Principles Of Accounts 2012 Jamb Examination

The historical cost concept (or cost principle) is a fundamental accounting principle which dictates that assets should be recorded and valued at the original price paid to acquire them at the time of the transaction. This cost is objectively verifiable through invoices and receipts, providing a reliable basis for financial reporting. Unlike current market values, which can fluctuate frequently and involve subjective estimation, historical cost remains stable in the accounting records, only being adjusted for depreciation or amortisation over the asset's useful life.

While the mechanical aspects of accounting—such as posting, casting (adding up columns), and preparing statements—are essential, the hallmark of a true professional is the application of professional competency. This involves the exercise of professional judgement, adherence to ethical standards, and the ability to interpret and communicate financial data in a way that provides value to stakeholders. Professional competency ensures that the accountant applies the correct accounting standards and principles to complex business scenarios, going beyond mere data entry to ensure the integrity of the financial information.

In the double-entry bookkeeping system, the rules of debit and credit are governed by the nature of the account. For assets and expenses, an increase is recorded as a debit, while a decrease is recorded as a credit. Conversely, for capital, liabilities, and revenue, an increase is recorded as a credit, while a decrease is recorded as a debit. Therefore, to reflect an increase in assets, you must debit the asset account; to reflect an increase in capital, you must credit the capital account. This maintains the accounting equation: Assets = Liabilities + Capital.

Capital is a liability of the business to its owner, and as such, it carries a normal credit balance. To increase the balance in the capital account—either through the introduction of additional funds by the owner or by transferring the net profit at the end of the period—the account must be credited. Debiting the capital account would represent a decrease, such as when the owner makes drawings for personal use or when the business incurs a net loss.

This transaction involves two asset accounts: Motor Van and Cash. When a business purchases a motor van, the asset 'Motor Van' increases; according to the rules of double entry, an increase in an asset is recorded by a debit. Simultaneously, because the purchase was made in cash, the asset 'Cash' decreases; a decrease in an asset is recorded by a credit. Therefore, the motor van account is debited to show the acquisition of the vehicle, and the cash account is credited to show the outflow of money.

For Ibrahim (the seller), this is a credit sale transaction (as it does not specify 'for cash'). In Ibrahim's books, an asset is created in the form of a debtor (Jide), as Jide now owes Ibrahim money. An increase in an asset (Debtor) is debited. On the other side, the business has generated revenue, which is recorded in the Sales account. An increase in revenue is always credited. Thus, Ibrahim debits Jide's account and credits the Sales account with #12,000.

From Jide's perspective (the buyer), this transaction represents a credit purchase. In Jide's books, an expense is incurred for the acquisition of goods intended for resale, which is recorded in the Purchases account; an increase in an expense is debited. At the same time, Jide has incurred a liability (Creditor) to Ibrahim. An increase in a liability is credited. Therefore, Jide debits the Purchases account and credits Ibrahim's account with #12,000.

When a cheque is received from a customer, it is initially recorded on the debit side of the bank column in the cash book. If the bank later refuses to pay the cheque (dishonours it), the transaction must be reversed to reflect that the money is no longer in the bank account. This reversal is achieved by recording the amount in the bank column on the credit side of the cash book. This entry decreases the bank balance and allows the accountant to re-establish the debt in the customer's personal account.

An ATM (Automated Teller Machine) card is a payment card provided by a financial institution which enables a customer to access their automated teller machine to perform transactions such as cash withdrawals, balance enquiries, and transfers. While credit cards can also sometimes be used for 'cash advances,' the primary and most common tool for drawing cash from one's own bank account in a modern banking environment is the ATM card. A bank teller is a person, not a tool used by the customer directly in the same automated sense, and a recharge card is for mobile credit.

A cash transfer requires an established banking relationship. To initiate a transfer, the transferor (the person sending the money) must have an account with the bank from which the funds will be moved. Without an account, there is no digital or ledger-based record of funds to facilitate a 'transfer' in the banking sense. While 'sufficient cash' (balance) is also necessary, the most fundamental prerequisite for using a banking system's transfer facility is being an account holder.