Principles Of Accounts 2011 Jamb Examination

Cheque clearing is the process of moving a cheque from the bank where it was deposited to the bank on which it was drawn, and the subsequent movement of money between the two institutions. This often happens through a central 'clearing house' where banks settle their mutual debts. While 'truncation' is a modern method of clearing using electronic images, 'clearing' remains the umbrella term for the reconciliation and settlement process between banks.

When the bank charges interest on an overdraft, it reduces the balance in the bank statement but has not yet been recorded in the cash book. To reconcile the two, if you are starting from the balance as per the cash book to reach the bank statement balance, you must subtract the interest. However, if you are starting from the bank statement balance to reach the cash book balance, you would add it back. In the context of standard examination questions where you are adjusting the cash book directly, these charges are debited (subtracted) in the adjusted cash book. To reach the Cash Book balance from the Bank Statement balance, it is added.

Current liabilities are obligations that a business is expected to settle within one year. Creditors (accounts payable) represent money owed for goods or services bought on credit and are a standard current liability. A bank loan, unless specified as 'long-term,' is often treated as a short-term obligation or overdraft in these simplified contexts. Since 'iii' (Creditors) is definitely a current liability and 'v' (Loan) is the only other liability in the list, they form the correct pair.

Current assets are assets that are expected to be converted into cash or consumed within one accounting year. Stock of goods (inventory) is held for sale in the near term, and cash at bank is already in liquid form. Furniture, on the other hand, is a non-current (fixed) asset intended for long-term use in the business.

Administrative expenses relate to the general management and running of the office. Repairs on a building (the office premises) is a classic example of an administrative or occupancy cost. Interest on loans is a financial charge, discount allowed is a selling/distribution expense, and tax is an appropriation of profit or a statutory liability.

In a period of falling prices, the LIFO (Last-In, First-Out) method assumes that the most recently purchased (cheaper) items are sold first. This results in a lower Cost of Goods Sold (COGS) compared to FIFO, which would be selling older, more expensive stock. A lower COGS leads to a higher Gross Profit. Conversely, in rising prices, FIFO results in higher profit.

The credit side of the Trading Account is primarily for income and closing stock. Sales is the main revenue item for a trading business and is recorded on the credit side. Returns outwards is typically deducted from purchases on the debit side, and carriage on sales is an expense found in the Profit and Loss account, not the Trading account.

We calculate the physical flow of units regardless of the valuation method.

Total Units In = 100 (Open) + 200 (July 8) + 200 (July 18) + 200 (July 28) = 700

Total Units Out = 160 (July 10) + 80 (Return July 17) + 180 (July 20) + 120 (July 29) + 100 (July 30) = 640

Units at Hand = 700 − 640 = 60

Under FIFO (First-In, First-Out), the first units in are the first sold.
1. Initial: 100 units @ N90, 200 units @ N95.
2. Sold 160 units: All 100 units from opening stock (@ N90) and 60 units from July 8 purchase (@ N95) are sold.
3. Remaining Stock: 140 units from July 8 purchase (@ N95).\[ \text{Value} = 140 \times 95 = 13,300 \]

Real accounts are those related to assets of a business (properties or possessions). Plant, machinery, buildings, and land are all tangible assets and therefore classified as real accounts. Prepayments are representative personal accounts, while expenses and income are nominal accounts.