Principles Of Accounts 2021 Jamb Examination

Accrual accounting is a fundamental financial accounting framework that dictates when transactions should be recorded in the books of accounts. Unlike cash accounting, which only records transactions when money physically moves, the accrual basis focuses on the timing of the economic event. Under this method, revenue is recognised at the point of sale (when it is earned), and expenses are recognised when the benefit is received (when they are incurred). This approach provides a more accurate representation of a company's financial performance during a specific period by matching revenues with the expenses used to generate them, regardless of the timing of cash flows.

The materiality concept states that accounting standards can be ignored if the net impact of doing so is so small that a reader of the financial statements would not be misled. While stationery technically provides utility over a period of time and could be classified as an asset (inventory), the cost of tracking every pen and notepad as a fixed asset is often considered insignificant relative to the size of the business. Therefore, for the sake of efficiency and practicality, such small items are written off as expenses in the period they are purchased. Materiality is subjective and depends on the size and nature of the organisation; what is immaterial for a multinational corporation might be material for a tiny kiosk.

To determine the credit side total of a trial balance, we must categorise each account based on its natural balance. According to the rules of double-entry bookkeeping:
1. Cash: This is an asset and carries a natural debit balance (₦2,000).
2. Furniture: This is a fixed asset and carries a natural debit balance (₦4,000).
3. Bank Overdraft: This represents a liability to the bank and carries a natural credit balance (₦2,000).
4. Capital: Since the trial balance must balance (\(\text{Debits} = \text{Credits}\)), and the total debits equal ₦6,000 (\(2,000 + 4,000\)), the credit side must also total ₦6,000. The credit side would consist of the Bank Overdraft (₦2,000) and the balancing figure, which is Capital (₦4,000). Thus, the total amount on the credit side is 6,000.

Fixed assets, also known as non-current assets, are long-term tangible items that a business owns and uses in its operations to generate income, and which are not intended for sale within the normal course of business. These assets typically have a useful life of more than one year. From the list provided:
- Premises (iii) and Land (iv) are classic examples of fixed assets as they are permanent in nature and provide long-term utility.
- Cash at bank (i) and cash in hand (ii) are current assets.
- Creditors (v) and loans (vi) are liabilities.
Therefore, the items representing fixed assets are premises and land.

Current assets are resources that a business owns and expects to convert into cash or consume within one year or one operating cycle. They represent the most liquid portion of a company's balance sheet. Analysing the items provided:
- Cash at bank (i) is the most liquid asset ready for immediate use.
- Cash in hand (ii) refers to physical currency held by the business, also highly liquid.
- Premises (iii) and land (iv) are fixed (non-current) assets.
- Creditors (v) and loans (vi) are liabilities, representing what the business owes rather than what it owns.
Consequently, the current assets are 'cash at bank' and 'cash in hand'.

Share premium arises when a company issues shares at a price higher than their nominal (face) value. In this case, the nominal value is ₦1.00 and the issue price is ₦1.50. The premium per share is calculated as:\[\text{Premium per share} = \text{Issue Price} - \text{Nominal Value}\]\[\text{Premium per share} = 1.50 - 1.00 = \text{₦}0.50\text{ (or 50k)}\]The total share premium is calculated based on the actual number of shares allotted to the public, not the number of applications received. Since 750,000 shares were issued and allotted:\[\text{Total Share Premium} = 750,000 \times 0.50 = \text{₦}375,000\]According to the rules of accounting for share capital, the Share Premium Account is a capital reserve and carries a natural credit balance. Therefore, when the premium is recognised (usually at the allotment stage), the account is credited with the total premium amount of ₦375,000.

When a company makes a call on shares, it creates a temporary account for that specific call to track the money due from shareholders. For the 'second and final call', the amount due per share is 25k (₦0.25). The total amount to be called is based on the 750,000 shares actually allotted:\[\text{Total Call Amount} = 750,000 \times 0.25 = \text{₦}187,500\]In the books of the company, when the call is made, the 'Second and Final Call Account' is debited to show the amount receivable, and the corresponding credit goes to the '12% Preference Share Capital Account' to reflect the increase in the equity/capital of the company. It is important to specify '12% Preference Share Capital' because these are not ordinary shares. While the bank account is later debited when the cash is actually received, the initial accounting entry to record the call is a debit to the call account and a credit to the preference share capital account.

LIFO (Last-In, First-Out) assumes that the most recently purchased items are the first ones to be sold. During a period of rising prices (inflation), the most recent purchases are the most expensive. By matching these higher, current costs against sales revenue, the Cost of Goods Sold (COGS) becomes higher than it would be under other methods like FIFO. Since Gross Profit is calculated as \(\text{Sales} - \text{COGS}\), a higher COGS results in a lower gross profit and, consequently, a lower taxable income. The items remaining in stock (closing stock) are the older, cheaper items, leading to a lower closing stock value on the balance sheet. Therefore, the primary tendency of LIFO during inflation is to inflate the cost of goods sold.

The primary purpose of departmental accounting is to provide management with detailed financial information regarding the individual sections of a large business. By preparing separate trading and profit and loss accounts for each department, the business can accurately measure the gross and net profit generated by each unit. This allows management to determine the 'contribution' each department makes to the overall profitability of the firm. This information is crucial for identifying which departments are efficient, which are struggling, and for making strategic decisions such as expansion, resource reallocation, or the closure of underperforming sections.

To register a company (incorporation), specific legal documents must be submitted to the Corporate Affairs Commission (CAC) or the Registrar of Companies. These include:
1. The Memorandum of Association: This defines the company's external relationship and its powers (name, objects, capital structure).
2. The Articles of Association: This sets out the internal rules for governing the company (directors' powers, meeting procedures).
3. Other Incorporation Documents: These include the statement of share capital, the list of directors and their consent, the registered office address, and a statutory declaration of compliance. Since all three items listed are essential requirements for the registration process under the Companies and Allied Matters Act, all of them must be delivered to the registrar.