains individual accounts for customers who owe money to the business. The Creditors ledger records amounts the business owes to suppliers, while the Nominal ledger holds income and expense accounts.

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Debit side of Creditors Control: Cash paid ₦195,000 + Purchases returns ₦14,000 + Discount received ₦6,000 + Contra ₦3,000 + Closing balance ₦94,000 = ₦312,000. Credit side: Opening balance ₦72,000 + Credit purchases ₦240,000 = ₦312,000. Closing balance = ₦72,000 + ₦240,000 − ₦195,000 − ₦14,000 − ₦6,000 − ₦3,000 = ₦94,000. All items that reduce the liability (payments, returns, discounts, contra) are debited to the control account.

AI Explanation

When cash is paid into the bank, the bank balance increases (debit Bank column) and the cash balance decreases (credit Cash column). This is a contra entry, indicated by 'C' in the folio column on both sides of the cash book, because both aspects of the transaction appear within the same book.

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Under the imprest system, the petty cashier is reimbursed with exactly the amount spent during the period to restore the float to the original imprest amount. Since payments totalled ₦18,750, the reimbursement required is ₦18,750, restoring the balance to ₦25,000.

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Trade discount is deducted before recording in the books of account and is never shown separately in the ledger. The invoice value is ₦60,000 − (10% × ₦60,000) = ₦60,000 − ₦6,000 = ₦54,000. This net amount of ₦54,000 is what is entered in the sales day book.

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The journal proper (general journal) is used to record transactions that do not fit into any other subsidiary book, including correction of errors, opening entries, closing entries, and purchase or sale of non-current assets on credit. Correcting a misposting from the salaries account to the rent account is a typical journal proper entry.

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The purchases day book total (₦120,000 + ₦85,000 + ₦95,000 = ₦300,000) is posted as a debit to the Purchases account in the ledger, not credit. However, the individual suppliers' accounts are credited. The periodic total of ₦300,000 is what is posted to the debit of the Purchases account. The correct total is ₦300,000.

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When a buyer (trader) returns goods to a supplier, this is a purchase return. It is recorded in the purchases returns day book (also called the returns outward book). The sales returns day book records goods returned by customers to the business.

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The general ledger is a principal book of account (part of the double-entry system), not a book of original entry. Books of original entry (subsidiary books) include the sales day book, purchases day book, cash book, and journal proper, where transactions are first recorded before being posted to the ledger.